Buy Federal Bank Ltd For Target Rs.110 - Motilal Oswal
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Business growth seeing strong traction; CASA mix moderates
Federal Bank (FB) released its quarterly update emphasizing its 4QFY21 business numbers. Here are the highlights:
* Growth in gross advances came in at ~9% YoY to ~INR1.35t. Sequentially, FB reported a strong uptick of 5.2% QoQ in loan growth (v/s 2.4% in 3QFY21). We believe this was led by gold loans, which have demonstrated robust traction over the past few quarters.
* The deposit base increased ~13% YoY to INR1.73t (+6.8% QoQ). The bank reported CASA growth of ~26% YoY (+4.7% QoQ); TD grew robustly at ~8% QoQ (+8% YoY). Thus, the CASA ratio moderated by 67bp QoQ to ~33.8%. We expect margins to remain stable, supported by an uptick in loan growth and low cost of funds.
* Certificate of Deposits posted a sharp increase (3.2x times QoQ) of 35% YoY to INR59.8b – after reporting consistent decline over the past few quarters. Inter-bank deposits grew 7% QoQ. The Liquidity Coverage Ratio (LCR) moderated to 206.9% (v/s 248.9% in 3QFY21), but remains strong vis-à-vis most peers.
* Valuation and view: FB posted a sharp increase in its loan base, which is expected to be driven by healthy growth in its retail asset portfolio (led by gold loans). Deposit traction came in robust, while the bank’s liability franchise remains strong, with a retail deposit mix of over 90%. Thus, low cost of funds – coupled with an uptick in loan growth and the sequential deployment of liquidity – is likely to keep margins steady. On the asset quality front, proforma PCR stood healthy at ~66%, while the restructuring book was controlled at ~1.3%; this would keep the asset quality steady. Nevertheless, we expect credit cost to remain higher in the near term. Maintain Buy, with TP of INR110/share (1.2x FY23E ABV).
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