MOSL: FEDERAL BANK (Buy)-Slippages dent profitability-Underlying story intact

​Federal Bank: Slippages dent profitability; Underlying story intact

(FB IN, Mkt Cap USD2.1b, CMP INR115, TP INR139, 21% Upside, Buy)

• Federal Bank's (FB) 1QFY18 PAT declined 18% QoQ (+26% YoY) to INR2.1b (14% miss), despite in-line PPoP (+2%/31% QoQ/YoY), due to the twin impact on NII and provisions from a spike in corporate slippages, with a restructured account slipping into NPA.
• NII growth came in at -5%/16% QoQ/YoY (7% miss) owing to interest reversals of ~INR160m, adjusted for which, calculated NIM would stand at 3.11% instead of 3.05%. Capital raise benefit (+15bp) will help near-term NIMs. Other income grew 17%/39% QoQ/YoY due to a lumpy contribution of INR2b of treasury income. CI ratio improved 60bp QoQ to 50.6%.
• Loan growth of 4%/29% QoQ/YoY was broad-based, with strong growth across segments. Corporate growth was the strongest at 6%/39% QoQ/YoY. Retail & agri loans grew by 3%/27% QoQ/YoY, and SME loans by 3%/17% QoQ/YoY.
• Asset quality deteriorated, with one bulky restructured account of INR1.05b (62% of corporate slippages) slipping into NPA; GNPA/NNPA increased to 2.42%/1.39% (+9bp/+11bp QoQ), with slippage ratio shooting up to 2.88% v/s 1.68% in 4QFY17. Recoveries and upgrades declined 34% QoQ. During the quarter, the bank sold ~INR480m from existing accounts to ARCs.
• Other highlights: a) CASA increased 33% YoY led by 28% CA growth. b) Growth picking up outside Kerala with 20%/25% growth in loans/SA, while overall loans/SA growth was 14%/19%.