Buy Federal Bank Ltd For Target Rs.90 - ICICI Securities
Steady performance in most business metrics; collections back at pre-covid level
Federal Bank (FB) has reported healthy financial performance in Q3FY21 led by – i) strong NII growth at 24% YoY despite ~Rs0.4bn of interest reversal on likely incremental stress, ii) improving NIM trajectory, iii) collection efficiency of ~95% (pre-covid level) and revised lower restructuring guidance to ~1.3% vs 2-3% earlier, iv) pro-forma slippages within guidance range and v) highest ever CASA ratio at 34.5%, reflecting its business resiliency and strong franchise. It utilised strong operating performance to improve provision coverage to 77% (66% including proforma slippage) from 66% in Q2FY21. Its redefined business strategy is driving strong 15% YoY growth in core-fee income and it expects this momentum to sustain going ahead. Management’s asset quality narrative, improving business momentum, technology investments/tie-ups and ~40bps of provision buffer will cushion future earnings volatility and improve the visibility of it touching 1% RoAs sooner than later. Maintain ‘BUY’ with a revised TP of Rs90 (earlier: Rs88) as we revise our FY21 earnings estimate upwards by ~22%.
* Asset quality in good stead, pro-forma slippages within guidance; lowers potential restructuring estimate to 1.3% vs 2-3% earlier. While headline slippages remained negligible in Q3FY21 owing to the Supreme Court’s interim order, it disclosed pro-forma slippages of Rs8.63bn. Segment-wise pro-forma slippages are broadly in-line with historical quarterly run-rate and within guidance range. While it restructured Rs10.6bn (0.54% of loans) worth of accounts in Q3FY21, it reduces potential restructuring to ~1.3% vs 2-3% as indicated earlier. It derives comfort from 95% collection efficiency and lower SMA pool at ~2.5%. The bank remains optimistic on its ability to navigate through the current cycle effectively given its favourable asset mix – 76% corporate book (38% of loans) rated A & above, ~10% gold loans and ~15% home loans. Delayed economic recovery would be key downside risk to asset quality outlook.
* NIM expansion driven by strong liability franchise and redesigned portfolio. Margin expanded 9bps QoQ to 3.22% despite it reversing interest income of Rs0.4bn on likely incremental stress. Margin expansion was largely driven by A) redesigned portfolio in favour of high-yielding products like gold loan and personal loan and calibrated growth in lower-yielding products like large corporate, etc. and B) reduced cost of deposit fell 23bps QoQ to 4.87%. Going ahead, with expected momentum in gold loans (up 16% QoQ in Q3FY21) and other high-yielding products, management expects NIMs to sustain at current level of 3.2% with all efforts on improving further. Higher than expected NIMs due to higher growth in products like Credit card, MFI, CV etc is key upside risk.
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