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For 3QFY2011, Federal Bank recorded net profit growth of 29.8% yoy and 1.9%
qoq to `143cr, in line with our estimates. NII grew by 17.4% yoy and 2.0% qoq to
`447cr. Subdued business growth and continued setbacks in asset quality were
the key highlights of the results. We maintain Buy on the stock.
Muted business growth; slippages continue to be high: For 3QFY2011, advances
and deposits growth was muted on a qoq as well as yoy basis. Advances grew by
2.2% qoq and 8.5% yoy to `28,240cr and deposits registered growth of 2.2%
qoq and 6.7% yoy to `36,914cr. CASA ratio stood at 29.0% compared to 29.4%
in 2QFY2011 and 25.9% in 3QFY2010. Including low-cost NRI deposits
(~`2,000cr of overall `7,788cr NRI deposits), overall low-cost deposits stood at
35.5% of total deposits. The cost of deposits increased by 15bp to 6.03%,
while yield on advances declined by 15bp to 11.06%. Consequently, reported
NIM contracted by 13bp to 4.44% from 4.31% in 2QFY2011. NII increased
marginally by 2.0% qoq and 17.4% yoy to `447cr. Gross NPAs and net NPAs
increased sequentially by 5.3% and 3.8%, respectively. Gross NPA ratio declined
to 4.0% (3.8% in 2QFY2011), while net NPA ratio fell to 0.8% (0.7% in
2QFY2011). Gross slippages stood at `321cr (as against `257cr in 2QFY2011),
indicating an annualised slippage ratio of 4.8% (3.8% in 2QFY2011).
Outlook and valuation: At the CMP, the stock is trading at 1.1x FY2012E ABV.
While lower leverage is leading to low RoE at present, the bank’s core RoAs are
relatively high and should improve further as asset-quality pressures start
moderating. We maintain Buy on the stock, assigning a multiple of 1.3x FY2012E
P/ABV, to arrive at a Target Price of `436 (`505), implying an upside of 20.1%.
Advances and deposits growth below industry
For 3QFY2011, advances and deposits growth was muted on a qoq as well as yoy
basis. Advances grew by 2.2% qoq and 8.5% yoy to `28,240cr and deposits
registered growth of 2.2% qoq and 6.7% yoy to `36,914cr. On a yoy basis, retail
loans recorded 8.8% growth, SME loans declined by 2.2% and corporate loans
grew by healthy 21.3%. On a sequential basis, corporate loans, SME loans and
retail loans increased by 4.3%, 1.0% and 07%, respectively.
On the deposits side, CASA deposits grew by healthy 19.7% yoy, driven by a
24.3% yoy increase in current account deposits and 21.7% yoy growth in savings
account deposits. CASA ratio stood at 29.0% compared to 29.4% in 2QFY2011
and 25.9% in 3QFY2010. Including low-cost NRI deposits (~`2,000cr of overall
`7,788cr NRI deposits), overall low-cost deposits stood at 35.5% of total deposits.
The cost of deposits increased by 15bp to 6.03%, while yield on advances declined
by 15bp to 11.06%. Consequently, reported NIM contracted by 13bp to 4.44%
from 4.31% in 2QFY2011. NII increased marginally by 2.0% qoq and 17.4% yoy
to `447cr.
As of 3QFY2011, the bank had 737 branches (446 in Kerala) and 105 branch
licenses approved mostly in tier-1 and tier-2 cities. Going forward, management is
targeting 5% sequential growth and expects volumes to improve significantly from
4QFY2011. Management has indicated that margins will continue to be under
pressure in 4QFY2011, but it is confident of keeping NIMs above 4.0%. Also, to
maintain its competitive advantage in NRI deposits, the bank is aiming to deepen
its existing relationships with clients and plans to take the existing number of NRI
relationship managers to 40 (currently ~25) by FY2012.
Lower-than-expected non-interest income
Non-interest income declined by 15.5% qoq, but registered a marginal increase of
4.5% yoy to `122cr during the quarter. The poor performance can be attributed to
the 41.8% qoq and 50.5% yoy decline in treasury income and 62.2% qoq and
54.7% yoy decline in forex income. Recoveries also declined sequentially by 16.0%
but registered strong growth of 56.1% on a yoy basis to `39cr compared to `47cr
in 2QFY2011 and `25cr in 3QFY2010. Commission, exchange and brokerage
(CEB) income growth was muted, in line with low advances growth.
