Federal Bank - Credit traction improving; stable NPA… :: ICICI Securities, report

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Credit traction improving; stable NPA…
• Profit grew 15% YoY to | 264.7 crore, above our estimate of | 253
crore, mainly due to negative provisions and strong other income
• Other income grew 40% YoY to | 219.9 crore, higher than our
expectation led by strong treasury gains of | 77 crore vs. | 24 crore
in Q2FY15. However, core fee income remained subdued at | 122
crore, flat YoY despite higher credit growth
• Credit and deposits grew higher than estimates at 17% YoY (| 48725
crore) and 13.5% YoY (| 65550 crore) vs. 14% and 10% expected,
respectively. We believe higher mortgage growth in retail and
corporate book paydowns, along with interest reversals on NPA have
led to NII growth coming below estimate at 7.6% YoY to | 587 crore
with NIM, thereby, declining to 3.2% vs. 3.35% QoQ
• Asset quality was steady with the GNPA ratio at 2.19% and RA at 5%
Strong liability franchise, non resident deposits - distinguishing factor
The bank’s widespread presence in Kerala (590 out of 1220 branches)
enables it to mobilise strong NRI deposits (NRE - | 22344 crore, 34% of
deposits). Besides, the CASA ratio of the bank has risen from 26% to 31%
in the last five years, which is among the best compared to peers. Retail
deposit constitutes a staggering ~82% 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 ~3.2-3.3%
compared to peers and manage lucrative NIM of ~4% in 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, expect NIM to be maintained at ~3.3%.
Adequately capitalised for healthy credit CAGR of 19% over FY14-16E
Federal Bank had raised capital in 2008 while 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%. We believe credit growth will
gradually pick up pace and estimate 19% CAGR to | 61251 crore by
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 | 15239
crore (31.3%), SME - | 11988 crore (24.6%), agri -| 5809 crore (11.9%)
and retail - | 15689 crore (32.2%). Overall, the asset quality has been
stable with few hiccups from time to time. GNPA has increased from
| 821 crore in FY10 to | 1087 crore in FY14. GNPA ratio is 2.19%, NNPA
ratio is 0.7% while the RA book is at | 2655 crore (5% of credit). Stable
asset quality seen with FY16E GNPA at | 1313 crore, NNPA at | 457 crore.
Bank stays our preferred long term portfolio play; revise TP higher
Federal Bank is the largest regional bank, earns healthy NIM of ~3.2%,
has strong tier-1 ratio of 13.9% and decent RoA of 1.3% by FY16E. Risk
balanced growth is expected to increase. However, remittance flows from
Middle East may be impacted due to declining crude oil prices. We
maintain our BUY recommendation and target price at | 164 valuing the
bank at 1.6x FY17E ABV

LINK
http://content.icicidirect.com/mailimages/IDirect_FederalBank_Q3FY15.pdf