Federal Bank- Buy Q4FY13 Result Update ::Centrum

A weak quarter though better times ahead
As expected, FED’s Q4FY13 core performance was weak with quality of earnings surprising negatively. NIM contracted by 40bps QoQ on reversal of interest income on NPA. Asset quality matrix improved with gross slippage rate easing to 3.8% and %GNPA easing by 40bps QoQ to 3.4%. We look at FY2013 as a year of realignment for the bank and believe that worst on asset quality is behind us. We believe that our thesis revolving around RoE expansion remains intact driven by NIM expansion and contained operating expenses and credit costs. Our estimates imply RoE of 14.6% for FY14 and 16.2% for FY15. We maintain Buy and target price of Rs600 (1.5x Sep’14E).
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NIM contracts by 40bps QoQ: NII de-grew by 2% YoY to Rs4.8bn as NIM contracted by 40bps QoQ to 3.05% during the quarter while credit growth stood at 17% YoY. The NIM contraction can be traced to reversal of interest income on NPAs and FITL (15-20bps) and partly due to 25bps reduction in base rate during Feb’13. This outweighed sequential improvement in investment yields and cost of funds. With pipeline of stress assets narrowing down, lower cost of funds and better loan mix, we expect the bank to expand its NIM by ~20bps during FY2014.
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Loan growth moderate at 17% but strong traction ahead: Loan growth during the quarter was a tad slower at 17% YoY (19% in the previous quarter) with bank continuing with its portfolio rebalancing exercise. Retail (up 25% YoY) and SME (22% YoY) grew at cost of corporate segment (up 7% YoY). Incrementally, the bank remains comfortable in expanding its SME and retail book given acceptable slippage performance though cautious stance towards corporate segment will stay for the near term. FY14 is likely to see material pick up in credit growth as the management is targeting ~25% YoY rate.

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Slippage rate spikes to 3.6%: After spiking to 4.7% led by chunky NPAs in Q3, the slippage rate eased to 3.6% for Q4FY13. Moreover, the bank sold off Rs1.8bn worth of NPAs to ARCs during the quarter thereby keeping GNPA largely stable QoQ. However on relative basis there was an improvement of 40bps QoQ. It should be noted that the slippages (Rs12bn) during FY13 were in line with the pipeline of stressed assets identified at the beginning of the year (NAFED was a negative surprise). With stress asset pipeline now shrinking down to Rs2.5bn and positive outcomes from CCI’s actions we believe that the worst on asset stress is behind us.
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Maintain Buy: Undoubtedly, FY2013 has been a year of realignment for the bank with asset stress keeping bank from growing its loan book aggressively and thus containing return ratios. However, we believe that worst on asset quality is behind us and hence reiterate our thesis revolving around RoE expansion driven by NIM expansion and contained operating expenses and credit costs. Our estimates imply RoE of 14.6% for FY14 and 16.2% for FY15. We maintain Buy and target price of Rs600 (1.5x Sep’14E).