Asset quality risks appear to be lower, particularly those emerging from the gold portfolio (10% of loans) with the recent rally in gold prices, a 15% rise since June 2013. As of Q1FY13, 10-15% of the gold loan portfolio was above 90% LTV, which would now be below 80%. We expect the bank to start focusing on growth compared to stabilising the portfolio. The extension of deadline in Saudi Arabia to November 4, 2013, on employment restrictions gives a further breather to the bank.
However, we maintain our cautious outlook on loan impairment emerging from the corporate portfolio as it is yet to stabilise, despite recent discussions with the management giving more comfort.
Federal Bank is best placed to gain from the strong NRI remittances in the country from the rupee depreciation (>20% in one year), which would reduce the dependence on wholesale deposits. Federal Bank has built a strong franchise in Kerala, which has helped it to capitalise on the high NRI remittances in the state. Casa ratio stands at 29% as of Q1FY14 with 40% of the saving account balances from NRE/NRO deposits.
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