Federal Bank’s gross advances witnessed 8.6% sequential growth, almost in line with our expectation of 9%. The strong growth was driven by corporate segment (12.6% qoq), followed by Retail (7.3% qoq) and SME (4.8% qoq). The yoy credit growth momentum has been strong in Retail and SME portfolio, reporting 20%+ growth. Corporate lending is expected to grow at a healthy pace in Q4 FY13 given the pipeline of sanctioned loans worth Rs20-25bn. Management has guided credit growth of 14-16% in FY13 and 20%+ in FY14. Retail and SME will be the main growth drivers in FY14. Deposits grew by 4.2% qoq, versus our expectation of 6%, driven by robust CASA mobilization and Non-Resident TDs. CASA ratio improved by 47bps qoq, from 29% in Q2 FY13 to 29.5% in Q3 FY13. With advances growing at a faster pace than deposits, C/D ratio improved by 4ppt qoq to 76.5%.
NIM declined by 11bps sequentially to 3.47% owing to interest reversal of Rs300mn and higher interest expenses pertaining to relatively high cost NR deposits. Re-pricing of NR TDs at higher rate (post deregulation) is almost completed, capping a further increase in CoF. NIM is expected to remain in the range of 3.5-3.6% in FY13.
Asset quality weakened marginally with delinquency ratio rising from 1.6% in Q2 FY13 to 3.7%. One major account worth Rs2bn (NAFED) slipped into the NPA during the quarter. However, strong recoveries (Rs1.4bn) and up-gradations (Rs1.3bn), barred the GNPA ratio from falling significantly. Less-than-commensurate provisioning resulted in decline in PCR from 80% in Q2 FY13 to 74.5% in Q3 FY13. Resultantly, NNPA ratio rose by 24bps qoq to 0.9%. During the quarter, bank added advances worth Rs2.2bn to the restructured book and made provision of Rs400mn (included in other provisions) for the same. There were absolutely no slippages from the restructured book in Q3 FY13. One account of ~Rs900mn was upgraded in the restructured book. Bank foresees stress in few corporate accounts aggregating Rs1.5-2bn.
Non-interest income spurted by 46.2% sequentially, led by robust portfolio gains (140.5% qoq) and healthy growth across all other segments. Resultantly, C/I ratio improved by 2ppt to 43.8% in Q3 FY13 notwithstanding weak NII growth. Management guided to add 80-100 branches in Q4 FY13. New branches will primarily focus on retail customer deposits, housing loans and gold loans.
Federal Bank is adequately capitalized with Tier I ratio of 14.3% (excluding 9M FY13 profits); sufficient to meet its planned balance sheet expansion in the medium term.
Given the recent unpredictability in asset quality and margin, we downgrade Federal Bank’s rating to Market Performer despite its undemanding valuation. Our 9-month target price on the stock is Rs526.
|(Rs mn)||Q3 FY13||Q2 FY13||% qoq||Q3 FY12||% yoy|
|Total Interest Income||15,218||15,256||(0.3)||14,668||3.7|
|Net Interest Income||4,974||5,059||(1.7)||5,280||(5.8)|
|Key Ratios||Q3 FY13||Q2 FY13||chg qoq||Q3 FY12||chg yoy|
|Yield on advances (%)||12.4||12.8||(0.4)||12.9||(0.5)|
|Cost of deposit (%)||7.6||7.6||0.0||7.6||0.1|
|Non-interest income (%)||29.1||21.6||7.5||20.7||8.4|
|Cost to Income (%)||43.8||45.8||(2.0)||37.1||6.7|
|Gross NPA (%)||3.9||3.8||0.0||4.0||(0.1)|
|Net NPA (%)||0.9||0.7||0.2||0.7||0.2|
|Y/e 31 Mar (Rs m)|
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