Analyst Corner: Maintain ‘buy’ on Federal Bank with TP of Rs 95

Total SMA book stands at ~4.6% of the loan book. Total restructuring is ~1.2% of the book with retail forming 68%.

By Axis Securities

The core operating performance of Federal Bank (FB) in Q4FY21 was below our estimates while lower provisioning aided bottom line growth of 82/18% yoy/qoq to Rs 480 crore. NII was up 17% yoy and down 1% qoq with NIMs flattish qoq at 3.23%. Provisioning was lower by 57.3%/42.4% yoy/qoq. Total SMA book stands at ~4.6% of the loan book. Total restructuring is ~1.2% of the book with retail forming 68%.

The management expects ~30– 40% of the restructuring book may slip in coming quarters but the major chunk is secured and only ~6% of the restructured book is unsecured. Reported total slippages was Rs 1,690 crore (1.38% annualized). Capital raise is expected in the H2CY21. We believe key positives for the company are its increasing retail focus, strong fee income, and adequate capitalization. We maintain a ‘buy’ with a target price of Rs 95 (1x FY23EABV), implying an upside of 13% from CMP.

Result highlights: Loan growth of 8% yoy was led by retail, up 19% yoy w/w gold loans grew 70% yoy; business banking grew 13% yoy while commercial banking grew 11% yoy; NIM were almost flattish qoq at 3.23%, on interest reversal impact of Rs 210 million; deposits growth was strong at 13% yoy with CASA up 26% yoy; CASA ratio stood at 33.8%, down from 34.5% qoq; and retail deposits at ~90% of total deposits.

The lender has made provisioning of Rs 2.4 bn vs Rs 4.2 bn in Q3FY21 with no additional Covid provisioning this quarter. Almost Rs 1.1 bn standard asset provisions made in prior quarters was absorbed. GNPA ratio was broadly stable qoq at ~3.4%, with PCR ~65%.NNPA ratio came down to 1.19% v/s 2.71% qoq.

Valuation and outlook: Federal Bank has been taking a cautious approach in building the loan mix toward high-rated corporates and retail loans. The bank’s liability franchise remains strong with CASA plus Retail TD of ~90% and one of the highest LCR amongst banks. FB has managed asset quality well despite the pandemic. Key positives are improved business mix, adequate CAR, liability franchise, and incremental lending to better-rated borrowers. New focus segments such as MFI, CV portfolio, and Credit Cards will gradually aid in margin improvement, though management remains conservative on growing these segments in the next couple of quarters.

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