Operating costs rise
During the quarter, the bank’s operating expenses increased by 27.8% yoy to
`212cr, driven by a 37.1% increase in employee costs and a 17.5% increase in
other operating expenses. The bank provided `8.5cr for pension liabilities arising
out of second pension option in 3QFY2011 (total gross liability of ~`160cr).
The cost-to-income ratio stood at 37.3% compared to 33.9% in 2QFY2011 and
33.4% in 3QFY2010.
High slippages continue amidst slower growth
Gross NPAs increased in absolute terms by 5.3% qoq to `1,153cr, while net NPAs
increased by 3.8% qoq to `227cr. Gross NPA ratio deteriorated to 4.0% as against
3.8% in 2QFY2011, while net NPA ratio declined from 0.7% in 2QFY2011 to 0.8%
in 3QFY2011. Gross slippages stood at `321cr (as against `257cr in 2QFY2011),
indicating an annualised slippage ratio of 4.8% (3.8% in 2QFY2011). Majority of
the slippages for 3QFY2011 were from the SME loans segment (`145cr). The retail
loans segment witnessed slippages of `67cr, of which slippages of ~`39cr were
from the housing segment. Out of the outstanding gross NPAs, the SME loans
segment accounted for 48.8% and the retail and corporate loans segments
accounted for 30.4% and 20.8%, respectively, during the quarter.
On the positive side, the bank’s provision coverage ratio including technical
write-offs remained strong at 88.3% (~92% in 2QFY2011). The bank restructured
`129cr of its loans during the quarter, taking its cumulative restructured loans to
`1,372cr (4.9% of loans, 26.9% of net worth).
Total slippages for 9MFY2011 amounted to `905cr. Due to high slippages, we
expect NPA expense to be 1.2% of average assets for FY2011E, which is among
the highest in the sector. Management has attributed the high slippages arising out
of retail home loans in the recent quarters to economic problems faced by
expatriates in the Middle East. With economic recovery underway there,
management hopes for faster recoveries going forward. As per management, by
4QFY2011, gross NPAs will likely come down by 10% and slippages will be lesser
than the slippages seen in 3QFY2011. We believe, with slippages already at
elevated levels, 4QFY2011 onwards, the bank could witness marked
improvements on the asset-quality front and lead to reduction in NPA expenses,
thus providing an upside to our earnings estimates.
Investment arguments
Healthy deposit mix
Federal Bank’s CASA deposits grew at a 20.4% CAGR during FY2005–10, leading
to a stable 25%+ CASA ratio. Further, a key differentiator for the bank is the
low-cost NRI deposits base, which constitutes 5.4% of total deposits. Thus,
effectively, low-cost deposits as a proportion of total deposits stand at around
35.5%, which are expected to underpin calculated NIM of about 3.6% in FY2012E,
even as the bank grows its advances faster than the industry to leverage its large
net worth.
Asset quality to improve
Earlier, during the year, the bank had witnessed NPAs from its retail loan book due
to the impact of the Dubai crisis on the bank’s substantial Middle East NRI clients.
Also, while the bank’s slippages from the SME sector have been at elevated levels
in the past few quarters, part of the high credit costs are compensated by the
bank’s relatively high yield on advances. Management is also taking steps to
stabilise its asset quality woes (reflected in low balance sheet growth and focus on
improving processes by the bank’s new CEO).
As indicated by the management, the bank is expecting faster recoveries and lower
slippages going forward as economic recovery gathers pace. We have factored in
NPA provisioning expenses at 1.2% of average assets for FY2011E, which is
amongst the highest in the sector. We expect this to come down to 0.6% in
FY2012E, aiding improvement in RoEs to 13.7%
Reasonable valuations
At the CMP, the stock is trading at 1.1x FY2012E ABV. While lower leverage is
leading to low RoE at present, the bank’s core RoAs are relatively high and should
improve further as asset-quality pressures start moderating. We maintain Buy on
the stock, assigning a multiple of 1.3x FY2012E P/ABV to arrive at a Target Price
of `436 (`505), implying an upside of 20.1%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Federal Bank – 3QFY2011 Result Update
Angel Broking maintains a Buy on Federal Bank with a Target Price of Rs. 436.
