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UBS Investment Research
Key Call: Federal Bank
D elivering on asset quality improvement
Event: Q2FY12 better than estimates both in quality and quantity
Federal Bank reported net profit of Rs 1.9 bn (+ 36% Y/Y, 31% Q/Q) ahead of our
estimates. Key highlights of the quarter: 1) NPL slippages declined to 3.2% from
4% in Q1, while strong recovery enabled decline in absolute Gross NPL; 2) Gross
NPLs ratio fell to 3.6% (3.9% in Q1), provisioning coverage improved to 84%,
credit costs at 0.9% (1.4% in Q1); 3) NIMs declined 10 bps Q/Q to 3.8% as CASA
dipped 100bps to 26%; 4) loans grew 22% y/y while fee income stayed flat y/y.
Impact: Supports our view on the underlying business turnaround
Asset quality has been a major bugbear on the stock and we believe this quarter
marks the improvement with a decline witnessed in gross NPLs (in absolute
amount) due to improved recoveries. Credit costs which have been high (at around
1.5%) in past few quarters would trend down to more normalized levels (of 1.0%)
in our view. Fee income is a major gap left which we expect management to fill in
coming quarters. We marginally increase estimates on better asset quality.
Action: BUY, Key call
Federal bank trades at a significant discount to private banking peers (even few
PSU banks). We believe the bank is firmly on track to improve its operating
metrics; considering which stock is attractively valued at 1.0x March’13E book
and 6.9x FY13E earnings. This remains our top pick.
Valuation: Maintain Buy rating, PT Rs 550
We derive our PT of Rs 550 using a residual income model which implies 1.5x
FY13E book and 10x FY13E earnings presenting 40% upside.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Key Call: Federal Bank
D elivering on asset quality improvement
Event: Q2FY12 better than estimates both in quality and quantity
Federal Bank reported net profit of Rs 1.9 bn (+ 36% Y/Y, 31% Q/Q) ahead of our
estimates. Key highlights of the quarter: 1) NPL slippages declined to 3.2% from
4% in Q1, while strong recovery enabled decline in absolute Gross NPL; 2) Gross
NPLs ratio fell to 3.6% (3.9% in Q1), provisioning coverage improved to 84%,
credit costs at 0.9% (1.4% in Q1); 3) NIMs declined 10 bps Q/Q to 3.8% as CASA
dipped 100bps to 26%; 4) loans grew 22% y/y while fee income stayed flat y/y.
Impact: Supports our view on the underlying business turnaround
Asset quality has been a major bugbear on the stock and we believe this quarter
marks the improvement with a decline witnessed in gross NPLs (in absolute
amount) due to improved recoveries. Credit costs which have been high (at around
1.5%) in past few quarters would trend down to more normalized levels (of 1.0%)
in our view. Fee income is a major gap left which we expect management to fill in
coming quarters. We marginally increase estimates on better asset quality.
Action: BUY, Key call
Federal bank trades at a significant discount to private banking peers (even few
PSU banks). We believe the bank is firmly on track to improve its operating
metrics; considering which stock is attractively valued at 1.0x March’13E book
and 6.9x FY13E earnings. This remains our top pick.
Valuation: Maintain Buy rating, PT Rs 550
We derive our PT of Rs 550 using a residual income model which implies 1.5x
FY13E book and 10x FY13E earnings presenting 40% upside.
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