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Maintain BUY on Federal Bank - Challenges more than factored in - HDFC Securities

Posted On: 2020-05-29 18:53:59

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

Federal Bank (Q4FY20 Results Review) : Challenges more than factored in, Maintain BUY
(TP Rs 62, CMP Rs 43, MCap Rs 85 bn)

FB's 4QFY20 PAT was below estimates due to higher opex and provisions. We've cut our earnings to factor in (1) NIM compression as the fall in yields is likely to outstrip any CoF reduction given the significant proportion of floating rate loans and (2) higher provisions, given low PCR and extrinsic factors. Depressed RoAEs in the near term with a gradual recovery cause us to assign a measly multiple (0.8x). Maintain BUY with a TP of Rs 62. A strong liability franchise and valuations underpin our stance.

Asset quality: GNPAs (Rs 35.3bn, 2.84%) were 2.4% lower QoQ as slippages dipped 52.9% QoQ to Rs 2.84bn (94bps ann.). However, (1) there appears to be an element of seasonality and, (2) the standstill classification had a 23/100bps cushioning impact on GNPLs and slippages. While w/os were 47.9% lower QoQ, they were significantly higher than FB's usual run rate. The mgt hinted at some corp stress on the horizon ($20mn to a middle eastern co. - std. for now). We have increased our slippages to 2.6% for FY21E factor in the impact of the prolonged COVID-19 related disruptions.

Deposits: At 12.8/5.3%, FB saw reasonable deposit traction, led by term deposits at ~16/7% and more specifically NRE deposits. Retail deposits grew 4% QoQ. As per latest regulatory filings, the bank's deposits from retail and small business customers are 85.2% of overall deposits- one of the highest in the banking industry. Further, the bank saw deposits grow ~2-2.5% in 1QFY21 so far (led by retail deposits), vs. a decline seen in earlier years.

Loans: At 10.9/2.6%, loan growth expectedly slowed and this trend was broad-based. The mgt indicated that the bank lost out on ~Rs 10bn of corporate and ~Rs 4-5bn of retail disbursals towards the year end. Retail loans remained the fastest growing segment of the bank's book, at 19.3/3.6% and constituted 30.5% of the book. For now, the bank is considering incremental gold loans (a peer bank's mgt has suggested the same), selective corporate lending and cross-selling to existing retail customers. We've reduced our growth estimates further, to ~10% over FY20-22E.

Management commentary on COVID-19: (1) 35% of the bank's portfolio as at 25-May-20 is under moratorium, (~65% in case of SME loans) (2) at its peak, ~38% of the bank's book was under moratorium, (3) the bank put 5-7% of its retail moratorium portfolio under the 'high-risk' category, (4) Rs 160-180bn of FB's portfolio is eligible under the NCGTC scheme and the bank intends to lend ~Rs 20bn under the scheme, and (5) the mgt puts overall LGDs between 38-40% (higher for corp and lower for retail loans).

Shares of FEDERAL BANK LTD. was last trading in BSE at Rs.44.95 as compared to the previous close of Rs. 42.75. The total number of shares traded during the day was 3599094 in over 6726 trades.

The stock hit an intraday high of Rs. 45.25 and intraday low of 41.4. The net turnover during the day was Rs. 158786174.

Source: Equity Bulls

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