Federal Bank shares faced significant selling pressure on Monday, dropping over 5% in intraday trade following the release of its Q1 FY26 results. The stock hit a low of ₹185.10, marking a 5.59% decline—its sharpest fall since January 28 this year. The market reaction was largely driven by concerns over higher provisioning, a spike in credit costs, and increased slippages, especially in the Microfinance Institution (MFI) segment.
Despite the weak quarterly performance, major brokerages remain confident about the bank’s long-term prospects. In fact, several firms have reiterated their Buy ratings and foresee an upside of up to 20% from current levels. So what’s behind this paradox of falling prices and rising optimism?
Let’s take a closer look at what analysts are saying and what could drive Federal Bank’s recovery in the coming quarters.
Motilal Oswal: Short-Term Pain, Long-Term Gain Federal Bank
Leading brokerage Motilal Oswal has reaffirmed its Buy recommendation on Federal Bank, setting a target price of ₹235, which translates to a nearly 20% potential upside from current levels.
However, they acknowledged that near-term headwinds are likely to persist. The bank’s Q1 results were notably impacted by:
- Higher-than-expected provisioning
- Significant decline in Net Interest Margin (NIM)
- Rising credit costs, especially from the MFI segment
Despite these setbacks, Motilal Oswal noted positive momentum in loan growth, particularly in the SME, Gold, and Agriculture portfolios. On the flip side, the Microfinance book contracted due to mounting stress.
Deposit growth remained modest, supported by healthy traction in certain segments. Yet, a seasonal outflow in the Current Account (CA) portfolio post-Q4 slightly diluted the CASA mix, which showed only marginal improvement.
The contraction in NIMs was attributed to T+1 loan repricing and repo rate adjustments. Federal Bank has guided for a further 5–10 basis point dip in NIMs in Q2FY26.
On the asset quality front, stress in the MFI segment led to elevated credit costs, although the Provision Coverage Ratio (PCR) remained stable. Motilal Oswal expects asset quality and margins to improve in the second half of FY26.
“We have trimmed our earnings forecast by 7% for FY26 and 4% for FY27 due to elevated provisioning and slight margin pressure. However, we see a turnaround coming in H2, supported by better delinquency trends and margin recovery.”
Nuvama: Short-Term Cuts, Long-Term Confidence
Another key market player, Nuvama, has also maintained its Buy rating on Federal Bank but revised the target price downward from ₹230 to ₹225.
While acknowledging that Q1FY26 results were subdued, they still regard Federal Bank as one of the “safest mid-sized banks” with robust fundamentals and growth potential.
Key observations from Nuvama’s report include:
- Net Interest Margin fell by 18 bps QoQ
- Slippages decreased by 34% QoQ
- Credit cost surged to 66 bps from 24 bps
The rise in credit costs was largely due to stress in the MFI portfolio, particularly in Karnataka, where the bank has a 20% exposure. However, the management expressed confidence that there is no major stress building in Business Banking (BUB), which is mostly secured.
The bank also guided for higher credit costs in Q2FY26 due to aging provisions in the MFI portfolio, but expects a sharp decline in H2FY26. The full-year credit cost estimate has been retained at 55 bps.
“The outlook for Q2 remains cautious, but the worst appears to be priced in. NIMs may see a 5–10 bps drop again but are expected to stabilize thereafter.”
HDFC Securities: Leveraging Balance Sheet Strength
HDFC Securities has joined the chorus, also maintaining its Buy rating with a target price of ₹225 per share. Despite acknowledging some pressing short-term issues, they remain optimistic about the bank’s overall positioning and growth trajectory.
In Q1FY26, Federal Bank reported:
- Soft deposit growth of just 1% QoQ
- CASA ratio held relatively stable at 30.3%, up 12 bps
- Healthy traction in fee-based income
The brokerage highlighted that provisioning related to the MFI segment continues to weigh on the bank’s performance. However, they also stressed that the MFI stress has likely peaked, with other asset classes performing steadily.
Federal Bank is also actively working to enhance the mix of fixed-rate loans—a move aimed at stabilizing earnings and improving profitability over the medium term.
“Federal Bank is well-positioned to leverage its strong deposit franchise, superior underwriting practices, and balance sheet stability. These strengths are expected to act as catalysts for sustainable earnings growth going forward.”
Key Takeaways: Should Investors Worry?
Despite the market’s knee-jerk reaction to a weak Q1, Federal Bank still holds significant long-term potential according to analysts. Here are the key positives to watch:
| Metric | Q1FY26 Performance | Outlook / Brokerage Take |
|---|---|---|
| Share Price Drop | -5.59% to ₹185.10 | Viewed as temporary by analysts |
| NIM | Declined due to repo repricing | Expected to stabilize by H2FY26 |
| Credit Cost | Rose to 66 bps due to MFI stress | Full-year guidance retained at 55 bps |
| Loan Growth | Driven by SME, Gold, and Agri | Positive outlook for core lending segments |
| MFI Segment | High slippages in Karnataka | Stress expected to peak and ease in H2 |
| Deposit Growth | Modest at 1% QoQ | CASA mix remained stable |
| Target Prices | ₹225–₹235 | Reflects ~20% upside from current levels |
Investor Perspective: What’s the Verdict?
From an investor’s standpoint, the stock’s current decline could present a buying opportunity for those with a medium-to-long-term horizon. Brokerages are unanimous in their view that the worst of the MFI-related stress may be over, and that Federal Bank’s strong fundamentals—particularly its quality deposit base and prudent lending practices—position it well for recovery.
Moreover, the bank’s strategy to focus on higher-yielding fixed-rate assets, coupled with stabilizing NIMs, could serve as catalysts for improved earnings and stock performance in the coming quarters.
Federal Bank’s disappointing Q1 results may have rattled short-term investors, but market experts see the stock as undervalued and potentially poised for a 20% rally. As credit costs normalize and margin pressures ease in the second half of FY26, Federal Bank could regain lost ground and offer meaningful returns to those who remain invested.
If you’re looking for a steady mid-cap bank stock with solid fundamentals, now may be the time to take a closer look at Federal Bank.