Buy Federal Bank Ltd For Target Rs. 245 By Yes Securities
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Our view – Most parts of RoA tree behaving reasonably well
Asset Quality – Asset quality remains truly pristine as even a moderate rise in slippages keeps slippage ratio well below 1%: Gross NPA additions amounted to Rs. 4.24bn for 1QFY25, translating to an annualized slippage ratio of 0.8% for the quarter. Gross NPA additions had amounted to Rs. 3.71bn during 4QFY24. Provisions were Rs 1.44bn, as against write back of -Rs. 0.95bn in 4QFY24 and provision of Rs. 1.56bn in 1QFY24, translating to calculated annualised credit cost of 27 bps. The guidance for normalized credit cost is in the range of 30-35 bps
Net Interest Margin - NIM declined sequentially somewhat and wasn't cause for particular alarm: NIM was at 3.16%, down -5bps QoQ and -4bps YoY. The yield on advances was down 5 bps QoQ. It may be noted that 4Q seasonally benefits in terms of yield due to higher recoveries. Cost of deposits has remained under control for the bank and is actually down 6 bps QoQ. The bank did benefit from a seasonal one off in terms of interest payable, which emerged in March, which explains the decline in cost of deposits. NIM is expected to remain at 1Q levels for the next 2 quarters.
Balance sheet growth – Balance sheet growth outcomes were admirable on both sides of the balance sheet: The deposits were at Rs. 2,661 bn, up by 5.4% QoQ and 19.6% YoY. The bank is working towards a deposit growth of 18-20%. Non-resident deposits were tapering off earlier but have made a comeback during the quarter. The advances for the bank stood at Rs. 2,208 bn, up by 5.4% QoQ and 20.3% YoY. We maintain ‘Buy’ rating on FED, which has been one of our top picks since June 2021, with a revised price target of Rs 245: We value the standalone bank at 1.5x FY26 P/BV for an FY25E/26E RoE profile of 14.1%/15.0%. We assign a value of Rs 13.9 per share to the subsidiaries, on SOTP. (See our sector report dated June 2021).
Other Aspects (See “Our View” above for elaboration and insight)
* Opex control: Total opex fell/rose -7.2%/26.5% QoQ/YoY, staff expenses fell/rose -16.8%/19.7% QoQ/YoY and other expenses rose 1.7%/32.3% QoQ/YoY
* Fee income: Fee income rose 6.1%/20.4% QoQ/YoY, sequentially driven higher by general service charges which had a reversal of Rs 670 mn in 4QFY24.
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