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Business growth outlook improving…

Federal Bank reported mixed results wherein it saw an improvement in business growth and stable asset quality but with utilisation of Covidprovisions in the current quarter, additional provisioning buffer has reduced.

Net interest income (NII) declined 1.2% QoQ to | 1420 crore. This was below our expectations. Reversals worth | 21 crore for interest on interest relief were party responsible for slower NII growth. NIMs remained stable at 3.23% vs. 3.22% on a QoQ basis aided by lower cost of funds. Other income also declined 3.4% QoQ to | 465 crore as treasury income fell 44% QoQ but fee income saw decent growth of 21.9% YoY, 3.5% QoQ.

Opex increased 4.7% QoQ due to increased business activity. Hence, as a result of subdued topline and increase in opex, C/I ratio jumped from 49.8% to 53.1% QoQ. The bank, during the quarter, used | 60 crore worth provisions towards restructuring under resolution framework and | 475 crore towards IRAC norms requirement, from | 536 crore Covid-19 provisions held in previous quarter. Overall provisions declined 42% QoQ. As a result, PAT was up 58% YoY, 18% QoQ to | 478 crore.

Overall asset quality saw a spike on a reported basis due to removal of standstill classification norm. However, on a proforma basis, GNPA ratio was largely stable at 3.41% vs. 3.38% (proforma) QoQ. Slippages for the quarter were at | 598 crore vs. | 1089 QoQ (proforma) while write-offs came in at | 379 crore vs. | 8 crore QoQ. Total standard restructured book is now at | 1618 crore (~1.2% of loans), of which ~| 1409 crore pertains to Covid related stress. Around 70% of restructured book are secured loans.

Collection efficiency in April dipped to ~88% from 95% in March due to partial lockdowns. Business traction saw increased momentum on a sequential basis as credit growth during the quarter came in at 5.1% QoQ to | 131878 crore. This was mainly driven by 18.6% YoY and 6.3% QoQ growth in retail advances, in which gold loan saw robust growth of 70% YoY. On the deposit front, growth was at 6.8% QoQ to | 172644 crore. Term deposit growth was higher at 7.9% QoQ vs. CASA growth of 4.7% QoQ.

Valuation & Outlook

Amid a gradual pick-up in advances, focus on operational matrix through improving margins and cost control is expected to contribute to earnings growth. We believe performance on the asset quality front holds the key as it will dictate credit cost requirements as the bank has relatively less buffer. However, valuations are benign, which factor in near term concerns. Hence, we remain positive at current levels of 0.9xFY23E ABV while RoA, RoE are expected at 1.1%, 14.7%, respectively, by FY23E. We maintain BUY rating on the stock with a revised target price of | 95 (earlier | 90) by valuing the share at 1.1x FY23E ABV.

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