Federal Bank Mixed performance despite challenges
Powered by the Sharekhan 3R Research Philosophy Banks & Finance Sharekhan code: FEDERALBNK Result Update Update Stock
3R MATRIX + = - Summary Federal Bank posted mixed results for Q4FY2021, largely in line with expectations Right Sector (RS) ü on the operational front along with stable asset quality and margins despite challenging times. Right Quality (RQ) ü GNPA/NNPA stood at stable 3.41%/1.19% compared to proforma Q3FY2021 values at 3.38%/1.14%, respectively, but elevated slippages (due to the spill over effect). Right Valuation (RV) ü The bank is reasonably placed in terms of book quality, with ~95% collection efficiency and ~76% of wholesale borrowers rated ‘A & above’. + Positive = Neutral - Negative We maintain Buy on the stock with a revised PT of Rs. 95.
What has changed in 3R MATRIX For Q4FY2021, Federal Bank posted largely mixed results in-line with expectations on the operational front along with stable asset quality and margins despite Old New challenging times. However, PAT performance was helped by lower provisions as RS the bank utilised its earlier-made COVID-related provisions. The bank had held a provision of Rs. 536.69 crore as of December 2020 against the likely impact of RQ COVID-19, including the Reserve Bank of India’s (RBI) mandated provision as per such guidelines. During the current quarter, the bank utilised Rs. 60.89 crores for RV creation of RBI mandated provisions for advances restructured and Rs. 475.80 crore towards the provision required as per extant IRAC norms, thereby fully utilising the Reco/View Change aforesaid amount. However, healthy capital levels and 65% PCR provide succour. We believe the bank is reasonably placed in terms of book quality, with ~95% of Reco: Buy pre-Covid collection efficiency and as ~76% of wholesale borrowers are rated ‘A & CMP: Rs. 82 above’; Credit cost outlook appears to be manageable. Going forward, with greater retail contribution and a largely secured book, the outlook is positive even though Price Target: Rs. 95 the near-term scenario remains a bit hazy due to the pandemic and lockdowns. á Upgrade Maintain â Downgrade Management commentary indicated a cautious outlook for the near term, but is also hopes to see better clarity from Q2. We maintain our Buy rating on the stock Company details with an unchanged price target (PT) of Rs. 95. Market cap: Rs. 16,291 cr Key positives Growth in business was with credit growth in chosen areas. Total advances grew 52-week high/low: Rs. 92 / 37 by 9% y-o-y, with retail advances growing by 19% y-o-y. Gold loans saw strong NSE volume: traction with growth of 70% y-o-y, while business banking was up by 13% y-o-y 370.3 lakh (No of shares) and commercial banking was up by 11% y-o-y. BSE code: 500469 Stable asset-quality performance with GNPA/NNPA at 3.41%/1.19% was in line with proforma GNPA/NNPA at 3.38%/1.14% as of Q3FY2021. NSE code: FEDERALBNK Net interest margin (NIM) stood at 3.16% for FY2021, while quarterly NIM stood at Free float: 3.23%, which was stable compared to 3.22% in Q3FY2021. 199.3 cr (No of shares) Key negatives Federal Bank utilised the earlier created COVID-19 provisions of Rs. 537 crore, Shareholding (%) which takes away some provision cushion earlier available. Promoters 0.0 Our Call Valuations: Federal Bank trades at 0.9x/0.8x its FY2022E/FY2023E BVPS, which FII 24.5 we believe is reasonable. Factors such as a rising focus on retail book, adequate DII 42.0 capitalisation (Tier-1 at 13.9%), and incremental lending to better-rated borrower(s) are positives. Management indicated growth may return in Q2FY2022E, but near-term Others 33.5 challenges have re-appeared due to the second wave of the pandemic. We have fine-tuned our estimates and the target multiple in light of the dynamic scenario. We Price chart maintain our Buy rating on the stock with an unchanged PT of Rs. 95. 110 Key Risks 90 Uncertainty and delay in economic recovery pose risks to the bank’s profitability in 70 the near to medium term. Valuation Rs cr 50 Particulars FY19 FY20 FY21 FY22E FY23E 30 20 21 20 21 Net interest income 4,176.4 4,648.9 5,533.7 6,130.8 7,072.2 - - - - Jan Sep Net profit 1,243.9 1,542.8 1,590.4 2,041.9 2,511.9 May May EPS (Rs) 6.3 7.7 8.2 10.6 13.0 Price performance PE (x) 13.1 10.6 10.0 7.8 6.3 (%) 1m 3m 6m 12m Book value (Rs/share) 65.6 71.5 79.9 88.0 97.9 Absolute 13.3 -5.9 40.5 -13.1 P/BV (x) 1.25 1.15 1.03 0.93 0.84 Relative to RoE (%) 9.7% 11.1% 10.5% 12.4% 13.8% 9.9 -1.8 27.7 -32.4 Sensex RoA (%) 0.78% 0.85% 0.78% 0.86% 0.90% Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates
