Federal Bank Ltd. share price target

Strong show on core operating parameters - Federal Bank reported a steady NIM in Q3FY19 which stood at 3.2%, similar as compared to Q2FY19. Net interest income grew by 13.4% YoY to `10.7bn in Q3FY19. Core Operating profits grew by 22.6% YoY and 1% QoQ to `6.5bn in Q3FY19 compared to `6.4bn in Q2FY19 and `5.3bn in Q3FY18. The Bank's CASA deposits stood at `412bn...

GNPA/NNPA ratios almost stable at 3.14%/1.72% against 3.11%/1.78% in Q2FY19 on account of reduction in slippages and improved recoveries. Strong growth in loan book at 25% YoY with significant performance from Retail and Corporate segments, while deposits grew by 24% YoY....

ICICI Securities Ltd | Retail Equity Research Fresh slippages moderated to | 426 crore in Q3FY19 but were higher compared to guidance. Slippages in the SME segment stayed elevated at | 192 crore vs. | 169 crore in Q2FY19. A higher reduction led to steady GNPA ratio at 3.14% vs. 3.11% in Q2FY19. Provision coverage ratio increased ~200 bps QoQ to 64.2%. The bank has exposure of | 245 crore to three SPVs of IL&FS;, classified as standard. Provision in lieu of the same is at ~7.5% of exposure...

Maintain NEUTRAL with a TP of Rs 93 (1.3x Dec-20E ABV of Rs 71.3). FBs impressive and sustained business growth (24/5% YoY/QoQ) failed to meaningfully impact core operating performance (PPOP remained sequentially flat); due to flat NIMs and a significant jump in opex (+10%). Opex was driven by higher staff costs (+15%) and CSR spends. Although slippages (~1.69% ann.) moderated due to lower Corp delinquencies, stress persists in the SME book, even after additional restructuring during the qtr.

Continued robustness in fee income growth for consecutive quarter which was primary reason of driving PPOP growth. FB's earnings of Rs3.3bn (PLe: Rs2.9bn) was better than expectations on back of relatively lower provisioning and strong other income. NII growth has been slower at 13.4% YoY, lower than B/s growth from last two quarters as NIMs pick up has been slower. Asset quality saw slight deterioration with slippages similar to trend levels with this quarter led from SME. Key positives...

17 January 2019 Federal Bank Loan growth of 4.7%/24.6% QoQ/YoY was largely driven by corporate loans (35.5% YoY). Retail book also continued strong traction with 22.4% YoY growth, while SME book grew 9% YoY. SME book outside Kerala (INR104.7b) showed healthy growth of 13.5% YoY. Corporate loan book now constitutes 43.5% of overall loan book. We believe this is largely opportunistic acquisition of new corporate relationships outside Kerala. According to management, corporate loans have the highest improvement (~50bp) in the incremental yields and the blended yield on the corporate book stands at 8.7% Slippages were INR4.3b v/s INR4.

Q3FY19 results of the bank were in-line with our expectations PAT grew by 30% yoy to 3.3 bn. Balance sheet growth was strong credit grew by 24% yoy led by corporate and retail loans. Core fee income (CEB + loan processing) grew by 34% - which is one of the highest growth we have seen in the recent past. Slippages were less at 4.3 bn vs. 4.8 bn last quarter. The bank has front-loaded some of Kerala flood related slippages during the quarter. On the other hand, positively, RBI audit of the bank for the year FY18 is done and there is no NPA divergence to be reported. Cost ratios inched up during the quarter to 50% (up by ~220 bps) due to higher provisions on gratuity (led by increase in gratuity limits) and rise in CSR expenses....

In our view, better days are ahead for the bank in terms of asset quality going forward. Large part of restructured assets has already been recognized as NPA by the bank (5.8 bn, down 77% in 4 yrs). Of this 5.8 bn of restructured stock, 2.8 bn is exposure to Air India and balance 3 bn are...

Loan growth within the banking system has picked up with increasing demand in working capital loans, pick-up in SME and continued momentum in retail business. Management guided of maintaining 25%+ loan growth in the coming quarters due to opportunities in the commercial and institutional banking portfolio. Within the corporate portfolio (~44% of the total loan book) almost half of the book is between INR0.25-1b, and the remaining has a ticket size above INR1b. On the retail side, the bank is diversifying towards high yielding retail loans like unsecured personal loans and CV financing (through partnership model). As of 2QFY19, the bank had an outstanding personal loan book of INR3b and has guided to increase focus on these high yielding segments. Total net stress loans (NNPA+ Standard restructured+ Net SRs) currently stands at INR27.8b (~2.8% of the loans) down from INR34.9b (~7.1% of the loans) in 1QFY16. Of this standard restructured exposure of INR5.

FB reported flat earnings primarily on account of higher provisions for investments even as operating profits were up 20% YoY. NII growth came at 14% YoY supported by loan growth of ~24% YoY while non-interest income grew 12% YoY. NIM was almost flattish at 3.2%.