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Further re-rating remains justified for FED

Result Highlights (See “Our View” below for elaboration and insight)

* Asset quality: Gross slippages amounted to Rs 4.96bn (annualized slippage ratio of 1.0%) and recoveries and upgrades were at Rs 2.9bn

* Margin picture: NIM at 3.19% was down -3bp QoQ, where sequentially the cost of deposits moved up faster than the yield on advances

* Asset growth: Advances grew 3.3%/18.4% QoQ/YoY driven on YoY basis by Retail, Agri, CV/CE, MFI and CoB loan segments

* Opex control: Total opex rose 5.9%/27.3% QoQ/YoY, staff expenses rose 10.7% /23.6% QoQ/YoY and other expenses rose 2.3%/30.5% QoQ/YoY

* Fee income: Fee income rose 1%/25.6% QoQ/YoY, sequentially driven higher by Cards, Para Banking and General services charges.

Our view – Low slippage, stable NIM and continued growth point to multiple enhancement

Gross slippage ratio has now averaged 1.0% over the past 10 quarters: There was a slightly chunky account worth Rs 0.7bn that slipped, and this has happened after a long gap. The reason for this account slipping was a fire in their factory and it is expected that the account will be upgraded in 4Q. Provisions were Rs 0.9bn, up by 108% QoQ but down -54% YoY, translating to calculated annualised credit cost of 19bps. However, the low credit cost was aided by a Rs 1.12bn provision reversal on standard assets. The restructured book provisions were reviewed and some provisions on the restructured book were reversed as far as RF1 is concerned.

The intention to preserve NIM at current levels looks largely achievable: The bank would aim to bring CD ratio down to 80% over calendar year 2024, which would exert some downward pressure on NIM, all other things remaining constant. No rise in deposit rates is expected except perhaps in a few buckets. The overall cost of deposits is expected to remain broadly stable and eventually inch lower. At this point in time, unsecured loans are not being grown as fast as capacity but this would be enhanced at some point.

FED is already tracking a quarterly RoA of 1.4% and has now flagged an aspirational RoA of 1.5% 12-18 months down the line: Loan growth outcome has remained broadly stable at 18% YoY, with management continuing to guide for a similar growth pattern. The sequential rise in employee cost was driven by wage hike provisions where the provisioning was done for 17% hike compared with 15% earlier.

We maintain ‘Buy’ rating on FED, which has been one of our top picks since June 2021, with an unchanged price target of Rs 195: We value the standalone bank at 1.3x FY25 P/BV for an FY24E/25E/26E RoE profile of 14.9%/15.0%/15.5%. We assign a value of Rs 16.1 per share to the subsidiaries, on SOTP

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