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Federal Bank (FB) reported PAT of INR 1.43 bn (up 30% Y-o-Y, 2% Q-o-Q), well
below our estimate of INR 1.65 bn, led by lower other income and higher
provisioning. NII came in line with our estimate of INR 4.47 bn, up a moderate 2%
Q-o-Q, led by 13bps decline in margins to 4.31% (still at the upper band of peer
set). Loan book growth continues to be sluggish – 2.2%Q-o-Q. After witnessing a
decline in Q2FY11, slippages once again trended up to INR 3.2 bn (~4.7%
annualised), leading to relatively higher LLP of 185bps. Headline asset quality
deteriorated with gross NPLs rising 7% Q-o-Q to 3.95%, with net NPLs rising 20% Qo-
Q to 0.81%. Provision coverage, however, declined 270bps Q-o-Q, to 80.3%, but
remains at healthy levels. Management made adequate provisions for second pension
option (INR 85 mn) during the quarter; the total liability is at INR 1.6bn. CASA
growth at 3% Q-o-Q continued to be steady.
Margin declines 13bps after peaking in Q2
After hitting an all-time high of 4.44% in Q2, margin declined 13bps to 4.31%,
as cost of funds rose 15bps and yield on advances declined 15bps. CD ratio
remained relatively stable at 76.5%. Decline in margin, coupled with slower
asset growth, led to a modest performance on NII (up 17% Y-o-Y, 2% Q-o-Q).
Management expects NIMs to come off slightly over the next two quarters due to
increase in deposit rates. We are building in 3.7% NIM (cal.) over FY11-12.
Outlook and valuations: Modest quarter; maintain ‘BUY’
FB enjoys an attractive franchise, characterised by high return ratios and
employee/branch productivity against regional peers. The bank is currently
undertaking restructuring exercise, putting people and processes in place to
further enhance productivity and achieve growth while maintaining high credit
standards. However, in the interim, led by slower traction on other income and
asset growth, we are revising our earnings estimate by ~6% and ~3% for FY11
and FY12, respectively. After touching peak multiples of 1.5 times, the stock has
significantly corrected by 30% and is currently trading at 1.05x FY12 book. We
believe, as benefits of restructuring gather pace over the next 9-12 months, the
stock has the potential to deliver strong returns. We maintain ‘BUY/Sector
Outperformer’ recommendation on it.
Slippage running high; retail slippages coming off, a positive
After witnessing a decline in Q2, slippages once again trended up to INR 3.2 bn (4.7%
annualised), in line with their relatively high run-rate of ~5%. However, gross NPLs grew
7% Q-o-Q, to INR 11.5 bn (3.95%), as the bank opted to write off INR 1.2 bn of NPLs.
Loan loss provisions continue to remain at high levels of 185bps, putting a drag on the
overall profitability. Management guided that slippages from retail accounts are declining
(a key problem area earlier). During the quarter, large corporate accounts contributed
significantly to overall slippages. Provision coverage declined 270bps Q-o-Q, but
continues to be at high levels of 80.3%. During the quarter, restructured assets
increased by INR 1.3 bn, taking the outstanding pool to INR 13.5 bn. Stressed assets of
above 8.5% (GNPL + restructured advances) continue to remain a key monitorable.
Muted performance on other income
Other income grew a modest 4.5% Y-o-Y, led by decline in the forex fees (down 55% Yo-
Y) and moderate performance on recoveries and CEB. Treasury gain during the quarter
came in at INR 82 mn, lower than INR 166 mn reported in Q3FY10.
