Buy Federal Bank; target of Rs 54: Emkay Global Financial

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Emkay Global Financial's report on Federal Bank

Despite stable NIM/higher treasury gains, which lead to a historically higher PPoP, the bank reported lower PAT at Rs3bn, dragged by higher wage revision/retirement provisions and LLP as the bank accelerated specific PCR to 54%. The bank also made Covid-19-related provisions of Rs930mn (0.08% of loans), which seem to be far lower vs. peers and thus, would call for additional provisions in FY21. As per management, the MSME guarantee scheme has opened up a growth opportunity of ~Rs20bn (1.6% of overall loans). The loan moratorium rate in value terms stands at Rs430bn/35% of loans, which may remain moderate in the second round. Based on its assessment, ~5-6% of its retail portfolio (~Rs14bn) under moratorium could be at high risk. The bank has no plans to raise capital in the next 12-15 months, with Tier I at 13.3%, while it plans to buy an additional 4% stake in IDBI Federal Life from its partners. The bank still awaits clarity on MD’s re-appointment from RBI.

Outlook

We cut our TP to Rs54, factoring in earnings/multiple cut (0.7x FY22E ABV v/s 0.9x earlier-on), but retain Buy due to its strong retail re-orientation, healthy liability profile, healthy capital position (Tier I at 13.2%) and lower valuations among mid-size banks.

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