Federal Bank (FEDBAN) 50

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1 Result Update Rating matrix Rating : Sell Target : 45 Target Period : 12 months Potential Upside : -10% What s Changed? Target Changed from 60 to 45 EPS Changed from 4.7 to 4.0 EPS Changed from 5.4 to 4.9 Rating Changed from Hold to Sell Quarterly Performance Crore Q3FY16 Q3FY15 YoY Q2FY16 QoQ NII Other Income PPP PAT Key Financials crore FY14 FY15 NII 2,229 2,380 2,453 2,755 PPP 1,480 1,628 1,462 1,632 PAT 839 1, Valuation summary FY14 FY15 P/E Target P/E P/ABV Target P/ABV RoA RoE Stock data Market Capitalisation 8392 crore GNPA (Q3FY16) 1684 crore NNPA (Q3FY16) 876 crore NIM (Q3FY16) 3% 52 week H/L 79 /52 Equity capital 171 Crore Face value 2 DII Holding 34.0 FII Holding 34.4 Price performance Return % 1M 3M 6M 12M South Indian Bank Federal Bank City union Bank Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com January 13, 2016 Federal Bank (FEDBAN) 50 Significant slippages shake investor belief On the asset quality front, GNPA slippages remained high at 566 crore of which 200 crore was sold to ARC taking GNPA to 1684 crore. Net addition was 185 crore raising GNPA ratio to 3.15% from 2.9% QoQ. Two large metal accounts slipped in corporate slippages of 190 crore. The rise in NNPA was higher at ~ 201 crore QoQ to 876 crore. Accordingly NPA provisions were higher than expected at 75 crore. Bank does not have any SDR or 5:25 restructuring Credit and Deposit growth was marginally better than estimated at 9.9% YoY to crore and 14% YoY to crore respectively. NII came in line with estimate growing 3.1% YoY to 605 crore with margin declining 5bps to 3.05%. PAT declined 38% YoY and flat QoQ to crore below our estimate of 175 crore mainly led by higher provisions. NRE deposits strong, Margins to stabilise around 3 to 3.1% The bank s widespread presence in Kerala (595 out of 1252 branches) enables it to mobilise strong NRI deposits (NRE crore, 38% of deposits up 1% QoQ). Besides, the CASA ratio of the bank has risen from 26% to 31.9% in the last five years, which is among the best compared to peers. Retail deposit constitutes a staggering ~96.5% of total deposits, which is less sensitive to interest rate risk and poses low liquidity risk. A strong liability franchise has enabled the bank to earn relatively high NIM of ~ % compared to peers and manage lucrative NIM of ~4% in FY09-12 when interest rate charge on NRE deposit was ~4%. However, post NRE rate deregulation in December 2011, the bank started paying ~8%, which increased its CoF. Consequently, NIM has steadily declined from ~4% in FY12 to 3.11% now. Quarterly NIM was at 3.04% and management has guided on NIM to be maintained at ~3.1% levels. Loan traction improved, high rated corporate portfolio rising Federal Bank had raised capital in 2008 while a slowing economy led to low growth at 13.7% CAGR in FY10-15 vs. 26.9% CAGR in FY The bank maintains one of the best tier-1 ratios of 13.9%. We raise our credit growth estimate for FY16 but maintain at 11% CAGR to crore by. Corporate credit grew 19% YoY and SME 17% YoY to crore and crore respectively. Share of AAA/AA rated has gone up to 52% from 26% QoQ, depicting better corporate growth. Asset quality concerns hit performance The credit book is diversified with corporate exposure of crore (31.3%), SME crore (26.2%), agri crore (11.3%) and retail crore (31.7%). Slippages have been significantly rising at 566 crore in Q3 vs 405 crore in Q2. GNPA deteriorated from 821 crore in FY10 to 1685 crore in Q3FY16. The GNPA ratio stood at 3.15% while the standard RA book is at 2445 crore (4.2% of credit), including SEB RA. We raised our NPA estimates with GNPA at 1980 crore. Downgrade to Sell, revise target downwards to 45 Slippages from corporate and SME continue to mar performance and thereby have raised provisions and reduced PAT estimates by 15% to 687 crore. Revised GNPA estimates also upwards to 1790 crore at 3.2%. Lower RoE and RoA at 9% and 0.8% respectively are expected to stay. We are now valuing the bank at 1x vs 1.3x. We revised our rating to Sell from Hold and revise target price lower to 45 ( 60 earlier) ICICI Securities Ltd Retail Equity Research

