Federal Bank - Lower slippages boost bottom-line - Centrum

FED's Q2FY13 core performance came in marginally weaker than expected (PPP at Rs3.5bn vs Rs3.7bn estimated) though bottom-line was well ahead of estimates as slippages were contained during the quarter. Asset quality matrices held up well as slippage rate halved to 1.5% while restructured pool was largely stable. The radical changes introduced by the new management are gradually beginning to yield result. This, along with improvement in broader economy, augurs well for our thesis of RoE expansion, which in turn should drive further re-rating of the stock over the long term. We upgrade the stock to Buy with a revised target price of Rs550.

- NIM expands by 15bps QoQ: NII grew by a muted 7% YoY to Rs5.1bn as NIM expanded by 15bps QoQ offsetting moderation in credit growth (8% YoY). Importantly, the expansion in NIM is the result of higher loan yields (~25bps QoQ) likely a result of change in loan mix for the quarter.

- Corporate loan book contracts QoQ: In an unexpected move, the incremental loan book mix for Q2FY13 changed materially from the trend in recent quarters. While retail and SME segments grew by healthy 18% and 15% respectively, the corporate loan book contracted by 3% YoY as competitive forces played out in the market.

- Slippage rate halves to 1.5%: Slippage rate eased materially during the quarter and stood at 1.5% compared with 3% in the previous quarter. The improvement in slippage rate was primarily driven by the corporate segment, as the quarterly run rate in SME (Rs1000mn) and retail (Rs500mn) continued. Consequently, the GNPA remained stable QoQ on absolute basis though inched up by ~20bps on relative basis. The absence of slippages in corporate segment is unlikely to be sustained in forthcoming quarters led by 1) macro environment and 2) pipeline of stressed assets worth Rs7-8bn.

- Healthy fee income: Non-interest income grew by a healthy 19% YoY during the quarter led by a spike in treasury gains (up 155% to Rs360mn). Meanwhile, the core fee income growth too was healthy at 17% YoY although the trend in recoveries was not encouraging and suggested a tough road ahead. Having said that, non-interest income should perform better in H2FY13 driven by new products/services launched in wholesale banking space.

- Upgrade to Buy: The management's strategy to enhance RoE by optimally leveraging the equity while at the same time shifting away from high risk-high yield to a lower risk-lower yield book is gradually yielding results (albeit mixed). The strategy should lead to further normalization of NIM in the near term while benefit on asset quality will be visible over the medium term. At the current price, the stock is trading at 1.3x FY14E ABVPS and implies a 13% upside to our revised price target of Rs550. We upgrade the stock to Buy and suggest that investors add on declines.

Source : Equity Bulls

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