Maintain BUY on Federal Bank - Benefits of a prudent, solid and secured portfolio - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

Despite a 12% beat on PPOP led by higher other income, Federal Bank (FB) disappointed on earnings (20% below estimates) due to higher-than-expected provisioning. The lack of provisioning buffer reflected in higher provisioning (2%) in Q1FY22 to cushion the second wave impact on the portfolio with annualised slippages at ~2% and a restructured book at 1.9% (Q4FY21: 1.2%). The COVID-restructured portfolio primarily comprises secured loans (home loans, LAP and gold loans contribute to nearly 2/3rd of the portfolio) and offers comfort on loss given default (LGDs). FB's partnerships with FinTechs in the retail business (with neo-banks, payments firms, and merchant acquirers) offer early-stage, medium-term catalysts for higher productivity (business growth) and greater efficiencies (profitability). We maintain BUY with a TP of INR98.

Operating performance driven by treasury income, recoveries: FB reported strong PPOP growth (+22% YoY) on the back of strong other income growth (+33% YoY), led by treasury gains and recovery from a corporate account. Funding cost tailwinds (25 bps sequentially) partly offset yield compression to support NII growth at 9% YoY, with NIM at 3.15%. The loan book grew +7% YoY, driven by retail (+15% YoY) and agri (+23% YoY) segments.

Asset quality stable in adverse times: FB's asset quality witnessed marginal deterioration and is likely to be mirrored by other lenders in this challenging environment. GNPA inched up marginally to 3.5%, while the restructured portfolio was at 1.9% of loans (+70bps sequentially). Incremental slippages were largely from the non-corporate portfolio (SME: 5%; Agri: 4%), while restructuring was largely centred on housing (3.7%), (LAP: 7.3%) and SME (2.5%). The higher-than-expected provisioning (~2%) kept PCR stable at ~66%, with ~15% provisioning on restructured portfolio. Given the nature of impairment (largely secured) and the existing stock of provisions, we see FB outperforming on eventual loan losses and mean reverting to normalised credit costs relatively quicker than its larger peers.

Building new growth avenues; bolstering FinTech partnerships: On the back of a strong liability franchise and a granular loan book, FB continues to focus on new avenues of growth to boost its profitability. The credit card business (launched for employees and ETB customers) is likely to resume onboarding new customers within 6-8 weeks of integrating with the alternative switch partner. A couple of FB-partnered neo-banks (Jupiter and epifi) have gone live and are expected to scale up. Its other partner BharatPe (~4mn merchants onboarded in tie-up with FB) offers its large customer and merchant base for cross-selling, which would improve profitability, going ahead.

Shares of FEDERAL BANK LTD. was last trading in BSE at Rs. 86.35 as compared to the previous close of Rs. 87.25. The total number of shares traded during the day was 1303288 in over 3264 trades.

The stock hit an intraday high of Rs. 88.4 and intraday low of 86.1. The net turnover during the day was Rs. 114395413.

Source : Equity Bulls

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