IGI Logo

PPoP in line; prudent provisions lead to an earnings miss

Asset quality remains steady

* Federal Bank (FB) reported 3QFY25 earnings of INR9.5b (7% miss), amid accelerated provisions, while PPoP stood broadly in line.

* NII was in line, while NIM stood broadly flat (down 1bp QoQ to 3.11%), as the bank focuses on reorienting its asset mix with a vision to improve yields.

* Advances stood flat as the bank followed a conservative policy to stay away from unsecured lending. Deposits declined 1% QoQ as the bank reduced wholesale deposits by INR40b. The CASA mix improved 9bp QoQ to 30.2%

* Fresh slippages increased 15% QoQ to INR4.98b. GNPA/NNPA ratios declined 14bp/8bp, respectively, to 1.95%/0.49%, while restructured book declined 3bp QoQ to 0.7%.

* We cut our estimates by 3.5%/2.6% for FY26/27E respectively, and estimate RoA/RoE of 1.3%/14.6% by FY27E. Reiterate BUY rating with a TP of INR225 (1.4x Sep’26E ABV).

Business growth weak; CD ratio rises to ~86.5%

* FB reported an earnings miss of 7% at INR9.5b, amid prudent accelerated provisions, while PPoP stood broadly in line. NII stood in line at INR24.3b (up 14.5% YoY/ 2.7% QoQ), while NIMs contracted marginally by 1bp QoQ to 3.11%. With the new strategy in place, the bank’s NIMs trajectory will be watched closely. For 9MFY25, the bank’s PAT grew 7% YoY, while 4QFY25 PAT is expected to grow 15% YoY to INR10.3b.

* Other income rose 6% YoY (down 5% QoQ) to INR9.2b (in line) amid steady core fee income. ? Opex stood at INR17.8b (in line), while the C/I ratio stood at 53%. The bank aims to bring this down to 50% over the next few quarters, with income being the main driver for the reduction. PPoP increased 9% YoY/0.3% QoQ to INR15.7b (in line).

* On the business front, advances grew 15.7% YoY/stood flat QoQ as the bank remains cautious in the unsecured space. Retail growth stood flat, while SMEs grew 2.7% QoQ, and corporate declined 0.6% QoQ.

* Deposits declined 1% QoQ to INR2.66t, led by an outflow in CA deposits by 6.8% QoQ. As a result, the CASA ratio improved 9bp QoQ to 30.2%. The bank’s overall CD ratio stood at 86.5% (up 90bp QoQ).

* Fresh slippages increased 15% QoQ to INR4.9b from INR4.2b in 2QFY25, while the GNPA/NNPA ratios declined marginally 14bp/8bp. Reported PCR stood healthy at 74.2%, as the bank took prudential accelerated provisions. Restructured book declined 3bp to 0.7%.

* With the new strategy in place, the bank will see a transition in advances as well as deposits, which may lead to short-term fluctuations but will ensure longer-term consistency. In 3Q, growth was weak, but the bank aims to accelerate the growth of its book while maintaining quality. The bank guides for healthy growth at 1.5X systemic credit growth.

Highlights from the management commentary

* The bank aims to deliver 1.5X of the banking system growth.

* Average advances and deposits have led to stable NIMs, with no offs in the quarter.

* Auto loans have shifted from floating to fixed rates, with 80% of disbursements now at fixed rates, resulting in improved yields.

* On the MFI front, there has been a high level of stress in the system, but the bank has experienced a lower level of stress compared to others.

* Going forward, the bank expects the credit cost to be at 0.4%.

Valuation and view: Reiterate BUY with a TP of INR225

FB reported a muted quarter as higher provisions led to an earnings miss. Business growth also remained muted as the bank reoriented its growth strategy to focus on profitable growth. Credit costs stood elevated as the bank took prudent provisions to boost its PCR. Management has guided for credit cost of 0.4-0.5%. Asset quality stood broadly stable, while accelerated provisions brought PCR to healthy levels at 74%. NIMs contracted marginally by 1bp QoQ to 3.11%. We believe that FB is well placed among the mid-sized private sector banks to deliver a healthy earnings trajectory, aided by steady business growth and gradual improvements in margins and operating leverage. Under the new leadership, the bank plans to unveil a revised business strategy in Feb’25, with an intent to deliver sustained growth and superior profitability. We cut our estimates by 3.5%/2.6% for FY26/27E, respectively, and estimate RoA/ RoE of 1.3%/14.6% by FY27E. Reiterate a BUY rating with a TP of INR225 (1.4x Sep’26E ABV).

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412