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Result Highlights

* Asset quality: FED upfronted slippages of Rs 6.4bn while taking a benevolent stand on restructuring, which rose to 1.82% of advances, up 78 bps QoQ

* Margin picture: NIM shrank 8 bps QoQ, impacted by an interest reversal of Rs 0.65bn, with management guiding for a reversion to 3.20% by the end of FY22

* Asset growth: Advances de-grew/grew -1.6%/7.0% QoQ/YoY supported by the agri book, which grew 4.7%/23.4% QoQ/YoY

* Opex control: Total opex declined -6.7% QoQ but management guided for a reversion to a cost to income ratio of 48%

* Fee income: Core fee income declined -29.7% QoQ due to weakness in processing fees, third-party distribution and cards

Our view – Upfronting of slippages and benevolent restructuring does not alter bullish thesis

Full year slippage guidance of ~Rs 18bn implies most of the slippages have been taken upfront:

Retail slippages amounted to Rs 1.27bn, of which slippages from gold loan book were Rs 0.85bn, the latter being deliberately taken as opposed to conducting auctions, to retain customers. Restructured book amounted to Rs 24.1bn, of which Rs 14.2 belonged to the core retail book, of which Rs 7.4bn was from home loans and Rs 5.7bn was from LAP book, both of which have low PD as well as low LGD. FED utilized treasury gains to make healthy provisions, which jumped 165% QoQ to Rs 6.4bn. Provisions were made with a view to providing a 15% cover on the restructured book. PCR excluding TWO remained healthy at 65%.

Elevated slippages meant interest reversals remained on the higher side at ~Rs 0.65bn:

Management stated that while the lion’s share of cost of deposits decline has played out due to reasons including most of the shedding of bulk deposits being behind us, yield on advances is expected to inch up going forward. A NIM of 320 bps has been envisaged by the end of the year.

Agri book was the only broad segment to display sequential growth but management flagged resolutions to 2 key segments:

Management stated that, while gold loan business remained stagnant for about 3 months, there has been a recovery over the last fortnight and this book is likely to grow ~30% over the year.Credit card foray was stalled due to the Mastercard embargo, but a resolution was 6-8 weeks away.

We maintain ‘Buy’ rating on FED with a revised price target of Rs 111:

We value the standalone bank at 1.0x FY23 P/BV for an FY22E/23E/24E RoE profile of 11.9/13.7/14.4%. We assign a value of Rs 7.5 per share to the subsidiaries, on SOTP.

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