Federal Bank - Q1FY16 Result Update - Sushil Finance

Federal Bank Ltd. (FB) has reported slightly disappointing set of numbers for the quarter ended June'15 with moderation in credit growth & deteriorating asset quality. We attended the conference call of the company and following are the key highlights of the results.

Key Highlights of Q1FY16 Results

- Advances grew at a slower pace of 10% YoY while it declined sequentially by ~3% mainly due to subdued growth in Corporate segment which was flat YoY while degrew by ~9% QoQ. Lack in demand coupled with some pre-payments resulted in subdued growth in the segment. SME / Agri witnessed healthy growth of ~16% while Retail grew by ~10% YoY; mgmt. expects all these segments to deliver healthy growth going forward. Growth in Corporate segment may be back-ended with overall segment growth expected to be in mid-teens in FY16E. Deposits grew by ~17% YoY & 2% QoQ with CASA witnessing healthy growth of 19% YoY & 5% QoQ (SA grew 19% YoY & 7% QoQ). CASA ratio improved by 90 bps to 31.3%.

- NII grew by ~7% YoY to Rs.6.0 bn with NIMs lower by 20 bps to 3.12%. Core Fee Income grew by 6% YoY to Rs.860 mn; Forex income was up by ~55% YoY to Rs.410 mn. Total other income included treasury gains of ~Rs.380 mn during the quarter. Higher provisioning on account of employee pension benefits & ongoing wage negotiations led to higher employee cost which grew by ~24% YoY to Rs.2.5 bn of which ~Rs.180 mn pertains to past arrears & is non-recurring. Higher provisioning on account of incremental slippages & treasury MTM losses (~Rs.490 mn) led to net profit de-growth of ~35% YoY to Rs.1.4 bn.

- Asset quality deteriorated with GNPA at ~2.6% (Q4-2.0%) & NNPA at ~1.0% (Q4-0.7%). Incremental slippages came in at Rs.3.1 bn (~2.5% annualized) which was highest in almost last 6-8 quarters which was mainly due to one of the accounts from metal & steel segment (~Rs.1.4 bn) slipping into NPA (~50% has been provided). It was a restructured account & was in stress over last few quarters. Moreover, 1 or 2 more accounts (~Rs.1 bn each) has been under stress, however mgmt doesn't foresee any major concern over the same. No major restructuring has been done in this quarter (~Rs.770 mn). PCR stands at 63% with CRAR at 15.1%.

- Guidance - 1) Expects Retail / SME / Agri to grow at ~18-20% with corporate expected to grow in mid-teens; Likely to focus more on personal loans going forward 2) NIMs likely to remain stable at 3.2-3.3% 3) C/I to decline gradually to ~50% in FY16E 4) Asset quality to remain more or less stable going forward - Expect credit cost of ~60-70 bps in FY16E 5) More focus on Digital Expansion & Technology Upgradation.

OUTLOOK & VALUATION

Moderation in growth along with surfacing asset quality concerns remains the major challenge for the bank going forward. However, with well-defined management strategies & focus on profitable growth, we expect overall performance to improve going forward & hence recommend 'Accumulate' on the stock with price target of Rs.82.

Shares of FEDERAL BANK LTD. was last trading in BSE at Rs.68.7 as compared to the previous close of Rs. 68.45. The total number of shares traded during the day was 201263 in over 1297 trades.

The stock hit an intraday high of Rs. 69.1 and intraday low of 67.85. The net turnover during the day was Rs. 13816479.

Source : Equity Bulls

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