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Federal Bank (FB)
Banks/Financial Institutions
Slippages remain high. Federal Bank reported a weak quarter, as gross NPLs increased
by 13% qoq, loans were flat qoq, weak fee income growth and margins declined by
about 10 bps qoq. Slippages, the key focus area, continue to remain persistently high at
4% levels. Management focus on HR-related issues in the current quarter could have
resulted in weak performance. We maintain our medium-term positive outlook on the
bank. The stock trades at 1.3X FY2012E book and 10X EPS. We maintain ADD.
Slippages increase qoq; gross NPLs rise 13% qoq
Gross NPLs increased 13% qoq to 4.1% of loans (`13 bn) compared to 3.5% of loans (`11.5 bn)
in March 2011 as high slippages remain persistent at 4% levels, while reductions were lower as
focus of the management shifted to other issues (HR related). Of the total slippages nearly 85% of
the slippages have come from retail and SME (broadly split equally). Recovery and upgradations
were weak while the bank made lower write-offs. The bank had sold NPLs of `850 mn in 4Q.
Despite the strong medium-term outlook, the near-term challenges of higher slippages and
getting internal reorganization risks remain which is taking a longer time than expected earlier. We
see the current quarter as an aberration and maintain that the investments made in marketing,
HR, training and systems are bound to turn positive over the next few quarters. For now, a strong
provisioning policy (coverage at 82%) and healthy margin continues to give us near-term comfort
despite higher slippages.
Loan growth flat qoq; marginally ahead of industry average at 22% levels
Loan book for the quarter was flat qoq though marginally ahead of industry average at 22% levels
to `330 bn. All segments showed similar performance - loans to large corporate grew by ~27%
yoy, a large base effect emerging from the lending made in 4Q. Retail loans grew by 10% yoy
while loans to SME grew by 16% yoy. We expect loan growth to pick up as we enter into the busy
season of credit growth in 2HFY12 and are building a loan growth of 22% CAGR in FY2011-13E.
Margins decline 13 bps to 3.9% cushioned by sharp rise in lending yields
Margins for the quarter declined by 13 bps qoq to 3.9% as a sharp rise in lending rates offset the
impact of revised savings rates and sharp rise in deposit rates. Deposits grew by 23% yoy. CASA
mobilizations were slower than overall deposit growth at 15% yoy. However, CASA ratio
improved marginally by 40 bps qoq to 27% as focus could have shifted in improving the liability
profile given the lower loan growth. CD ratio was flat qoq to 77%. We are broadly maintaining
our 30 bps decline yoy as business is shifting more towards low-risk and relatively low-yielding
segment.
Other operational highlights for the quarter
Non-interest revenues grew by 6% with core fee income growth of 13% yoy. Income
from recoveries was muted at `233 mn compared to `240 mn in June 2010. With the
recent hire at the top management to head the corporate business vertical we expect fee
income to show stronger contribution to overall non interest income, though we expect it
to be more gradual in nature.
Cost-income ratio increased to 39% compared to 41% in March 2011 as 4QFY11 had a
change in the reporting of staff expenses pertaining to retired employees.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Federal Bank (FB)
Banks/Financial Institutions
Slippages remain high. Federal Bank reported a weak quarter, as gross NPLs increased
by 13% qoq, loans were flat qoq, weak fee income growth and margins declined by
about 10 bps qoq. Slippages, the key focus area, continue to remain persistently high at
4% levels. Management focus on HR-related issues in the current quarter could have
resulted in weak performance. We maintain our medium-term positive outlook on the
bank. The stock trades at 1.3X FY2012E book and 10X EPS. We maintain ADD.
Slippages increase qoq; gross NPLs rise 13% qoq
Gross NPLs increased 13% qoq to 4.1% of loans (`13 bn) compared to 3.5% of loans (`11.5 bn)
in March 2011 as high slippages remain persistent at 4% levels, while reductions were lower as
focus of the management shifted to other issues (HR related). Of the total slippages nearly 85% of
the slippages have come from retail and SME (broadly split equally). Recovery and upgradations
were weak while the bank made lower write-offs. The bank had sold NPLs of `850 mn in 4Q.
Despite the strong medium-term outlook, the near-term challenges of higher slippages and
getting internal reorganization risks remain which is taking a longer time than expected earlier. We
see the current quarter as an aberration and maintain that the investments made in marketing,
HR, training and systems are bound to turn positive over the next few quarters. For now, a strong
provisioning policy (coverage at 82%) and healthy margin continues to give us near-term comfort
despite higher slippages.
Loan growth flat qoq; marginally ahead of industry average at 22% levels
Loan book for the quarter was flat qoq though marginally ahead of industry average at 22% levels
to `330 bn. All segments showed similar performance - loans to large corporate grew by ~27%
yoy, a large base effect emerging from the lending made in 4Q. Retail loans grew by 10% yoy
while loans to SME grew by 16% yoy. We expect loan growth to pick up as we enter into the busy
season of credit growth in 2HFY12 and are building a loan growth of 22% CAGR in FY2011-13E.
Margins decline 13 bps to 3.9% cushioned by sharp rise in lending yields
Margins for the quarter declined by 13 bps qoq to 3.9% as a sharp rise in lending rates offset the
impact of revised savings rates and sharp rise in deposit rates. Deposits grew by 23% yoy. CASA
mobilizations were slower than overall deposit growth at 15% yoy. However, CASA ratio
improved marginally by 40 bps qoq to 27% as focus could have shifted in improving the liability
profile given the lower loan growth. CD ratio was flat qoq to 77%. We are broadly maintaining
our 30 bps decline yoy as business is shifting more towards low-risk and relatively low-yielding
segment.
Other operational highlights for the quarter
Non-interest revenues grew by 6% with core fee income growth of 13% yoy. Income
from recoveries was muted at `233 mn compared to `240 mn in June 2010. With the
recent hire at the top management to head the corporate business vertical we expect fee
income to show stronger contribution to overall non interest income, though we expect it
to be more gradual in nature.
Cost-income ratio increased to 39% compared to 41% in March 2011 as 4QFY11 had a
change in the reporting of staff expenses pertaining to retired employees.
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