IGI Logo

Focus shifting to profitable growth; asset quality/MD term extension key monitorable

* Federal Bank reported a strong beat on PAT at Rs4.8bn (est. Rs3.2bn), mainly driven by lower provisions. Stable GNPA at 3.4%, lower restructured pool at 1%, stable SMA pool at 4.6% and healthy specific PCR at 66% are positive, but the bank does not carry any contingent provision buffer entering into FY22 amid the second Covid-19 wave.

* Overall credit growth trajectory improved further in Q4 (9% yoy/5% qoq), led by healthy retail growth and seasonal pick-up in corporate book. Though the bank intends to focus on secured retail products, it plans to accelerate the share of CV, MFI and credit card businesses in order to boost margins, which may lead to sustainable high RoAs (>1%).

* The bank’s retail portfolio remained largely resilient due to the higher share of secured mortgages/gold loans (~50%), but the recent diktat on collections in the state and cyclone pose near-term risk. The bank’s Tier-I is reasonable at 13.9%, but we believe that the bank may consider raising capital to strengthen B/S and secure growth capital.

* We estimate the bank’s RoA/RoE to improve gradually to 0.9-1.1%/11-14% over FY22- 24E from 0.8%/10%, led by better NIMs/lower LLP. Retain Buy with a revised TP of Rs100 (from Rs95), valuing the bank at 1x FY23E ABV. Current MD’s term has been extended twice by one year till Sep’21, and thus clarity on the same will be vital.

Healthy growth, stable margins:

Overall credit growth improved to 8% yoy/5% qoq, led by continued healthy growth in retail (8% yoy/6% qoq) as well as seasonal pick-up in corporate (7% qoq). Deposit growth too was healthy (up 7% qoq/13% yoy), while CASA share improved by 330bps yoy to CASA of 33.8%, reflecting into lower cost of deposit (4.7% from 5.7% in Q4FY20). Reported NIM was largely stable at 3.2% despite interest reversal on NPAs. Going forward, the bank plans to accelerate growth in CV, MFI and credit card loans. It intends to grow its unsecured loan book from Rs20bn to Rs70-80bn in next 2-3 years. We believe that the bank’s healthy CASA ratio and increasing share of unsecured book should drive structural improvement in NIMs, which otherwise has been sub-par.

Stable asset quality, but additional contingent provisioning buffer would have been preferred:

Overall GNPA ratio remained qoq stable at 3.4% vs. pro forma in Q3, while restructured pool stood at 1% and SMA pool too was stable at 4.6%. The bank has consumed the Covid-19 provision buffer of Rs5.3bn (0.4% of loans) toward specific provisions on NPAs at Rs4.8bn and restructured provisions at Rs0.6bn. The bank now carries healthy specific PCR of 66% on its GNPA pool (54% in Q4FY20), but an additional contingent provisioning buffer would have been preferred, particularly given the drop in collection efficiency from 95% to ~90% in Apr’21 due to Covid-19-induced disruption. Recent adverse diktat on collections in the state adds to the concern.

Outlook and Valuations:

We estimate the bank’s RoA/RoE to improve gradually to 0.9- 1.1%/11-14% over FY22-24E from 0.8%/10%, led by better NIMs/lower LLP. Retain Buy with a revised TP of Rs100 (valuing at 1x FY23E ABV), up from Rs95, factoring in a slight uptick in earnings estimates.

Key risks:

RBI has extended current MD’s term twice by one year till Sep’21, and thus further extension could be difficult, leading to a potential regime change. Recent call by state CM to halt collections in the wake of Covid-19-induced disruption and cyclone should impact asset quality in the near term.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer