Federal Bank (Update) : Growth momentum to continue. Maintain BUY :: HDFC Sec, link

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Growth momentum to continue
Our interaction with Federal Bank (FB) management
corroborates our positive stance on the stock. FB
trades at 1.3x FY17E ABV (Rs 111) with RoAs/RoEs of
1.3/~15%. We retain FB as a top pick within mid-tier
PVT banks as we see a case for an expansion in both
earnings and multiple. Maintain a BUY rating with a
TP of Rs 177.
Following are the meeting highlights: (1) Steady loan
growth of 20% driven by SME & Retail loans (2)
Strong traction in saving deposits continue thus
leading to a stable CASA of ~31% (3) NIMs to remain
stable; however with an expected reduction in the
base rate (in 4Q), NIMs might marginally compress
(4) No major asset quality shocks within the
corporate book and slippages remain on a declining
trend within retail/SME segments (5) Two major CDR
accounts (steel sector) of Rs 2.4bn remain under the
watch list. (6) Expected to add 60-70branches/year.
 Granular growth to continue : FB continues to build a
granular B/S with continued traction in small ticket SME
& Retail loans and Saving deposits. Management
maintained its stance of ~20% book growth driven by
SME (24% of total loans) and Retail loans (32% of total
loans). Despite strong sanctions, the bank’s Corp loan
book (33%) is yet to witness a demand pickup. FB’s gold
loan book grew ~9% QoQ in 2QFY15 to Rs 68.5bn (14.1%
of loans) and is now expected to grow steadily and form
~15% of total loans. With continued traction in the
SME/retail book and lower base in the Corp book, we
factor 20% loan CAGR over FY14-17E. On the liability
side, FB continues to witnesses a strong traction in the
saving deposits, thus leading to a stable CASA
proportion (~31%). As on Sept-14, the bank’s retail TD
and CASA proportion stood at ~95%+ (+1000bps over
FY13).
 NIMs to be stable : FB management continues to guide
for steady NIMs of 3.2-3.3%, despite strong traction in
SME/Retail loans and SB deposits. We sense the
conservative NIM guidance is in light of the expected
pickup in the low yielding corp book and the likely
base rate (10.2%) reduction in 4Q. We have factored
NIMs of 3.35% over FY15-17E vs. 3.3/3.2.
 No negative surprise on asset quality : FB management
seemed very positive on further slowing asset
impairment in the coming quarters. Management
expects no major asset quality shocks within the
corporate book and expects slippages in the retail/SME
segments to decline. We have factored slippages of
~1.0% over FY15-17E vs. 1.2/2.0% in FY14/13. However
management hinted that two major CDR accounts (steel
sector) of Rs 2.4bn remain under the watch list. As on
Sept-14, FB’s restructured book stood at Rs 24bn (5.5%
of loans; 2.7% ex SEBs).

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010407