Federal Bank reported PAT of Rs 1.45bn (-43% y-o-y) in Q4FY18 on account of elevated provisions. Gross slippages were at 4.3% annualised (Rs 8.9bn), with annualised specific credit costs at 1.7% (including write-down on SRs). 55% of the slippages for the quarter were as a result of accelerated recognition on four accounts driven by the new stressed asset resolution guidelines. Net impaired loans (Net NPA + non-NPL stress) is now at 2.3%. Moreover, while loan growth was robust for the quarter (+25% y-o-y), soft growth on the core fee line remains a concern.
While we cut our earnings estimate by 3% for FY19E, our overall provisioning estimate (including haircuts on impaired assets) over FY19-20E remains the same at Rs 21bn.We revise our target price to Rs 120/sh as we cut our target multiple to 1.7x FY20E fully adjusted BVPS, factoring in a sustainable RoE of 16% in our 2-stage GGM. We continue to expect RoA to cross 1% by FY20E with RoEs touching 13% in that year. Gross slippages for the quarter were at 4.3% annualised as Federal Bank was impacted by the new stressed asset resolution guidelines. Standard restructured book reduced 44% q-o-q to Rs 7.9bn.
The restructured book still has 2 chunky exposures (PSU aviation major and a road account) totalling Rs 3.7bn, which remains a key monitorable. Management guides for Rs 11-12bn of slippages in FY19E, of which ~Rs 4 billion is expected to further slip from the restructured book. While management guides for 65-70bps of credit cost for FY19, we build ~75bps of credit cost over FY19E/FY20E as PCR for FB is still below comfort levels at 44.5%. FB grew its loan book by 25.4% y-o-y in Q4FY18 with strong growth trends in corporate loans, while retail and SME book growth was moderate. Core fee income growth for the quarter was soft at 12% , albeit off a high base.