2 [ Variance analysis Q3FY16 Q3 Q3FY15 YoY Q2FY16 QoQ Comments NII came in lin with estimate with higher growth in advances at 9% YoY but margin pressure. NII Writebak of inerest on corporate slippages was also seen NIM bps bps Lower corporate yield due to writebacks and base rate impacted NIM Other Income Net Total Income Staff cost Other Operating Expenses PPP Provision , Higher slippages led to higher-than-expected credit cost PBT Tax Outgo PAT PAT declined 38% YoY and flat QoQ to crore below our estimate of 175 crore mainly led by higher provisions Key Metrics GNPA 1,684 1,589 1, , Fresh slippages continued higher at 571 crore vs 405 crore in Q2FY16 vs. 317 crore seen in Q1FY16 leading to net increase of 185 crore in GNPA. NNPA Provision coverage declined further to 71.6% from 76.6% in Q2FY16 Total Restructured assets 2,254 2,455 2, , Change in estimates ( Crore) Old New % Change Old New % Change Net Interest Income 2,503 2, ,746 2, Lower margin expectation & credit traction led to downward revision in NII Pre Provision Profit 1,561 1, ,681 1, NIM (calculated) bps bps NIM expected to remain under pressure due to asset quality pressure PAT Lower margins, credit growth and higher provision to impact PAT ABV per share ( ) Assumptions Current Earlier FY14 FY15 Credit growth High rate corporate credit offtake leads tosurge in FY16 Deposit Growth CASA ratio NIM Calculated NIM expected to remain under pressure due to asset quality pressure Cost to income ratio GNPA ( crore) 1,087 1,058 1,789 1,980 1,654 1,843 GNPA estimate revised upwards due to higher slippage in FY16 NNPA ( crore) ,015 1, ,091 Slippage ratio Credit cost ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Exhibit 1: Business traction expected to stay in line with industry, going ahead We expect the business to grow at a CAGR of 12% over FY15-17E. The bank is adequately capitalised to grow its credit with tier 1 ratio of 13.97% ( Crore) FY12 Q1FY13 Q2FY13 Q3FY13 FY13 Q1FY14 Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 FY15 Q1FY16 Q2FY16 Q3FY16 Source: Company quarterly presentation and annual report, ICICIdirect.com Research a) Credit growth - The bank has grown its credit at a modest pace of 13.7% CAGR during FY All sectors including corporate, retail, SME and agri have contributed to overall credit growth. Credit growth witnessed improvement in Q3FY16 vs 5% in Q2FY16. On a YoY basis, the corporate segment surged 19% while SME grew at 17% YoY. Agri and retail grew in the range of 4-7% YoY. Going ahead, we estimate 11% credit CAGR during F16-17E to crore in line with management guidance. b) Deposit growth Bank has a strong deposit franchise with 32.1% CASA. Deposit growth was higher than estimate at 14.1% YoY to crore with savings growth remaining healthy at 20% YoY. NRI deposits constitute 38%, up from ~37% of total deposits on a QoQ basis. Exhibit 2: Deposit growth maintained above industry 50, , ( Crore) 30,000 20, ,000 0 FY11 FY12 Q1FY13 Q2FY13 Q3FY13 FY13 Q1FY14 Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 FY15 Q1FY16 Q2FY16 Q3FY Current Savings Term CASA (RHS) Source: Company quarterly presentation, ICICIdirect.com Research The CASA ratio improved ~20 bps to 32.1% with CASA deposits increasing 20% YoY to crore. We expect 13% CAGR in deposits to crore. ICICI Securities Ltd Retail Equity Research Page 3

