Published on 23/10/2020 12:16:33 PM | Source: SPA Securities Ltd

Update On Federal Bank By SPA Securities

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Federal Bank reported gross advance growth of 1.28% for Q1FY20 on a QOQ basis while deposits rose by 1.17%on a QOQ basis, against a QOQ advance decline of 0.66% in Q1FY21 and deposit growth of 1.74%in Q1FY21. NIMS for the quarter stood at 3.13% against 3.07% in Q1FY21. GNPA's stood at 2.84% against 0.99% in Q1FY21 while NNPA stood at 0.99% against 1.22% in Q1FY21. The provision coverage ratio was at 78.34% against 75.09% in Q1FY21.


Gross advances growth led by retail and agri

Gross advances logged in a growth of 1.28% on a QOQ basis led by 9% growth in agri loans and 5% each in SME and retails advances while corporate advances degrew by 5% on a QOQ basis. Within retail - gold loans logged the best growth rates. On the deposit front current accounts logged 12.04% QOQ growth while savings grew 5.37% on a QOQ basis. Term deposits degrew 1% QOQ.


Around NIL Slippages

For the second quarter slippages remained nil to muted as recoveries averaged around historical numbers. A real picture on slippages will only emerge in the Q3 numbers. Without the supreme court directive the slippages for the quarter would have been around INR 2750 mn which is lower than the quarterly run rate of ~ INR 3000 mn. Collection efficiencies at the bank have come back to pre-covid levels.


Operating profits higher while provisioning prudence drags

Operating profits were higher by 8% QOQ as NII and other income grew by 6% and 4% QOQ respectively. NII improved on the back yield on advances dropping by 8 bps while the cost of deposit registered a reduction of 27 bps QOQ. During the current quarter, the Bank has made additional provision of INR 4016.10 mn (INR 930.00 mn during Q1FY21) leading to a 23.24% drop in PAT on a sequential basis. Other income improved as fee income form the retail and wholesale segment clawed back to normalcy while treasury income slowed after 2 consecutive quarters of healthy profit booking


Clarity only past January 2020

As the effects of seasonality and pent up demand recede over the current quarter and slippage accounting returns to normalcy, further clarity will emerge regarding the actual quantum of asset quality pain within the bank and the strength of the Indian economy, we remain confident of a smart recovery in the economy.


Valuation and Outlook

We believe that only 20% of the loan book is susceptible to default probabilities of 10-15%. We retain our expectation of advances growth of~16% for the period FY20-FY22E and GNPA's at 2.4% in FY22E as the impact of stimulus, a global shift from China, MSME capex and urban and rural Indias' retail engine firing, NIP investments and recovery post COVID start reflecting coupled with improved recovery proceeding timelines. The bank is currently trading at 0.7x P/ABV of FY22E ABV of INR 83. We retain our buy recommendation and target of INR 124 in 18-24 months implying a p/b multiple of 1.5x onFY22E on a standalone basis.


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