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Despite slight upset on margins (down 18bps qoq to 3.3%), Federal Bank reported beat on PAT at Rs9bn (vs our est at Rs8.1bn) on the back of higher treasury gains and lower provisions. The bank reported exit RoA of 1.45% in 4Q/1.3% in FY23 and has guided for RoA of 1.3-1.35% in FY24. It reported 20% credit growth in FY23 and expects high teen growth in FY24 as well, mainly led by strong traction in retail. Mgmt. has guided for slightly better NIM at 3.30-3.35% for FY24E vs. 3.3% for FY23 due to portfolio mix change. We revise our earnings est. for FY24-25E by 3% and introduce FY26 est. We expect the bank to deliver healthy RoA/RoE of ~1.3%/15-16% over FY24-26E (without factoring capital raise). We retain Buy with a revised TP of Rs180, valuing the bank at 1.3x its FY25E ABV vs. 1.4x its Dec-24E ABV earlier.

Higher corporate growth, cost catch-up leads to higher than expected margin contraction

Federal Bank reported healthy credit growth at 20% YoY/4% QoQ for Q4FY23, led by healthy growth in corporate (+24% YoY). Retail growth too was healthy at 17% YoY/4% QoQ, but gold loan book declined for the second quarter in a row due to a regulatory hiccup leading to slower growth through fintech partner, Rupeek. Higher growth in unsecured loans and increased risk weight on unrated corporate exposure led to a sharp increase in RWA to 60% of assets and, thus, softness in CET 1. Deposits growth accelerated to 17% YoY/6% QoQ, mainly due to faster growth in TDs and cannibalization of SA book (mainly in the NRI segment), leading to a 156bps QoQ decline in CASA ratio to 32.7%. This coupled with a higher TD rate led to a 55bps QoQ increase in the cost of deposits. Thus, a combination of lower loan yield expansion and higher CoF led to an 18bps QoQ contraction in NIM to 3.3%, from a high of 3.49% in Q3. Management has guided for high teen credit growth in FY24, mainly led by retail, while it expects NIM to remain soft in 1H and later improve, leading to full-year NIM of 3.3-3.35%.

Agri/BB stress leads to slightly higher slippages, but headline NPAs trend down

Slippages were marginally higher than expected at Rs4.5bn/1.3% of loans, owing to seasonally higher agri slippages and some stress in the BB segment. However, better recoveries/higher growth resulted in a 7bps QoQ reduction in GNPA ratio to 2.4%. The restructured book contracted by 23bps QoQ to 2% of loans, but it optically remains high vs. peers, as the bank has not declassified loans despite a satisfactory performance.

Outlook and Valuations

We revise our earnings estimates for FY24-25E by 3% and introduce FY26E estimates. We expect the bank to deliver healthy RoA/RoE of ~1.3%/15-16% over FY24-26E (without factoring in the capital raise). However, we believe the bank would soon look for a capital raise via QIP to fund growth aspirations, while still alluding FedFina IPO. We retain Buy with a revised TP of Rs180 (vs. Rs185), valuing the bank at 1.3x its FY25E ABV vs. 1.4x its Dec-24E ABV earlier. Key risks: Slower growth, incl. mortgages, due to macro slowdown; cost-sticky funding cost hurting margins; and key mgmt. attrition.

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