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MOSL: FEDERAL BANK (Buy)-Operational performance getting stronger

FEDERAL BANK: Operational performance getting stronger; improvement in return ratios to drive re-rating

(FB IN, Mkt Cap USD2.5b, CMP INR89, TP INR115, 30% Upside, Buy)

 

• Federal Bank (FB) reported PAT of INR3.3b (6% ahead of our estimate) for 3QFY19, led by controlled provisions of INR1.9b (-34% QoQ). PPoP increased 26% YoY to INR7.1b, despite the bank making MTM provisions of INR350m for pension liabilities. For 9MFY19, PPoP grew 18.0% YoY to INR20b, while PAT increased 17.5% YoY to INR8.6b.
• NII stood at INR10.8b (+13.4% YoY/+5.4% QoQ; in-line), which, coupled with a 51.1% YoY increase in other income, drove 21% YoY growth in total revenue. NIM improved marginally to 3.17% and management suggested for calibrated improvement, going ahead. Fee income grew at a robust 45% YoY to INR2.8b.
• Loan growth was healthy at 24.2% YoY (+4.6% QoQ), led by 35% YoY growth in corporate loans, partly offset by moderation in SME growth to 9% YoY. Deposits grew 22.8% YoY to INR1.2t, taking the CD ratio to 85.5%. CASA mix stood at 33.3% (-4bp QoQ).
• Fresh slippages came in higher at INR4.26b (2% annualized), driven by an increase of 57% YoY in SME slippage to INR1.9b and of 69% YoY in agriculture slippage to INR0.7b. This led to a 5.5% QoQ rise in GNPL to INR33.6b. However, healthy recoveries/upgrades at INR2.4b drove a 234bp QoQ improvement in PCR to 45.9%. Total NSL (incl. SR book) stood at INR28.6b (2.7% of loans).
• Other highlights: (1) Slippage guidance was revised to INR2b-2.5b for 4Q, of which INR1b is expected from MSME. (2) Bank guided for 4Q RoA of ~1% and a 100bp improvement in C/I ratio in FY19. (3) FB has INR2.45b of exposure to IL&FS and carries 7.5% standard provision here. (4) SMA-2 at 1% of loan book.