Federal Bank | Q3FY15 First Cut Analysis | We have a BUY rating on stock with target price of Rs 175 . :: IndiaNivesh

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Federal bank reported Q3FY15 results which were lower than expectation on Net
Interest Income front which stood at Rs 5.9 bn, up 8% yoy mainly due to lower loan
growth (15% yoy and stable qoq). NIMs (rep) were down 20 bps qoq to 3.2% mainly
due to one off interest income in Q2FY15. Operating profit was up 12% yoy to Rs
3.97 bn (vs our exp of Rs 4.18 bn). Despite lower than expected NII / operating
profit growth, Net profit was ahead of expectation at Rs 2.64 bn thanks to provision
write back. Asset quality impacted marginally with increase of 9 / 3 bps qoq in
Gross / Net NPA.
Loan book of Federal bank grew by 15% yoy to Rs 480 bn led by healthy growth in
SME advances by 18% yoy and Retail advances by 15% yoy.
Net interest income was lower than expectation by 6% at Rs 5.9 bn due to lower
loan growth and also could be due to lower interest income growth on back of one
large NPA account of Rs 1.3 bn. NIMs have come down by 20 bps qoq to 3.2%. Non
interest income surprised positively with increase of 41% yoy to Rs 2.2 bn. We
believe this could be due to higher treasury gains which the bank might have
booked during Q3FY15. We will try to get the more details and reasoning from
management for lower NIMs and higher non interest income.
Operating profit grew by 12% yoy to Rs 3.97 bn. Operating expense grew by 18%
yoy with cost to income ratio of 51%. However Net profit growth was higher at 15%
yoy mainly due to write back of provisioning. We will try to get the more insight on
same in results conference call.
Asset quality impacted marginally with increase of 9 / 3 bps in Gross / Net NPA to
2.2% / 0.7% respectively. In absolute terms, Gross / Net NPA increased by 4-5%
each to Rs 10.7 / 3.3 bn respectively. There is one large account of Rs 1.3 bn which
has turned NPA during Q3FY15 which has affected asset quality.
Valuation
At CMP of Rs 145, Federal Bank is trading at P/ABV of 1.7x and 1.6x for FY15E and
FY16E respectively. We have a buy rating on stock with target price of Rs 175. We
will come up with further updates after conference call with management.

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