EUR 120.00 For Business Accounts Only

MOSL: FEDERAL BANK (Buy)-Asset quality outlook turning better; RoA expansion to drive re-rating

FEDERAL BANK: Asset quality outlook turning better; RoA expansion to drive re-rating

(FB IN, Mkt Cap USD2.6b, CMP INR93, TP INR115, 24% Upside, Buy)

 

Liability franchise remains strong; asset mix improving

• Federal Bank (FB) reported a sharp decline in net stressed loans to ~2.3% of loans (-14bp QoQ) in 3QFY20, led by the resolution of a large restructured account (airline). Management expects slippages to subside further with no residual stress in corporate loans above INR1b. Also, healthy provision coverage (incl. TWO) will facilitate controlled credit cost (estimated to average ~62bp over FY20-22).
• Although margins were impacted by ~15bp over the last two quarters, the changing asset mix changing toward retail and moderating slippages will drive an improvement in margins over the near term.
• We believe that the stock trades at inexpensive valuations (1.3x FY21 ABV) and thus offers ample scope of re-rating as the earnings cycle recovers. Maintain Buy with a target price of INR115 (1.4x for Sep'21E ABV). 

Watch-list dissolution nearly complete; asset quality to improve gradually 

• FB reported a sharp decline in net stressed loans to INR27b (~2.3% of loans v/s 4.0% in 3QFY18). It indicated that there is no residual stress in corporate accounts above INR1b. Also, retail/agri/ business banking are showing improving trends for the last two quarters. Overall, FB maintains a healthy coverage ratio of 66.2% (incl. TWO), which will facilitate controlled credit costs. We thus estimate avg. credit cost of ~62bp over FY20-22.