MOSL: FEDERAL BANK (Buy)-Strong operating performance-Growth continues with asset quality stable

​Federal Bank: Strong operating performance; Growth continues with asset quality stable

(FB IN, Mkt Cap USD2.1b, CMP INR250, TP INR302, 21% Upside, Buy)

• Federal Bank (FB) recorded robust PPoP growth of 5%/23% QoQ/YoY (INR5.8b, 8% beat), led by 12%/24% QoQ/YoY NII growth, and controlled opex growth (+5%/+18% QoQ/YoY; 7% beat) on curbed employee expenses (+7% YoY).
  
• NII growth came in at 12%/24% QoQ/YoY (3% beat), aided by 25% YoY loan growth and an increase in the CD ratio to 83% (75%/80% in 2QFY18/1QFY18). NIM expanded 18bp QoQ to 3.31%, as 1QFY18 was impacted by interest reversal of INR160m. Other income fell 13% QoQ as the base quarter had a lumpy INR2b treasury income component. CI ratio rose 20bp QoQ to 50.8%.
  
• Loan growth of 6%/25% QoQ/YoY was broad-based, with strong growth across segments. Corporate growth was the strongest at 7%/43% QoQ/YoY, with retail/agri loans also showing strong traction (+17%/+24% YoY).
  
• Asset quality was stable, as total slippages declined ~11% QoQ to INR2.8b (adjusted for lumpy slippage of INR1.05b in 1Q); GNPA/NNPA declined to 2.39%/1.32% (-3bp/-7bp QoQ), with the slippage ratio down to 1.8% v/s 2.9% in 1QFY18. Recoveries and upgrades increased 66% QoQ to INR1.6b, while write-offs came in at INR502m.
  
• Other highlights: a) FB witnessed 45% growth in new account opening, b) business growth is picking up outside Kerala, with 31% YoY growth in each of retail/SME loans and 26% SA growth, c) Fed-fina contributing INR1.5b of loans each month.