{LONGTERMINVESTORS} Federal Bank - Centrum Wealth Research

 

 

Federal Bank

Outperformer

Target Price: Rs81

CMP: Rs79

Upside: 2%

 

Sustainable improvement hereon

 

Federal Bank continued reporting improvement in its quarterly numbers with net interest income (NII) growing 19.4%, in Q2FY17, backed by 27% growth in advances, 3.31% net interest margin (NIM), net profit up 25%. Asset quality also showed improvement with gross non-performing assets (NPA) declining 14bps QoQ to 2.78%. Business growth picked-up further at 21% YoY backed by healthy growth in advances and deposits.

View: The bank started reporting improved numbers from Q1FY17 and the stock price has gained 30% since then. With fundamentals improving, we have upgraded our estimates and expect advances and net profit to witness 23% and 75% CAGR, respectively over FY16-18E. As a result, the return ratios are expected to improve to 1.3% RoA (from 0.54% in FY16) and 15.7% RoE (from 6% in FY16). Hence, we turn positive on the stock and value the same at 1.6x FY18E P/ABV with a target price of Rs81. Given the current market environment where fundamentally good stocks attract higher valuations, Federal Bank could remain an Outperformer.

Q2FY17 Result Summary  

Y/E Mar (Rs Cr)	Q2FY17	Q2FY16	YoY %	Q1FY17	QoQ %
NII	726	608	19.4	693	4.8
PPP	475	337	41.1	426	11.5
PAT	201	161	24.8	167	-
NIM* (%)	3.31	3.11	20bps	3.28	3bps
Gross NPA (%)	2.78	2.90	-12bps	2.92	-14bps
Net NPA (%)	1.61	1.33	28bps	1.68	-7bps

Source: Company, Centrum Wealth Research, Note: *NIM= Net Interest Margin

Higher NIMs maintained: The bank has maintained high NIM at 3.31% (3.28% in Q1FY17 and 3.31% in Q4FY16), due to benefit from re-pricing of some legacy deposits, 14% growth in CASA deposits (at 31.04%) and healthy growth of 27% in advances (24% in retail + Agri). Over FY16-18E, we expect the bank to maintain its NIM in excess of 3% backed by improving asset mix and increasing low-cost deposits.

Business growth picking up: The business growth improved to 21.1% YoY to Rs150,986 crore as on September 30, 2016. Retail & agri advances grew by 24%, SME by 17% and wholesale grew at a robust pace of 47%, taking the total advances growth to 27%, the highest growth in several years. Deposits grew 17% with CASA deposits up 14%. During Q2, gold loans have started improving and are expected to pick-up over the next few quarters. Over FY16-18E, business is expected to witness 21% CAGR to Rs199,713 crore.

Asset quality to have gradual improvement: The gross NPAs declined 14bps QoQ and 12bps YoY to 2.78% on the back of lowest slippages in last 5 quarters at Rs266 crore (Rs280 crore in Q1 and Rs403 crore in Q2FY16). The slippages from restructured book stood at Rs190 crore. With declining slippages and improvement in recoveries, the asset quality is expected to improve to 2.2% gross NPA and 1.4% net NPA by end FY18E.

Risk factors: a) Slowdown in loan growth and low-cost deposits; b) With growing corporate book, bulky slippages would deteriorate asset quality;

 

Regards,

Centrum Wealth Research

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