Federal Bank- High NIM, improving CASA; maintain Buy: Anand Rathi

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Federal Bank
High NIM, improving CASA; maintain Buy
Federal Bank’s 3QFY11 profit grew 29.8% yoy, led by 17.4% yoy
NII growth. We maintain Buy as we expect the bank’s high
NIM, respectable NPA coverage and stable productivity to boost
RoE expansion to 15.6% in FY13e from 10.3% in FY10.

 Consolidating balance sheet, higher NIM. The bank
consolidated its balance sheet, with growth of 8.5% yoy in
advances and 6.7% in deposits. We expect the bank to register
higher business growth in FY12 as it strengthens its processes.
Margin remains impressive at 4.3%, higher 26bps yoy driven by a
375bps yoy increase in CASA share to 29.6%.
 Stable productivity and fee income. 9MFY11 cost-to-income at
35.7% is one of the best among peers, despite investment in
branches and additional provision on account of gratuity and
pension (`1.59bn). Non interest income excluding treasuries
remained flat due to a subdued balance sheet growth; however,
growth in third-party products and recoveries remains healthy.
 High NPA provisioning; sufficient capital. Gross NPAs rose
5.3% qoq, but NPA provisioning at 88.3% including technical
writeoffs is adequate to protect the bank against additional
delinquencies. Capital at 16.1% is sufficient to fuel the bank’s
business growth.
 Valuation and risks. At our target price of `564, Federal Bank
would trade at 1.7x FY12e and 1.5x FY13e ABV. Risks: Higher
credit costs due to higher-than-expected slippages.