Brokers's Call: Federal Bank (Buy)

| Updated on October 17, 2019 Published on October 18, 2019

LKP Research


CMP: ₹84.4

Target: ₹121

Net profit came in at ₹420 crore, up by 56.6 per cent y-o-y. This quarter numbers were marked by slower growth, higher NPLs (led by one large corporate account), elevated opex cost and a miss on margins too. Slippages were at ₹540 crore (versus ₹420 crore q-o-q) which were largely led by one large corporate account amounting to ₹180 crore. Bank highlighted its exposure to few large vulnerable accounts (including 2 HFCs and IL&FS) amounts to ₹475 crore which are still standard in the books and provisions on these are at ₹70 lakh. Margins q-o-q slipped by about 14 bps to 3 per cent led by linking of advances & deposits to external benchmark repo rates.

We have tweaked our estimates largely to factor in revised tax rates, slower credit growth and marginally higher credit cost. We expect PAT to grow by 48 per cent in FY20e and by 29 per cent in FY21e. We expect ROA/ROE to improve to 1.2 per cent/14.9 per cent in FY21e from 0.8 per cent/9.8 per cent in FY19. Given the improvement in return ratios expected in coming quarters, there would be sufficient room for multiples to improve. Provisioning cost and asset quality for the next two quarters would be higher given exposure to few large stressed accounts. Despite factoring higher credit cost, profitability to remain healthy for current fiscal. Retain BUY with TP of ₹121 (at our target price, stock is trading at 1.5x FY21 ABV).

Published on October 18, 2019
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