Federal Bank (FB) has reported healthy financial performance in Q3FY21 led by - i) strong NII growth at 24% YoY despite ~Rs0.4bn of interest reversal on likely incremental stress, ii) improving NIM trajectory, iii) collection efficiency of ~95% (pre-covid level) and revised lower restructuring guidance to ~1.3% vs 2-3% earlier, iv) pro-forma slippages within guidance range and v) highest ever CASA ratio at 34.5%, reflecting its business resiliency and strong franchise. It utilised strong operating performance to improve provision coverage to 77% (66% including proforma slippage) from 66% in Q2FY21. Its redefined business strategy is driving strong 15% YoY growth in core-fee income and it expects this momentum to sustain going ahead. Management's asset quality narrative, improving business momentum, technology investments/tie-ups and ~40bps of provision buffer will cushion future earnings volatility and improve the visibility of it touching 1% RoAs sooner than later. Maintain 'BUY' with a revised TP of Rs90 (earlier: Rs88) as we revise our FY21 earnings estimate upwards by ~22%.
- Asset quality in good stead, pro-forma slippages within guidance; lowers potential restructuring estimate to 1.3% vs 2-3% earlier. While headline slippages remained negligible in Q3FY21 owing to the Supreme Court's interim order, it disclosed pro-forma slippages of Rs8.63bn. Segment-wise pro-forma slippages are broadly in-line with historical quarterly run-rate and within guidance range. While it restructured Rs10.6bn (0.54% of loans) worth of accounts in Q3FY21, it reduces potential restructuring to ~1.3% vs 2-3% as indicated earlier. It derives comfort from 95% collection efficiency and lower SMA pool at ~2.5%. The bank remains optimistic on its ability to navigate through the current cycle effectively given its favourable asset mix - 76% corporate book (38% of loans) rated A & above, ~10% gold loans and ~15% home loans. Delayed economic recovery would be key downside risk to asset quality outlook.
- NIM expansion driven by strong liability franchise and redesigned portfolio. Margin expanded 9bps QoQ to 3.22% despite it reversing interest income of Rs0.4bn on likely incremental stress. Margin expansion was largely driven by A) redesigned portfolio in favour of high-yielding products like gold loan and personal loan and calibrated growth in lower-yielding products like large corporate, etc. and B) reduced cost of deposit fell 23bps QoQ to 4.87%. Going ahead, with expected momentum in gold loans (up 16% QoQ in Q3FY21) and other high-yielding products, management expects NIMs to sustain at current level of 3.2% with all efforts on improving further. Higher than expected NIMs due to higher growth in products like Credit card, MFI, CV etc is key upside risk.
- Fee income stream improving. Core fee income grew strong 15% YoY and the same was driven by improved cross-sell, redefined corporate portfolio strategy and higher gold loan disbursement. While fee income growth was broad-based, traction in corporate fee is noticeable as it already generated ~80% of full year FY20 fees in 9MFY21 despite corporate assets falling by 5% YoY. Its leadership position in debit card spends (5th largest) is also driving retail fees.
- Credit growth is likely to remain at 8-10% in FY21. While Federal registered strong 4% QoQ growth in advances (ex-corporate) spread across sectors like gold loans, personal loans and SMEs, it continues to maintain cautious stance in growing advances during current uncertainties, guiding at ~8-10% YoY credit growth in FY21. Overall credit growth in Q3FY21 remains muted at 2% QoQ with higher growth in retail segment across all products, while its redefined strategy to focus on profitability per account resulted in wholesale portfolio remaining flat sequentially.
Shares of FEDERAL BANK LTD. was last trading in BSE at Rs.77.3 as compared to the previous close of Rs. 75.4. The total number of shares traded during the day was 4426826 in over 12185 trades.
The stock hit an intraday high of Rs. 77.95 and intraday low of 74.6. The net turnover during the day was Rs. 337742461.