Downgrade Federal Bank to ‘hold’ (earlier ‘buy’ with a revised target price of R69 per share (earlier Rs 74). At our target, we value the stock at 1.4x FY17e price-to-adjusted book value. Federal Bank’s Q2FY16 performance was below expectation as it was marred by higher slippages and muted business growth. We revise downwards our FY16e and FY17e earnings estimates by 26% and 25%, respectively to factor higher slippages, elevated credit costs and lower business growth.
Federal Bank’s Q2FY16 result was way below our and street estimates due to sharp increase in fresh slippages during the quarter along with substantial increase in C/I ratio. Total fresh slippages in Q2FY16 stood at R4.1 billion (slippage ratio of 3.3%) versus R3.2 billion in Q1FY16 and R1.8 billion in Q2FY15. Higher slippages were owing to the increased slippages from SME and corporate loan portfolio. C/I ratio also deteriorated to 57.4% versus 54% in Q1FY16 and 48.9% in Q2FY15 due to considerably higher growth in opex as compared to operating income.
Business growth remained subdued on y-t-d basis owing to decline in corporate and agri loan book. Management has revised its business growth target downwards along with higher guidance for slippages and credit cost for full FY16.
| Subscribe To Our Free Newsletter |
