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FED underlines low-risk business model, Reiterate as key top pick

Result Highlights

* Asset quality: Annualized gross slippage ratio for 2QFY22 was 97 bps (Rs 3.2bn), with recoveries and upgrades at Rs 4.21bn

* Margin picture: NIM at 3.2% was up 5 bps QoQ, with management guiding for a range of 320-325 bps going forward

* Asset growth: Advances grew 3.6%/9.4% QoQ/YoY driven by business banking and commercial banking

* Opex control: Total opex rose 13.5%/20.0% QoQ/YoY, staff expenses rose 8.3%/17.3% QoQ/YoY and other expenses rose 20.2%/23.2% QoQ/YoY

* Fee income: Commission, Exchange, Brokerage fees rose 51.6%/26.2% QoQ/YoY, implying fee income strategy was working, albeit from a low base

Our view –

FED underlines low-risk business model, Reiterate as key top pick

Slippages were well-contained with all segments under control and nil slippages from corporate book: Management alluded to a sound recovery environment, while guiding for a run rate of Rs 3-3.5bn for recoveries per quarter against a gross slippage guidance of Rs 4bn per quarter. Total standard restructured book rose from 194 bps of gross advances to 259 bps but, unlike some other banks, restructured book had very little contribution from unsecured consumer finance, which comprised a mere 1.2% of restructured book.

Like in the past, management refrained from being overly bullish with NIM guidance, talking of a best case scenario of 330 bps: They further stated that they are not worried about a rate cycle upturn as FED is comfortably placed on ALM, given liability granularity. The yield for fast-growing segments, commercial banking and business banking, at 8.5-9% and 9.5-10.5%, respectively, is materially healthier than that for corporate loans.

Commercial banking and business banking grew rapidly at 6.9% QoQ and 7.6% QoQ, respectively: Management stated that the growth seen in these segments is not driven by a dilution of standards but rather by deeper penetration and improved offering.

We maintain ‘Buy’ rating on FED with a revised price target of Rs 130: We value the standalone bank at 1.2x FY23 P/BV for an FY22E/23E/24E RoE profile of 12.2/14.9/16.0%. We assign a value of Rs 7.5 per share to the subsidiaries, on SOTP. We had flagged FED as one our top 3 picks in our sector initiation report dated 30th Jun 2021.

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