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Published on 21/10/2019 10:36:38 AM | Source: Motilal Oswal Ltd

Buy Federal Bank Ltd For The Target Rs.110 - Motilal Oswal

Business growth moderates; asset quality marginally under pressure

* PAT increased 57% YoY to INR4.2b (our estimate: INR4.4b) in 2QFY20 on the back of a lower tax rate, even as employee expense increased by 43% YoY due to retiral/wage provisions. PBT grew 14% YoY to INR4.7b. For 1HFY20, PPoP/PAT was up 16%/52% YoY to INR15b/INR8b.

* NII growth moderated to 10% YoY (INR11.2b), affected by interest reversals, yields compression on loans linked to T-bill, and negative carry due to excess liquidity. NIM thus moderated by 14bp QoQ to ~3.0%.

*  Other income grew 30% YoY, led by a significant rise of 27% YoY in fee income. Total income growth (15% YoY) trailed opex growth, resulting in muted 3% YoY growth in PPoP, while the C/I ratio was up ~410bp QoQ to 53.5%.

*  Loan growth moderated to 14.8% YoY, led by sluggish trends in corporate/commercial banking, while retail loans continued growing strongly at 25% YoY. Deposit base grew 18% YoY to INR1.4t. CASA mix stood at 31.6% (+10bp QoQ).

* Fresh slippages increased to INR5.4b (2.3% annualized), driven by a rise in corporate slippages of INR1.8 toward one account, while SME slippages also stood higher at INR1.5b. GNPA/NNPA ratios thus increased by 8bp/10bp QoQ, while PCR declined ~180bp QoQ to 49.0% (66.2% incl. tech. w/o).

 

*  Other highlights:

(1) FB maintained its credit cost guidance of 60-62bp for FY20.

(2) Stressed exposures: The bank’s exposure toward HFC/Financial conglomerate/IL&FS stands at INR4.75b, wherein it is carrying a standard provision of INR720m, while exposure to real estate group stands at INR3b.

 

*  Valuation view:

FB has reported a moderation in loan growth, reflecting the challenging macro environment. The slippage trajectory remains uneven as FB recognizes stressed account into non-performing, but it continues guiding for controlled credit cost of 60-62bp, enabled by a lower quantum of stressed assets. However, the coverage ratio of 66.2% (including TWO) remains healthy. Margins could remain slightly subdued, even as FB has changed the loan pricing methodology from T-Bill to repo rate. We cut our earnings estimate by 6%/9% for FY20/21 and estimate RoA/RoE at 1.0%/13.3% by FY21. Maintain Buy with a revised target price of INR110 (1.4x FY21E ABV).

 

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