Buy Federal Bank Ltd For Target Rs. 92 - HDFC Securities
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Sustained improvement in key metrics
FB’s 3QFY21 operating performance increasingly demonstrates an improving franchise that is beginning to find and consistently exercise pricing power (a gradual 9bps QoQ NIM expansion and strong fee traction). Provisions remained sticky (~130bps ann.), as FB continued to cover pro forma slippages. Even as we continue to monitor asset quality outcomes, we revise our earnings upwards as we foresee a sustained improvement in operating metrics. Maintain BUY with a target price of Rs 92 (1.0x FY23E ABV).
* Strong operating momentum:
For a second consecutive quarter, FB registered a strong operating performance, clocking a PPOP growth of 30% YoY (13% ahead of our estimates) on the back of 9bps margin expansion and strong fee momentum (~1% of loans, ann.).
* Pricing power at play:
FB registered a 22/9bps YoY/QoQ reflation in margins to 3.2%, on the back of declining CoF (4.7% calc., -107/-32bps). This, in turn was aided by sustained re-pricing on the liabilities’ side and strong CASA accretion (34.8%, +302/80bps). We’ve revised our NIM estimates to ~3.2% over FY21-23E (vs. ~3.1% earlier) to factor in CoF tailwinds.
* Pro forma stress rising; par for the course:
FB’s pro forma GNPAs rose to 3.38% (+39bps YoY), led by a spike in the retail segment. Over 9MFY21, the bank clocked pro forma slippages of ~Rs 10.8bn. Collection efficiency came in at 95% in 3QFY21, an improvement of sorts from 2QFY21 levels (excluding the moratorium portfolio). The bank reported a restructured portfolio to the tune of Rs 10.6bn and expects to restructure a further ~Rs 6bn (total ~1.2%). Surprisingly, the retail segment (and mortgages in particular) contributed to a significant chunk of the COVID-19 restructured portfolio. Adjusted for proforma slippages, the PCR improved marginally to 67% - we build blended credit costs at 75bps over F21-22E.
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