Federal Bank performance continues to improve | Q2FY18 results | Outlook | Valuation | Loan Growth | Indianotes.com

FB reported strong net earnings of Rs2.64bn (first quarter post Q4FY15) mainly led by strong NII growth of ~24% and loan growth of ~25% YoY (despite higher base of bought loan book). Credit cost which had remained a elevated for the last few quarters is stabilizing and bank expect it to remain at steady range for next few quarters. Bank continues to focus on upgrading technology, improving processess and adding feet on street which should culiminate into better loan growth and cross sell for fees which should have higher opex. We see return ratios moving up gradually and risks of asset quality to be limited and hence retain our positive view with TP of Rs144 (up from Rs138) based on 2.2x Sep‐19 ABV (rolled over from Mar‐19).

Strong top line but offset by slightly slower other income and higher opex: NII grew strong ~24% YoY as bank benefitted from lower cost of funds and continuedstrong loan growth of 25% YoY. As a result, reported margins were up by 18bps QoQ to 3.31% (H1FY18 3.25%). Management expects margin to be in similar band of 3.25‐3.3% in FY18. PPOP growth of ~23% YoY was relatively softer on the back of slower other income and higher other opex (loan buyout book management fees, technology up gradation & payout to DSA & Sub).

Loan growth of 25% YoY broad based across segments: Loan growth continued to be robust at 25% YoY led by corporate (38% YoY,4% QoQ) & retail (24% YoY,6% QoQ) with also uptick on Agri (17% YoY,5% QoQ) and SME loan growth (8.7% YoY,5% QoQ). Bank continues to focus on the mid‐market & biz banking segment, while also seeing strong traction in most retail segments (new biz origination of Rs16.9bn v/s 10bn QoQ). Bank expects most segments to continue grow in mid 20s in FY18.

Liabilities facing challenges; asset quality see stability: Deposits growth was slower at 13% YoY with CASA growth of 18% YoY, but has seen momentum significantly slowing down with CASA ratio at 32.9% (down 50bps QoQ). On asset quality, slippages were relatively lower at Rs2.84bn v/s 4.25bn in Q1FY18 and were mainly from retail & agri, while was lower from corporate & SME in‐line with guidance. Bank expects retail slippages to come off, while agri slippages to remain steady but expects credit cost to remain at similar trajectory for next 2‐3 quarters.

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