Published on 26/11/2020 12:35:38 PM | Source: Motilal Oswal Financial Services Ltd

Buy Federal Bank Ltd For Target Rs.70 - Motilal Oswal

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Strong operating performance; Collection efficiency back to pre-COVID levels

Expect restructuring of up to 3% of total loans

* Federal Bank (FB) posted strong 2QFY21 operating performance on healthy NII growth aided by (a) margin expansion, (b) recovery in core fees, and (c) improvement in provisioning coverage. Higher provisions toward COVID-19 though affected PAT. Overall, the bank holds ~50bp provisions toward the COVID-19 impact. PCR has improved to 66% and FB expects restructuring of up to 3% of loans as collection efficiency improved to 95% for Sep’20.

* We have fine-tuned our estimates for FY21 and increased it for FY22E by ~10% owing to an increase in our margin and credit cost estimates. Maintain Buy.


Strong operating performance; COVID related provisions affected PAT

* FB reported 26% YoY decline in net profit to INR3.1b, mainly due to the higher provisions of INR5.9b, which includes additional provisions of ~INR4.0b toward COVID-19. Thus, total COVID-19 provisions now stand at ~INR5.9b (~0.5% of loans).

* NII grew 23% YoY (~INR13.8b) as margins increased 6bp QoQ to 3.13%. Core fee income stood broadly flat YoY due to muted loan growth trends while higher treasury income resulted in other income growth of ~21% YoY. Opex growth moderated to 7% YoY, and thus, C/I ratio improved to 46.7% (v/s 47.8% in 1QFY21). Therefore, PPoP grew 40% YoY.

* Loan growth moderated to ~6% YoY (1.3% QoQ) to INR1.2t, led by sluggish trends in the wholesale portfolio while Retail/Agri loans grew ~13%/20% YoY. Also, FB’s Business Banking portfolio grew 13% YoY. Within Retail, Gold loans grew 54% YoY (+24% QoQ) while Housing loans grew 10% YoY. Deposit base grew ~12% YoY, led by CASA growth of 20% YoY. CASA ratio, thus, improved by 166bp QoQ to ~33.7%.

* On the asset quality front, slippages were negligible, primarily due to the Supreme Court (SC) order on temporary halting of NPL recognition. Thus, GNPA/NNPA ratio improved by 12bp/23bp QoQ to ~2.8%/~1.0%. PCR improved significantly to 65.7% v/s 59.6% in 1QFY21. Management further indicated that if the SC hadn’t temporarily halted NPA recognition, slippages would have stood at INR2.37b.


Highlights from management commentary

* Overall, expect total restructuring of INR30-35b (up to 3% of loans) with INR10b in the corporate portfolio and INR15b in the retail portfolio. SME/Business Banking portfolio would form the balance INR5-10b.

* Collection efficiency reached 95% of Feb’20 levels (pre-COVID levels) for Sep’20. In case of the non-moratorium pool, collection efficiency stood at ~99%, while for the business segments – Retail (91%) and Commercial Banking (93%).


Valuation and view FB has delivered healthy loan growth in the retail asset portfolio, led by Gold loans. Its wholesale portfolio trend remained muted, reflecting the current weak economic trends. However, the bank’s liability franchise remains strong with retail deposit mix at >90%, which is likely to keep margins steady. On the asset quality front, PCR has strengthened to ~66% and the bank expects restructuring of up to 3% of loans as collection efficiency has improved to 95% for Sep’20. Overall, we expect credit cost trends to remain elevated as slippages would increase during 2HFY21. We have finetuned our estimates for FY21 and increased it for FY22E by ~10% owing to an increase in our margin and credit cost estimates. We have also introduced our FY23E estimates. We, thus, estimate FB to report RoA/RoE of 1.0%/12.7% by FY22E. Maintain Buy with TP of INR70 (0.7x Sep-22E ABV).


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