Federal Bank (FED.BO)
Buy Equity Research
Below expectations on higher provisions and lower top line
What surprised us
FED reported 1QFY14 PAT of Rs1.1bn, -44% yoy and 56%/50% below
Gse/Bloomberg on higher loan loss provisioning and lower top line,
although asset quality showed an improvement. Key highlights: 1) Asset
quality improved as GNPLs declined 5% qoq on fresh slippages that
moderated to 3.2% from 3.8% in 4QFY13. Even the fresh stress loan
formation (fresh slippages + fresh restructuring – slippages from
restructuring) was much lower at 2.5%; 2) Credit costs came in much
higher at 2.3% vs GSe 0.6%, as the bank chose to fully provide against one
large account, NAFED, an Indian govt. entity; 3) Coverage ratio improved
c.200bps to 83%, though the bank aggressively wrote off NPLs during the
quarter; 4) NIM expansion of 6bps qoq was limited as credit-deposit (CD)
ratio dropped to 72.4%, 414bps lower sequentially; 5) The drop in CD ratio
was triggered by strong growth in NRE deposits (13% qoq vs -1% qoq for
total deposits) and moderation in loan growth across all segments as the
bank turned cautious due to a challenging macro environment; 6) Savings
deposits grew 8% qoq, primarily led by higher growth in NRE savings
deposits (+14% qoq). The SA ratio moved up to 24.2%, +210bps vs
4QFY13; 7) Growth in mortgage continued (+5% yoy and 2% qoq), though
the volatility in gold loan prices has led to a sequential contraction in the
bank’s gold loan book.
What to do with the stock
We lower our FY14-16E EPS by 3-13% to factor in higher provisions and
lower NII. Consequently, we lower our 12-m RIM-based TP to Rs510 (from
Rs530), but maintain Buy. Key risks: Higher slippages, lower loan growth,
and missteps in execution of strategy.
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Buy Equity Research
Below expectations on higher provisions and lower top line
What surprised us
FED reported 1QFY14 PAT of Rs1.1bn, -44% yoy and 56%/50% below
Gse/Bloomberg on higher loan loss provisioning and lower top line,
although asset quality showed an improvement. Key highlights: 1) Asset
quality improved as GNPLs declined 5% qoq on fresh slippages that
moderated to 3.2% from 3.8% in 4QFY13. Even the fresh stress loan
formation (fresh slippages + fresh restructuring – slippages from
restructuring) was much lower at 2.5%; 2) Credit costs came in much
higher at 2.3% vs GSe 0.6%, as the bank chose to fully provide against one
large account, NAFED, an Indian govt. entity; 3) Coverage ratio improved
c.200bps to 83%, though the bank aggressively wrote off NPLs during the
quarter; 4) NIM expansion of 6bps qoq was limited as credit-deposit (CD)
ratio dropped to 72.4%, 414bps lower sequentially; 5) The drop in CD ratio
was triggered by strong growth in NRE deposits (13% qoq vs -1% qoq for
total deposits) and moderation in loan growth across all segments as the
bank turned cautious due to a challenging macro environment; 6) Savings
deposits grew 8% qoq, primarily led by higher growth in NRE savings
deposits (+14% qoq). The SA ratio moved up to 24.2%, +210bps vs
4QFY13; 7) Growth in mortgage continued (+5% yoy and 2% qoq), though
the volatility in gold loan prices has led to a sequential contraction in the
bank’s gold loan book.
What to do with the stock
We lower our FY14-16E EPS by 3-13% to factor in higher provisions and
lower NII. Consequently, we lower our 12-m RIM-based TP to Rs510 (from
Rs530), but maintain Buy. Key risks: Higher slippages, lower loan growth,
and missteps in execution of strategy.
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