Neutral on Federal Bank - Angel

For 3QFY2012, Federal Bank reported 41.1% yoy (5.6% qoq) growth in its net profit to Rs.202cr, in-line with our estimates. While the bank witnessed a sequential healthy growth in its operating income (12.6% qoq), higher provisioning expenses (up by 59.6% qoq) lowered profitability growth to 5.6% qoq. We remain Neutral on the stock.

Asset quality surprises negatively: For 3QFY2012, the bank's loan portfolio contracted by 1.2% qoq (up 17.6% yoy), while deposits shrunk by 1.1% qoq (up 26.6% yoy). The bank witnessed qoq contraction in all loan segments except retail (up 2.0% qoq). Gold loans continued to witness robust traction, growing by over Rs.400cr during 3QFY2012, taking the overall proportion of gold loans (~Rs.3,000cr as of 3QFY2012) to 9.0% of the overall loan book. The bank's SA deposits grew by strong 9.0% qoq (up 25.5% yoy) and CA deposits grew by healthy 5.1% qoq (up 11.1% yoy), leading to a 247bp qoq improvement in CASA ratio to 28.2%. Including the NRE-TD (Rs.1,125cr) and FCNR deposits (Rs.1,552cr), low-cost deposits as of 3QFY2012 stood at 33.9% (31.3% in 2QFY2012). The bank's reported NIM improved by 17bp qoq to 3.9% as the move towards higher yielding retail assets (particularly gold) during 3QFY2012 led to yield on advances rising by 17bp qoq to 12.9%. The bank's slippages for 3QFY2012 surprised negatively, coming in at Rs.330cr compared to Rs.265cr witnessed in 2QFY2012. While higher retail slippages were the primary contributor to NPAs during 2QFY2012, slippages from large corporate (Rs.193cr) accounted for 58% of the total slippages in 3QFY2012. High NPAs from the corporate side can be attributed to 5-6 chunky accounts (pertaining to sectors such as agri, textile, shipping and oil), which slipped during 3QFY2012.

Outlook and valuation: Valuations at 1.1x FY2013 ABV are higher than the 0.5-0.7x range at which mid-size PSU banks with similar KPIs are trading. While in the medium term, we expect a gradual increase in the bank's leverage to lead to higher RoEs, but higher valuations coupled with the diminished advantage of low-cost NRE deposits are likely to limit upside from current levels. Hence, we recommend a Neutral rating on the stock.

Source : Equity Bulls

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