FB delivered another strong quarter with earnings growth of 26% y-o-y led by ~33% y-o-y revenue growth. Cost growth remains high despite negligible expansion in infrastructure led by demonetisation and retirement-related costs. While the bank has slowly addressed the headline concerns, RoE expansion requires improvement in cost ratios, which we believe should be achievable by FY 2019-20 E. Maintain buy rating with TP at Rs 90 (Rs 85 earlier).
Earnings grew 26% y-o-y on the back of ~31% NII and non-interest income growth of 34% y-o-y. NIM was stable q-o-q and loan growth was impressive at 32% y-o-y, albeit off a low base. Cost-income ratio deteriorated 300 bps q-o-q to 55%. High treasury income boosted non-interest income. Asset quality was stable q-o-q with gross NPLs unchanged at 2.8% and restructured loans declining 20 bps q-o-q at 2.1%. Provision coverage ratio was stable at 71%.
We do believe that there are several one-offs for the quarter— sharp decline in interest rates leading to higher provisions for retirement costs and costs associated with demonetisation. Federal Bank is taking the right steps by moving the business model closer to that of new private sector banks, even though it is unlikely to shed its old private sector bank image in the near term. The bank needs to communicate a path towards 15%+ sustainable RoE over the medium term to long term to enable greater confidence in higher multiples.