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Federal Bank (FB)
Banks/Financial Institutions
High slippages continue amidst slower growth. Slippages continued for yet another
quarter, driven by select corporate exposure but trends on slippages from retail and
SME have improved in recent quarters. Improving loan portfolio has clearly taken
precedence over business growth. Stock trades at attractive valuations of 1X FY2012E
PBR and 8X PER. We maintain ADD rating with TP of `450 and would await more
clarity on loan portfolio before an upgrade.
No respite on slippages; nearly 5% (annualized) in 3Q
Asset quality continues to remain under pressure with further slippages at `3.2 bn (4.6% of loans
annualized) resulting in gross NPL increasing to `11.5 bn (4% of loans) compared to `8.2 bn in
September 2010 (3% of loans). However, slippages trend on retail and SME portfolio has
improved as the process related issues have been sorted out while improving economic conditions
in Middle East are resulting in higher recoveries. Nearly a third of the slippages were from the
corporate portfolio (mainly from restructured loan).
However, strong provision policy (coverage of 80%), adequate margins and strong asset collateral
gives comfort to these high slippages. Loan loss provisions were at 1.9% for the quarter. We have
maintained our assumptions on slippages and loan loss provisions for FY2011E but expect a strong
recovery in FY2012E resulting in lower provisions (60 bps decline over FY2011E).
Loan growth diverging from industry trends; focus remains on asset quality
Loan book growth was at 2% qoq and 5% YTD indicating that the management has shifted focus
on cleaning the balance sheet before a fresh look is given to loan growth. The management
highlighted that the recent changes made is taking more than expected time to gain acceptance
from employees. Also, the bank is focusing on improving the risk management practice that would
ensure lower slippages. For the quarter, only agriculture and SME showed sequential growth of
4% and above.
On the back of current performance, we are revising our credit growth for FY2011E to 11% from
14% but maintain our FY2012-13E growth of 21% CAGR as we expect the bank to come back on
track by the end of this year
Deposit growth at 7% yoy with CASA ratio at 30%; NIMs impressive at 4.3%
Deposit growth was well below industry average at 7% yoy (2% YTD). CASA mobilizations
were impressive at 22% yoy and CASA deposits constitute 30% of deposits compared to
26% in 3QFY10, improvement partially driven by lower deposit growth. CD ratio was stable
at 77% for the quarter. Margins for the quarter declined 13 bps to 4.3% as cost of deposits
increased by 15 bps qoq (bulk deposits constitute about 20% of deposits). While we expect
margins to remain high for the bank on the back of relatively higher risky assets and lower
leverage, we are building a compression of about 20 bps in FY2012E and about 10 bps in
FY2013E as we expect cost of deposits to rise faster compared to asset yields.
Other operational highlights for the quarter
Non-interest revenues grew by 5% with core fee income growth of 10% yoy. Income
from recoveries was muted qoq at `393 mn compared to `468 mn in September 2010.
Cost-income ratio declined to 37% compared to 34% in September 2010. The bank has
estimated an approximate pension liability of `1.4 bn (3% of FY2011 networth).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Federal Bank (FB)
Banks/Financial Institutions
High slippages continue amidst slower growth. Slippages continued for yet another
quarter, driven by select corporate exposure but trends on slippages from retail and
SME have improved in recent quarters. Improving loan portfolio has clearly taken
precedence over business growth. Stock trades at attractive valuations of 1X FY2012E
PBR and 8X PER. We maintain ADD rating with TP of `450 and would await more
clarity on loan portfolio before an upgrade.
No respite on slippages; nearly 5% (annualized) in 3Q
Asset quality continues to remain under pressure with further slippages at `3.2 bn (4.6% of loans
annualized) resulting in gross NPL increasing to `11.5 bn (4% of loans) compared to `8.2 bn in
September 2010 (3% of loans). However, slippages trend on retail and SME portfolio has
improved as the process related issues have been sorted out while improving economic conditions
in Middle East are resulting in higher recoveries. Nearly a third of the slippages were from the
corporate portfolio (mainly from restructured loan).
However, strong provision policy (coverage of 80%), adequate margins and strong asset collateral
gives comfort to these high slippages. Loan loss provisions were at 1.9% for the quarter. We have
maintained our assumptions on slippages and loan loss provisions for FY2011E but expect a strong
recovery in FY2012E resulting in lower provisions (60 bps decline over FY2011E).
Loan growth diverging from industry trends; focus remains on asset quality
Loan book growth was at 2% qoq and 5% YTD indicating that the management has shifted focus
on cleaning the balance sheet before a fresh look is given to loan growth. The management
highlighted that the recent changes made is taking more than expected time to gain acceptance
from employees. Also, the bank is focusing on improving the risk management practice that would
ensure lower slippages. For the quarter, only agriculture and SME showed sequential growth of
4% and above.
On the back of current performance, we are revising our credit growth for FY2011E to 11% from
14% but maintain our FY2012-13E growth of 21% CAGR as we expect the bank to come back on
track by the end of this year
Deposit growth at 7% yoy with CASA ratio at 30%; NIMs impressive at 4.3%
Deposit growth was well below industry average at 7% yoy (2% YTD). CASA mobilizations
were impressive at 22% yoy and CASA deposits constitute 30% of deposits compared to
26% in 3QFY10, improvement partially driven by lower deposit growth. CD ratio was stable
at 77% for the quarter. Margins for the quarter declined 13 bps to 4.3% as cost of deposits
increased by 15 bps qoq (bulk deposits constitute about 20% of deposits). While we expect
margins to remain high for the bank on the back of relatively higher risky assets and lower
leverage, we are building a compression of about 20 bps in FY2012E and about 10 bps in
FY2013E as we expect cost of deposits to rise faster compared to asset yields.
Other operational highlights for the quarter
Non-interest revenues grew by 5% with core fee income growth of 10% yoy. Income
from recoveries was muted qoq at `393 mn compared to `468 mn in September 2010.
Cost-income ratio declined to 37% compared to 34% in September 2010. The bank has
estimated an approximate pension liability of `1.4 bn (3% of FY2011 networth).
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