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Soft margins; but lower provisions aid earnings

Despite slower NII growth at 9% YoY and, hence, softness in NIM (down 36bps YoY/3bps QoQ to 3.19%), Federal Bank has once again reported a beat on PAT, of 6%, at Rs10.1bn/1.3% RoA, mainly due to lower provisions. Bank saw a oneoff gain from the Fedfina stake sale (Rs0.9-1bn) in 3Q which was partly evened out by the recent wage revision. Going forward, staff cost may remain elevated in 4Q due to impact of the wage revision on retirement liability, while the bank may also take some hit on AIF. Slippages during 3Q were slightly higher due to stress in the corporate pool (a chemical a/c), but Bank expects overall asset quality, as also the provisions, to stay well under control, thereby supporting profitability. We expect the bank to deliver healthy RoA of 1.3-1.4%/RoE of ~14% on the expanded equity base post the recent capital raise. Bank has initiated the process to identify a new MD & CEO after RBI’s recent rejection to extend the incumbent MD’s term post Sep-24. We retain BUY with TP of Rs180/sh, implying 1.1x core bank Dec-25E ABV and Rs13/sh subsidiary value.

Growth, margin soften a bit

Federal Bank reported some moderation in credit growth, at 18% YoY/3% QoQ from the 19-21% YoY/5% QoQ trajectory in 1H, mainly due to some moderation in retail/SME growth. Mortgage growth remains weak, and retail gold loan growth continues to drag. However, VF, LAP, and CV maintain their faster growth pace. We believe that the RBI’s recent action on unsecured loans could take away some steam from PL growth. On an overall basis, we have cut our credit growth estimates for FY24/FY25 by 200bps each. Deposits grew 19% YoY/3% QoQ in 3Q, but CASA ratio further declined by ~54bps QoQ to 30.6%, thereby driving funding cost. Thus, Bank’s NIM declined by a marginal 3bps QoQ to 3.2%, despite the capital raise from IFC and some loan yield expansion. Going forward, we expect margins to remain range-bound amid the rising cost pressures.

Corporate slippages inch up, but provisions remain contained

Slippages were slightly higher at Rs5bn/1.2% of loans vs Rs3.7bn/0.9% of loans in 2QFY24, mainly due to temporary stress in a corporate account (a chemicals player). However, the management expects the corporate a/c to be upgraded in Q4FY24 and lead to some reduction in its otherwise sticky GNPA ratio of 2.3%. Bank maintains a healthy specific PCR at 72% and should thus limit incremental provisions on the back-book. Bank has not taken a hit on its AIF portfolio in 3Q which should hence likely reflect in 4Q.

We retain our BUY rating

We expect the bank to deliver a healthy RoA of 1.3-1.4%/RoE of ~14%, on an expanded equity base post the recent capital raise. Bank has initiated the process of identifying a new MD & CEO after the recent rejection by the RBI to extend the incumbent MD’s term beyond Sep-24. We retain BUY with TP of Rs180/sh, implying 1.1x core bank Dec-25E ABV and subsidiary value of Rs13/sh. Key risks: Sticky funding cost hurting margins, higher opex, and KMP attrition.

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