Modest loan book growth
Advances grew at a moderate 8.3% Y-o-Y and 2.2% Q-o-Q, to INR 282.4 bn in Q3FY11,
in line with management guidance of focusing on asset quality and setting systems
before embarking on a high growth trajectory. Slower traction in the SME segment
(down 2.2% Y-o-Y) offset the 21% Y-o-Y pick up in the large corporate segment. Given
the slower traction in the first 9 months of the year we are revising down our loan
growth assumption for FY11 from 19% to 14%. The bank grew its deposits at 6.7% Y-o-
Y and 2.2% Q-o-Q. Traction remained steady in both savings (3% Q-o-Q, 22% Y-o-Y)
and current (3.5% Q-o-Q, 24% Y-o-Y) balances, while term deposits recorded a modest
growth of 1.9% Q-o-Q. CASA and NRE deposits contributed 30% and 22%, respectively,
to the overall deposit base.
Other highlights
• Tax rate stood at 33.2% during the quarter
• Capital adequacy stands strong at 16.4%
Company Description
Federal Bank is a Kerala-based private sector bank. It has an asset base of ~INR 441 bn
as on Q2FY11 and a market cap of INR 80 bn, branch network of over 720 (60% in
Kerala), and over 760 ATMs. SME and retail lending are the bank’s focus areas and
constitute 35% and 30%, respectively, of its loan book. The bank’s merger with Ganesh
Bank has added 32 branches to its existing network, increasing its foothold in western
India.
Bank also has a joint venture agreement with IDBI Ltd & Fortis Insurance International N
V for a Life Insurance Company under the name of IDBI Federal Life Insurance Company
Ltd. During the year 2007-08, FBL has opened its Representative office at Abu Dhabi,
Capital of U.A.E. for the gateway of the bank to the whole of Middle East.
Investment Theme
SME and retail loans, which constitute a bulk of the bank’s loan book, are likely to
continue to lead its growth in future. The loan book is expected to grow at 25% (CAGR)
over the next two years through network expansion and increased penetration. NRI
deposits contribute 16% of overall deposit base which provides sticky source of
inexpensive funds helping the bank to maintain above 3% margins. The bank is
adequately capitalised with tier-1 capital above 15%, one of the highest in the industry.
Key Risks
The bank’s high dependence on the NRI segment (20% of its deposits come from the
segment) exposes it to regulatory risks.
Lower CASA comparatively in this current scenario will be a negative for the bank.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Federal Bank (FB) reported PAT of INR 1.43 bn (up 30% Y-o-Y, 2% Q-o-Q), well
below our estimate of INR 1.65 bn, led by lower other income and higher
provisioning. NII came in line with our estimate of INR 4.47 bn, up a moderate 2%
Q-o-Q, led by 13bps decline in margins to 4.31% (still at the upper band of peer
set). Loan book growth continues to be sluggish – 2.2%Q-o-Q. After witnessing a
decline in Q2FY11, slippages once again trended up to INR 3.2 bn (~4.7%
annualised), leading to relatively higher LLP of 185bps. Headline asset quality
deteriorated with gross NPLs rising 7% Q-o-Q to 3.95%, with net NPLs rising 20% Qo-
Q to 0.81%. Provision coverage, however, declined 270bps Q-o-Q, to 80.3%, but
remains at healthy levels. Management made adequate provisions for second pension
option (INR 85 mn) during the quarter; the total liability is at INR 1.6bn. CASA
growth at 3% Q-o-Q continued to be steady.
Margin declines 13bps after peaking in Q2
After hitting an all-time high of 4.44% in Q2, margin declined 13bps to 4.31%,
as cost of funds rose 15bps and yield on advances declined 15bps. CD ratio
remained relatively stable at 76.5%. Decline in margin, coupled with slower
asset growth, led to a modest performance on NII (up 17% Y-o-Y, 2% Q-o-Q).
Management expects NIMs to come off slightly over the next two quarters due to
increase in deposit rates. We are building in 3.7% NIM (cal.) over FY11-12.
Outlook and valuations: Modest quarter; maintain ‘BUY’
FB enjoys an attractive franchise, characterised by high return ratios and
employee/branch productivity against regional peers. The bank is currently
undertaking restructuring exercise, putting people and processes in place to
further enhance productivity and achieve growth while maintaining high credit
standards. However, in the interim, led by slower traction on other income and
asset growth, we are revising our earnings estimate by ~6% and ~3% for FY11
and FY12, respectively. After touching peak multiples of 1.5 times, the stock has
significantly corrected by 30% and is currently trading at 1.05x FY12 book. We
believe, as benefits of restructuring gather pace over the next 9-12 months, the
stock has the potential to deliver strong returns. We maintain ‘BUY/Sector
Outperformer’ recommendation on it.
