FEDERAL BANK

Federal Bank Ltd. (FB) has reported decent set of numbers for the quarter ended September’14 with better credit growth & stable asset quality. We attended the conference call of the company and following are the key highlights of the results.

Key Highlights of Q2FY15 Results

- Healthy advances growth coupled with stable margins led to NII growth of 6% YoY & 3% QoQ to Rs.5.8 bn (excl. one-off interest on income tax refund of Rs.270 mn). Comparatively lower NII growth was to an extent attributed to 35 bps reduction in base rate. NIM's remained stable at 3.35% (Adj. NIMs 3.25%) which management expects to remain steady going forward. Non-interest income grew by 36% YoY & 25% QoQ to Rs.2 bn while core-fee income grew by ~13% YoY & 27% QoQ majorly led by Loan Processing fees & Forex. Improving cost efficiency along with higher noninterest income led to marginal improvement in Adj. C/I to 50.6% (Q1 - 51.2%).

- Advances & Deposits grew by ~15% YoY & 14% YoY resp. Revival in advances growth was mainly on account of strong growth in Agriculture (25%), Retail (16%) & SME (26%) while Corporate portfolio grew marginally by 2% YoY & 9% QoQ. Management expects revival in Corporate segment over the next few quarters considering the strong disbursement pipeline. After couple of quarters, even gold portfolio witnessed healthy growth in Q2 (~20% YoY & 9% QoQ) which mgmt expects to continue going forward. CASA remained flat at 30.6%. Business outside Kerala has been improving with CD ratio at ~90%. Credit growth has been ~20% over last 2 quarters while SA growth has been 32% YoY.

- Asset quality remained stable with GNPA & NNPA at 2.1% (Q1-2.2%) & 0.66% (Q1- 0.68%) resp. Slippages in Q2 stood at Rs.1760 mn (1.4% annualized) with nil slippages from Corporate segment. Mgmt doesn't foresee any direct impact of coal deallocation decision. Restructured book stands at Rs.29 bn (Air-India & Discom - Rs.12 bn).

- Management Guidance: 1. Expects credit growth of +20% in FY15E with better growth in H2, 2. Non-interest income growth to be ~22-25%, 3. NIMs to remain stable at 3.2- 3.3%, 4. Credit cost for FY15E to be ~50-60 bps, 5. C/I likely to improve to ~48%.

OUTLOOK & VALUATION

Focused approach with well-defined strategies has helped bank to be back on growth trajectory after couple of quarters. Revival in advances growth across segment as well as better traction in newer geographies provides better growth visibility. Improving business mix, better cost efficiency coupled with higher focus on core-fee income generation to result in better return ratios going forward. Better visibility of profitable growth along with stable asset quality & improving return ratios instills further confidence. Hence considering the improving fundamentals & strong growth prospects, we remain positive on the stock & recommend‘Hold’ with a price target of Rs.156 based on our FY17E estimates.