Federal Bank’s (FB) Q3FY18 earnings were marked by sustained momentum in core operating performance (ex-treasury)—up >35% y-o-y. Key highlights: (i) slippages rose to 2.0% (1.5% in Q2FY18) largely due to retail slippages (primarily education loans). But credit cost was restricted to 59bps as FB had earlier upfronted provisions; (ii) sustained & broad-based loan growth momentum at >5% q-o-q/22% y-o-y; and (iii) 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 & 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 rise; better recovery restricts rise in GNPLs: Slippages rose to Rs 4.1 bn, driven by one-off increase in retail portfolio.
Outlook: FB is well placed given upfronting of stress recognition and ample growth levers (with adequate capital). But, limited scope for NIMs improvement and higher cost are key monitorables. Factoring lower treasury gains we have cut our FY18 EPS by 6.5%. Despite this, we estimate earnings CAGR of >27% over FY17-20 with RoE improving to >12% (post capital).