Maintain BUY on Federal Bank - Operating performance surprises - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities

We maintain a BUY on FB with a target price of Rs 78 (1.0x Sept-22E ABV). FB's PPOP grew strongly, led by an uptick in NIMs and core fees. However, a sharp (prudent) rise in non-tax provisions dragged net earnings. Despite the improvement in operating performance and positive commentary on collections, our earnings estimates are mostly unchanged, as we conservatively factor in higher provisions. Attractive valuation and a strong liability franchise underpin our stance.

2QFY21 highlights: FB's PPOP grew 40/8% YoY/QoQ to ~Rs 10bn and was 29.9% ahead of estimates, led by 22.8/6.4% NII growth (led by a sharp CoF reduction), and 21/4% other income growth (led by a rebound in core fees).

Comments on asset quality and collections were surprisingly positive: (1) 95% collection efficiency in September (1.5% of borrowers did not make any repayments), (2) slippages in 2Q would have been ~Rs 2.4bn (3) out of ~Rs 37bn of SMA loans as of 1st March, only ~Rs 7.6bn remain, (4) slippage guidance of 30-40% of the usual run rate in case of retail and SME loans, (5) no significant corporate stress seen, and (6) 3% of the book is expected to be restructured. Our slippage estimates at 2.0% over FY21-23E are conservative.

Provisioning: The bank made COVID-19 related provisions of Rs 4bn (including 15% of potential 2Q slippages of ~Rs 2.4bn), taking the total stock of such provisions up to 0.5% of loans. Calc. PCR increased by 1675/612bps to 65.7%. However, we continue to build LLPs of ~1.10% over FY21-23E.

Funding side trends: Deposit growth continued to be healthy at 12.3/1.2% and ahead of loan growth, led by strong CASA growth at 19.9/6.4%. Consequently, the CASA ratio increased to 33.7%, and this has partly contributed to the sharp fall in CoF. The management explicitly indicated that the bank is not looking to raise equity in the near term (CRAR of 14.6%).

Shares of FEDERAL BANK LTD. was last trading in BSE at Rs.52.25 as compared to the previous close of Rs. 51.75. The total number of shares traded during the day was 3987594 in over 6589 trades.

The stock hit an intraday high of Rs. 53.45 and intraday low of 51.45. The net turnover during the day was Rs. 209739414.

Source : Equity Bulls

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