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SME and corporate segments to drive healthy loan growth
After being flat in Q1 FY12 due to organizational restructuring and
employee issues, Federal Bank’s loan book expanded by healthy 5% qoq in
Q2 FY12. With substantial SME and corporate exposure, bank’s credit
growth typically accelerates in H2. The loan mix has been shifting towards
corporate segment off-late with the bank lapping-up better-quality
opportunities. Within the retail segment, mortgages and gold loans are
likely to be the key drivers. We estimate a healthy 18% CAGR in advances
over FY11-13. Regional loan mix is expected to become more diversified in
the medium term with reduction in Kerala concentration.
NIM to remain stable; adverse liquidity conditions is the only risk
During H1 FY12 Federal Bank’s NIM moderated to 3.8% from higher levels
of 4%+ in FY11 impacted by tight liquidity, unfavorable shift in deposit mix
and decline in C/D ratio. H2 FY12 outlook for NIM is sanguine as the
favorable impact of recent lending rate hikes (more effective for bank as
90%+ advances are floating), improvement in C/D ratio would comfortably
offset the headwinds of higher deposits cost (mainly from retail TDs) and
shift in loan mix towards lower-yielding corporate segment. Justifiably, the
bank has given a NIM guidance of 3.75-3.8%.
Sharp spike in NPLs unlikely; credit cost to be modest
Driven by substantial slippages in the SME segment, delinquency ratio was
high in H1 at 3.5%. As macro credit environment continues to weaken, we
don’t foresee notable improvement here. However, strong recoveries and
acceleration in loan growth would drive marginal improvement in GNPL
ratio. Federal Bank’s perturbing exposure to Kingfisher, Air India and SEBs
(combined ~4%) is currently standard with restructuring not requested by
borrowers. Bank’s high PCR at 83% lends strength to the balance sheet
and provides some leeway for commensurately lower LLP. We therefore
expect credit cost at relatively modest 1.1-1.2% in H2. With net NPL ratio
to be sustained at 0.6%, NNPL/Networth ratio (NPL risk) would continue to
be one of the lowest in the industry at near 4%.
Provides comfort on multiple parameters; preferred mid-cap bank
Federal Bank’s strong pricing and lean operating structure enabled it to
earn respectable RoA even during tough times of 2008-09 despite higher
LLP. RoA is estimated to sustain near 1.2% aided by lower credit cost and
stable NIM. With Tier-1 capital at 14%, capitalization level is high and
reassuring in current environment. Bank has underperformed most peers
in past 3/6 months and valuation has corrected significantly to 1x rolling 1-
yr fwd P/adj.BV. In our view, Federal Bank provides comfort on multiple
fronts - diversified loan profile, robust provisioning cover, high
capitalization, low NPL risk and attractive valuation vis-à-vis estimated
RoA. Initiate coverage with BUY rating and 9-month target of Rs440.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SME and corporate segments to drive healthy loan growth
After being flat in Q1 FY12 due to organizational restructuring and
employee issues, Federal Bank’s loan book expanded by healthy 5% qoq in
Q2 FY12. With substantial SME and corporate exposure, bank’s credit
growth typically accelerates in H2. The loan mix has been shifting towards
corporate segment off-late with the bank lapping-up better-quality
opportunities. Within the retail segment, mortgages and gold loans are
likely to be the key drivers. We estimate a healthy 18% CAGR in advances
over FY11-13. Regional loan mix is expected to become more diversified in
the medium term with reduction in Kerala concentration.
NIM to remain stable; adverse liquidity conditions is the only risk
During H1 FY12 Federal Bank’s NIM moderated to 3.8% from higher levels
of 4%+ in FY11 impacted by tight liquidity, unfavorable shift in deposit mix
and decline in C/D ratio. H2 FY12 outlook for NIM is sanguine as the
favorable impact of recent lending rate hikes (more effective for bank as
90%+ advances are floating), improvement in C/D ratio would comfortably
offset the headwinds of higher deposits cost (mainly from retail TDs) and
shift in loan mix towards lower-yielding corporate segment. Justifiably, the
bank has given a NIM guidance of 3.75-3.8%.
Sharp spike in NPLs unlikely; credit cost to be modest
Driven by substantial slippages in the SME segment, delinquency ratio was
high in H1 at 3.5%. As macro credit environment continues to weaken, we
don’t foresee notable improvement here. However, strong recoveries and
acceleration in loan growth would drive marginal improvement in GNPL
ratio. Federal Bank’s perturbing exposure to Kingfisher, Air India and SEBs
(combined ~4%) is currently standard with restructuring not requested by
borrowers. Bank’s high PCR at 83% lends strength to the balance sheet
and provides some leeway for commensurately lower LLP. We therefore
expect credit cost at relatively modest 1.1-1.2% in H2. With net NPL ratio
to be sustained at 0.6%, NNPL/Networth ratio (NPL risk) would continue to
be one of the lowest in the industry at near 4%.
Provides comfort on multiple parameters; preferred mid-cap bank
Federal Bank’s strong pricing and lean operating structure enabled it to
earn respectable RoA even during tough times of 2008-09 despite higher
LLP. RoA is estimated to sustain near 1.2% aided by lower credit cost and
stable NIM. With Tier-1 capital at 14%, capitalization level is high and
reassuring in current environment. Bank has underperformed most peers
in past 3/6 months and valuation has corrected significantly to 1x rolling 1-
yr fwd P/adj.BV. In our view, Federal Bank provides comfort on multiple
fronts - diversified loan profile, robust provisioning cover, high
capitalization, low NPL risk and attractive valuation vis-à-vis estimated
RoA. Initiate coverage with BUY rating and 9-month target of Rs440.
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