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Federal Bank Q3FY14 results update

January 20, 2014, Monday, 06:44 GMT | 01:44 EST | 12:14 IST | 14:44 SGT
Contributed by Nirmal Bang


Federal Bank (FB) reported higher than expected PAT driven by lower provisions.
 
- Provisions were lower on account of write back on restructured loan. NIMs declined 6 bps QoQ owing to 9 bps increase in cost of deposits. Muted growth in income and higher opex led by branch expansion resulted in increase in cost to income ratio. Led by write off of Rs 120 cr and sale of assets to ARC worth Rs 186 cr, gross NPA witnessed significant improvement. Slippages in the corporate book continued to remain under control for the second consecutive quarter.
 
- Loan book growth was muted at 5.4% YoY and witnessed decline of 1.4% QoQ. Corporate book continued to decline while SME book witnessed strong growth. Management continues to adopt cautious approach on the corporate loan book and does not intend to ramp it up significantly. Retail and SME continues to remain the focus areas for the management and FB aims to maintain the current growth momentum in these segments. On a consolidated level, growth is expected to remain muted for FY14E. However, we expect growth to pick up from FY15E.
 
- NIMs are expected to remain in the range of 3.2% for Q4FY14. On asset quality front, nearly Rs 300-400 cr is the current pool of watchful assets in corporate segment. The bank restructured Rs 19 cr in Q3FY14 taking the total outstanding standard restructured book to Rs 2,273 cr (5.5% of the advance book). The restructured book includes Rs 300 cr worth of SEB bonds; excluding which the restructured book would have stood lower. As of now restructuring pipeline stands at ~Rs 100 cr.
 
- Bulk deposit continues to decline and now stands at 6% of total deposits.
 
- Capital Adequacy Ratio remained healthy at 14.8% (Tier I at 14.2%).
 
- The bank added 18 branches during the quarter taking the total branch network to 1142. Going forward management intends to moderate the pace of branch expansions.
 
Challenging macro environment/ high interest rate scenario has restricted the pace of recovery in FB’s performance. Despite this, we have seen some steady signs of improvement in the last 2 quarters. The bank’s strategy of not targeting aggressive growth goes well with the current stress in economy. Adequate capitalization protects the bank from dilution of earnings.
 
Asset quality is holding up well since last two quarters and restructuring pipeline is not too significant. FB has also slowed the pace of branch expansion which would lead to control over cost to income ratio. Margin improvement and higher fee income are the levers for the bank going forward. We expect overall profitability to remain muted and grow at 2.7% CAGR over FY13-FY15E. We expect RoE to witness a dip in FY14E and then reach to 12.1% levels in FY15E.
 
At CMP, the stock is trading at 1.02x and 0.93x FY14E and FY15E Adj BVPS and 8.52x and 7.64x FY14E and FY15E EPS respectively. We maintain our HOLD rating on the stock with a target price of Rs 93 (1.1x FY15E Adj BV) suggesting an upside of 18% from current levels.

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