Federal Bank - Net interest income disappoints - Ambit

Results overview: In 3QFY13, Federal Bank's PAT at Rs2.1bn (18% below our estimates and in line with consensus estimates) was driven by lower net interest income (NII). NII declined 6% YoY and was 18% below our expectations, despite advances increasing by 19% YoY (vs our expectations of 20% YoY growth) and margins being in line with our estimates at 3.49% (vs our expectations of 3.48% for FY13E). The cost-to-income ratio continued to trend higher, with opex to advances increasing by 20bps QoQ to 3.2%. Whilst gross NPAs remained stable at 3.85%, tangible provisioning coverage ratio (PCR) declined by 600bps to 77% in contrast to the management's desire to maintain the loan loss coverage north of 80%. Delinquencies in the SME segment continued to trend lower (at 60bps during 3QFY13 compared to 91bps during 2QFY13) while retail delinquencies were marginally off their lows at 52bps (compared to 40bps last quarter). A surprise positive highlight of the result was a stunning 31% growth in current account (CA) balances in an environment where banks are struggling to protect their CA. We await today's earnings conference call to assess the reasons for the decline in loan loss coverage, the key drivers of asset quality this quarter and the sustainability of the liability mix.

Where do we go from here? Federal Bank's (FB) re-engineering of its credit appraisal process has resulted in a substantial improvement in its SME and retail asset quality over the past few quarters. However, the potential re-rating has been subjected to investor scepticism around: (a) exposure to stressed borrowers from its legacy large corporate book; and (b) spiralling operating costs from its ongoing branch expansion. Whilst our analysis in the 18 December 2012 note 'Poised for a leap of faith' suggests that the overhang from these two concerns is overdone, we remain vigilant on any trends that signal a contrary conclusion. We remain highconviction BUYers with a base-case valuation of Rs585, yielding an upside of 14%. Our bull-case valuation implies a 33% upside whilst our bear-case valuation implies a 29% downside. The stock is currently trading at 1.2x FY14 BVPS.

Source : Equity Bulls

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