Federal Bank: Maintain ‘buy’ with increased TP of Rs 134

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Published: July 18, 2019 1:52:20 AM

Core performance is largely steady, but volatility in asset quality remains a key concern. Besides, SA accretion (sub-10% y-o-y) is soft and improvement thereof is key.

Federal Bank, Federal Bank Q1, Federal Bank total income, Federal Bank share, Federal Bank nse, Federal Bank results, Federal Bank stock, Federal Bank newsFederal Bank’s limited stress baggage, growth tailwinds and healthy tier 1 (13%) lend comfort.

The Q1FY20 earnings of Federal Bank show steady growth in its core operating performance (ex-treasury) — up >20% year-on-year. Key highlights: a) Slippages rose a tad to 1.6% (1% in Q4FY19) largely due to higher retail slippages (mainly in Kerala); b) Credit cost contained at 63 bps with FY20 guidance maintained at 55–60 bps, indicating a steady improvement; c) Loan growth of 19% y-o-y along with sustained NIM supported core profitability, up >20% y-o-y. Core performance is  largely steady, but volatility in asset quality remains a key concern. Besides, SA accretion (sub-10% y-o-y) is soft and improvement thereof is key. Federal Bank’s limited stress baggage, growth tailwinds and healthy tier 1 (13%) lend comfort. Rolling forward the valuation, we are raising the target price to Rs 134 (from Rs 128). Maintain ‘buy.’

Slippages rose to Rs 4.3 billion (up 1.6% after a solid Q4FY19 with a 1% run rate). The rise is attributable to the retail segment. SME and agri slippages were contained while corporate slippages rose only marginally (including the ones relating to IL&FS entities worth Rs 320 million). The bank maintained strong coverage of 67%, thereby reining in NNPLs to 1.49%, which is commendable. It has guided for credit cost of 55-60 bps, but will keep an eye out for volatility in its asset quality. Exposure to IL&FS worth Rs 2.1 billion (an amber entity, standard) and stressed housing finance (Rs 2.75 billion, standard) could throw in volatility. Loan growth softened to 19% y-o-y (from 25%-plus earlier) dragged by softer corporate growth. Retail growth continues to be strong (25% y-o-y) — a trend the management expects to sustain. A steady NIM (3.15%), improving core fee and controlled opex (up <18% y-o-y) led to steady core operating (ex-treasury) growth of about 20% y-o-y. Federal Bank has delivered on core momentum, but persistent NIM pressure is a key variable.

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