For 3QFY2011, Federal Bank recorded net profit growth of 29.8% yoy and 1.9%
qoq to `143cr, in line with our estimates. NII grew by 17.4% yoy and 2.0% qoq to
`447cr. Subdued business growth and continued setbacks in asset quality were
the key highlights of the results. We maintain Buy on the stock.
Muted business growth; slippages continue to be high: For 3QFY2011, advances
and deposits growth was muted on a qoq as well as yoy basis. Advances grew by
2.2% qoq and 8.5% yoy to `28,240cr and deposits registered growth of 2.2%
qoq and 6.7% yoy to `36,914cr. CASA ratio stood at 29.0% compared to 29.4%
in 2QFY2011 and 25.9% in 3QFY2010. Including low-cost NRI deposits
(~`2,000cr of overall `7,788cr NRI deposits), overall low-cost deposits stood at
35.5% of total deposits. The cost of deposits increased by 15bp to 6.03%,
while yield on advances declined by 15bp to 11.06%. Consequently, reported
NIM contracted by 13bp to 4.44% from 4.31% in 2QFY2011. NII increased
marginally by 2.0% qoq and 17.4% yoy to `447cr. Gross NPAs and net NPAs
increased sequentially by 5.3% and 3.8%, respectively. Gross NPA ratio declined
to 4.0% (3.8% in 2QFY2011), while net NPA ratio fell to 0.8% (0.7% in
2QFY2011). Gross slippages stood at `321cr (as against `257cr in 2QFY2011),
indicating an annualised slippage ratio of 4.8% (3.8% in 2QFY2011).
Outlook and valuation: At the CMP, the stock is trading at 1.1x FY2012E ABV.
While lower leverage is leading to low RoE at present, the bank’s core RoAs are
relatively high and should improve further as asset-quality pressures start
moderating. We maintain Buy on the stock, assigning a multiple of 1.3x FY2012E
P/ABV, to arrive at a Target Price of `436 (`505), implying an upside of 20.1%.
Advances and deposits growth below industry
For 3QFY2011, advances and deposits growth was muted on a qoq as well as yoy
basis. Advances grew by 2.2% qoq and 8.5% yoy to `28,240cr and deposits
registered growth of 2.2% qoq and 6.7% yoy to `36,914cr. On a yoy basis, retail
loans recorded 8.8% growth, SME loans declined by 2.2% and corporate loans
grew by healthy 21.3%. On a sequential basis, corporate loans, SME loans and
retail loans increased by 4.3%, 1.0% and 07%, respectively.
On the deposits side, CASA deposits grew by healthy 19.7% yoy, driven by a
24.3% yoy increase in current account deposits and 21.7% yoy growth in savings
account deposits. CASA ratio stood at 29.0% compared to 29.4% in 2QFY2011
and 25.9% in 3QFY2010. Including low-cost NRI deposits (~`2,000cr of overall
`7,788cr NRI deposits), overall low-cost deposits stood at 35.5% of total deposits.
The cost of deposits increased by 15bp to 6.03%, while yield on advances declined
by 15bp to 11.06%. Consequently, reported NIM contracted by 13bp to 4.44%
from 4.31% in 2QFY2011. NII increased marginally by 2.0% qoq and 17.4% yoy
to `447cr.
As of 3QFY2011, the bank had 737 branches (446 in Kerala) and 105 branch
licenses approved mostly in tier-1 and tier-2 cities. Going forward, management is
targeting 5% sequential growth and expects volumes to improve significantly from
4QFY2011. Management has indicated that margins will continue to be under
pressure in 4QFY2011, but it is confident of keeping NIMs above 4.0%. Also, to
maintain its competitive advantage in NRI deposits, the bank is aiming to deepen
its existing relationships with clients and plans to take the existing number of NRI
relationship managers to 40 (currently ~25) by FY2012.
Lower-than-expected non-interest income
Non-interest income declined by 15.5% qoq, but registered a marginal increase of
4.5% yoy to `122cr during the quarter. The poor performance can be attributed to
the 41.8% qoq and 50.5% yoy decline in treasury income and 62.2% qoq and
54.7% yoy decline in forex income. Recoveries also declined sequentially by 16.0%
but registered strong growth of 56.1% on a yoy basis to `39cr compared to `47cr
in 2QFY2011 and `25cr in 3QFY2010. Commission, exchange and brokerage
(CEB) income growth was muted, in line with low advances growth.
