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Federal Bank 4QFY2014 performance highlights and results update

May 7, 2014, Wednesday, 04:23 GMT | 23:23 EST | 07:53 IST | 10:23 SGT
Contributed by Angel Broking

Federal Bank reported operating performance above expectations, while asset quality witnessed improvement (aided by sale of vulnerable assets to ARCs). On the operating front, Net Interest Income for the bank increased by 30.3% yoy (on back of income tax refund interest of Rs.100cr, adjusting one-off item NII grew by just 9.4% yoy), while noninterest income de-grew by 9.4% yoy, leading to a healthy operating income growth of 18.8% yoy. Operating expenses grew 22.8% yoy, leading to pre-provisioning profit growth of 15.2%. Provision expenses for the bank came lower at Rs.55cr as compared to Rs.93cr in 4QFY2013, which enabled bank to clock an earnings growth of 24.9% yoy.

Business growth weak; NIM improves qoq: During 4QFY2014, the bank witnessed a weak growth in its balance sheet, as its advances de-grew by 1.5% yoy, while deposits grew by just 3.7% yoy. The growth in advances was due to a 27% de-growth in the corporate segment. The Retail and agri book grew moderate by 6% and 9% respectively while the SME book registered a strong growth of 36% yoy. CASA deposits grew by 18.6% yoy, as savings deposits grew by 19.9% yoy, while current deposits reported a moderate increase of 12.3% yoy. Consequently, the CASA ratio improved 387bp yoy (45bp qoq) to 30.8%. During the quarter, the NIM for the bank improved by 35bp qoq to 3.6%. Going ahead, the Management has guided for a NIM in the range of 3.3-3.35% for FY2015. The bank’s performance on the non-interest income (excluding treasury) front was largely flat yoy at Rs.138cr. On the asset quality front, the slippages increased qoq (annualized slippage rate at 1.8% as against 1.3% in 3QFY2014 and 3.8% in 4QFY2013). During the quarter, the bank witnessed slippages of Rs.194cr (retail – Rs.29cr, SME and Agri - Rs.94cr, and corporate – Rs.71cr), as against Rs.145cr in 3QFY2014. The bank sold assets worth around Rs.153cr to ARCs during the quarter as against Rs.186cr sold in 3QFY2014. A robust recoveries/upgrades performance aided the bank to report a 9.5% qoq decline in absolute Gross NPA levels. Net NPA levels witnessed a sequential decline of 9.7% qoq. The bank restructured advances worth Rs.397cr during the quarter (as compared to Rs.19cr restructured in the sequential previous quarter). The restructured book for the bank stands at Rs.3,080cr.

Outlook and valuation: After witnessing severe asset quality pressures for the last few years, the bank’s asset quality has shown improvement over the last two quarters (on lower slippages and better recoveries/upgrades). We remain watchful of the bank’s near term performance on the asset quality front. Bank trades at premium valuation of 0.9x of FY2016E P/ABV compared to its peers with better ROEs and ROAs. Hence we recommend an Accumulate rating on the stock, with a target price of Rs.99.