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Key Concall Highlights Outlook: FY2022 looks like an arduous year, with near-term challenges. Q1 is uncertain, but momentum is strong. Got top-level management rejig done and two new hirings. Have a formidable team well set on a long-term basis for the bank. Credit cost has been well contained, with provision coverage now at 65%, and would be ~78% if one is including technical writebacks. Credit card business launch has done well, and will be launching in 15days to existing customers. Provisions used: The bank has used up all of COVID-19 provisions so far in Q4FY2021. The bank will have 60%-65% of provision cover going forward, with largely secured book and expect LGD (around 55%) to be manageable. SMA book has 95% collection efficiency. It was <5% of the book in Q3 and continues to remain at the same level in Q4. Restructured book: COVID-19 restructured book is Rs. 1,409 crore, whereas total standard restructured book is Rs. 1,618 crore. Restructuring book: Almost 68%-70% of the book is fully backed by security, most of it being mortgage security (corporate book has nil contribution to the restructured book). LGD for mortgage-backed loans has been very low, generally in single digit. About 30%-40% of the restructured book may slip. Unsecured portion consists of education loans etc. Gold Loan Book: Gold loans constitute Rs. 16,000 crore – of this, more than 30% is retail gold loan and the rest is agri and SME gold loans. Had strong growth, also helped by higher gold prices and also tonnage wise growth by ~30% growth. Gold loans growth going forward will be ~30% y-o-y on a normalised basis. NIMs: NIM improved due to higher yield hold loan and business banking growing strong. Book Quality: The bank is reasonably confident on its internal portfolio quality and underwriting going forward. However, the bank does not have full visibility on external level. Credit cost is likely to be lower than FY2021, unless the bank has to take the impact due to its decision to maintain 65% PCR. Pension-related cost will keep employee cost elevated and will taper off in FY2022E end only. Merchant banking: The bank has merchant base opportunity (such as Bharat pay etc.), given the volume and size of the transaction, based on which the lending platform can benefit. Credit cost was high in Q4 due to impact of recognition because of bunching up of NPLs in Q4. ECLGS book is Rs. 3,000 crore. ROA: Even on risk adjusted basis, ROA is lower than comparable peers. The bank is looking to increase its ROA trajectory, and even though the pandemic period is there, it is looking to build upon granular and steady change in business mix and model to increase it. ROA is also benefitted due to off balance sheet activities, and non-fund based (commission on LC, BG etc), which have a credit exposure component base as well. So, Federal Bank is looking to provide fund-based business solutions, which kind of limits the ROA trajectory. MFI business: The bank had earlier indicated interest in the segment and will move forward in the direction provided it is satisfied with risk and return on book. Credit card will grow gradually, and bank will proceed with a view to effective management of risk. Currently, the product has been given only to Bank’s own employees. By June, it will launch Credit Card product for its existing customers. SBI Card: Federal Bank was doing business with SBI card earlier, which it has discontinued and the size was small. Yields were 9+% for Q4FY2021, CV was 9%, and corporate was around 7.5% Book on EBLR and MCLR is ~32% and 28% of the book, respectively. Fixed rate book is around 30%.
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Unsecured retail book can grow to Rs. 7,500 crore-8,000 crore over the next 2-3 years. Credit Card business will entail some upfront technological investment. This has been factored in by the management. Provisions: Outside of specific provisions and the small quantum of COVID-19 provisions, the bank is carrying ~10% provision cover on the standard restructured book. PCR, including written-off accounts, is about 78%. The bank intends to hold about 10% in excess of LGD and last year (pre COVID-19), it was working with an LGD of 38%, which is why its PCR was close to 48% back then. RoA guidance: An exit quarter RoA for FY2022E of 1.1%-1.15% is possible if the current situation does not worsen.
