Buy Federal Bank; target of Rs 117: HDFC Securities

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HDFC Securities' research report on Federal Bank

In a seasonally weak qtr, slippages at 1.56% ann. and corp slippages of merely ~Rs 880mn (74bps incl. IL&FS of Rs 320mn) are creditable. Expectedly, retail (Rs 1.4bn, 1.75% ann.) and SME (Rs 1.2bn, 1.46% ann.) slippages were higher QoQ, esp. in Kerala. We have factored in higher slippages of 1.75% over FY20-21E as part of FB’s exposure to IL&FS (~Rs 1.9bn) and DHFL and Reliance HF (~Rs 2.75bn) remain standard. At ~19/2% YoY/QoQ, loan growth lost a bit of steam (seasonal), with sluggish growth in the corporate (+18/1%) and SME (+12/-1%) books dragging overall growth. Retail growth was much better at ~26/3%. Home loans constituted half the retail book and were a major growth driver (+31/4%). We have modeled loan book growth of 19% over FY20-21E. Operating efficiency has long been a challenge for FB in spite of no material branch addition for several qtrs. The dip in the C-I ratio (~240/60bps) to 49.4% can be attributed to higher treasury gains (+86/23%). The stable core C-I ratio (ex-treasury) of 52.4% over the trailing three quarters points to upcoming oplev. We have slightly tweaked our cost assumptions, implying a C-I ratio of 47% over FY20-22E.

Outlook

We upgrade Federal Bank to BUY (TP Rs 117, 1.5x June-21 ABV of Rs 77) after a better than expected show across parameters, in a seasonally weak quarter. Further consistency can lead on to significantly better outcomes.

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