Federal Bank Research Report By HDFC Securities

Federal Bank’s (FB) 3Q performance was positive. Earnings beat (NII/PAT was 10/7% ahead of estimates) was led by strong broad-based loan growth (+32%), healthy CASA growth (33%), steady NIM (3.3%) and stable asset quality. However, opex (13% QoQ) saw a steep rise due to pension provisions of Rs 170mn and one-off demonetisation related expenses of Rs 430mn, resulting in a 300bps rise in C-I ratio. While slippages were stable QoQ, utilisation of RBI’s dispensation lowered them by Rs 350-400mn (23bps ann.).

Outlook

Federal Bank has made incremental progress in reviving growth and pulling back on asset quality; slippages are at a 7-quarter low, while loan growth is accelerating. For oplev to play out, costs must now be pegged. We have raised estimates by 9/5% for FY17E/18e. Our BUY is based on growth and asset quality recovery, for which FB is now well poised. Our revised TP of Rs 93 (1.7x Dec-17 ABV of Rs 55) faces upside risk from a positive surprise on costs and efficiency.