Buy Federal Bank; target of Rs 110: Motilal Oswal

Motilal Oswal's research report on Federal Bank

FB reported a PAT of ~INR3.7b in 1QFY22, led by strong other income (recovery from a written-off account and treasury gains of INR2.6b). It prudently deployed these gains towards provisions, which stood elevated at INR6.4b (63% YoY increase), to further strengthen its Balance Sheet. The bank posted a moderation in business growth, with loans across most segments declining sequentially. Deposit growth was muted, while the CASA ratio touched ~35% (record high levels). The share of Retail deposits rose to 93% of total deposits. On the asset quality front, higher disruption due to the second COVID wave caused elevated slippages of INR6.4b (annualized ~2% of loans), though higher write-offs led to stable asset quality ratios. Provision coverage remains stable ~66% (highest among midsize Banks). The restructured book increased to ~1.9% of loans (v/s ~1% of loans in FY21). It expects to restructure loans worth INR4b (~0.3% of loans) over 2QFY22. Collection efficiency remained stable at 95%.

Outlook

We maintain our earnings for FY22E/FY23E and estimate RoA/RoE at 1.1%/13.8% for FY23E. FB remains our top pick among midcap Banks. We maintain our BUY rating with a TP of INR110 per share (1.2x FY23E ABV + INR9/share from subsidiaries/JVs).