Federal Bank - Improving CASA and asset quality; Buy - Anand Rathi

Despite muted business growth, Federal Bank's 2QFY13 profits were up 12.5%, driven by treasury profits and better asset quality. We raise our target to Rs.564, as we value the bank at 1.3x FY14e BV (1.4x 1HFY14e earlier). With its consolidation nearly over, the bank is expected to show better productivity coupled with high capital adequacy, which will raise RoE to 17.5% by FY15. We maintain Buy.

- Muted credit growth, higher CASA. Credit growth remained muted at 8% as the corporate credit book declined 2.9% yoy. Deposit growth was lower at 4.8% yoy. Although NIM was lower 20bps yoy, it increased 16bps qoq on account of higher CASA share of 29% (up 60bps qoq), despite lower credit-deposit (down 190bps qoq) of 73.3%. We expect the bank to register higher loan growth in FY14/15, with its consolidation largely over.

- Low productivity, high treasury profits. Cost-income increased sharply by 691bps to 45.8%, a result of strong branch network expansion plan (up 22.7% yoy to 1010). Non-interest income grew 19.2% boosted by 155% growth in treasury profits. We expect the bank to reap benefits of its branch expansion over FY14-15. As a result, we expect cost-assets to improve to 1.7% by FY15, as asset growth outstrips opex growth.

- Lower slippages, high NPA coverage and capital. Gross slippages (as % of advances) improved sharply, decreasing 147bps yoy to 1.6%, a result of zero slippages in corporate portfolio. NPA coverage remains high at 82.9%, better than most peers. The bank additionally restructured Rs.2bn of loans in the quarter. Best-in-class capital adequacy of 15.8% is sufficient to offset additional delinquencies.

- Valuation. The stock would trade at PBV of 1.5x FY13e and 1.3x FY14e. Our target is based on the two-stage DDM (CoE: 15%; beta: 0.8; Rf: 8%). Risk: Slower-than-expected economic growth could hit loan growth and credit quality.

Source : Equity Bulls

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