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Spark Capital: Federal Bank 1QFY14 result review - The darkest hour of all is the hour before dawn




Spark Capital Advisors(India) Private Limited


23 Jul 2013





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Federal Bank 1QFY14 result review - The darkest hour of all is the hour before dawn After being negative over much of FY11-13, where we had questioned the street’s extrapolation of the pace of Federal Bank’s turnaround, we turned constructive in 1QFY14, well nigh the end of a loan book cleanup. Events since then have only strengthened our thesis – slippages for 1QFY14 trended downwards to 2.8% from 3.6% in 4QFY13 while the restructured portfolio was stable qoq at 4.7% of the book - incremental restructuring was only Rs. 0.77bn, down from Rs2.2bn a quarter back. Hearteningly, the SME and retail books continued to witness 20% yoy growth rates, with annualized slippages stabilising at ~1.6% for retail and ~2% for SME (slippages at 2.1% and 3.3% respectively a year ago). Large corporate loans accounted for 60% of the slippages (the 3rd consecutive quarter of ~4% annualized slippage on the corporate portfolio) and although we foresee a couple more quarters of large corporate related asset quality stress, the overall slippage trend remains southward. NIMs rose 5bps qoq led by a led by 14% sequential decline in the low yield large corporate book, which currently accounts for 38% of the credit portfolio (42% in 4QFY13). Notwithstanding a relatively better quarter on the asset quality front, provisions spiked 242% yoy led by 100% provisioning on NAFED (Rs. 2.2bn exposure, provision cover of 50% as of 4QFY13); although our numbers do not factor in a settlement, a possible OTS on NAFED could act as a stock price driver. Adjusted for one off provisions, 1QFY14 was an inline quarter, and we believe the management’s strategies of transforming the bank’s economics and risk-reward framework from a high risk customer-high margin-high credit cost way of doing business to a low risk customer-low margin-low credit cost model will pan out more meaningfully over FY14-16. We would recommend investors to buy now and rate the stock a BUY with a target price of Rs. 495, 1.3x FY14EABV.

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