Buy Federal Bank, :: ICICI Securities

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Improving credit traction encouraging…
• Federal Bank reported yet another healthy quarter wherein credit
traction improved further to 14.8% YoY to | 48466 crore while
adjusted margins & asset quality remained stable QoQ
• PAT at | 240 crore (up 9% QoQ) was supported by strong growth in
other income of 25% QoQ to | 196 crore led by 27% QoQ increase in
fee income to | 136 crore
• Margins stood at 3.35% vs. 3.25% in Q1FY15. However, in Q2FY15,
there was interest on I-T refund of | 27 crore, which impacted NIMs
positively by 10 bps. Adjusted for this, Q2 NIMs were steady QoQ
• Asset quality was steady with the GNPA ratio declining from 2.22%
to 2.1%. The slippage ratio fell to 1.60% from 1.66% in Q1FY15
Strong liability franchise, non resident deposits - distinguishing factor
The bank’s widespread presence in Kerala (586 out of 1174 branches)
enables it to mobilise strong NRI deposits (| 19938 crore, 32% of
deposits). Besides, the CASA ratio of the bank has risen from 26% to 31%
in the last four or five years, which is among the best compared to peers.
Also, the retail deposit constitutes a staggering ~95% of total deposits,
which is less sensitive to interest rate risk and poses low liquidity risk.
A strong liability franchise has enabled the bank to earn relatively high
NIM of ~3.3% compared to peers. The bank used to manage lucrative
NIM of ~4% during FY09-12 when interest rate charge on NRE deposit
was ~4%. However, post NRE rate deregulation in December 2011, the
bank pays ~8%, which has increased its CoF. Consequently, NIM has
steadily declined from ~4% in FY12 to 3.2% now. Going ahead, we
expect NIM to be maintained at ~3.4%, in sync with the management.
Adequately capitalised for healthy credit CAGR of 19% over FY14-16E
Federal Bank has raised capital in 2008. Since then, a slowing economy
led to low growth at 12.7% CAGR over FY10-14 (down 1.5% in FY14) vs.
26.9% CAGR in FY06-08. Even five years post raising capital, the bank
maintains one of the best tier-1 ratios of ~14%. Going ahead, we believe
credit growth will gradually pick up pace and estimate 19% CAGR to
| 61251 crore in FY16E. All sectors including SME, corporate, retail, etc.
are expected to contribute to overall credit growth. An improvement in
credit growth will result in higher leverage (low at 10.9x now) and
enhancement in RoE from 12.6% in FY14 to 14.8% in FY16E.
Asset quality in line with economy
The credit book is well-diversified with corporate exposure of | 14734
crore (32%), SME - | 11202 crore (25%), agri - | 5251 crore (11%) and
retail - | 14496 crore (32%). Overall, the asset quality has been stable with
few hiccups from time to time. The GNPA has increased from | 821 crore
in FY10 to | 1087 crore in FY14. Its GNPA ratio is 2.5%, NNPA ratio is
0.7% while the RA book stands at | 2655 crore (6% of credit). The bank
cautiously entered de-growth in FY14. We estimate stable asset quality
with GNPA of | 1313 crore and NNPA of | 457 crore by FY16E.
Bank stays our preferred long term portfolio play; revise TP higher
Federal Bank is the largest regional bank, earns healthy NIM of ~3.4%,
has strong tier-1 ratio of 13.6% and decent RoA of 1.3% by FY16E.
Structurally, the bank is moving in the right direction with its focus on
improving credit growth now. This would further attract investor interest
and lead to a re-rating of the stock. We maintain our BUY
recommendation and revise our target price higher to | 155 valuing at
1.6x FY16E ABV.

LINK
http://content.icicidirect.com/mailimages/IDirect_FederalBank_Q2FY15.pdf