Maintain ‘buy’ on Federal Bank, revised TP Rs 90

Federal Bank (FB) has reported healthy financial performance in Q3FY21 led by – strong NII growth at 24% YoY despite ~Rs 0.4bn of interest reversal on likely incremental stress, improving NIM trajectory, collection efficiency of ~95% (pre-covid level) and revised lower restructuring guidance to ~1.3% vs 2-3% earlier, iv) pro-forma slippages within guidance range and highest ever CASA ratio at 34.5%, reflecting its business resiliency and strong franchise.

It utilised strong operating performance to improve provision coverage to 77% (66% including pro-forma slippage) from 66% in Q2FY21. Its redefined business strategy is driving strong 15% YoY growth in core-fee income and it expects this momentum to sustain going ahead.

Management’s asset quality narrative, improving business momentum, technology investments/tie-ups and ~40bps of provision buffer will cushion future earnings volatility and improve the visibility of it touching 1% RoAs sooner than later. Maintain ‘BUY’ with a revised target price of Rs 90 (earlier: Rs 88) as we revise our FY21 earnings estimate upwards by ~22%.

The asset quality is in good stead and pro-forma slippages are within guidance. While headline slippages remained negligible in Q3FY21 owing to the Supreme Court’s interim order, it disclosed pro-forma slippages of Rs 8.63bn. Segment-wise pro-forma slippages are broadly in line with historical quarterly run-rate and within guidance range.

While it restructured Rs 10.6 bn (0.54% of loans) worth of accounts in Q3FY21, it reduces potential restructuring to ~1.3% vs 2-3% as indicated earlier. It derives comfort from 95% collection efficiency and lower SMA pool at ~2.5%.