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Federal Bank Q4FY14 results update

May 2, 2014, Friday, 11:21 GMT | 06:21 EST | 15:51 IST | 18:21 SGT
Contributed by Nirmal Bang

Federal Bank (FB) reported higher than expected bottom line performance led by one time income from tax refunds. Adjusted for the one-off item, results were below estimates. Bottom-line performance was boosted by lower provisions on YoY basis. For FY14 PAT was flat with mere 0.1% YoY growth.

- Loan book growth was muted at 4.3% QoQ and witnessed decline of 1.5% YoY. 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. We expect growth to pick up from FY15E and have factored in growth of 12.9% for FY15E and 15.8% for FY16E.

- Asset quality witnessed improvement on account of higher recoveries and sale of assets to ARC worth Rs 158 cr (186 cr last quarter). Slippages in the corporate book increased to Rs 71 cr (Rs 30 cr related to steel accounts) after remaining stable for the last two quarters (around Rs 23-26 cr). The restructured book witnessed significant increase at Rs 327 cr (included Rs 200 cr on account on one discom and 3 steel accounts) taking the total standard restructured book to Rs 2,523 (5.8% of total loan book). As per the management, in the near term most of the restructuring has been taken care of leaving limited restructuring pipeline.

- NIMs witnessed increase of 35 bps on QoQ basis led by refund on income tax. Adjusted for this, margins witnessed compression. We expect margins to be 3.3% for FY15E vs management expectation of 3.3%-3.35%.

- Non-interest income included Rs 40 cr on account of sale of investment.

- The bank added 32 branches during the quarter taking the total branch network to 1174. However, most of the branches were added in the rural areas as a result of which cost to income ratio was broadly in control. Going forward management intends to moderate the pace of branch expansions.

Challenging macro environment restricted the pace of recovery in FB’s performance. Despite this, we have seen some steady signs of improvement in the bank’s operational performance in the last 3 quarters. The bank has slowed down on the corporate book considering the stress on asset quality in the segment. Adequate capitalization protects the bank from dilution of earnings.

However, higher restructuring in the quarter has raised some concerns over the asset quality of the bank. FB has slowed the pace of branch expansion which would lead to control over cost to income ratio. Margin improvement, continued CASA traction and growth in core fee income are the levers going forward. We expect PAT to grow at 11.8% CAGR over FY14-FY16E after remaining flat in FY14. We expect RoE to improve to 13.0% FY16E from 12.6% in FY14. At CMP, the stock is trading at 1.06x and 0.96x FY15E and FY16E Adj BVPS and 8.61x and 7.50x FY15E and FY16E EPS respectively. We maintain our HOLD rating on the stock with a target price of Rs 104; an upside of 13.2% from current levels.

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