FED's Q3FY13 core performance was largely in line (PPP at Rs3.9bn vs Rs3.8bn estimated) though spike in provisions led to a lower than expected bottomline. NIM contracted by ~10bps QoQ on reversal of interest income on NPAs. Asset quality matrices deteriorated due to one-offs with 1) gross slippage rate jumping to 5.4% led by chunky slippage 2) GNPA going up 9% QoQ to 3.85% and 3) PCR eroding by 600bps QoQ despite high provisioning cost at 82bps. Notwithstanding the one-off hit to asset quality during the quarter, we remain positive on the radical changes introduced by the new management and its potential long term benefits. We stick to our thesis of RoE expansion, which in turn should drive further re-rating of the stock over the long term. We maintain Buy and target price of Rs600.
- NIM contracts by 11bps QoQ: NII de-grew by 6% YoY to Rs5.0bn as NIM contracted by 11bps QoQ offsetting the uptick in credit growth (19% YoY vs 8% last quarter). Importantly, the contraction in NIM was the result of reversal of interest income on NPAs (Rs300mn mainly Air India & NAFED). Meanwhile, cost of deposits inched up marginally as the last leg of NR deposits repriced upwards to post-deregulation rates. Q4FY13 would still have the burden of Air India FITL and hence will continue to contain NIMs. Management guided for a NIM of 3.55% for FY13.
- Uptick in loan growth: Loan growth during the quarter registered an uptick and stood at 19% YoY (from 8% in the previous quarter) with key segments driving growth. The corporate segment made a major comeback with 12.6% QoQ growth. Incrementally, the bank remains comfortable in expanding its SME and retail book given acceptable slippage performance though cautious stance towards corporate segment will stay for the near term. The management intends to close FY13 with a loan growth of 15-16% while for FY14 it expects to get more aggressive with target of ~25% YoY.
- Slippage rate spikes to 5.4%: After a clear moderating trend for the last 4 quarters, slippage rate spiked to 5.4% led by chunky NPAs. Exposure to NAFED (Rs2bn) was recognized as NPA (40% provided for) and the borrower has requested for a settlement with 40% haircut. Various banks exposed to NAFED have declined to accept 40% haircut and hence negotiations are underway with resolution likely in a couple of quarters. The bank sold off Rs710mn worth of NPAs to ARCIL, net of which the slippage rate would have been 4.8%. Effectively, the %GNPA inched up by 10bps QoQ to 3.85% while pushing the PCR down by 600bps QoQ to 77%.
- Maintain Buy: The management's strategy to enhance RoE by optimally leveraging the equity, enhancing liability franchisee and containing asset stress is gradually yielding results (albeit mixed). We expect the aggressive branch expansion to start yielding results over FY14 & FY15 in terms of growth and enhanced liability profile. At the current price, the stock is trading at 1.3x FY14E ABV and implies 19% upside to our price target of Rs600. We suggest investors should Buy the stock.