INSUBCONTINENT EXCLUSIVE:
LKP Securities has a buy call on Federal Bank with a target price of Rs 121.
The current market price of Federal Bank is Rs 89.80.
Time
period given by brokerage is one year when Federal Bank price can reach defined target.
Investment rationale by brokerage-
Higher asset
growth and better fees led to a surge in PPOP: Advances continue to grow at a healthy pace at 24 per cent YoY led by higher growth in
corporate loans (24 per cent), business banking (20 per cent) and retail loans (23 per cent)
Within retail, housing loans are growing at a scorching pace of 35 per cent YoY and mortgages by 21 per cent
Mgmt guided that growth will continue to remain strong in coming quarters as well
Also, core fee income (incl
growth we have seen in recent past
On margin side, margins were largely stable QoQ at 3.17 per cent mark
Going forward, bank is looking at a stable to marginally improving margin profile
Positively, incremental corporate yields for bank has jumped by 50 bps QoQ to 8.7 per cent levels and while in retail, SME and agri
portfolios rise is to tune of 12-15 bps.
No negative surprise in asset quality: There was no big negative surprise on asset quality side
Slippages were less at Rs 4.3 bn vs
Corporate slippages were low sequentially at Rs 0.6 bn vs
Rs 1.2 bn while SME slippages were elevated at Rs 1.9 bn vs Rs 1.7 bn QoQ
Of total slippages, slippages from Kerala were at Rs 2.2-2.25 bn and flood-related slippages were at Rs 1 bn (bank has front-loaded some of
SMA 2 accounts stand at 1 per cent levels currently signalling much lower NPA pain going forward
For Q4FY19, bank expects slippages to be in range of Rs 2-2.5 bn
On other hand, positively, RBI audit of bank for year FY18 is done and there is no NPA divergence to be reported.
Cost inched up due to
higher gratuity provisions: Cost ratios inched up on a sequential basis from 48 per cent to 50 per cent led by a higher provision on
GOI has enhanced gratuity limit to Rs 20 lakh from 10 lakh earlier leading to an additional burden of Rs714 mn (to be spread over 4 quarters
beginning current quarter)
Also, bank was short on CSR provisions which have been made good for in this quarter, leading to escalated cost ratios
Going forward, management expects C/I ratio of 50 per cent in FY19 and 49 per cent in FY20E.
Valuations attractive: We see PAT grow at 30
per cent CAGR over next 2 yrs FY19-21E
Over years, bank has strengthened its balance-sheet, gained market share in good quality rated assets, made sizeable digital investments
in-line with larger peers and is growing assets at a much higher pace than industry average
We are optimistic about future growth outlook of bank
In our view, current valuations of bank offer decent upside
It is trading at 1.3x and 1.1x FY20E FY21E ABV resp
Retain BUY with a target price of Rs 121 giving upside of 38 per cent from current levels.