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Federal Bank (FB)
Banks/Financial Institutions
Strong performance on asset quality. Federal Bank reported impressive earnings
growth (31% yoy) primarily led by lower provisions as asset quality showed a smart
turnaround during the quarter. Slippages were 3.3% as against 4% in June 2011. Shift
in loan mix is resulting in lower slippages (and lower NIMs) and focus on recoveries is
driving improvement. We expect the bank to trade at higher valuations as we see more
confidence in the underlying NPL trends. The bank is trading at inexpensive multiples of
1.2X book and 9X FY2013E EPS delivering RoEs in the range of 17% (normalized) and
27% EPS CAGR for FY2011-13E. Maintain BUY with TP of `500 (our top mid-cap pick).
Slippage and recovery trends normalize, especially in retail/SME segment; gross NPLs decline qoq
Federal Bank showed a sharp improvement in overall asset quality with lower slippages (both yoy
trends and qoq) and better recoveries giving confidence that the weak performance in 1Q was an
aberration. Gross NPLs declined 4% qoq to 3.6% (`12.5 bn) compared to 3.9% (`13 bn) in June
2011 as slippages declined to 3.3% compared to 4% in June 2011. The focus of the management
shifted back to improving asset quality trends which saw sharp deterioration in 1QFY12 primarily
due to HR-related issues while loan mix has increasingly shifted to less delinquent corporate loans.
The management identified significant improvement (slippages as well as recoveries) in retail and
SME segments driving lower slippages in 2QFY12. Recoveries/upgradation were strong at `2.5 bn
(`1.6 bn in 1QFY12). Provision coverage stands at 84% with LLP declining sharply to 0.8%.
Loan growth in line with industry trends at 22% yoy; large corporate continues to drive growth
Loan book grew by 22% yoy to `336 bn (2% YTD); driven primarily by large corporate segment
(40% yoy). Retail loans grew by 9% yoy while loans to SME grew by 12% yoy. We note that the
bank’s investment in gold loan business (10% of the branches are currently disbursing loans) is
showing sharp growth – in line with the underlying opportunity in that space (155% yoy to `30.8
bn, 9.2% of loans). We expect overall loan growth to pick up as we enter into the busy season of
credit growth in 2HFY12E and are building a loan growth of 22% CAGR in FY2011-13E.
Margins decline 10 bps to 3.8%; focus to maintain at current levels
Shift in loan book (>40% large corporate), decline in CD ratio to 71% (from 77% in June 2011) as
well as rise in cost of funds has led to a further NIM compression of 10 bps qoq to 3.8% – largely
in line with our expectations. We believe that the bank should be able to maintain NIMs at closer
to current levels and any shift in loan mix and decline in cost of funds (FY2013E) and improvement
in CD ratio could give cushion to NIMs (we factor 35 bps compression in FY2012E) at current
levels. Lending yields improved 75 bps qoq to 12.7% (one of the highest amongst peers), cost of
funds increased by 40 bps to 7.4% while investment yields improved by 30 bps qoq to 7.2%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Federal Bank (FB)
Banks/Financial Institutions
Strong performance on asset quality. Federal Bank reported impressive earnings
growth (31% yoy) primarily led by lower provisions as asset quality showed a smart
turnaround during the quarter. Slippages were 3.3% as against 4% in June 2011. Shift
in loan mix is resulting in lower slippages (and lower NIMs) and focus on recoveries is
driving improvement. We expect the bank to trade at higher valuations as we see more
confidence in the underlying NPL trends. The bank is trading at inexpensive multiples of
1.2X book and 9X FY2013E EPS delivering RoEs in the range of 17% (normalized) and
27% EPS CAGR for FY2011-13E. Maintain BUY with TP of `500 (our top mid-cap pick).
Slippage and recovery trends normalize, especially in retail/SME segment; gross NPLs decline qoq
Federal Bank showed a sharp improvement in overall asset quality with lower slippages (both yoy
trends and qoq) and better recoveries giving confidence that the weak performance in 1Q was an
aberration. Gross NPLs declined 4% qoq to 3.6% (`12.5 bn) compared to 3.9% (`13 bn) in June
2011 as slippages declined to 3.3% compared to 4% in June 2011. The focus of the management
shifted back to improving asset quality trends which saw sharp deterioration in 1QFY12 primarily
due to HR-related issues while loan mix has increasingly shifted to less delinquent corporate loans.
The management identified significant improvement (slippages as well as recoveries) in retail and
SME segments driving lower slippages in 2QFY12. Recoveries/upgradation were strong at `2.5 bn
(`1.6 bn in 1QFY12). Provision coverage stands at 84% with LLP declining sharply to 0.8%.
Loan growth in line with industry trends at 22% yoy; large corporate continues to drive growth
Loan book grew by 22% yoy to `336 bn (2% YTD); driven primarily by large corporate segment
(40% yoy). Retail loans grew by 9% yoy while loans to SME grew by 12% yoy. We note that the
bank’s investment in gold loan business (10% of the branches are currently disbursing loans) is
showing sharp growth – in line with the underlying opportunity in that space (155% yoy to `30.8
bn, 9.2% of loans). We expect overall loan growth to pick up as we enter into the busy season of
credit growth in 2HFY12E and are building a loan growth of 22% CAGR in FY2011-13E.
Margins decline 10 bps to 3.8%; focus to maintain at current levels
Shift in loan book (>40% large corporate), decline in CD ratio to 71% (from 77% in June 2011) as
well as rise in cost of funds has led to a further NIM compression of 10 bps qoq to 3.8% – largely
in line with our expectations. We believe that the bank should be able to maintain NIMs at closer
to current levels and any shift in loan mix and decline in cost of funds (FY2013E) and improvement
in CD ratio could give cushion to NIMs (we factor 35 bps compression in FY2012E) at current
levels. Lending yields improved 75 bps qoq to 12.7% (one of the highest amongst peers), cost of
funds increased by 40 bps to 7.4% while investment yields improved by 30 bps qoq to 7.2%.
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