Federal Bank’s advances witnessed significant growth of 11.7% qoq, marginally above our expectation of 10%. The growth was driven by corporate segment (16.1% qoq) as expected, followed by Retail (9.2% qoq) and SME (6.4% qoq). Within Corporate, three ‘AAA’ rated NBFCs were disbursed loans to the tune of Rs14bn, confirming the high credit quality of the incremental disbursement in this segment. On yoy basis, credit growth stood at 16.8% largely led by Retail (25.5%) and SME (15%). Going forward, management expects Retail and SME to be the main growth drivers. And among these segments, better rated SME loans and growth in non-gold retail portfolio are the main target areas.
Deposits grew in-line with advances by 11.6% qoq, keeping the C/D ratio intact at 76.5%. Strong growth was driven by High-value (48.7% qoq) and Retail Deposits (24.3% qoq). CASA ratio dipped by 252bps sequentially owing to slower than deposits growth. Federal Bank savings ratio has been stable at 21-24% over the past twelve quarters despite huge rate differential of retail TDs and higher rate offered by some of its peers (post de-regulation). With TD rates set to decline materially in the medium term, we expect a material improvement in Federal Bank’s CASA ratio in ensuing quarters.
NIM declined dramatically by 40bps qoq to 3.07% owing to interest reversal pertaining to NPAs, FITL impact of restructured advances and a base rate cut of 25bps in Q4 FY13. Management has guided a NIM of 3.35-3.40% in FY14 supported by focus on relatively better yielding Retail and SME segments, improvement in asset quality (on the back of realignment of the bank’s operational structure) and decline in cost of funds (owing to improvement in CASA ratio).
Asset quality improved with GNPA ratio declining from 3.85% in Q3 FY13 to 3.44% in Q4 FY13. Delinquency ratio declined to 3.4% from 3.7% in the previous quarter. Of the total slippages of Rs3.6bn, a major chunk was attributed to corporate segment accounting for ~Rs2bn (comprised of 4-5 Mid-corporate accounts), followed by SME (Rs1.2bn) and lowest from the Retail (Rs360mn) segment. Gold loan portfolio (9.7% of total advances) has not deteriorated post the recent gold price correction. Also with the current LTV bank has the capacity to absorb an additional 10% decline in gold prices without impacting its gold loan book. PCR (excluding technical w/off) is ~72% (calculated) compared to 77% in the previous quarter. Management has indicated an improvement in this ratio in the coming quarters. During the quarter, bank added advances worth Rs2.2bn to the restructured book which included Tamil Nadu Electricity Board (~Rs1.5bn) and upgraded old restructured accounts aggregating Rs460mn owing to their satisfactory performance (as per the RBI guidelines). Outstanding restructured portfolio stood at 4.6% of total advances (Rs20.5bn) compared to 5.5% in Q3 FY13. Bank has realigned its operational structure adopting stringent credit monitoring and appraisal norms, benefit of which will be realized in the near term.
Non-interest income declined sequentially by 3.4% due to one-off in Q3 FY13. However on yoy basis, it rose by 25%, highest in past four years. Notwithstanding the one-off in Q3 FY13, bank expects a similar growth in FY14 as well. C/I ratio rose by 157bps to 45.4% in Q4 FY13 owing to de-growth in Net Interest Income (3.5% qoq). During the quarter, bank added 79 new branches; of which 51 were set up outside Kerala. Management guided to add ~100 branches in FY14.
With Tier I ratio 14.09%, bank is strongly capitalized to meet its planned balance sheet expansion in the medium term as well as the Basel III norms.
Although Q4 FY13 turned out to be a weak quarter for Federal Bank, the outlook remains bright with several efforts in place to realign the operational structure. Further, focus on relatively better yielding and also better quality assets, improvement in Cost of Funds, strong growth in non-interest income and robust capitalization supports our view. The stock price has witnessed steep fall post the recent correction in gold price. Current valuation of 1.0x FY15E P/Adj.BV looks attractive and offers significant upside to the long-term investors. Thereby retain BUY with 9-month target price of Rs560.
|(Rs mn)||Q4 FY13||Q3 FY13||% qoq||Q4 FY12||% yoy|
|Total Interest Income||15,835||15,218||4.1||14,790||7.1|
|Net Interest Income||4,798||4,974||(3.5)||4,912||(2.3)|
|Key Ratios||Q4 FY13||Q3 FY13||chg qoq||Q4 FY12||chg yoy|
|Non-interest income (%)||29.1||29.1||0.0||24.6||4.5|
|Cost to Income (%)||45.4||43.8||1.6||42.9||2.5|
|Gross NPA (%)||3.4||3.9||(0.4)||3.4||0.1|
|Net NPA (%)||1.0||0.9||0.1||0.4||0.6|
|Y/e 31 Mar (Rs m)||FY12||FY13||
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