Federal Bank - 1QFY2014 Result Update - Angel Broking

Federal Bank announced a weak set of numbers for 1QFY2014, with a muted NII growth of 3.7% yoy. Non-interest income grew at 73.6% yoy primarily boosted by treasury gains and helped the bank to achieve a pre-provisioning profit growth of 15.6% yoy. Provisioning expense grew by 290% yoy (as the bank increased NAFED provisioning to 100%), which resulted in earnings de-growth of 44.5% yoy.

NIMs improve sequentially; Asset quality pressures persist: During 1QFY2014, the bank witnessed moderate growth in its balance sheet, as its advances grew by 8.5% yoy, while deposits grew by 12.7% yoy. Within advances, Retail and SME book registered a healthy growth of 21.0% and 19.9% yoy, respectively, while corporate book de-grew by 6.0% yoy. CASA ratio came in higher by 202bp sequentially and 60bp yoy to 29.0%. NIMs improved by 6bp qoq to 3.13%, aided by a 21bp sequential fall in cost of deposits to 7.4%. Boosted by treasury gains, the overall non-interest income for the bank grew by 73.6% yoy to Rs. 216cr. Treasury income came in at Rs. 89cr compared to Rs. 26cr in 1QFY2013. Non-interest income (excluding treasury) grew strongly by 29.3% yoy to Rs. 127cr. During the quarter, the annualized slippage rate came in elevated at 2.8%, though lower than 3.8% in previous quarter. As of 1QFY2014, the Gross NPA ratio stands at 3.5% (3.4% in 4QFY2013), while the net NPA ratio stands at 0.9% (1.0% in 4QFY2013). The PCR (including technical write-offs) improved ~200bp sequentially to 83.0%. The bank restructured advances worth Rs. 76cr during the quarter. Going forward, the Management guided that few large ticket advances worth Rs. 300-400cr could slip into NPAs over the next few quarters, while the restructuring pipeline for the bank stands at ~ Rs. 150-180cr.

Outlook and valuation: Though the Management has taken various steps to stabilize its asset-quality woes, but given the weakening economic environment and the recent macro-economic developments, the pace of improvement in asset quality is expected to be slower than earlier anticipated. Moreover, the bank's gold loan portfolio accounts for ~15% of the overall loan book. As per the Management, ~10-15% of its gold loan book has a loan-to-value (LTV) of more than 90%, which could pose asset quality challenges if there is a significant correction in gold prices here on. At CMP, the stock trades at 0.9x FY2015E ABV. We recommend a Neutral rating on the stock.

Source : Equity Bulls

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