Stock corner: Maintain ‘buy’ on Federal Bank, revised target price of Rs 110

Margins could remain slightly subdued, even as FB has changed the loan pricing methodology from T-Bill to repo rate.

Business growth moderates; asset quality marginally under pressure PAT increased 57% Y-o-Y to Rs 420 crore (our estimate: Rs 440 crore) in 2QFY20 on the back of a lower tax rate, even as employee expense increased by 43% Y-o-Y due to retiral/wage provisions. PBT grew 14% YoY to Rs 470 crore.

The NII growth moderated to 10% Y-o-Y (Rs 1,120 crore), affected by interest reversals, yields compression on loans linked to T-bill, and negative carry due to excess liquidity. NIM thus moderated by 14bp Q-o-Q to ~3.0%.

Other income grew 30% Y-o-Y, led by a significant rise of 27% in fee income. Total income growth (15% YoY) trailed opex growth, resulting in muted 3% Y-o-Y growth in PPoP, while the C/I ratio was up ~410bp QoQ to 53.5%.

The loan growth moderated to 14.8% Y-o-Y, led by sluggish trends in corporate/commercial banking, while retail loans continued growing strongly at 25% YoY. Deposit base grew 18% Y-o-Y to Rs 1.4 lakh crore.

Other highlights: The lender maintained its credit cost guidance of 60-62bp for FY20. Stressed exposures: The bank’s exposure toward HFC/financial conglomerate /IL&FS stands at Rs 475 crore, wherein it is carrying a standard provision of Rs 720 million, while exposure to real estate group stands at Rs 300 crore.

Valuation view: FB has reported a moderation in loan growth, reflecting the challenging macro environment. The slippage trajectory remains uneven as FB recognises stressed account into non-performing, but it continues guiding for controlled credit cost of 60-62bp, enabled by a lower quantum of stressed assets. However, the coverage ratio of 66.2% (including TWO) remains healthy.

Margins could remain slightly subdued, even as FB has changed the loan pricing methodology from T-Bill to repo rate. We cut our earnings estimate by 6%/9% for FY20/21 and estimate RoA/RoE at 1.0%/13.3% by FY21. Maintain Buy with a revised target price of Rs 110 (1.4x FY21E ABV).