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Federal Bank (FED.BO)
3Q11: Turning But Slowly
3Q11 profits up 30%, qualitatively mixed — Federal’s 3Q11 results were mixed
with slow loan growth (9%YoY); sluggish fee income and modest asset quality –
offset by sustained high NIMs. New management is now firmly in place and driving
long overdue business process improvements (e.g., creation of centralized credit
processing cells) – should lead to fundamental improvements – but only gradual.
P&L: NIMs still strong, though possible headwinds ahead — Federal’s 3Q11
NIMs were strong at 431bps (down 13bps QoQ); expect moderation ahead as
funding remains wholesale biased (management confident of sustaining margins
above 4%). Fee income was sluggish this quarter (management focusing on third
party distribution), we expect modest traction and should remain largely in-line with
loan growth. Credit costs remained high (close to 2% levels in 3Q11), but
management was optimistic of a meaningful reduction ahead (after a long time) –
is it the beginning of an improving trend? We believe too early to call.
Balance sheet: Slow loan growth, funding vulnerable to rising rates —
Federal’s loan growth at 8.5%YoY was well below industry and was driven by
strong growth in SME and corporate (collectively form 72% of the loan book).
Management’s 15% guidance for FY11E appears a bit of a stretch in our view.
Federal’s funding mix remained wholesale (19.5% bulk) and suggests possible
margin squeeze, if liquidity remains tight. Asset quality remains an overhang for
now – NPLs at 4.1% are higher than industry, so do slippages (4.5% annualized),
but a healthy coverage ration (88%) and capital cushion provide comfort.
Increasing earnings, target price; Maintain Buy — We raise our earnings 1-
15% for FY11-13E (incorporating higher-than-expected near-term NIMs) and
revise our EVA-based target to Rs437 (benchmarked off 1.3x FY12E P/BV, in-line
with larger PSU banks). We maintain our Buy (1M) as we believe the stock is a
longer-term value pick in the sector (1.1x FY12E P/BV) – there is likely to be a
business turn – in growth and profitability – albeit gradual.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Federal Bank (FED.BO)
3Q11: Turning But Slowly
3Q11 profits up 30%, qualitatively mixed — Federal’s 3Q11 results were mixed
with slow loan growth (9%YoY); sluggish fee income and modest asset quality –
offset by sustained high NIMs. New management is now firmly in place and driving
long overdue business process improvements (e.g., creation of centralized credit
processing cells) – should lead to fundamental improvements – but only gradual.
P&L: NIMs still strong, though possible headwinds ahead — Federal’s 3Q11
NIMs were strong at 431bps (down 13bps QoQ); expect moderation ahead as
funding remains wholesale biased (management confident of sustaining margins
above 4%). Fee income was sluggish this quarter (management focusing on third
party distribution), we expect modest traction and should remain largely in-line with
loan growth. Credit costs remained high (close to 2% levels in 3Q11), but
management was optimistic of a meaningful reduction ahead (after a long time) –
is it the beginning of an improving trend? We believe too early to call.
Balance sheet: Slow loan growth, funding vulnerable to rising rates —
Federal’s loan growth at 8.5%YoY was well below industry and was driven by
strong growth in SME and corporate (collectively form 72% of the loan book).
Management’s 15% guidance for FY11E appears a bit of a stretch in our view.
Federal’s funding mix remained wholesale (19.5% bulk) and suggests possible
margin squeeze, if liquidity remains tight. Asset quality remains an overhang for
now – NPLs at 4.1% are higher than industry, so do slippages (4.5% annualized),
but a healthy coverage ration (88%) and capital cushion provide comfort.
Increasing earnings, target price; Maintain Buy — We raise our earnings 1-
15% for FY11-13E (incorporating higher-than-expected near-term NIMs) and
revise our EVA-based target to Rs437 (benchmarked off 1.3x FY12E P/BV, in-line
with larger PSU banks). We maintain our Buy (1M) as we believe the stock is a
longer-term value pick in the sector (1.1x FY12E P/BV) – there is likely to be a
business turn – in growth and profitability – albeit gradual.
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