PL Stock Report: Federal Bank (FB IN) - Q1FY24 Result Update - Margins and capital raise to be watched - BUY

Federal Bank (FB IN) - Gaurav Jani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs127 | TP: Rs175

Q1FY24 Result Update - Margins and capital raise to be watched

Quick Pointers:

♦ Core PPoP miss of 3.7% led by higher opex; asset quality disappoints.

♦ NIM declines QoQ but may increase in Q2’24 as yields could enhance.

FB reported a slightly weak quarter with core PPoP missing PLe by 3.7% led by higher opex while asset quality saw a blip as GNPA was 2.38% (PLe 2.28%) due to higher slippages and lower recoveries. Loan growth was 5.2% QoQ (~2.5% for system) and bank expects this momentum to sustain. We expect credit growth of 18% YoY in FY24E. While NIM for Q1’24 declined by 11bps QoQ to 3.3% due to back-ended loan growth and pricing pressures, margins could expand in Q2’24 as yields have risen since the last 45 days. For FY24 we are factoring a NIM decline of 14bps to 3.1%. However, NII/NIM estimates could be upgraded if FB raises capital. Shareholder approval for fund raise is to the tune of Rs40bn. Credit cost environment remains benign and we raise FY24/25E PAT by 4.5%/2.5% due to lower provisions. Maintaining multiple at 1.5x on FY25E ABV, we retain BUY and raise TP to Rs175 from Rs170.

♦ Core earnings miss led by higher opex; asset quality was weaker: NII was largely in-line at Rs19.2bn (PLe Rs19.25bn). Led by higher interest cost NIM was lower at 3.31% (PLe 3.35%). Loan and deposit accretion was 21% YoY each. Other income was a beat at Rs7.3bn (PLe Rs6.2bn) due to PSLC income of Rs520mn. Opex came in a tad higher at Rs13.5bn (PLe Rs13.15bn) mainly due to other opex due to which core PPoP at Rs10.75bn was a miss to PLe by 3.7%. Asset quality was weak due to higher slippages/lower recoveries. Hence GNPA rose by 2bps QoQ to 2.38% (PLe 2.28%) while NNPA was stable at 0.69%. Provisions came below PLe at Rs1.6bn (PLe Rs2.1bn). PAT was Rs8.5bn (PLe Rs7.7bn) while core PAT at Rs7.1bn was lower to PLe by 3.4%.

♦ Loan growth to sustain: Credit growth at 5.2% QoQ was broad based, led by corporate (4.4%), retail (4.3%), SME (6.2%) and agri (7.5%). Major industries in MSME include FMCG, vendors of large OEMs, chemicals and white goods. Bank is not witnessing any demand slowdown in home loans and moderation (+1.7% QoQ) was due to pricing pressure. Higher margin segments now contribute 33.9% (vs 32.7% a year ago). As per the bank, demand momentum is strong which may sustain in FY24 and it expects an 18-20% YoY growth in overall business. We are factoring a 17.5% loan CAGR over FY23-25E. Targeted retail to wholesale mix is 55:45 (now 54:46). Incremental reliance on wholesale funding continues; its share stands at 18% (vs 6% a year ago).

♦ NIM declines by 11bps QoQ; bank expects uptick from hereon: Margins were a miss for Q1’24 due to competition and loans being booked towards quarter end. Bank expects NIM to improve in Q2FY24E as pricing is improving since 45 days and hence yield expansion might outpace funding cost. As a result, bank sees reported NIM for FY24 to be stable YoY at 3.3%. We expect calc. NIM for FY24E to decline by 14bps YoY to 3.1% as yield increase post Q2’24 seems unlikely and FB is more focused on growth. However, we have not factored a capital raise which could positively impact NIM.

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