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Strong upside potential from current level

Federal Bank Ltd, is an Indian commercial bank in the private sector headquartered in Kerala having 1,272 branches and 1,941 ATM/ Recyclers with a loan book size of ~Rs1,31,879cr.

* Total advances grew by 9% YoY and 5% QoQ supported by 19% YoY growth in retail advances and 23% growth in agri advances.

* We expect advances to grow at CAGR of 11.7% and deposits to grow at 11.0% over FY21-23E

* Net Interest Income grew 17% YoY while decline 1% sequentially partially due to interest on interest reversal of Rs.21cr.

* Current Account Savings Account (CASA) mix improved by 331bps YoY during Q4FY21 to 33.81%.

* Asset quality remains stable with GNPA/NNPA at 3.41%/1.19% against 3.38/1.14 during Q3FY21(pro forma basis)

* Provision Coverage Ratio has slightly declined on QoQ basis to 65.14% compared to 66.12% (pro forma basis)

* We maintain our Buy rating on the stock based on 1.1x Adj.BVPS of FY23E with a revised upward target price of Rs.103.

Advances grew by 9% YoY and deposit by 13% YoY

In Q4FY21, total advances grew by 9% YoY and 5% QoQ supported by 19% YoY growth in retail advances and 23% growth in agri advances. Gold loan has shown a stellar growth of 70% on YoY basis. Business banking segment has shown a growth of 13% YoY and commercial banking segment grew by 11%. We expect loan book to grow at a CAGR of 11.7% over FY21-23E.

Total deposit of the bank grew by 13% YoY while retail deposits registered a growth of 14% YoY and 4% QoQ. NRE deposit of the bank grew by 12%YoY and 2% sequentially. CASA deposit grew by 26% YoY and 5% YoY and resultantly CASA ratio improved 331bps on YoY basis to 33.81% while on sequential basis, it has shown a dip of 67bps. We expect total deposit of the bank to grow at a CAGR of 11.0% during FY21-23E.

Highest quarterly net profit supported by lower provisioning

During Q4FY21, interest income has shown a decline of 0.9% YoY and 2.7% QoQ while interest expense declined by 10.8% YoY and 3.8% QoQ. As a result Net Interest Income grew 17% YoY and while it declined 1% sequentially. Sequential decline in interest income was partially due to interest on interest reversal of Rs.21 cr during the quarter. Reported NIM remained steady on QoQ basis at 3.23% against 3.22% in Q3FY21. Other income registered a de-growth of 34.6% YoY and 3.4% QoQ as treasury income fell 44% QoQ while operating expense increased 4.7% sequentially.

Therefore, pre-provision profit de-grew by 8.1% QoQ and 7.7% YoY. Cost to Income ratio for the quarter increased to 53.06% against 49.82% last quarter. However, because of 57.3% YoY and 42.4% QoQ decline in provisioning, net profit jumped 58.6% YoY and 18.2% QoQ to register the highest quarterly new profit of Rs.478cr.

Asset quality steady compared to Q3FY21 pro forma numbers

During Q4FY21, bank has witnessed fresh slippage of Rs.1685cr and GNPA stands at Rs.4602cr while NNPA is at Rs.1569cr. GNPA ratio during the quarter is 3.41% compared to 3.38% last quarter (pro forma basis). NNPA ratio stands at 1.19% against 1.14% in Q3FY21 (pro forma basis). Total restructured books is at Rs.1618cr which is about 1.2% of advances. Provision Coverage Ratio has slightly declined on QoQ basis to 65.14% compared to 66.12%(pro forma basis). This quarter, banks has utilized much of its Covid related provision held in the previous quarter.

Outlook and valuation

We expect business to continue its growth supported by credit growth and improved margins. However, asset quality movement in the coming quarters has to be closely watched as bank has less provision buffer. We remain positive on the long term outlook of the bank and see upside potential from current levels. We therefore value the stock at 1.1x Adj.BVPS of FY23E with a revised upward target price of Rs.103.

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