Federal Bank’s 3QFY17 results were better than our expectations. PAT growth of 26.4% YoY, with stable asset quality and accelerated loan growth were the key developments during the quarter.
Business growth remained buoyant:
Loan growth momentum continued to remain strong up 29.1% YoY. After a 26.2% growth in FY17, this is a commendable job by the bank. SME grew by 10% YoY, Retail+ Agri grew by 40% YoY, while corporate segment grew by 46%. Deposit growth was at 18.1% YoY, though the growth rate was lower than what we saw in Q4FY17, overall it can be considered a decent growth on a higher base. CASA continued to have fairly strong growth, up 20.3% and CASA ratio improved to 33.4% vs 32.6% QoQ.
NIM dropped sequentially due to higher interest reversal:
While cost of funds have a downward bias, during the quarter the slippages went up again, due to one large account and hence the interest reversal impacted NIM, down 29 bps QoQ to 3.13%. However, we expect NIM to rebound in the coming quarters. Further cost of funds can also see easing going ahead which will support the NIM.
Asset quality marginally weakened:
Slippages during Q1 stood at `425 cr, substantially higher than `244cr in Q4FY17, as one large corporate account slipped into NPAs. However, the bank had earlier been maintaining that few large accounts remain sticky and were under pressure, so this has not been a negative surprise and incremental slippages could be much lower going ahead. Though slippages remained higher in absolute term, asset base had a strong growth and hence there was only a 9 bps rise in GNPAs to 2.42% vs 2.33% QoQ.
Outlook and valuation:
After exhibiting meaningful improvement in FY17 both in terms of asset quality and earnings, the beginning of FY18 has, remained subdued for the bank, however as we have mentioned earlier, large part of the stress in the loan book is over for Federal Bank and baring some minor hiccups we don’t expect material deterioration in asset quality. We remain positive about the banks performance going ahead. At the CMP, the stock is trading at 1.8x it FY19 Adj BV. We maintain BUY on the stock with a target price of `140.
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