Federal Bank - Bottom-line disappoints on higher provisions - Centrum

Persistent slippages continued to suppress core profitability and balance sheet growth. Slippage rate, while down QoQ, remained high at 2.8% though Q1FY14 saw sequential stability in %GNPA (at 3.5%), restructured assets (4.7% of loans) and PCR (74%). Importantly, the management sounded quite cautious on growth and quality given the operating environment. We lower our estimate downwards, after revising loan growth and asset quality assumptions, leading to a revised price target of Rs425 (1.1x Sep'14 estimates). Downgrade to Hold.

NIM expands marginally but remains weak: NII came in lower than expected at Rs5.1bn led by tepid growth in advances (8% YoY but down 6% QoQ) even as NIM reflected signs of stability (albeit at a lower level). Loan yields expanded ~50bps QoQ, which was offset by lower investment yields leading to marginal contraction in blended yields. However, cost of funds eased by ~20bps leading to marginal (5bps QoQ) improvement in NIM.

Asset quality surprises negatively: Slippages for the quarter were high at Rs3bn (2.8% slippage rate) though lower than 3.6% in the previous quarter. Slippages include a few restructured accounts for which CDR process fell through leading to NPA status. Importantly, these slippages are not part of the stress pipeline indicated by the management (Rs5-6bn). The bank provided fully for its exposure towards NAFED compared with 50% provisioning earlier. Citing the uncertain environment, the management abstained from offering any guidance on the behaviour of corporate book.

Loan growth moderates further: FED's Q1FY14 advances grew by 8% YoY (de-growth of 6% QoQ) likely due to asset quality challenges. From a segmental perspective, the bank de-grew its corporate book by 6% YoY although Retail and SME registered a healthy growth of 21% and 20% respectively. For FY2014, the bank is targeting ~20-25% loan growth in retail and SME segments and 10-15% in corporate book, implying ~21% overall loan growth.

Treasury boost: Non interest income was strong with a 74% YoY growth led by strong treasury performance. Treasury income for the bank came in higher at Rs890mn as against Rs262mn in Q1FY13. Cost-income ratio eased QoQ to 44.8% led by healthy treasury gains. The bank intends to scale down its branch expansion momentum in FY2014 with a view to ramp-up productivity in branches added over the past two years.

Poor visibility on RoE improvement, Hold: At the current market price, the stock trades at 6.5x FY2015E EPS and 0.9x FY2015E ABV. We have revisited our earnings assumptions to factor in tighter asset quality assumptions and weaker NIMs. Based on our revised estimates and a fair value multiple of 1.1x, we lower our target price to Rs425 (based on 1.1x Sep'14 ABV). Given limited upside (12%) for a mid-cap bank and poor visibility on improvement in return ratios, we downgrade the stock to Hold.

Source : Equity Bulls

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