Federal Bank - Results better than they appear; Buy - Anand Rathi

Modest credit growth, higher CASA, lower productivity. Federal Bank's loan growth sofftened to 8.5% yoy (6.4% qoq), as its corporate loan book slipped 6% yoy (14.4% qoq). The retail and SME segments grew at healthy clips of 21% and 19.1% respectively. NIM declined 30bps yoy (though up 6bps qoq) on account of the lower credit-deposit, which declined 280bps yoy to 72.4%. However, the proportion of CASA improved 60bps yoy to 29% on traction in savings deposit (up 15.3% yoy). We expect the bank to register higher loan growth of 22% over FY15/16, driven by its focus on the SME and retail sub-segments. Cost-income rose 110bps bps yoy to 45.4%, a result of the continuing branch-network expansion (up 11% yoy to 1,107 branches). We expect the bank over FY15-16 to reap the benefits of its branch expansion, with cost-assets improving to 1.6% by FY15 (from 1.8% in FY13).

Provisioning jumps due to large write offs, however slippages improve. Provisioning jumped 291% yoy as the bank wrote off assets of ~Rs. 3bn during the quarter. It has fully provided for its exposure to NAFED. As a result GNPA dropped 4% qoq, while NPA coverage increased 260bps qoq to 74.8%, better than its peers. Further, gross slippage (as percent of advances) decreased 30bps qoq to 2.95%, still higher than its peers, with improvement in both the SME and corporate segments. Retail registered higher delinquencies. The bank restructured an additional Rs. 0.7bn of loans in the quarter. A high 14.7% capital adequacy is better than most peers and offers fair assurance against further delinquencies.

Our take. On higher credit costs, we reduce our FY14/15 earning estimates 9.9%/7.4%. On the lower RoE, we trim our target to Rs. 481, from Rs. 539 earlier. The diversified loan book, better productivity and high capital adequacy would aid RoE expansion by FY15 to 17%. On the inexpensive valuations, we retain a Buy. At our Mar'14 target, the stock would trade at P/BV of 1.2x FY14e and 1.0x FY15e. Our target is based on the two-stage DDM (CoE: 15%; beta: 0.8; Rf: 8%). Risk: Higher-than-expected delinquencies.

Source : Equity Bulls

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