Why has the stock of Federal Bank rallied post Q1 results?

Federal Bank, which declared its June quarter results for the current fiscal on Wednesday, appears to have kick-started the earnings season on a sound footing. Even as the Nifty Bank index continues to be under pressure, the stock gained a tidy 7 per cent early in trade on Thursday, thanks to its healthy June quarter performance. The stock trading at an attractive 0.7 times price to book (FY20) is also driving investor interest.

Strong deposit growth, fall in the proportion of loans under moratorium (as against that declared earlier), improvement in the cost-to-income ratio, healthy growth in retail loans led by high-yielding segments such as gold loans, and strong capital ratios are key positives in the bank’s June-quarter performance. The bank also used the higher treasury gains to improve its overall provision cover and increase Covid-related provisions to ₹186 crore in the June quarter (from ₹93 crore in March quarter).

That said, industry-wide uncertainty over the loans under moratorium continues to pose asset quality risk for all banks, including Federal Bank. Also, for Federal Bank, while overall loans under moratorium fell in the June quarter thanks to some repayments, elevated moratorium in the commercial and business banking segments may need a watch in the coming quarters. While the bank has beefed up its Covid-related provisions, they are still on the lower end, and there could be a rise in provisions in the coming quarters. However, the bank’s strong capital ratios (Tier-I at 13 per cent) provide adequate buffer to absorb future provisions and fund growth.

Lower moratorium

In the June quarter, overall loans under moratorium fell to 24 per cent from 35 per cent earlier. In the retail segment, moratorium stands at 33 per cent, while in the commercial and business banking segments it stands at 35 per cent and 42 per cent respectively. These are still notable in value and may need in a watch in the coming quarters.

In the June quarter, while overall slippages fell, corporate slippages shot up owing to one large account being recognised as NPA. Currently, the bank’s GNPA ratio stands at 2.96 per cent of loans. While slippages could rise after the moratorium is lifted, the bank’s higher share of housing loans (nearly half of retail excluding agri and business banking) lends comfort. Also, the bank has seen a fairly resilient asset quality performance in its corporate book in recent times.

Strong deposit growth

The bank reported a strong 17 per cent growth in deposits (y-o-y), with 19 per cent growth each in CASA and NRE deposits. Strong deposit traction and growing market share is a key positive in the current challenging times when few private banks are struggling to grow deposits.

However, the bank’s overall loan growth moderated to 9 per cent in the June quarter from 11 per cent in the March quarter. While growth could remain under pressure in the near term, the bank’s strategy to focus on high yielding loans such as gold loans should aid margins. In the June quarter, gold loans grew by 10 per cent sequentially.