Operating costs rise
During the quarter, the bank’s operating expenses increased by 27.8% yoy to
`212cr, driven by a 37.1% increase in employee costs and a 17.5% increase in
other operating expenses. The bank provided `8.5cr for pension liabilities arising
out of second pension option in 3QFY2011 (total gross liability of ~`160cr).
The cost-to-income ratio stood at 37.3% compared to 33.9% in 2QFY2011 and
33.4% in 3QFY2010.
High slippages continue amidst slower growth
Gross NPAs increased in absolute terms by 5.3% qoq to `1,153cr, while net NPAs
increased by 3.8% qoq to `227cr. Gross NPA ratio deteriorated to 4.0% as against
3.8% in 2QFY2011, while net NPA ratio declined from 0.7% in 2QFY2011 to 0.8%
in 3QFY2011. Gross slippages stood at `321cr (as against `257cr in 2QFY2011),
indicating an annualised slippage ratio of 4.8% (3.8% in 2QFY2011). Majority of
the slippages for 3QFY2011 were from the SME loans segment (`145cr). The retail
loans segment witnessed slippages of `67cr, of which slippages of ~`39cr were
from the housing segment. Out of the outstanding gross NPAs, the SME loans
segment accounted for 48.8% and the retail and corporate loans segments
accounted for 30.4% and 20.8%, respectively, during the quarter.
On the positive side, the bank’s provision coverage ratio including technical
write-offs remained strong at 88.3% (~92% in 2QFY2011). The bank restructured
`129cr of its loans during the quarter, taking its cumulative restructured loans to
`1,372cr (4.9% of loans, 26.9% of net worth).
Total slippages for 9MFY2011 amounted to `905cr. Due to high slippages, we
expect NPA expense to be 1.2% of average assets for FY2011E, which is among
the highest in the sector. Management has attributed the high slippages arising out
of retail home loans in the recent quarters to economic problems faced by
expatriates in the Middle East. With economic recovery underway there,
management hopes for faster recoveries going forward. As per management, by
4QFY2011, gross NPAs will likely come down by 10% and slippages will be lesser
than the slippages seen in 3QFY2011. We believe, with slippages already at
elevated levels, 4QFY2011 onwards, the bank could witness marked
improvements on the asset-quality front and lead to reduction in NPA expenses,
thus providing an upside to our earnings estimates.
Investment arguments
Healthy deposit mix
Federal Bank’s CASA deposits grew at a 20.4% CAGR during FY2005–10, leading
to a stable 25%+ CASA ratio. Further, a key differentiator for the bank is the
low-cost NRI deposits base, which constitutes 5.4% of total deposits. Thus,
effectively, low-cost deposits as a proportion of total deposits stand at around
35.5%, which are expected to underpin calculated NIM of about 3.6% in FY2012E,
even as the bank grows its advances faster than the industry to leverage its large
net worth.
Asset quality to improve
Earlier, during the year, the bank had witnessed NPAs from its retail loan book due
to the impact of the Dubai crisis on the bank’s substantial Middle East NRI clients.
Also, while the bank’s slippages from the SME sector have been at elevated levels
in the past few quarters, part of the high credit costs are compensated by the
bank’s relatively high yield on advances. Management is also taking steps to
stabilise its asset quality woes (reflected in low balance sheet growth and focus on
improving processes by the bank’s new CEO).
As indicated by the management, the bank is expecting faster recoveries and lower
slippages going forward as economic recovery gathers pace. We have factored in
NPA provisioning expenses at 1.2% of average assets for FY2011E, which is
amongst the highest in the sector. We expect this to come down to 0.6% in
FY2012E, aiding improvement in RoEs to 13.7%
Reasonable valuations
At the CMP, the stock is trading at 1.1x FY2012E ABV. While lower leverage is
leading to low RoE at present, the bank’s core RoAs are relatively high and should
improve further as asset-quality pressures start moderating. We maintain Buy on
the stock, assigning a multiple of 1.3x FY2012E P/ABV to arrive at a Target Price
of `436 (`505), implying an upside of 20.1%.
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