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Anand Rathi
Federal Bank (Buy)
CMP: ₹94.6
Target: ₹110
Key takeaways: a) No surprises on asset quality: Slippage for the quarter was ₹590 crore, of which ₹270 crore came from DHFL and Reliance HF (highlighted in the previous quarter). This led to higher credit cost of 82 bps. Stressed assets (GNPA + standard restructured loans) continued declining and are now about 3.4 per cent of loans. With most of the corporate stress recognised, we expect slippages to normalise in coming quarters.
b) Loan growth slows: Growth of loans for the quarter was about 12 per cent y-o-y (a multi-quarter low). This slowdown was primarily due to only about 6 per cent y-o-y growth in the corporate book. Other portfolios, however, grew well, with retail up about 23 per centy y-o-y agri up about 17 per cent and SME up about 12 per cent. Management expects FY20 growth at about 16 per cent; however,we model it at about 14 per cent given the weak economic environment and selective lending by the bank.
Valuation: Our January 2021 sum-of-parts target price (1.2x FY22e bookvalue, ₹9 a share for Fedfina and IDBI-Federal Life) works out to ₹110 a share.
Risk: Lumpy slippages from the corporate book.
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