Q1FY24 Review: Federal Bank: NIM has likely bottomed; risk-reward attractive

14 Jul 2023 , 10:07 AM

Federal Bank’s Q1FY24 net profit was 7%/9% ahead of consensus/IIFL estimates on higher non-II (PSL income) and lower provisions. NII was flat sequentially despite of 5% loan growth, as NIMs contracted 16 basis points on higher COF. With faster growth in higher-yielding loans, still lower share of unsecured loans (7%) and benefit from potential capital raise, analysts at IIFL Capital Services expect NIMs to expand 15 basis points from Q1 level. Asset quality was largely stable, barring an uptick in retail slippage. Analysts at IIFL Capital Services have increased their estimates by 1-5%. They have retained their Buy rating on the stock given undemanding valuation of 1.1x FY24 P/B for mid-teen ROEs.

Loan growth of 5% QoQ/21% YoY was broad based, but higher-yielding loans grew faster at 25% YoY. Asset yield expanded 13 basis points QoQ, but was offset by 26 bps increase in COF, and thus resulting in 16 basis points of NIM compression. 

GNPA ratio was stable (+2 bps), but slippages inched up in the retail segment (1.8% ann.), primarily from restructured home loan and LAP pool. Unsecured loan book is not witnessing any uptick in stress yet. Overall stressed loan ratio fell 20 bps QoQ to 3.8%. PCR on GNPAs was flat at 71%, and improved by 3pp to 45% on overall stress pool. Credit cost remains benign at 35 bps, within the management guidance of 40 bps for FY24.