Federal Bank 3QFY2014 performance highlights and results update
January 22, 2014, Wednesday, 06:11 GMT | 01:11 EST | 11:41 IST | 14:11 SGT
Federal Bank reported as in-line operating performance, while asset quality surprised positively (aided by sale of vulnerable assets to ARCs). On the operating front, while the NII increased by 9.7% yoy, the overall non-interest income degrew by 23.4% yoy, leading to a flattish operating income yoy. Operating expenses grew 12.6% yoy, resulting in an operating profit decline of 9.7% yoy. Provision expenses came in much lower at Rs.7cr (as the bank reversed NPA provisions worth Rs.51cr during the quarter) as against Rs.74cr in 3QFY2013, which aided the bank in reporting an earnings growth of 9.2% yoy.
NIM improves qoq; Robust recoveries/upgrades on back of vulnerable assets’ sale to ARCs results in lower Gross NPAs: During 3QFY2014, the bank witnessed a muted growth in its balance sheet, as its advances grew by 5.4% yoy, while deposits grew by 11.9% yoy. Within advances, the SME book registered a strong growth of 38.4% yoy, while growth in retail advances was moderate at 11.5% yoy. The corporate loan book de-grew 14.4% yoy. CASA deposits grew by 16.3% yoy and the CASA ratio improved 116bp yoy to 30.4%. Aided by a 7bp qoq improvement in yields on advances, the bank’s margins improved 17bp qoq to 3.5%. The bank’s performance on the non-interest income (excluding treasury) front was healthy, registering a growth of 17.4% yoy. On the asset quality front, while the slippages remained largely flat qoq (annualized slippage rate at 1.3% as against 1.4% in 2QFY2014 and 4.5% in 3QFY2013), the performance on recoveries and upgrades was robust (recoveries and upgrades amounted to Rs.290cr for the quarter as against Rs.168cr in the sequential previous quarter, largely aided by sale of assets to ARCs worth around Rs.186cr). A robust recoveries/upgrades performance aided the bank to report an 18.1% qoq decline in absolute Gross NPA levels. Net NPA levels witnessed a sequential decline by 13.4%. The PCR (incl. technical write-offs) for the bank increased 206bp sequentially to 83.3%. The bank restructured advances worth Rs.19cr during the quarter (as compared to Rs.214cr restructured in the sequential previous quarter). Going forward, the Management remains watchful on advances worth Rs.300-400cr, while the advances in the restructuring pipeline for the bank stand at Rs.100cr.
Outlook and valuation: After witnessing severe asset quality pressures almost every quarter for the last few years, the bank’s asset quality has shown stable to improving signs over the last two quarters (on lower slippages and better recoveries/upgrades). While, we remain watchful of the bank’s near term performance on the asset quality front, the stock’s current valuation at 0.9x of FY2015E P/ABV offers scope of decent upside here on. Hence, we recommend an Accumulate rating on the stock, with a target price of Rs.87.