Buy Federal Bank; target of Rs 468: SKP Securities

“Federal Bank’s net Interest Income (NII) grew 6.9% YoY but virtually flat on a sequential basis to Rs. 4,916 mn. PAT on the other hand grew 30.2% YoY (-19.9% QoQ) to Rs. 1,904 mn on the back of 53.2% decline in overall provisions. CASA ratio surprisingly grew 142 bps YoY and 112 bps sequentially owing to the robust branch expansion spree that the bank is undergoing. Total branch network stood at 977, adding 231 branches over the past 12 months."

"Pressure on NIMs continued to take a toll on Federal Bank’s (FB) NII, which grew merely 7% YoY despite 19% growth in advances. NIMs compressed by 45 bps YoY and 14bps QoQ notwithstanding 142 bps YoY and 112 bps QoQ increase in CASA ratio to 28.7%. We expect NIMs of the bank to reduce to 3.5% in FY13E from 3.8% in FY12. Where as CASA ratio is expected at 28% for FY13E."

“FB recorded strong 18% YoY increase in business backed by 19% growth in advances and ~18% growth in deposits. The growth in advances was backed by ~24% growth in corporate advances and 99% (albeit on a lower base) increase in gold loan advances. Deposit growth was led by +65% rise in NRE deposits and CASA deposit growth. We expect FB’s advances to grow at 18% for FY13E, whereas deposit growth is expected to complement advances and grow at 19% for FY13E. FB witnessed a 33 bps decline in its Gross NPLs to 3.6% in Q1FY13 whereas the Net NPLs declined by 12bps to 0.6%. As a result provisions declined 53% YoY to Rs. 620mn. The bank restructured assets worth Rs. 2 bn during the quarter and further Rs. 2 bn worth of loans of Tamil Nadu state electricity board are expected to be restructured in Q2FY13.  We expect FB’s Gross NPL’s at 2.7% in FY13E and 2.4% in FY14E. Whereas Net NPL’s at 0.5% and 0.4% in FY13E and FY14E respectively.”

"The Bank currently trades at 1.0x FY14E ABV of Rs. 404. At our target price of Rs. 468 (18 months) FB trades at 1.2x P/ABV multiple. We rate Buy on the stock yielding a potential upside of 16%,” says SKP Securities research report.

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