Slippage running high; retail slippages coming off, a positive
After witnessing a decline in Q2, slippages once again trended up to INR 3.2 bn (4.7%
annualised), in line with their relatively high run-rate of ~5%. However, gross NPLs grew
7% Q-o-Q, to INR 11.5 bn (3.95%), as the bank opted to write off INR 1.2 bn of NPLs.
Loan loss provisions continue to remain at high levels of 185bps, putting a drag on the
overall profitability. Management guided that slippages from retail accounts are declining
(a key problem area earlier). During the quarter, large corporate accounts contributed
significantly to overall slippages. Provision coverage declined 270bps Q-o-Q, but
continues to be at high levels of 80.3%. During the quarter, restructured assets
increased by INR 1.3 bn, taking the outstanding pool to INR 13.5 bn. Stressed assets of
above 8.5% (GNPL + restructured advances) continue to remain a key monitorable.
Muted performance on other income
Other income grew a modest 4.5% Y-o-Y, led by decline in the forex fees (down 55% Yo-
Y) and moderate performance on recoveries and CEB. Treasury gain during the quarter
came in at INR 82 mn, lower than INR 166 mn reported in Q3FY10.
Modest loan book growth
Advances grew at a moderate 8.3% Y-o-Y and 2.2% Q-o-Q, to INR 282.4 bn in Q3FY11,
in line with management guidance of focusing on asset quality and setting systems
before embarking on a high growth trajectory. Slower traction in the SME segment
(down 2.2% Y-o-Y) offset the 21% Y-o-Y pick up in the large corporate segment. Given
the slower traction in the first 9 months of the year we are revising down our loan
growth assumption for FY11 from 19% to 14%. The bank grew its deposits at 6.7% Y-o-
Y and 2.2% Q-o-Q. Traction remained steady in both savings (3% Q-o-Q, 22% Y-o-Y)
and current (3.5% Q-o-Q, 24% Y-o-Y) balances, while term deposits recorded a modest
growth of 1.9% Q-o-Q. CASA and NRE deposits contributed 30% and 22%, respectively,
to the overall deposit base.
Other highlights
• Tax rate stood at 33.2% during the quarter
• Capital adequacy stands strong at 16.4%
Company Description
Federal Bank is a Kerala-based private sector bank. It has an asset base of ~INR 441 bn
as on Q2FY11 and a market cap of INR 80 bn, branch network of over 720 (60% in
Kerala), and over 760 ATMs. SME and retail lending are the bank’s focus areas and
constitute 35% and 30%, respectively, of its loan book. The bank’s merger with Ganesh
Bank has added 32 branches to its existing network, increasing its foothold in western
India.
Bank also has a joint venture agreement with IDBI Ltd & Fortis Insurance International N
V for a Life Insurance Company under the name of IDBI Federal Life Insurance Company
Ltd. During the year 2007-08, FBL has opened its Representative office at Abu Dhabi,
Capital of U.A.E. for the gateway of the bank to the whole of Middle East.
Investment Theme
SME and retail loans, which constitute a bulk of the bank’s loan book, are likely to
continue to lead its growth in future. The loan book is expected to grow at 25% (CAGR)
over the next two years through network expansion and increased penetration. NRI
deposits contribute 16% of overall deposit base which provides sticky source of
inexpensive funds helping the bank to maintain above 3% margins. The bank is
adequately capitalised with tier-1 capital above 15%, one of the highest in the industry.
Key Risks
The bank’s high dependence on the NRI segment (20% of its deposits come from the
segment) exposes it to regulatory risks.
Lower CASA comparatively in this current scenario will be a negative for the bank.
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