Buy Federal Bank; target of Rs 87: ICICI Direct

Post higher slippages in H2FY16, the pace of GNPA accretion has continued slower at Rs 273 crore in Q3FY17, primarily led by a decline in slippages in SME segment. Absolute GNPA was at Rs 1951.6 crore (GNPA ratio eased 1 bps QoQ at 2.77%). RA declined from Rs 2012 crore in Q2FY17 to Rs 1964 crore (2.8% of loans). There was no account restructuring in terms of 5/25 scheme, SDR or sale to ARCs.

Higher slippages have been hurting earnings in the past couple of quarters. However, the pace of slippages has pared down, which remains encouraging. However, future asset quality trajectory needs to be watched, especially in the wake of increasing corporate exposure. Factoring in higher balance sheet growth, we have revised our earnings estimate and expect PAT CAGR at 52% in FY17-18E. RoA is expected to inch up to 1% in FY18E. Consequently, we revise our target price upwards to Rs 87 from Rs 80 earlier, as we assign higher multiple of 1.75x FY18E ABV. Consequently, we upgrade our rating on the stock to BUY.