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Federal Bank Q1FY15 results update

July 18, 2014, Friday, 06:56 GMT | 01:56 EST | 11:26 IST | 13:56 SGT
Contributed by Nirmal Bang

Federal Bank (FB) reported in line performance. Bottom-line performance was boosted by lower provisions on YoY basis.

- Q1FY15 started on a good note for the bank in terms of loan growth after witnessing de-bulking in FY14. Loan growth witnessed an increase of 9.1% YoY and 3.6% QoQ. After witnessing decline in its corporate book for the last 4-5 quarters, FB witnessed 6.2% QoQ increase in its corporate book. Management now seems confident of achieving its target of 20%+ advance growth for FY15E with corporate book picking up. Retail and SME continues to remain the focus areas for the management. We have factored in growth of 16.3% for FY15E and 17.2% in advance book for FY16E.

- The bank witnessed an increase in slippages from Rs 194 cr in Q4FY14 to Rs 224 cr in Q1FY15. SME and Agri portfolio remained stable while retail slippages inched up during the quarter. Corporate slippages included Rs 41 cr of NPA which has been sold to ARC. In addition to this, the bank has also sold off previous quarter NPA worth Rs 100 cr which resulted in an improvement in the overall Gross and Net NPA numbers. The bank restructured assets worth Rs 88 cr during the quarter taking the total standard restructured book to Rs 2,464 (5.5% of total loan book).

- As per the management, the current pool of stressed accounts now stands in the range of Rs 150-200 cr and is not a major cause of worry.

- NIMs witnessed an increase of 12 bps on YoY basis while on QoQ basis it declined as last quarter included interest income on income tax refund. We expect NIMs to be 3.3% for FY15E.

- Non-interest income declined 27.5% YoY and 12.3% QoQ led by lower treasury and forex income. Core fee income too remained muted during the quarter. Management is targeting fee income to track balance sheet growth and is making efforts to improve in this area. We have factored in ~15% increase in non-interest income in FY15-16E.

- FB added 29 branches during the quarter taking the total branch network to 1203 which led to an increase in cost to income ratio. Going forward as operational efficiency kicks in cost to income ratio is expected to witness improvement. We expect C/I ratio to remain sub 50% levels for FY15-16E.

We have witnessed Federal Bank emerging strong through tough times with focus on consolidation and improving its balance sheet strength and at the same time maintaining core operational matrix. In Q1FY15, FB witnessed uptick in loan growth which is a positive sign. Margin improvement, CASA traction and growth in core fee income are the levers going forward. Adequate capitalization protects the bank from dilution of earnings. We expect PAT to grow at 18.9% CAGR over FY14-16E leading to RoE improvement from 12.6% in FY14 to 14.5% in FY16E. At CMP, the stock is trading at 1.42x and 1.26x FY15E and FY16E Adj BVPS and 11.06x and 8.94x FY15E and FY16E EPS respectively. We maintain our HOLD rating on the stock with a target price of Rs 137 (1.4x FY16E ABV); an upside of 10.7% from current levels.