Federal Bank: Muted performance :: Kotak Sec,report

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Muted performance. Federal Bank delivered a muted performance with earnings
growth of 15% yoy driven by treasury income. Further improvement in loan growth from
15% yoy in the previous quarter did not materialize as large corporate loans grew <10 p="">yoy or declined 6% qoq. There are challenges to the business, especially on funding side
due to the recent decline in crude prices but we think the changes effected to the
business should make it easier for the bank. Maintain BUY. TP revised to `160 (from `145)


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Not a strong quarter despite earnings meeting expectations
Earnings grew 15% yoy on the back of 15% yoy revenue growth and reversal in provisions.
Operating profit growth was weak at 12% yoy and expenses grew 18% yoy as the bank made
higher provisions for retirement costs to factor changes in long-term interest rates. NII growth
was weak at 8% yoy despite loan growth of 15% yoy as the recent changes to base rate have
hurt growth. NIM (adjusted for interest income on IT refunds) was stable qoq at 3.2%. Noninterest
income grew 40% yoy primarily on the back of treasury income, which including writeback
of provisions contributed 35% of PBT. Impairment ratios were stable with slippages at
1.9% and negligible fresh restructuring. Gross NPLs increased 10 bps to 2.2% while
restructured loans were unchanged at 5% of loans (50% of restructured loans to aviation and
electricity distribution companies).
Two risks: slower-than-expected growth and high dependence on NR deposits could hurt SA
At this stage, we are worried about two key risks, which are critical for the bank: (1) Growth
has not accelerated and is still at 15%. We expected growth to be closer to ~20% in retail and
SME business, which has not happened, and large corporate portfolio always has a risk of
slowdown and alternate sources. (2) 35% of total deposits come from non-resident deposits
(Exhibit 6), primarily from the Middle-East, which contribute 35% of the overall NR deposit
flows (Exhibit 9). Federal Bank is a primary beneficiary from this region and these economies
have been impacted by the sharp fall in crude prices. While the residential and NR term deposit
rates post deregulation are similar, we would be more worried on the CASA as share of savings
deposits from various NR channels is high (Exhibit 6) at ~45%.
Maintain BUY; well-placed among regional banks
We maintain our positive view and value the bank at 1.5X book and 11X September FY2016E
EPS for RoEs in the range of 15% in the short term (17% in the long term) and solid earnings
growth ~18% CAGR in the medium term. At our target multiple, we value the bank at `160
(from `145 earlier) to reflect roll-forward of our earnings. Federal Bank is unlikely to shed its old
private sector bank image but we believe that that the initiatives taken by the current
management could move its business model closer to the new private sector banks, which
should result in higher multiples.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily16012015kl.pdf