15 January 2018
Q3FY18 Results Update | Sector: Financials
Federal Bank
Buy
BSE SENSEX
34,844
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm
Free float (%)
S&P CNX
10,742
FB IN
Strong core operating performance; asset quality deteriorates slightly
1,967
FB recorded PPoP growth of -4%/18% QoQ/YoY (INR5.6b; 4% miss), driven by a
222.8 / 3.5
5% miss on total income (24% beat on other income, which declined 20%/13%
128 / 73
QoQ/YoY to INR2.29b). The impact, however, was partly offset by a 5% beat on
1/-10/28
opex, which grew 2%/4% QoQ/YoY to INR6.2b, as employee expenses fell
1126
4%/6% QoQ/YoY. Core PPoP growth was strong at 5%/37% QoQ/YoY.
100.0
NII growth came in at 6%/20% QoQ/YoY (1% beat), aided by 22% YoY loan
CMP: INR113
TP:INR149 (+32%)
Financials & Valuations (INR b)
Y/E Mar
2018E 2019E
NII
36.3
43.2
OP
23.5
28.2
NP
10.0
12.6
NIM (%)
3.2
3.2
EPS (INR)
5.5
6.5
EPS Gr. (%)
13.3
19.1
BV/Sh. (INR)
63.4
69.0
ABV/Sh. (INR)
56.7
62.1
ROE (%)
9.4
9.8
ROA (%)
0.8
0.8
Payout (%)
20.3
19.7
Valuations
P/E(X)
20.7
17.4
P/BV (X)
1.8
1.6
2020E
51.8
34.1
15.9
3.2
8.2
26.1
76.4
68.6
11.3
0.9
19.7
13.8
1.5
Quarterly Performance (Consolidated)
Net Interest Income
% Cha nge (YoY)
Othe r I ncome
Net Income
Ope ra ti ng Expe ns e s
Operating Profit
% Cha nge (YoY)
Othe r Provi s i ons
Profit before Tax
Ta x Provi s i ons
Net Profit
% Cha nge (YoY)
Operating Parameters
NI M (Ca l , %)
De pos i t Growth (%)
Loa n Growth (%)
CD Ra ti o (%)
Asset Quality
Gros s NPA (I NR b)
Gros s NPA (%)
Ne t NPA (I NR b)
Ne t NPA (%)
Sl i ppa ge ra ti o (%)
growth and a stable NIM of 3.33% (+2bp QoQ). Other income fell 20%/13%
QoQ/YoY, driven by sharp moderation in treasury gains (-61%/-66%
QoQ/YoY).
Loan growth of 5%/22% QoQ/YoY was driven by corporate book growth of
30% YoY. Retail/agri and SME loans also maintained strong traction (up 18%
and 20% YoY, respectively).
Asset quality deteriorated slightly due to a spike in education loan slippages
(INR710m out of total retail slippages of INR1.5b). Total slippages at 1.94%
(1.4% in 2QFY18) led to an 11% QoQ increase in GNPA to INR21.6b.
However, the bank has up-fronted provisions toward education loans, taking
PCR to 46.5% from 45.3% in 2QFY18. GNPA/NNPA declined to 2.51%/1.36%
(+12bp/+4bp QoQ). Recoveries and upgrades increased 35% QoQ to
INR2.2b, while write-offs were negligible at INR10m.
Other highlights:
a) Business growth is picking up outside Kerala, with
38%/40% YoY growth in retail/SME loans. c) CASA ratio stayed stable
sequentially at 32.96%.
Valuation and view:
We believe FB’s asset quality concerns, which are largely
legacy issues, are now mostly behind. The bank is ahead of its corporate lending
peer banks on the asset quality curve, especially with its opportunistic entry into
the mid-commercial segment. Considering asset quality distractions in the PSU
space, we believe FB is well positioned to gain market share in highly rated
corporates. We largely maintain estimates for FY18/19, and reiterate
Buy
with a
target price of INR149 (2x Sept 2019 BV) based on the RI model.
1Q
6,927
14.5
2,370
9,297
5,039
4,259
16.0
1,685
2,574
901
1,673
18.3
3.3
12.5
19.3
72.9
17.5
2.9
9.9
1.7
2.3
FY17 FY18E
FY17
FY18E
2Q
3Q
4Q
1Q
2Q
3Q
4Q
7,262
7,914
8,424
8,007
8,989
9,500
9,783 30,526 36,279
19.4
30.7
22.8
15.6
23.8
20.0
16.1
21.7
18.8
2,616
2,747
2,821
3,291
2,872
2,286
3,991 10,818 12,441
9,878 10,661 11,245 11,298 11,861 11,786 13,774 41,345 48,720
5,128
5,912
5,753
5,719
6,029
6,172
7,315 22,095 25,236
4,750
4,749
5,492
5,579
5,832
5,614
6,459 19,249 23,484
41.1
45.9
39.2
31.0
22.8
18.2
17.6
35.2
22.0
1,684
1,588
1,227
2,364
1,768
1,624
2,572
6,184
8,328
3,066
3,161
4,265
3,214
4,064
3,990
3,888 13,065 15,156
1,053
1,104
1,699
1,113
1,427
1,390
1,223
4,757
5,153
2,013
2,057
2,566
2,102
2,637
2,600
2,664
8,308 10,003
24.8
26.4 2,400.9
25.6
31.0
26.4
3.8
74.7
20.4
3.3
17.0
27.2
75.0
18.2
2.8
10.4
1.6
2.1
3.3
23.3
32.0
75.5
19.5
2.8
11.0
1.6
2.1
3.3
23.4
26.2
75.1
17.3
2.3
9.4
1.3
1.7
3.0
18.1
29.1
79.6
18.7
2.4
10.6
1.4
2.9
3.3
12.6
24.7
83.0
19.5
2.4
10.7
1.3
1.8
3.3
9.0
22.0
84.5
21.6
2.5
11.6
1.4
2.4
3.2
19.0
22.0
77.0
21.5
2.4
11.8
1.3
2.3
3.3
23.4
26.2
75.1
17.3
2.3
9.4
1.4
1.9
3.2
19.0
22.0
77.0
21.5
2.4
11.8
1.3
1.9
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 3982 5540
| Anirvan Sarkar
(Anirvan.Sarkar@MotilalOswal.com); +91 22 3982 5505
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
| Parth Gutka
(Parth.Gutka@motilaloswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.