4 Exhibit 3: Q3FY15- break-up of loan book Agri 12% Large corporat e 31% Exhibit 4: Q3FY16- loan book tilted to SME/Corp Agri 11% Large corporat e 31% Retail 32% SME 25% Retail 32% SME 26% Source: Company quarterly presentation, ICICIdirect.com Research Source: Company quarterly presentation ICICIdirect.com Research The loan book of Federal Bank has remained welldiversified over the years The management has guided at maintaining NIM in the range of % during Exhibit 5: Margins to remain at in range of 3-3.1% for full year Q4FY12 FY12 Q1FY13 Q2FY13 Q3FY13 FY13 Q1FY14 Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 FY15 Q1FY16 Q2FY16 Q3FY16, calculated NIM for FY15E and 16E Exhibit 6: Raise our NPA estimates post sharp rise in slippages in FY We have factored in GNPA of 1980 crore and NNPA of 1221 crore by FY10 FY11 FY12 Q1FY13 Q2FY13 Q3FY13 FY13 Q1FY14 Q2FY14 Q3FY14 FY14E Q1FY15 Q2FY15 Q3FY15 FY15 Q1FY16 Q2FY GNPA (LHS) NNPA (LHS) PCR* (RHS) Source: Company quarterly presentation, ICICIdirect.com Research Asset quality over the years has remained stable until the past three quarters. On the asset quality front, GNPA slippages remained high at 571 crore of which 200 crore was sold to ARC taking GNPA to 1684 crore. Net addition was 185 crore raising GNPA ratio to 3.15% from 2.9% ICICI Securities Ltd Retail Equity Research Page 4

5 QoQ. Two large metal accounts slipped in corporate slippages of 190 crore. Retail and SME NPA were 61 crore and 190 crore respectively. The rise in NNPA was higher at ~ 201 crore QoQ to 876 crore. Accordingly NPA provisions were higher than expected at 75 crore. Bank does not have any SDR or 5:25 restructuring. Total standard outstanding restructured assets stood at 2250 crore forming 4.2% of credit. Exhibit 7: Concerns on credit growth, quality to hit return ratios We expect RoA to be below 1% and RoE of 9.8% by FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 FY13 Q1FY14 Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 FY15 Q1FY16 Q2FY16 Q3FY16 ROE (LHS) ROA (RHS) Source: Company quarterly presentation and annual report, ICICIdirect.com Research Exhibit 8: Consistent lower RoE and now RoA disappoint FY11 FY12 FY13 FY14 FY15 Net interest income/ avg total assets Non-interest income/ avg total assets Net total income/ avg total assets Operating expenses/ avg total assets Operating profit/ avg total assets Provisions/ avg total assets Return on avg assets Leverage (avg assets/ avg equity) (x) Return on equity ICICI Securities Ltd Retail Equity Research Page 5

6 [ Outlook and valuation Slippages from corporate and SME continue to mar performance and thereby have raised provisions and reduced PAT estimates by 15% to 687 crore. Revised GNPA estimates also upwards to 1790 crore (3.2%). Lower RoE and RoA at 9% and 0.8% respectively are expected to stay. We are now valuing the bank at 1x vs 1.3x earlier, we revised our rating to Sell from Hold and revise target price lower to 45 from 60 earlier. Exhibit 9: Valuation NII Growth PAT Growth PE ABV P/ABV RoA RoE ( cr) ( cr) (x) ( ) (x) FY13 1, FY14 2, FY15 2, , , (31.7) , ICICI Securities Ltd Retail Equity Research Page 6

