Federal Bank (Q2 FY14)

India Infoline News Service | Mumbai |

Federal bank delivered a net profit of Rs2.3bn in Q2 FY14, up more than 2x qoq on account of negligible provisioning and strong NIM performance.

CMP Rs79, Target Rs84, Upside 6.6%

  • Federal bank delivered a net profit of Rs2.3bn in Q2 FY14, up more than 2x qoq on account of negligible provisioning and strong NIM performance. The key highlight was an improvement in the Gross NPL ratio to 3.4% underpinned by lower slippages (annualized ratio of 1.4% v/s 3.3% in previous three quarters) and higher recoveries/upgrades. Retail and SME asset quality has been largely stable over the past few quarters. Restructuring during the quarter was higher as compared to Q1 FY14 at Rs2.1bn. Cumulative restructured advances stood at around Rs28bn, a material 6.6% of total advances. There was a net write-back of loan loss provisions as the bank released provisions on a pool of NPAs having asset cover of over 200%. 


  • Loan growth stood at 16% yoy and it continues to be driven by SME and retail segments. Corporate loan book shrunk further by 3% (post contracting by 14% in Q1 FY14) as de-bulking exercise was accentuated by spike in wholesale funding rates during the quarter. Its share in overall advances has declined by 500bps in H1 FY14 to 37%. Growth outlook in the corporate segment remains hinged on the availability of attractive spreads. Retail book growth was at healthy 17% yoy driven by robust 94% yoy growth in LAP. Gold loan portfolio contracted for second consecutive quarter and the annual pace of growth moderated to 15%. SME loans grew by brisk 37% yoy and more importantly the rating profile of the portfolio has improved notably in the past 12 months. 


  • Against our expectation of 10bps contraction, NIM improved by 20bps to 3.1%. There was sharp sequential improvement in lending yield due to lower interest reversal as compared to the previous quarter. Further, investment yield was also significantly higher during Q2 FY14 with hardening of rates across maturities. The increase in the cost of deposits was restrained by material improvement in the profile. CASA ratio improved by 200bps qoq to 31% while the share of bulk funding declined by 400bps qoq to 7%. The latter was a result of bank’s conscious effort towards de-bulking its balance sheet. In H2 FY14, NIM is likely to remain in a narrow band of 3.1-3.3%. For the full, we estimate lower margin than FY13. 


  • Aided by strong growth in the forex income, the overall fee growth stood strong at 38%. Treasury income was marginal at Rs70mn representing trading gains solely. The bank chose to amortize the depreciation on HFT portfolio and MTM loss on AFS portfolio combined Rs1.2bn and provided only 1/7th of the amount during the quarter through the provisioning line.     

  • ²  Overall, Federal Bank’s performance was strong considering a highly challenging operating environment during Q2 FY14. We upgrade estimates cautiously as we expect asset quality challenges and recognition of unamortized investment loss to depress bank’s earnings in coming two quarters. Though we raise our 9-month target to Rs84, the recent sharp rally in price leave little room for upside. Downgrade to Market Performer.

Result table
(Rs mn)
Q2 FY14
Q1 FY14
% qoq
Q2 FY13
% yoy
Total Interest Income
17,144
16,533
3.7
15,256
12.4
Interest expended
(11,661)
(11,437)
2.0
(10,197)
14.4
Net Interest Income
5,484
5,096
7.6
5,059
8.4
Other income
1,434
2,158
(33.5)
1,394
2.9
Total Income
6,918
7,254
(4.6)
6,453
7.2
Operating expenses
(3,378)
(3,249)
4.0
(2,957)
14.3
Provisions
(110)
(2,451)
(95.5)
(305)
(63.9)
PBT
3,429
1,555
120.6
3,192
7.4
Tax
(1,171)
(498)
135.3
(1,041)
12.5
Reported PAT
2,258
1,057
113.7
2,151
5.0
EPS
13.2
6.2
113.7
12.6
5.0
 
Key  Ratios
Q2 FY14
Q1 FY14
chg qoq
Q2 FY13
chg yoy
NIM (%)
3.3
3.1
0.2
3.6
(0.3)
Yield on Adv (%) - Computed
12.1
11.6
0.5
12.4
(0.3)
Cost of Funds (%) - Computed
7.5
BSE 105.10 [1.65] ([1.55]%)
NSE 105.00 [1.85] ([1.73]%)

***Note: This is a NSE Chart

 

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