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Improving visibility on RoA sustaining >1.2% in FY23/24E; credit growth to remain strong

Multi-quarter high RoA / RoE at 1.3% / 16% despite Rs0.5bn additional provision towards SR portfolio, sharp NIM expansion by >15bps QoQ, steady decline in net stressed asset portfolio to 1.8% summarise Federal Bank’s strong financial performance during Q3FY23. This is an outcome of the management’s successful execution of its new business strategy revolving around scaling up of highmargin products like CV / CE, MFI, MSME and credit cards (put together contributes 21% of total loans), focus on profitable growth and derivation of synergies from fintech partnerships. Launch of digital personal loan with Paisa Bazzar for NTB customers and cross-sell of personal loans on Fi platform are steps taken in the right direction to reap benefits from fintech partnerships.

Broad-based recovery in credit growth (up 19% YoY), steady margin expansion and strong PCR @70% reinforce our view that earnings trajectory would continue to remain strong. While the bank was investing towards franchise build-up and new business lines, asset quality remained of utmost importance as reflected in stressed asset portfolio in Q3FY23 (net NPA + std. restructured book + net SR) declining to 1.78% vs 1.98% in Q2FY23. Given the improving visibility on higher credit growth and sustainability of >1.2% RoA in FY23E/FY24E, we maintain BUY with revised target price of Rs170 (earlier: Rs155), valuing at PBV of 1.6x (1.5x earlier) on FY24E BVPS. We are not factoring value unlocking from subsidiaries

* Strong traction in earnings continued with Federal delivering multi-quarter high RoA of 1.3%. Improving trajectory in core operating performance continued for fifth consecutive quarter as reflected in strong 14% QoQ growth in PAT despite additional provision of Rs0.5bn towards security receipts, thereby, driving RoA improvement to 1.3% during Q3FY23 vs 1.02% / 1.03% / 1.08% / 1.21% during Q3- Q4FY22/ Q1-Q2FY23, respectively. Strong NII growth at 11% QoQ, controlled expenses (up only 5% QoQ) and lower provision at Rs2bn (credit cost at 38bps) drove the earnings during Q3FY23. NII was primarily driven by sharp >15bps QoQ NIM expansion and 4% QoQ loan growth. Cost/income ratio improved to 49% during Q3FY23 vs 55% in Q3FY22. Total provision during 9MFY23 remained at 33bp

* Launched cross-sell of personal loans on Fi platform. In line with its increased focus on reaping benefits from fintech partnership, it launched cross-sell of PL on Fi platform to tap salaried customers who are digitally native. During the short span of lunch, it already disbursed 3,000 loans during Q3FY23. FB is already live with Paisa Bazaar for NTB personal loans.

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