We maintain a BUY on Federal Bank with a target price of Rs 64. Our earnings estimates are mostly unchanged. We assign a target multiple of 0.9x FY22E, as return ratios are likely to be subdued over FY21-22E at ~0.75%, mostly due to elevated credit costs (~1.25%) and muted growth (~10%). We believe the impact of COVID-19 on the bank will be lesser than is indicated by its current valuation. Further, we like its granular liability franchise (FB’s deposits (%) from retail and small business customers are the highest amongst peers).
* 1QFY21 highlights: NII at ~Rs 13bn (+12.3/6.6% YoY/QoQ) was 9% ahead of estimates, led by better-than-expected NIMs (3.07%). High treasury gains (Rs 3bn) resulted in a PPOP beat (+28.9% vs. estimates).
* Moratorium trends: FB’s gross moratorium (by value) was stable at 35%. However, the net moratorium dipped to 24%, as borrowers representing ~11% of loans paid all (four) instalments, but these loans were classified as ‘under moratorium’. While the downtrend in the net moratorium is positive, as some locations have re-instituted lockdowns, the sustainability of this trend will be keenly watched.
* Provisioning: FB made non-tax provisions of Rs 3.95bn; including COVID19 related provisions of Rs 930mn (total Rs 1.86bn). The uptrend in PCR (59.6%, +886/510bps) persisted. We expect non-tax provisions to remain elevated at 0.9% of average assets in FY21E.
* Deposits and capital: FB saw healthy deposit growth at 17/2%, led by CASA deposits at 19/7%. CET-1 was ~13%. We believe that it may be prudent for the bank to raise capital. However, the management said that the bank does not intend to do so in the near term. We have not incorporated an equity raise in our estimates.
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