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Spark Capital: Federal Bank 4QFY13 result review - Valuations largely price in the negatives: Maintain BUY




Spark Capital Advisors(India) Private Limited


30 Apr 2013





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Federal Bank 4QFY13 result review - Valuations largely price in the negatives: Maintain BUY Federal Bank’s (FB) 4QFY13 numbers brought to the fore our concerns with the management’s well intentioned but highly challenging restructuring strategies of transforming the bank’s economics and risk-reward framework from a high risk customer-high margin-high credit costs way of doing business to a low risk customer-low margin-low credit cost model. NIMs caved in 40bps qoq led by ~97bps decline on the YoA - the decline in YoA was led by both continuing asset quality woes and a 200bps qoq rise in the low yield large corporate book to 42% of the credit portfolio. Slippages continued to remain elevated at 3.6% with the large corporate segment contributing 56% of incremental slippages while incremental restructuring was ~Rs. 2.2bn, although the overall restructured portfolio is down to 4.7% post a recent reclassification. We see the bank getting the jugglery act between growth-NIMs-credit costs-RoA right over an extended period of time and believe that current valuations factor the reality fairly enough. Incremental RoE improvements will therefore be driven more by leverage than a significant shift in RoAs. We think the reasons which have contributed to the stock’s recent correction, 1) gold price fall and 2) Saudi Arabia’s Nitaqat program are not material enough to impact financial performance. Gold needs to fall another 25% for RoAs to be meaningfully impacted and the Nitaqat program, even if extended to more Middle-East countries is unlikely to have a material impact on the remittance flows to the bank. We would recommend investors to buy now and rate the stock a BUY with a target price of Rs. 520, 1.3x FY14EABV.

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