MOSL: Federal Bank (Buy) - Healthy balance sheet growth continues - profitability marred by opex and provisions

Federal Bank: Healthy balance sheet growth continues; profitability marred by opex and provisions

(fB IN, Mkt Cap USD3.1b, CMP INR101, TP INR127, 26% Upside, Buy)

• Federal Bank (FB) recorded PPoP growth of 5%/7% QoQ/YoY (to INR5.9b; 10% miss), as 7% beat on other income (+37%/+11% QoQ/YoY to INR3.1b) was offset by 6% miss on opex (+7%/+15% QoQ/YoY to INR6.6b) due to additional INR179m of gratuity provisions. Core PPoP growth was healthy at 6%/14% QoQ/YoY. Elevated provisions at INR3.7b (driven by high slippages) led to PAT of INR1.45b.
• NII growth came in at -2%/+11% QoQ/YoY (5% miss), as NIM shrunk to 3.11% (-22bp QoQ), driven by a 41bp QoQ decline in yield on advances.
• Loan growth of 8%/25% QoQ/YoY was driven by 36% YoY growth in corporate book, while retail and SME loans also maintained their healthy traction (+18%/+10% YoY). Deposits grew 11%/15% QoQ/YoY to INR1.12t. CASA ratio stood at 33.26%.
• Asset quality deteriorated due to a spike in slippages (INR8.7b, of which INR4.9b was due to the RBI’s revised stressed asset guidelines). Total slippages at 4.8% (2.4% in 3QFY18) led to GNPA rising 29% QoQ to INR27.9b. PCR declined to 44.5% from 46.5% in 3QFY18. GNPA/NNPA increased to 3.0%/1.69% (+48bp/+33bp QoQ). Recoveries and upgrades increased 19% QoQ to INR2.4b, while write-offs were negligible at INR141m. Total net stressed book (NNPA, OSRL and net SRs) stood at INR28.9b (3.1% of advances).