Federal Bank - Q4FY12 Result update - Centrum

Weak core performance, asset quality improves

FED's Q4FY12 bottom-line performance (Rs2.4bn, up 38% YoY) was well ahead of our estimates led by higher treasury income and lower provisioning cost as %GNPA contracted by ~60bps QoQ. Core performance was weaker than estimates with NIM contracting by ~40bps QoQ and core fee income growth muted at 11%. We believe that current valuations largely discount the positives emanating from potential expansion in RoE in the medium term as leverage is ramped up. While we maintain Buy, we suggest that investors enter the stock at lower levels (Rs370-380) given the limited upside to our fair value estimate (~8%) currently.

- NIM surprises negatively: NII grew by a muted 9.7% YoY (below estimates) led by a 40bps contraction in NIM sequentially though credit growth was healthy at 18% YoY. Blended yields contracted by 20bps as the bank reversed interest income of Rs250mn due to slippages/restructuring. This, along with a 15bps increase in cost of funds QoQ, (led by deregulation of NRE deposits) led to material NIM contraction. For FY13, we are building in 15bps contraction notwithstanding increased focus on high yielding gold loans.

- Asset quality a mixed bag: FED's Q4FY12 asset quality matrices were mixed as slippage rate eased (to 3.2%) led by the corporate segment and helped bring down %GNPA by 60bps QoQ. Material additional restructuring (in SEB & aviation) pushed the cumulative standard restructured assets to Rs20.4bn (5.4% of loans) with cumulative slippages at ~22%. We maintain our view that restructured portfolio is likely to increase further led by challenges faced by certain sectors though the quantum is likely to tapper off going ahead. Against management's guidance of keeping credit costs contained in 90-100bps range, we have factored in 110bps for FY13 and FY14.

- Credit growth guidance upped: The advances book grew by 18% YoY to Rs377bn primarily driven by the corporate segment (22.6% YoY). For FY13, the management has guided for a higher credit growth (~20%) as the centralization of credit monitoring and appraisal has been largely achieved. From a segmental perspective, retail and gold loans are likely to be the key drivers for incremental disbursals.

- Strong treasury gains: Non-interest income grew by 14% YoY driven by a 5-times jump in treasury gains while core fee income (CEB + fx) grew by a muted 11% YoY. Income from recoveries too remains weak. Clearly, the investment made by the bank to strengthen fee income stream is yet to pay off.

- Maintain Buy: We have tweaked our earnings estimates as we factor in additional information. We roll over our valuations to FY14E, which leads us to tweak our target price upwards to Rs450 (from Rs435 earlier). At current market price of Rs415, the stock trades at 7.2x FY2014E EPS and 1.1x FY2014E ABVPS. We believe that current valuations largely discount the potential positives emanating from expansion in RoE in the medium term as leverage is ramped up. While we maintain Buy, we suggest that investors enter the stock at lower levels (Rs370-380) given the limited upside to our fair value estimate (~8%).

Source : Equity Bulls

Keywords