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Placed as third top pick in June 2021, FED showcases positive outcomes

Our view – A great bank to own in terms of evolution undergone

Asset Quality – An annualised gross slippage ratio well below 1% in a worsening asset quality cycle shows FED is in a class of its own: Gross NPA additions amounted to Rs. 4.34bn for 2QFY25, translating to an annualized slippage ratio of 0.8% for the quarter. Gross NPA additions had amounted to Rs. 4.24bn during 1QFY25. The bank has benefited from lower-than-expected slippages in home loans, car loans and other vehicle loans. There is mild uptick in SMA accounts but it is far lower than the industry. Slippages are generally expected to hold but there may be a marginal uptick. Provisions were Rs 1.58bn, up by 9.8% QoQ and 261% YoY, translating to calculated annualised credit cost of 28bps.

Net Interest Margin – Margin declined slightly entirely on account of penal charges rules, adjusted for which there was mild sequential expansion: NIM was at 3.12%, down -4bps QoQ and -10bps YoY. The negative impact from the penal charges rules amounted to 7 bps. Adjusted for the impact of penal charges rules, the NIM has actually improved from 3.16% to 3.19%. Management stated that other newer segmental options will be explored to enhance overall margin.

Balance sheet growth – A slight niggle emerged in terms of sluggish sequential deposit growth but management flagged the same as transient: The deposits were at Rs. 2,691 bn, up by 1.1% QoQ and 15.6% YoY. The overall deposits growth for the quarter has been relatively slower since the bank did not hike term deposit rates as it did not want pay high rates, which it does not regard as sustainable. The loan growth guidance has been retained at 18% YoY for the year.

We maintain ‘Buy’ rating on FED, which has been one of our top picks since June 2021, with an unchanged price target of Rs 240: We value the standalone bank at 1.5x FY26 P/BV for an FY25/26/27E RoE profile of 14.1%/15.0/15.4%. We assign a value of Rs 12 per share to the subsidiaries, on SOTP. (See our sector report dated June 2021).

(See Comprehensive con call takeaways on page 2 for significant incremental colour.)

Other Highlights (See “Our View” above for elaboration and insight)

* Opex control: Total cost to income ratio was at 53.0% down/up by -19/53bps QoQ/YoY and the Cost to assets was at 2.1% down/up by -2/5bps QoQ/YoY

* Fee income: Core fee income to average assets was at 0.9%, up 11/5bps QoQ/YoY

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