IGI Logo

Asset Quality in check; Strong growth across segments

Price Analysis

Federal Bank has reported 1QFY23 earnings in line with our expectations and the positive pointers are a) NPA ratio improvement (GNPA: 2.69% v/s 2.8% in the previous quarter), on the back of denominator effect of high credit growth, b) restructuring pool flat with 21% coverage, c) Robust NII growth (13% YoY and 5% QoQ) with 6bps expansion in NIMs, d) Expected Increase in provisioning expenses with stable PCR, e) Credit growth was better than guidance of 17% YoY and 4.7% QoQ, and e) quarterly profit reached ?6bn for the first time with ROA above 1%. However, the disappointments are 1) Higher slippages (?4.4bn v/s ?3.6bn in 4QFY22), and 2) lower other income because of lackluster treasury and forex income. The bank’s credit quality is in check with no major hiccups. However, the business growth in coming quarters will be key monitor-able as management guided 15% credit growth for FY23. Consistent growth may drive a re-rating with higher valuation than 1.0x book value.

Gazing the core

GNPA ratio improved, restructuring flat:

As expected the bank’s fresh slippages were up sequentially to ?4.4bn v/s ?3.6bn reported in the previous quarter. SME book (BuB + CuB) contributed 34% of the fresh slippages where Agriculture book contributed 20% of total slippages. The retail slippages up at ?2.0bn against ?0.86bn in 4QFY22. The bank’s up-gradation and recoveries moderated sequentially at ?2.8bn v/s ?4.1bn in previous quarter. Moreover, write-offs are at lower side of ?1.6bn. GNPA ratio (2.69%) decreased because of denominator effect of high credit off-take. The bank’s GNPA/NNPA/PCR stood at 2.69%/0.94%/66% v/s 2.8%/0.96%/66% in the previous quarter. The absolute GNPA up sequentially by 0.4%. The total standard restructuring reported worth ?33.6bn (2.2% of book); decreased sequentially from ?35.4bn (2.4% of book). The restructuring amount is line with expectations. Retail restructuring contributes ~60% of total amount. The management expects a relapse rate of ~30% from the pool in 2-3 years and would maintain a 65% PCR on the same as prudent measure.

Highest reported profit despite higher credit cost:

The bank has made provisioning of ?1.7bn v/s ?0.7bn in 4QFY22. The loan loss provisions stood at ?1.5bn. The bank’s NII stood at ?16bn; grew by 13.1% YoY and 5.2% sequentially. NIM expanded sequentially by 6bps to 3.22% driven by 8bps increase in CoD at 4.20%. Management estimates NIMs range of 3.2%-3.3% for FY23. Non-interest income has witnessed de-growth of 2.7% QoQ driven by lower treasury and forex income. C/I ratio has decreased significantly and stood at 52.7%. Employee expenses to remain high for next few quarters due to pension costs going up because of regulations related to purchasing annuity. ?1.77bn family pension impact will amortize over 5 years with incremental impact per quarter of about ?250mn. Therefore, the employee cost is likely to be at stable on higher side. Owing to sequentially higher NII and lower operating expenses, the bank’s PPOP grew by 22% QoQ. Provisioning expenses are at higher side (?1.67bn v/s 0.75bn in the last quarter) on the back of higher loan loss provisions. Thus, it resulted in PAT stability at ?6bn; grew by 63% YoY and 11% sequentially. The bank’s ROA/ROE improved to 1.1%/12.7%. The management targets ROA of 1.1% in FY23E.

Better loan growth than guidance: The bank’s net advances stood at ?1.52tn; grew by 17% YoY and 4.7% QOQ. Retail book (32% of book) grew at 4.8% QoQ. Agriculture book (13% of book), SME (BuB+cuB) book (19% of book) and corporate book (35.0%) grew by 3.9% QoQ, 3.1% QoQ and 5.4% QoQ respectively. The Gold loans portfolio stood at ?185bn (17% YoY) with a LTV 72%. The management guided loan growth of above 15% for FY23. Deposits grew by 8.2% YOY and grew 1% QOQ; CASA ratio stood flat at 36.8% vs. 36.9% in last quarter. The bank’s CRAR stood at 14.57% with Tier 1 of 13.3%. RWA to total assets down up 340bps and stood at ~58.7%. The bank has maintained a LCR of above regulatory requirement.

Outlook & Valuation

We believe the asset quality is likely to stay stable with gradual improvement in profitability. We have incorporated steady provision requirements along with stable growth in the balance sheet and thus expect it to deliver RoA/ RoE of 1.1%/13% by FY23E. We reiterate BUY with increased target price of ?124 (based on 1.1x FY24E Adj. BVPS); a potential upside of 25%.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at www.lkpsec.com/#foo

SEBI Registration number is INM000002483

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