Maintain BUY on Federal Bank - Pristine asset quality offsets a low provisioning buffer - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities

Federal Bank's (FB) 4QFY21 earnings were ahead of our estimates on account of lower-than-expected provisions. NIM remained steady with funding cost tailwinds offsetting yield compression (interest reversals, re-pricing etc.). FB's asset quality continues to remain resilient with slippages and restructured portfolio, well within management guidance and significantly better than peers. However, complete run-down of the COVID buffer was disappointing, resulting in us having to raise our FY22 credit cost forecasts. We revise our FY22/FY23 earnings estimates downwards by 3.9%/1.2% on account of higher provisions and lower loan growth. Maintain BUY with revised TP of INR97.

Sustained traction in operating performance: FB reported a steady quarter with NII growth of 17% YoY, along with healthy fee income traction (~0.8% of assets). NIMs were steady at 3.23% as a ~33bps sequential compression in loan yields (driven by interest reversals) was offset by declining cost of funds (~35bps). Loan book grew by 8%/5% YoY/QoQ driven by Retail (19% YoY) and Agri segment (25% YoY).

Asset quality remains intact: FB's asset quality remains robust with GNPA inching up marginally to 3.41% and steady collection efficiency at ~95%. FY21 gross slippages were at ~1.5% (FY20: 1.65%) (best-in-class even compared to the larger private sector banks), along with restructured portfolio at ~1.2% of loans, well within management guidance. Incremental slippages during the quarter were driven by non-corporate portfolio (SME: 3.5%; Retail: 3%) with zero fresh slippages from the corporate book. With a granular and largely secured portfolio (~85%), we expect slippages to remain range-bound for FY22 as well.

Run-down of surplus buffer drives higher credit cost estimates: FB utilized its entire surplus COVID buffer (~INR5bn), shoring up its PCR to ~66%. While the management is optimistic of normalized credit costs for its portfolio going forward, we believe that a lack of provisioning buffer is likely to keep credit costs elevated in the near-term. We raise our cumulative credit costs to 169bps over FY22-FY23 (FY21: 119bps).

Shares of FEDERAL BANK LTD. was last trading in BSE at Rs.84.35 as compared to the previous close of Rs. 81.65. The total number of shares traded during the day was 4502735 in over 16097 trades.

The stock hit an intraday high of Rs. 86.4 and intraday low of 83.15. The net turnover during the day was Rs. 382454896.

Source : Equity Bulls

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