EUR 120.00 For Business Accounts Only

MOSL: FEDERAL BANK (Buy)-Business growth moderates; asset quality outlook turning better

(FB IN, Mkt Cap USD2.6b, CMP INR94, TP INR115, 23% Upside, Buy)

RoA expansion to continue
** FB reported moderation in business growth due to the weak environment and higher repayments/stress account resolutions. Although slippages stood elevated, bulk of it came from the pre-disclosed watch-list, which resulted in an overall decline in stressed assets.

** We tweak our estimates marginally for FY21/22 and believe that the bank remains well positioned to deliver a continued improvement in RoA led by margin/cost improvements. Maintain Buy.

Lower provisions aid earnings; corp. slippages came largely from watch-list
** PAT of INR4.4b (+32% YoY) came in higher than our estimate of INR3.9b as provisions were lower at INR1.6b (-36% QoQ) aided by lower charge on debit card loyalty points. NII growth moderated to 7% YoY (INR11.5b), affected by interest reversals of INR0.2b, while margins stood stable at 3%. PPoP stood at INR7.4b (+5% YoY). C/I ratio declined ~100bp QoQ to 52.4%.

** Loan growth moderated to 13% YoY, led by sluggish trends in corporate/commercial banking, while retail loans continued growing strongly at 23% YoY. Within retail, housing and mortgage grew robustly at 21% and 28% YoY, respectively. Deposit base grew 17% YoY, within which CA deposits increased 10% QoQ. CASA mix thus stood at 31.5% (-9bp QoQ).

** Fresh slippages came in at INR5.9b (2.3% annualized), driven by a rise in corporate slippages as two HFCs slipped during the quarter, while all other segments reported a decline. Write-offs stood higher at INR3.3b. GNPA ratio thus moderated by 8bp QoQ, while the NNPA ratio increased by 4bp QoQ as PCR declined ~260bp QoQ to 46.4% (66.4% incl. tech. w/o).