FY19e PAT down 3.4% due to slippages of `15.4 bn for fiscal; ‘Buy’ maintained.
Federal Bank reported profit of Rs 2.66 bn in Q2FY19 (flat y-o-y, 2.7% above JMFe). While NII was broadly in-line with our estimates, a strong performance on core fees (34% y-o-y) resulted in a PPoP beat of 19%. Provisions for the quarter were, however, elevated (specific credit cost at 0.9%) as gross slippages came at 2.1%. Slippages (`4.8 bn) were elevated on account of the floods in Kerala (c.10% of slippage). Management disclosed that FB has an overall exposure of c.Rs 2 bn to the IL&FS Group (0.2% of loans), spread across 3 operational projects, where it does not expect significant stress. Management expects slippages on account of Kerala floods to be contained at Rs 1.5 bn in FY19. We now build slippages of Rs 15.4 bn (1.7% delinquency) in FY19, resulting in a cut in our PAT estimates by 3.4% for FY19. We believe FB can deliver RoA/RoE of 1/13% in FY20e.
Strong core fee growth drives PPoP: FB posted 14% y-o-y NII growth, as NIM expanded marginally to 3.15% and loan growth was strong (+25% y-o-y). Core fees growth (34% y-o-y) was driven by strong growth in loan processing charges (51% y-o-y) and forex income (49% y-o-y). Cost-to-income fell sharply on account of outperformance in fees (down 365bps q-o-q to 48%), as opex growth was flattish q-o-q. Management expects NIMs to further expand to 3.2% by Q4FY19 driven by lower interest reversals and better asset mix. We build 3.1/3.15% NIMs over FY19/20e.