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Published on 31/10/2020 1:43:23 PM | Source: Emkay Global Financial Services Ltd

Buy Federal Bank Ltd For Target Rs. 65 - Emkay Global

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Operationally strong quarter; shores up provisioning buffer

* Federal Bank beat PPoP estimates by 10% on the back of healthy margins, fees and treasury gains. However, as a prudent measure, the bank increased specific PCR to 66%. Contingency Covid-19-related provisions led to a 26% yoy fall in PAT at Rs3.1bn.

* Though the overall loan growth trajectory remained moderate, retail growth picked up well on healthy growth in gold loans and some pick-up in mortgages, PL and VF loans. FB expects better growth in 2H, which, coupled with healthy CASA and CoF, should support margins.

* The GNPA ratio fell 12bps qoq to 2.8% due to a Court stay on NPA tagging. Management, however, expects non-corporate slippages in 2H to be 30-40% higher than BAU levels after the moratorium, while 2.5-3% of loans could be restructured based on the current reading, which is lower than our expectation and thus, will be closely tracked.

* We retain Buy on the stock for its strong liability profile, improving retail orientation, reasonable capital position and undemanding valuations. We raise our TP to Rs65 (from Rs58), based on 0.8x Sep’22E ABV.

 

* Growth moderates, but NIM remains healthy: Retail loan growth picked up well (up 13%yoy/6% qoq), but overall growth remained subdued at 6.5% yoy/1.4% qoq mainly due to contraction in the corporate book. Retail loan growth was mainly driven by gold loans (up 54% yoy/24% qoq, and now form 10% of overall loans). The bank has indicated that the business activity is at nearly 80% of pre-Covid levels and reported about 8-10% yoy growth in FY21E. CASA growth remains strong at 20% yoy, with CASA share rising to a historical high of 33.6%, reflecting into lower CoF and better margins (up 6 bps qoq to 3.13%). The bank expects NIMs to remain stable despite upcoming NPA recognition on the back of improving retail orientation and better CoF.

 

* Supreme Court stay on NPA tagging to bunch up NPAs in Q3; bank raises provisioning buffer: The GNPA ratio declined 12bps qoq to 2.8% due to virtually nil slippages given SC stay on NPA tagging and better recoveries/upgrades. If not for SC stay, slippages in Q2 would have been Rs2.4bn, which will now be deferred to Q3 along with accelerated flow of NPA recognition after the moratorium. The bank’s SMA book as of now remains well <1% of loans, including loans worth Rs7.6bn (0.6% of loans), where asset classification benefit was extended due to the moratorium. The bank’s overall collection efficiency in Sep’20 was healthy at 95% (91% for retails loans, 99% for corporate, 93% for commercial banking and 95% for business banking. For the non-moratorium book, collection efficiency stood strong at 99%. Management expects non-corporate slippages in 2H to be 30-40% higher than BAU levels, while 2.5-3% of loans could be restructured based on the current reading. Accordingly, the bank has accelerated specific provision coverage to 66% and has finally shored up Covid-19-related provisioning buffer to Rs5.9bn (50bps of loans), including Rs4bn on the expected restructured book.

 

* Outlook and Valuations: We retain Buy on the stock for its strong liability profile, improving retail orientation, reasonable capital position and undemanding valuations. We have trimmed our earnings estimates for FY21-23 by 4-6%, factoring higher LLP. We raise the TP to Rs65, rolling forward on 0.8x Sep’22E ABV. Key risks to our call: Higher-than-expected NPA formation and prolonged weakness in growth trajectory

 

 

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