Federal Bank Research Report By Motilal Oswal

Strong balance sheet and core PPoP growth; Stable asset quality

 Federal Bank’s (FB) 3QFY17 PAT grew 26% YoY to INR2.05b (10% beat), led by strong core PPoP growth (+42% YoY) and lower credit costs (64bp annualized). NII grew 31% YoY and 9% QoQ to INR7.9b, driven by strong loan growth and stable sequential NIM (+28bp YoY to 3.3%). Adjusted for one-off income of INR190m, NII grew 28% YoY.

 Other income increased 44% YoY (5% miss), led by strong growth in fee income (+33% YoY). Trading gains were lower than expected at INR860m (27% of PBT)

 Strong loan growth of 32% YoY was driven by corporate (+71% YoY; predominantly consisting of working capital loans) and retail (ex-gold loans, +35% YoY).

Deposit growth of 23% YoY (+7% QoQ) was led by strong mobilization in SA deposits (+32% YoY). CASA ratio improved 360bp QoQ to 34.7% (CASA grew 33% YoY)

 Incremental slippages increased marginally to INR2.73b from INR2.66b in 2Q (annualized slippage ratio of ~2.1%), led by higher slippages in corporate and retail. The bank made use of the RBI’s 90dpd dispensation on portfolio of ~INR350-400m. Absolute GNPA increased 7% QoQ, but remained stable in percentage terms (2.77%). There was no sale to ARC during the quarter. Valuation and view: We are enthused by FB’s core operating performance, driven by its strong balance sheet. Although the bank’s corporate asset quality issues may not be completely behind, we believe it is ahead of corporate lending peer banks on the asset quality curve. Considering asset quality distractions in the PSU space, we believe FB is well positioned to gain market share in highly rated corporates. We largely maintain FY17/18 estimates, and retain Buy with a target price of INR105 (1.8x December FY18 BV) based on RI model.