Federal Bank reported a moderate set of numbers for 3QFY2015, with NII growth at 7.6% yoy and pre-provisioning profit growth at 11.6% yoy. A provisioning write back of `0.8cr aided the bank to report an earnings growth of 15%.
Advances growth remains healthy; NIM fell qoq
During 3QFY2015, the bank witnessed a healthy loan growth of 15.3% yoy, while deposits grew by 13.5% yoy. Growth in advances was led by the Agri and SME books, which grew by 26.8% and 17.7% yoy, respectively. The Management has guided at a loan growth of around 18% for FY2015 with traction in Retail and SME segments. CASA deposits increased by 14% yoy with CASA ratio improving by 13bp yoy to 30.5%. The Reported NIM fell by 15bp qoq to 3.2%. However, had interest on income tax refund of `27cr in 2QFY2015 been adjusted, the NIM would have been stable on a qoq basis. During the quarter, the bank registered a moderate growth of 3.0% yoy on the non-interest income (excluding treasury) front. Trading gains during the quarter came in at `77.5cr as against `18cr in 3QFY2014. Cost to income increased by 148bp yoy to 50% for the quarter. Employee expenses increased by 33% yoy, mainly due to higher provision for retirement related expenses.
On the asset quality front, the annualized slippage ratio was higher at 2.2% as compared to 1.6% in 2QFY2015 and 1.3% in 3QFY2014. During the quarter, the bank witnessed slippages of `234cr, out of which slippages from the retail segment amounted to `30cr, SME segment slippage came in at `63cr and slippage from the corporate account stood at `125cr. Recoveries and upgrades were lower at `198cr during the quarter resulting in increase in absolute Gross NPA levels by 3.5% qoq to `1,067cr. Higher slippages led to a marginal increase in the Gross NPA ratio by 9bp qoq to 2.19%. Net NPA was flat qoq at 0.7%. The bank has restructured advances worth `40.7cr as against `68cr in 2QFY2015, with the outstanding restructured book at `2,427cr.
Outlook and valuation:
After having witnessed severe pressure in the last few years, the bank’s asset quality has been showing improvement over the past few quarters (on lower slippages and better recoveries/upgrades). While we remain watchful of the bank’s near term performance on the asset quality front, the stock’s current valuation at 1.5x its FY2016E P/ABV offers limited scope of upside from here on. Hence, we recommend a Neutral rating on the stock.
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