Federal Bank - Treasury Aids Profitability, Loan Build Up Key Monitorable; Result Update Q3FY15 :: Edelweiss, report

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Federal Bank’s (FB) Q3FY15 PAT at INR2.6bn came in marginally higher than our estimate riding higher treasury profit. Key highlights: (1) loan book grew 15% YoY, but dipped QoQ due to run down in short-term loans (STL), however, retail and SME remained on track; (2) NIMs optically lower at 3.2% versus 3.35% in Q2FY15. The latter was higher due to one-off income, adjusting for which NIMs were stable; and (3) slippages were marginally higher at 2.25% (1.7% in Q2FY15) due to one lumpy account contributing INR1.25bn. With growth set to bounce back (consolidation phase over and growth engine in place) and promising asset quality metrics (unrelenting focus on granularity and quality), we believe FB is well equipped to capture the macro improvement and deliver higher earnings (25% CAGR over FY14-17E).

Post consolidation phase growth key monitorable 

FB’s strategy of sharpening focus on debulking corporate book and quality took a toll on growth in FY14. However, SME and retail (ex-gold) continued to thrive, surging 26% and 16% YoY, respectively, during the year. Despite some aberration in Q3FY15 (on rundown in STL of INR7bn), we expect growth to bounce back given that it successfully navigated the consolidation phase, SME/retail are holding the fort and strategic expansion is in place. Improving productivity, following better revenue traction, will lower its cost/income (45% target by FY16), in turn aiding return ratios.

NIMs dip 15bps due to one-off item, but core margin stable

Though optically NIMs appear lower at 3.2% (down 15bps QoQ), adjusting for one-off in Q2FY15, they remained stable. With growth slated to stage a come back, we anticipate surging CD ratio, tilt in favour of SME and lower asset quality stress to aid NIMs expansion. FB is targeting NIMs in the 3.25-3.35% range.

LINK
https://www.edelweiss.in/research/Federal-Bank--Treasury-Aids-Profitability,-Loan-Build-Up-Key-Monitorable;-Result-Update-Q3FY15/28052.html