Q3FY24 Review: Federal Bank: Q3 result – good operational trends

17 Jan 2024 , 11:42 AM

FB’s Q3 net profit (adj. for gain from FedFina listing) was 3% ahead of consensus on lower provisions. NII grew 3% QoQ, in line with loan growth as NIM was largely stable (-3 bps QoQ). Loan yield benefit from increase in the share of higher-yielding loans, can potentially be offset by rise in cost of deposit, as the bank accelerates deposit growth to lower the CD ratio. Asset quality was stable, barring one corporate account slippage. Analysts of IIFL Capital Services increase their est. by 1-4%, and raise TP to Rs180; after adding Rs10/share for the FedFina stake. Maintain BUY rating on undemanding valuation of 1.1x FY25 P/B for mid-teen ROEs. 

Strong loan growth across the board; NIMs likely bottomed: 

Loan growth of 6% QoQ/21% YoY was broad based, but higher-yielding loans grew faster at ~50% YoY. While the asset yield expanded 5bps QoQ, it was more than offset by 18bps rise in COF; thereby resulting in 3bps of NIM compression. Loan yield benefit from increase in the share of higher-yielding loans, can potentially be offset by increase in cost of deposit as the bank accelerates deposit growth to lower the CD ratio. 

Asset quality remains benign. 

GNPA ratio was stable (+2 bps), but slippages inched up in the Corporate segment (1% ann.); primarily due to one corporate account that the bank expects to upgrade in Q4. Unsecured loan book is not witnessing any uptick in stress yet. Overall stressed loan ratio fell 20 bps QoQ to 3.4%. PCR on GNPAs was flat at 72%, and improved by 2pp to 49% on the overall stress pool. Credit cost remains benign at 19bps, within the management guidance of 35- 40 bps for FY24E. 

Risk-reward remains attractive. 

Analysts of IIFL Capital Services expect FB to continue gaining loan and deposit market share, improve efficiency and demonstrate stable NIMs as the share of higher-yielding loans rise. They estimate it to deliver 15% PAT Cagr over FY24-26E and avg. ROA of 1.25 bps —30bps higher than its LT avg. analysts of IIFL Capital Services GGM-based TP of Rs180 is derived using fair P/B of 1.2x and Rs10/share for the FedFina stake. Retain BUY as the valuations are undemanding at 1.1x FY25 P/B and 9x P/E (both slightly above LT avg.) for mid-teen ROEs.