Federal Bank, a private sector lender, reported stable asset quality with GNPA at 3.50% versus 3.41% QoQ (vs 2.96% YoY) and NNPA at 1.2 vs 1.2% QoQ (1.2% YoY) led by recovery from kingfisher account and higher write off. Covid Specific Restructuring assets saw uptick at Rs 8.5 billion in Q1FY22 by retail and gold loans (Rs 6.5 billion) and expects Rs 4 billion in Q2FY22; overall it stands at 1.8% versus 1% earlier. Stressed book % of assets which was declining for last 3 years spiked to 2.24% versus 1.76% QoQ.Due to Second covid wave, Credit growth slowdown to 7% YoY vs 9% YoY (FY21); Deposits growth stood at 9% YoY vs 13% YoY (FY21). Net interest income growth slowdown to 9% YoY (17% YoY growth Q4FY21) led by declined in NIMs.
Operating profit grew by 22% YoY driven by lower cost to Income (45% vs 53% QoQ). Provisions grew by 63% YoY at Rs 6.4 billion (+165% QoQ) led to decline in PAT at 8% YoY (23% QoQ). Collection efficiency remains stable at 95% QoQ. However, Bank able to collect 95% against demand from 14% of restructured book.
IDBI Capital has recommended 'Buy' rating on Federal Bank with a new target price of Rs.102 (earlier Rs.96) valuing it at 1.1x (earlier 1.0x) P/ABV FY23E.
Key highlights and investment rationale
Credit and Deposit growth slowdown: Loan book grew by 7% YoY (-1.6% QoQ) as against 9% YoY (Q4FY21). Retail/Agri/SME grew at 15%YoY/24%YoY/10%YoY respectively, whereas corporate book continues to decline by 4% YoY. Under retail portfolio, gold loan book growth lowers at 54% YoY (-0.3% QoQ) vs 70% YoY in Q4FY21 and expects to grow at 30% further. Bank expects further loan growth would come from business banking, retail, credit card and gold loan. Credit card customers stands at 25,000 (comprise of ETB and employees) while due to Master card issue, issuance halted for 6-8 weeks. Deposits grew at 9% YoY with improvement in CASA to 34.8% vs 33.8% YoY.
Stable Asset quality, restructured book saw uptick: Asset quality remain stable as GNPA stood at 3.50% vs 3.41% QoQ and NNPA at 1.23% vs 1.19% QoQ. Slippage ratio stood at 2.0% (annualized) vs 0.6% YoY while write offs increased substantially at 4.4bn. Covid Specific Restructuring assets in Q1FY21 stood at Rs 8.5 billion comprise of Retail/Gold loan of Rs 4.5 billion/ Rs 2 billion respectively and rest from SME portfolio. Bank expects Rs 4 billion addition in Q2FY22. Overall it stands at 1.8% (vs 1% earlier) of total advances. Stressed book % of assets saw uptick at 2.24% vs 1.76% QoQ due 2nd covid wave. Collection efficiency remains stable at 95% QoQ while collected 95% against demand from 14% of restructured book.
NIMs remain stable: NIMs remain lowers 8bps at 3.2% QoQ as decline in cost of deposits (down 25bps QoQ) at par with decline in yields (down 25bps QoQ). Management expects NIM to remains in range of 3.15%-3.20%.
Outlook: Federal bank has transited through first wave covid-19 impact much better than its peers (mid cap private banks) with respect to lower restructuring as well as lower additions to NPA. We expect second wave impact will also be lower as compared to its peer group. Bank had enough opportunity to grow in front of fee income in terms of cross sell as its customer base stands at 8mn. We believe there is potential for an improvement of 5-10bps every year in ROA post flagging of Covid -19 impacts.
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