ICICI Direct recommended is bullish on Federal Bank has recommended buy rating on the stock with a target price of Rs 110 in its research report dated January 18, 2019.
ICICI Direct's research report on Federal Bank
Fresh slippages moderated to Rs 426 crore in Q3FY19 but were higher compared to guidance. Slippages in the SME segment stayed elevated at Rs 192 crore vs. Rs 169 crore in Q2FY19. A higher reduction led to steady GNPA ratio at 3.14% vs. 3.11% in Q2FY19. Provision coverage ratio increased ~200 bps QoQ to 64.2%. The bank has exposure of Rs 245 crore to three SPVs of IL&FS, classified as standard. Provision in lieu of the same is at ~7.5% of exposure NII came in at Rs 1077 crore, up 13.4%YoY, on the back of stable margins of 3.17% & healthy credit growth of 25% YoY. Opex came higher led by pension (~Rs 45 crore) & CSR expense (Rs 12 crore). PPP came at Rs 708 crore vs. estimate of Rs 749 crore, up 16% YoY Post higher provision in previous quarters, credit cost moderated to Rs 190 crore. Accordingly, PAT growth came in healthy at 28.3% YoY to Rs 333.6 crore vs. estimate of Rs 288 crore Business growth continued to stay healthy. Gross advances rose 25% YoY to Rs 107065 crore, with higher growth in corporate segment at 31% YoY. Deposit grew ~23% YoY to Rs 123457 crore.
Outlook
The bank reported healthy quarter with balanced loan growth, steady margins & strong fee income. Investment in brand & digital banking to keep the pace of balance sheet growth, while sweating of current infrastructure to improve productivity. We factor in healthy credit growth of 23.6% CAGR in FY18-20E along with margins >3.1%. Front loading of flood related stressed assets & dispensation in SME segment to keep asset quality steady. Classification of IL&FS exposure needs to be watched. We retain our BUY rating with a target price of Rs 110, valuing at 1.7x FY20E ABV.
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