MOSL: FEDERAL BANK (Buy)-Strong core operating performance-asset quality deteriorates slightly

Federal Bank: Strong core operating performance; asset quality deteriorates slightly

(FB IN, Mkt Cap USD3.5b, CMP INR113, TP INR149, 32% Upside, Buy)

•  FB recorded PPoP growth of -4%/18% QoQ/YoY (INR5.6b; 4% miss), driven by a 5% miss on total income (24% beat on other income, which declined 20%/13% QoQ/YoY to INR2.29b). The impact, however, was partly offset by a 5% beat on opex, which grew 2%/4% QoQ/YoY to INR6.2b, as employee expenses fell 4%/6% QoQ/YoY. Core PPoP growth was strong at 5%/37% QoQ/YoY.
• NII growth came in at 6%/20% QoQ/YoY (1% beat), aided by 22% YoY loan growth and a stable NIM of 3.33% (+2bp QoQ). Other income fell 20%/13% QoQ/YoY, driven by sharp moderation in treasury gains (-61%/-66% QoQ/YoY).
• Loan growth of 5%/22% QoQ/YoY was driven by corporate book growth of 30% YoY. Retail/agri and SME loans also maintained strong traction (up 18% and 20% YoY, respectively).
• Asset quality deteriorated slightly due to a spike in education loan slippages (INR710m out of total retail slippages of INR1.5b). Total slippages at 1.94% (1.4% in 2QFY18) led to an 11% QoQ increase in GNPA to INR21.6b. However, the bank has up-fronted provisions toward education loans, taking PCR to 46.5% from 45.3% in 2QFY18. GNPA/NNPA declined to 2.51%/1.36% (+12bp/+4bp QoQ). Recoveries and upgrades increased 35% QoQ to INR2.2b, while write-offs were negligible at INR10m.
• Other highlights: a) Business growth is picking up outside Kerala, with 38%/40% YoY growth in retail/SME loans. c) CASA ratio stayed stable sequentially at 32.96%.