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Outperforming growth guidance; ROA/ROE at multi quarter highs

Price Analysis:

Federal Bank has reported strong 3QFY23 earnings and the positive pointers are a) NPA ratio improvement (GNPA: 2.43% v/s 2.46% in the previous quarter) on the back of healthy credit growth and strong recoveries, b) Reported slippages (?4bn v/s ?3.7bn in 2QFY23) were higher with healthy recoveries (?2.8bn), c) restructuring pool flat with 21% coverage, d) Robust NII growth (27% YoY and 11% QoQ) with 19bps expansion in NIMs, e) Decrease in provisioning expenses with stable PCR, f) Credit growth was better than guidance of 19.5% YoY and 4.3% QoQ, and g) quarterly profit reached ~?8bn for the first time with thirty quarters high ROA of 1.32%. The bank’s credit quality is in check with no major hiccups. Furthermore, the business growth is better than guidance of 15% for FY23E. Consistent growth may drive further re-rating with higher valuation than 1.4x book

Gazing the core:

Multi-quarter low NPA ratios: As expected the bank’s fresh slippages were slightly higher sequentially to ~?4bn v/s ?3.7bn reported in the previous quarter. Retail book contributed 47% of the fresh slippages where Agriculture book contributed 17% of total slippages. There is almost negligible corporate slippages reported. The bank’s up-gradation and recoveries were stronger at ?2.9bn v/s ?3.3bn in previous quarter. Moreover, write-offs are insignificant at Rs0.08bn. GNPA ratio (2.43% v/s 2.46% in 2QFY23) decreased on the back of higher credit growth (denominator effect). The bank’s GNPA ratio (2.43%) and NNPA ratio (0.73%) lowest in 25 quarters and 35 quarters respectively. The bank’s GNPA/NNPA/PCR stood at 2.43%/0.73%/69% v/s 2.46%/0.78%/68% in the previous quarter. The absolute GNPA increased sequentially by 3%. The total standard restructuring reported worth ?30.4bn (1.8% of book); decreased sequentially from ?32.7bn (2.0% of book). The total stress book (restructuring + NNPA + NSR) stood 1.9% of book. The management expects a relapse rate of ~30% from the pool in 2-3 years and would maintain a 65% PCR on the same as prudent measure. The bank has made provisioning of ?1.98bn v/s ?2.68bn in 2QFY23. The loan loss provisions stood at ?1.56bn. Moreover, credit cost decreased to 38bps for 3QFY23.

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