Federal Bank - Effectively navigating the cycle; structurally strengthening franchise - ICICI Securities

Federal Bank's (FB) Q2FY21 collection efficiency of ~95% (portfolio level), potential restructuring of 2-3%, slippages guidance of sub-2%, provisioning coverage of 66% and ~50bps contingency buffer summarises its expectations of asset-quality performance. This, coupled with improving NIM profile (lowest savings rate, competitive TD rates on offer, rising better-rated asset profile), and building traction of core-fee income improves the visibility of it touching RoAs of 1% sooner than later. Management's asset quality narrative, strengthening lending and deposit franchise, technology investments/tie-ups and upfront interest de-recognition and provisioning will cushion future earnings volatility. This reinforces our confidence that FB is shifting away from typical regional bank mindset. The bank's 0.7x FY22E ABVPS appears quite tempting. Maintain 'BUY'.

- Asset quality in good stead, but slippages may increase by 30-50% than normal quarterly run-rate due to Covid-19 pandemic. Fresh slippages remained negligible in Q2FY21 owing to Supreme Court's interim order, but its segment-wise analysis, and portfolio behaviour of Morat book suggest incremental slippages may increase 30-50% over next 2-3 quarters, translating into annualised slippage ratio of sub-2%. The bank remains optimistic on its ability to navigate the current cycle effectively given its favourable asset mix - 80% of corporate book (38% of loans) rated A & above, ~10% gold loans and ~15% home loans.

- Contingency buffer of ~50bps of loans and coverage ratio of 65% will cushion earnings going ahead. Its conservative approach in utilising Q2FY21's strong profitability to strengthen balance sheet as reflected in creating Rs4bn Covid-related buffer, improving PCT to 66% and upfrontly de-recognising interest of Rs300mn, is likely to help it navigate the current cycle with manageable credit costs and steady NIMs. Further, the bank's restructuring guidance at 2-3% and Sep'20 collections at ~95% vindicate our view about it maintaining better asset quality than peers.

- NIM expansion driven by strong liability franchise and redesigned portfolio. It has strategically redesigned its portfolio in favour of high-yielding products like gold loan and personal loan, and calibrated growth in lower-yielding products like home loan, large corporate products, etc. This, coupled with strong traction in deposits, despite offering most competitive rates (SA rate @ 2.5% & peak TD rate @ 5.5%) enabled 6bps QoQ margin improvement in Q2FY21. Going ahead, with expected momentum in gold loans (up 24% QoQ in Q2FY21) and other high-yielding products, management expects NIMs to continue improving hereon and settle between long-term averages of 3.2-3.3%.

- Maintaining cautious stance in growing advances until the overall economy improves. While Federal registered strong 6% QoQ growth in advances (ex-corporate) largely driven by gold loans, personal loans and SMEs, it continues to maintain cautious stance in growing advances during current uncertainties, guiding at ~8% YoY credit growth in FY21e. Overall credit growth in Q2FY21 remains muted at 1% QoQ with higher growth in retail segment across all products, while deleveraging in few large corporates resulted in wholesale portfolio declining 3% QoQ.

Shares of FEDERAL BANK LTD. was last trading in BSE at Rs.52.25 as compared to the previous close of Rs. 51.75. The total number of shares traded during the day was 3987594 in over 6589 trades.

The stock hit an intraday high of Rs. 53.45 and intraday low of 51.45. The net turnover during the day was Rs. 209739414.

Source : Equity Bulls

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