7 Company snapshot Target price: Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Jan-06 Acquires Ganesh Bank of Kurundwad FY07 Enters into JV agreement with IDBI Ltd and Fortis Insurance International for incorporating life insurance company May-07 Earnings surprises positively as Federal Bank delivers 23% higher PAT than estimate Oct-07 Issues rights in the ratio of 1:1 at a premium of 240 per share Dec-11 Deregulation of NRE/NRO deposits leads to rise CoF for Federal Bank, leading to a decline in NIM from 4% in Q3FY12 to 3.1% in Q1FY14 as a fair portion of deposits come from same May-13 G-sec yields spike post Fed announcement of its intention to taper QE on May 22 and tight liquidity measures by the RBI. MTM risk and CoF rise Sep-13 Stock recovers as new governor announces measure to tackle rupee volatility, eases liquidity. Risk of further rise in CoF subsides but MTM risk stay Sep-13 With governor's measures easing liquidity, risk of a further rise in CoF subsides while RBI swap window for FCNR deposit helps to ease liquidity and provide cheap rate deposit for Federal Bank. Also, no CRR/SLR requirement on the same. Stock split in 1:10 ratio done Oct-13 Stock split of 10/- per share of the bank into shares of 2/- each May-15 Bonus issued in the ratio of 1:1 Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 1 Nuvo ChrysCapital Advisors Pvt. Ltd. 30-Jun Promoter Reliance Capital Asset Management Ltd. 31-Aug FII Templeton Asset Management Ltd. 30-Sep DII ICICI Prudential Asset Management Co. Ltd. 31-Aug Others Birla Sun Life Asset Management Company Ltd. 31-Aug Veetil (Yusuffal Musaliam AB) 30-Jun Amansa Capital Pte Ltd. 30-Jun UTI Asset Management Co. Ltd. 31-Aug HDFC Asset Management Co., Ltd. 31-Aug Dimensional Fund Advisors, L.P. 31-Aug Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Hasham Investment & Trading Company Pvt. Ltd m 18.40m HSBC Global Asset Management (Hong Kong) Limited m m Birla Sun Life Asset Management Company Ltd. 4.90m 4.72m World Bank -8.69m -7.48m Manulife Asset Management (Asia) 4.36m 4.40m HDFC Asset Management Co., Ltd m -5.72m Franklin Templeton Asset Management (India) Pvt. Ltd. 4.07m 4.40m ICICI Prudential Asset Management Co. Ltd m -4.40m Tata Asset Management Limited 3.50m 3.78m Excel Funds Management Inc m -3.32m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 [ Financial summary Profit and loss statement Crore (Year-end March) FY14 FY15 Interest Earned 6, , , ,472.9 Interest Expended Net Interest Income 2, , , ,754.5 growth Non Interest Income Fees and advisory Trading Gains Other income Net Income Staff cost Other operating Expense Operating Profit Provisions PBT Taxes Net Profit , growth EPS ( ) Key ratios (Year-end March) FY14 FY15 Valuation No. of Equity Shares (Crores) EPS (Rs.) BV (Rs.) ABV (Rs.) P/E P/BV P/ABV Yields & Margins Net Interest Margins Yield on assets Avg. cost on funds Yield on average advances Avg. Cost of Deposits Quality and Efficiency Cost to income ratio Credit/Deposit ratio GNPA NNPA RoE RoA Balance sheet Crore (Year-end March) FY14 FY15 Sources of Funds Capital Reserves and Surplus Networth Deposits Borrowings Other Liabilities & Provisions Total 74, , , ,05,474.7 Application of Funds Fixed Assets Investments Advances Other Assets Cash with RBI & call money Total 74, , , ,05,474.7 Growth ratios (Year-end March) FY14 FY15 Total assets Advances Deposit Total Income Net interest income Operating expenses Operating profit Net profit Net worth ICICI Securities Ltd Retail Equity Research Page 8

9 ICICIdirect.com coverage universe (Banking) CMP M Cap EPS ( ) P/E (x) P/ABV (x) RoA RoE Sector / Company ( ) TP( ) Rating ( Cr) FY15 FY15 FY15 FY15 FY15 Bank of India (BANIND) Sell 7, NA Bank of Baroda (BANBAR) Hold 29, Punjab National Bank (PUNBAN) Hold 17, State Bank of India (STABAN) Buy 146, Indian Bank (INDIBA) Buy 4, Axis Bank (AXIBAN) Buy 93, City Union Bank (CITUNI) Buy 5, DCB Bank (DCB) Sell 2, Federal Bank (FEDBAN) Sell 8, HDFC Bank (HDFBAN) 1,045 1,220 Buy 261, IndusInd Bank (INDBA) 936 1,000 Hold 54, Jammu & Kashmir Bk(JAMKAS) Hold 3, Kotak Mahindra Bank (KOTMAH) Hold 125, South Indian Bank (SOUIN0) Hold 2, Yes Bank (YESBAN) Buy 27, ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 10

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