We expect margin trajectory to stay stable, aided by improving CASA mix and shedding of high cost certificate of deposits (CDs).
Federal Bank (FB) has released its quarterly update emphasising its 3QFY21 business numbers. Below are the key highlights. Growth in gross advances stood ~6% year on year to ~ Rs1.28t. Sequentially, it reported an uptick in loan growth (2.4% QoQ v/s 1% over 1HFY21). CD ratio was stable ~78.2%. Deposit base increased to Rs1.62t, growth of ~12% YoY (3.1% QoQ). It reported a strong CASA growth (~23% YoY, 5.6% QoQ) while TD grew ~7% YoY (1.9% QoQ). CASA ratio improved by 80bp QoQ to ~34.5%.
We expect margin trajectory to stay stable, aided by improving CASA mix and shedding of high cost certificate of deposits (CDs). CDs declined 57% YoY (stable QoQ) to Rs18.5b, while inter-bank deposits declined 1.3% sequentially. FB has maintained one of the highest liquidity coverage ratio (LCR) at 248.3% (v/s 266% in 2QFY21) compared to its peers. In a separate filing, the management informed that the bank has received RBI’s approval for re-appointment of Ashutosh Khajuria as the executive director for a period of one year with effect from 1st Apr’21 to 31st Mar’22. We maintain our ‘buy’ rating with a target price of Rs 80 per share (0.9x Sep-22E ABV).
Valuation and view. FB posted a slight increase in sequential loan base, driven by healthy loan growth in its retail asset portfolio, led by gold loans. The bank’s liability franchise remains strong. CASA mix is improving, with retail deposit mix highest LCRs among banks. On the asset quality front, PCR has strengthened to ~66% and the management expects restructuring of up to 3% of loans as collection efficiency has improved to 95% from Sep’20. We expect credit cost to remain elevated as slippages would increase during 2HFY21.