IGI Logo

Steady asset quality despite challenges

Federal Bank’s (FB) Q4FY21 and FY21 asset quality performance (flat GNPL sequentially with ~65% coverage ratio) despite covid-related challenges is testimony to its favourable asset mix and business resiliency, which reinforces our view that the bank will navigate the disruption better than peers.

FB’s resilient business model reflects in: i) strong NII growth at 17% YoY despite ~Rs0.2bn of interest reversals, ii) ~20bps improvement in NIM over the past four quarters, iii) flat YoY delinquency ratio at 1.5%, and iv) full-year RoA at 0.8% despite elevated credit cost at 1.3% vs 1% in FY20. Management’s encouraging asset quality narrative even after considering the drop in collections in April / May’21, improving business momentum, and technology investments/tie-ups would help it improve RoA in FY22E/FY23E. However, the absence of a provision buffer despite lower collections remains a key downside risk. Maintain BUY with a revised target price of Rs100 (earlier: Rs90).

* Management confident about maintaining best-in-class asset quality even after taking into account near-term concerns.

FB’s asset quality performance with GNPLs at 3.4%, full-year slippages at 1.5%, total restructuring at 1.5% and ECLGS disbursements at ~2.3%, is outcome of its right blend of asset mix, and prudent and conservative growth strategy. Going ahead, management sounded confident about maintaining robust asset quality assuming that operating environment will not worsen from the current levels. It expects credit cost in FY22E to remain manageable given 65% coverage on the existing NPL pool vs LGD expectation of ~50-55% and stress unfolding within assessment range as on May’21. However, considering its full utilisation of covid buffer, hence absence of provision buffer, poses risk.

* Collections in April fell to 91% from 95% in March.

Disruption in business activities led by resurgence of covid cases resulted in lower collections in April; management expects May collections to further decline. However, taking cognisance of its FY21 performance and its favourable asset mix – 76% corporate book (38% of loans) rated ‘A’ and above, ~12% gold loans and ~15% home loans – it remains optimistic on its ability to navigate through the current cycle effectively.

* New business initiatives to remain at forefront in FY22 if operating environment remains conducive.

Management stated its strategy to incrementally focus on profit maximisation in FY22E if the operating environment remains conducive and covid-related challenges start fading out from June onwards. On better recovery in H2FY21, it launched credit card business in Q4FY21 but currently only among staff and will commercially launch it in Q1FY22E. It also plans to scale up CV and MFI business in the current fiscal.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

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