Federal Bank’s (FB) Q3FY18 earnings were marked by sustained momentum in core operating performance (ex-treasury)—up >35% y-o-y. Key highlights: a) slippages rose to 2.0% (1.5% in Q2FY18) largely due to retail slippages (primarily education loans). But credit cost was restricted to 59bps (71bps in Q2FY18) as FB had earlier upfronted provisions; b) sustained & broad-based loan growth momentum at >5% Q-o-Q/22% y-o-y; and c) this, in conjunction with improved risk-adjusted NIMs, led to steady 20% spurt in NII. Key monitorables: i) soft CASA accretion (SA up 6% y-o-y, CA down 9% y-o-y); ii) cost metrics remain high as FB continues to invest in marketing & technology, and iii) RBI’s divergence report (still not out) & transition impact within SRs. Limited stress baggage, tailwinds for growth and strong tier-1 (13.8%) lend comfort. As we roll forward to FY20E, we maintain ‘BUY’ with revised TP of Rs 152 (Rs 146 earlier), on 2.1x FY20E P/ABV.Slippages rose to Rs 410 crore (2% after 4 quarters of sub-2% run rate). The rise was driven by one-off increase in retail portfolio (impact of education loan given anticipated state dispensation). Meanwhile, SME and agri slippages were within trend, with marginal rise in corporate slippages (granular).
FB, commendably, continues to maintain strong coverage (70%). Additionally: a) lower stress pool at sub 5% level; and b) declining SMA-2 pool, lend comfort on asset quality. Having said that, RBI’s divergence still remains a key monitorable.Loan growth sustained momentum—up 22% y-o-y—with broad-based rise across retail, SME and corporate segments. This, with sustained NIMs (at 3.3%), led to steady 20% NII growth. While cost growth was softer (lower employee expense on higher discount rate), elevated cost/income remains a monitorable. We estimate core momentum to sustain, helping FB deliver better return ratios—RoA/RoE of 1.0% /12.3% by FY20E, post capital. FB is well placed given upfronting of stress recognition and ample growth levers (with adequate capital).
