Federal Bank Annual Report Analysis - New guardrails under construction for new profit pools - HDFC Securities

Krishnan ASV, Institutional Research Analyst, HDFC Securities and Deepak Shinde, Institutional Research Analyst, HDFC Securities

Federal Bank's (FB) Annual Report 2020-21 reinforces a steady franchise that is gradually adding new guardrails (FinTech partnerships in white spaces and high-ROA businesses such as CVs, MFI and credit cards) to its conventional moats (granular deposits, strong underwriting architecture and a secular NR franchise). Despite conservative impairment recognition during the pandemic year, FB carries limited baggage, albeit with negligible provisioning buffers. However, the recent equity infusion by IFC offers much-needed long-term capital to a franchise that is smartly adding new-gen legs and profit pools (government business, HNIs and DSA in business banking). We incorporate the recent equity infusion and revise our FY22/FY23E PAT estimates upwards by 1% each and maintain BUY with a revised TP of INR 98 (earlier INR 97).

Conventional moats intact: Concentration risk on both sides of the balance sheet continues to remain low, with top 20 depositors and exposures in line with leading private sector banks at 4.8% and 10.4% respectively. The bank's deposit franchise is among the most granular with >90% retail deposits, driving cost of deposits lower by ~90bps (at 4.7% in FY21).

Building blocks for the next leg of growth: The Annual Report disclosures lend further credence to the fact that FB continues to witness traction from growth initiatives launched during earlier years. On the deposit front, the HNI segment (targeted under the Celesta program) contributes ~45% of the CASA balances (FY20: 40%) and is beginning to reflect in early benefits on fee income. On the asset side, FB is driving incremental portfolio growth in high-RoA areas (CV, credit cards and MFI businesses) and building scalable FinTech partnerships, as evidenced in the bank's emergence as the largest banking partner for BharatPe (3.8mn merchants on-boarded on the Business Banking vertical; 48mn transactions during the year).

Pension obligations an old problem; PSLCs a new normal: FB's operating efficiency gains on the back of increasing digitisation initiatives have been offset by stubbornly-high pension obligations on the back of wage revisions and declining yields (~20bps impact). The RBI's de-classification of 'trade' segment from PSL-MSME led to ~10% PSLC buyout and an increase in RIDF deposits to 6.5% of loans (FY20: 4.9%) - a continued drag on asset yields.

Strong capitalisation acts as source of competitive advantage: Although the overall stress pool (including the restructured portfolio at 1.2% of loans) was largely steady, FB had completely drawn down its provisioning buffer (0.4% of loans) during Q4FY21. The recent equity infusion by IFC offers much-needed long-term patient capital and a formidable competitive advantage to opportunistically capitalise on potential growth opportunities.

Shares of FEDERAL BANK LTD. was last trading in BSE at Rs.84.8 as compared to the previous close of Rs. 84.65. The total number of shares traded during the day was 1479077 in over 4540 trades.

The stock hit an intraday high of Rs. 86.3 and intraday low of 84.6. The net turnover during the day was Rs. 126188679.

Source : Equity Bulls

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