Anand Rathi
In all major perimeters Federal Bank did well, with PAT, deposits and advances growing respectively 46 percent, 19 percent and 18 percent y/y. However, asset quality slightly deteriorated with GNPA increasing 7bps sequentially to 2.99 percent and slippages came at 1.5 percent (of the loan book). We retain our positive view on the bank, given the strong business growth prospects, steady margins and stable credit costs.
Supported by ~24 percent y/y revenue growth and a 4 percent decline in provisioning, the bank reported earnings rocketing 46 percent y/y. With the management intending to accelerate growth in the higher-yielding retail book and with the re-pricing benefits from the existing book, margins are expected to be stable if not step up. With stable margins, strong fee income and stable credit cost, we expect a 22 percent earnings CAGR over the next two years.
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Slippages were ~1.46 percent of the loan book 54bps higher than the previous quarter but lower than the 2 percent average of the past five years. Stressed assets (GNPA + standard restructured loans) continued declining and are now ~3.5 percent of loans. We have factored in a 1.6 percent slippage over FY20-21 (though more than management talked of) due to the accelerated recognition from the residual stressed portfolio.
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Our Jul’20 sum-of-parts target price (1.5x FY21e book value, Rs 13 a share for Fedfina and IDBI-Federal Life) works out to Rs 130 a share.
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