Buy Federal Bank; target of Rs 120: JM Financial

JM Financial's research report on Federal Bank

Federal Bank reported a strong quarter in 1QFY19, with PAT at INR 2.63bn (+8% above JMFe). The beat in net profit was primarily driven by strong NII growth (+22% YoY), as margins held up for FB. Credit cost was contained at 80bps for FB in 1QFY19, as slippages almost halved sequentially to 2.3% (annualised). Net stress on FB’s loan book (net NPA + other stress) is now at 2% of loans (from 2.3% as of 4QFY18). Management remains confident of containing slippages at INR 11-12bn in FY19E, with credit costs in the range of 65-70bps. Furthermore, FB is positive on its margin outlook, and expects this, along with the containment of credit cost will help it deliver 1% exit RoA by 4QFY19. We remain cautious on the margin outlook for FB and continue to build credit cost of 77bps/74bps in FY19E/FY20E. Our gross slippage expectation of 1.4%/1.2% over FY19E/20E is well below the 2.7% in FY18.

Outlook

We believe FB can deliver RoA/ RoE of 1%/13% in FY20E. Maintain BUY with unchanged TP.