Results Rs cr Particulars Q4FY21 Q4FY20 Y-o-Y % Q3FY21 Q-o-Q % Interest earned 3,366.3 3,396.8 -0.9 3,459.5 -2.7 Interest expended 1,946.0 2,180.8 -10.8 2,022.5 -3.8 Net interest income 1,420.4 1,216.0 16.8 1,437.0 -1.2 Non-interest income 465.4 711.1 -34.6 481.5 -3.3 Net total income 1,885.8 1,927.1 -2.1 1,918.5 -1.7 Operating expenses 1,000.7 967.8 3.4 956.0 4.7 Pre-provisioning profit 885.1 959.3 -7.7 962.5 -8.0 Provisions 242.3 567.5 -57.3 420.6 -42.4 Profit before tax 642.8 391.8 64.0 541.9 18.6 Tax 165.0 90.6 82.1 138.2 19.4 Profit after tax 477.8 301.2 58.6 403.7 18.3 Source: Company; Sharekhan Research
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Outlook and Valuation n Sector view - Credit growth yet to pick up, private banks placed better System-level credit offtake, which is still subdued, is now improving, albeit still sluggish, and is with credit growth of ~6% in the recent few prints. On the other hand, deposits have been growing by ~12%, which indicate a reasonably healthier economic scenario. Moreover, the accommodative stance of the RBI, resulting in surplus liquidity, provides succour in terms of easy availability of funds and lower cost of funds for banks and financials. Going forward, collection efficiency is likely to be a function of book quality, client profile, as well as economic pickup along with the likely pace of pandemic-induced lockdowns and the severity of the same. At present, we believe the banking sector is likely to see increased risk-off behaviour, with tactical market share gains for well-placed players. We believe private banks, with improved capitalisation and strong asset quality (with high coverage and provisions buffers), are structurally better placed to take-off once the situation normalises. n Company outlook - Sound fundamentals Federal Bank remains a strong business franchise with robust capitalisation and displays a stable trend in asset quality. The focus has been on de-bulking and better risk management has reflected positively on asset-quality trends so far. However, we believe the COVID-19 pandemic will lead to a delay in recovery and improvement in profitability further. While it is still dynamic, intuitively, in response to challenges, lenders such as Federal Bank are responding well and are now seeing early glimmers of recovery, helped by headroom provided by buffers on provisions and focusing on collection efficiency. We find Federal Bank to be an attractive franchise with a strong balance sheet and well-managed asset quality, which will help it tide over medium-term challenges. n Valuation - Maintain Buy, with an unchanged PT of Rs. 95 Federal Bank trades at 0.9x/0.8x its FY2022E/FY2023E BVPS, which we believe is reasonable. Factors such as a rising focus on retail book, adequate capitalisation (Tier-1 at 13.9%), and incremental lending to better-rated borrower(s) are positives. Management indicated growth may return in Q2FY2022E, but near-term challenges have re-appeared due to the second wave of the pandemic. We have fine-tuned our estimates and the target multiple, in light of the dynamic scenario. We maintain our Buy rating on the stock with an unchanged PT of Rs. 95.
One-year forward P/E (x) band 2.5
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Peer Comparison CMP P/BV(x) P/E(x) RoA (%) RoE (%) Particulars Rs/Share FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E Federal Bank 82 0.9 0.8 7.8 6.3 0.9 0.9 12.4 13.8 City Union Bank 169 1.8 1.6 12.8 9.3 1.6 2.0 15.5 18.0 Indusind Bank 956 1.6 1.4 13.3 11.4 1.1 1.1 12.3 12.7 Source: Company, Sharekhan research
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About company Federal Bank is an old-generation private sector bank headquartered at Aluva, Kerala. The bank operates in four segments: treasury operations, wholesale banking, retail banking, and other banking operations. The bank has 1,250+ branches and 1,900+ ATMs/Recyclers and has its representative offices at Abu Dhabi and Dubai and an IFSC Banking Unit (IBU) in Gujarat International Finance Tec-City (GIFT City). Federal Bank has been building incremental addition in better-rated borrowers and has been successful in bringing down the stressed pool. Federal Bank’s efforts to diversify its income source by investments in related businesses, adding new streams to fee, and other income are also bearing fruits, albeit slowly.
Investment theme Federal Bank has been able to maintain a consistent and stable deposit franchise (helped by overseas remittance flow to Kerala) with high proportion of retail deposits with lower branch spread. This idiosyncrasy allows it access to cost-effective, low-cost funds, crucial to not only maintain its loan growth but also sustain its margins. On the assets side, with a focused approach, the bank has been building incremental addition in better-rated corporate borrowers, which has helped bring down the stressed pool. Although the bank’s cautious approach to loan growth was there, the impact of COVID-19 and the resultant lockdown impact pose risks to borrowers’ cash flows and, therefore, may result in challenges in the near to medium term and slower growth. However, factors such as strong capitalisation levels and a dependable liability franchise are positive factors for long-term investors.
Key Risks Uncertainty and delay in economic recovery pose risks to the bank’s profitability in the near to medium term.
Additional Data
Key management personnel Mr. Shyam Srinivasan Managing Director & CEO Ms. Shalini Warrier Chief Operating Officer Mr. Sumit Kakkar Chief Credit Officer Mr. Baby K P Exec VP/Head :Treasury Mr. Ashutosh Khajuria Executive Director Source: Company Website
Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Franklin Resources Inc 6.6 2 ICICI Prudential Asset Management 5.7 3 Life Insurance Corp of India 3.9 4 YUSUFFAL MUSALIAM VEETIL 3.9 5 HDFC Life Insurance Co Ltd 3.9 6 Nippon Life India AMC 2.6 7 HDFC AMC 2.5 8 DSP Investment Managers 2.4 9 Jhunjhunwala Rakesh 2.4 10 Vanguard Group Inc/The 2.3 Source: Bloomberg
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May 17, 2021 5 Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research Know more about our products and services
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