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Flagged as a top pick last year, FED continues to deliver

Result Highlights

* Asset quality: Gross slippages amounted to Rs 3.90bn (annualized slippage ratio of 1.0%) and recoveries and upgrades were healthy at Rs 3.29bn

* Margin picture: NIM at 3.30% was up 8 bps QoQ on account of 35bps QoQ increase in yield on advances as against 16 bps QoQ increase in cost of deposits

*  Asset growth: Advances grew 6.2%/19.4% QoQ/YoY driven sequentially by Business Banking, CV/CE and Corporate loans

*  Opex control: Total opex rose 7.0%/9.5% QoQ/YoY, staff expenses rose/fell 3.3% /-9.8% QoQ/YoY and other expenses rose 10.1%/32.1% QoQ/YoY

* Fee income: Commission, Exchange, Brokerage fees rose 18%/38% QoQ/YoY, sequentially driven by Card fees and Processing Fee & charges on Loans.

Our view – Flagged as a top pick last year, FED continues to deliver

Even the conservative management found reason to enhance margin and RoA guidance: Full year NIM guidance stands revised upward to 330 bps. Apart from yield, the other lever for NIM expansion is lower interest reversals. For the quarter, NIM improved 8 bps QoQ to 3.30%. This was driven by a 36 bps improvement in yield on advances QoQ. 110-115 bps of the rate hikes have got passed on. Management revised guidance for full year FY23 upward to 1.2% with exit quarter guidance now being 1.25%.

FED has achieved cost to income ratio guidance ahead of time but guidance is retained as such: The bank had guided that they would get closer to 48% in FY24 but has upfronted the achievement. The bank still guides for a cost to income ratio of 48-49%.

Slippages remained under control, underlining once again the low-risk retail lending model: Provisions were Rs 2.68bn, up by 61% QoQ but down -8.5% YoY. Provisions have risen on sequential basis since the bank has chosen to enhance PCR by 238 bps. The standard restructured book stood at Rs 32.66bn or 2.0% of gross advances.

Management reiterated growth guidance, while alluding to capital raise next financial year: Management stated that FED would grow in the high teens in FY23, with the growth being funded internally. The bank could explore a capital raise in early FY24.

We maintain ‘Buy’ rating on FED with a revised price target of Rs 165: We had flagged FED as one of our top 3 bank picks in our Sector Initiation Report dated June 2021. We value the standalone bank at 1.3x FY24 P/BV for an FY23E/24E/25E RoE profile of 13.6/14.5%/15.5%. We assign a value of Rs 8.7 per share to the subsidiaries, on SOTP.

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