Federal Bank’s 50 per cent growth in profit beat Street estimates widely. Advances growth at 10 per cent was healthy; deposit growth was stable too. Slippages also moderated meaningfully, analysts said.
Add to that was a strong management commentary, where the bank said existing provisions would be sufficient to manage the stress, even if 25-30 per cent of the restructured book slips over the next two years. Federal Bank is on track to achieve its exit return on asset (RoA) guidance of 1 per cent by FY22, the management said, adding that it aims to increase RoA target to 1.25 per cent over the next two years.
While the ‘Big Bull’ kept his stake in Federal Bank unchanged at 5,47,21,060 shares in September quarter, Jhunjhunwala and his better half Rekha, under the name of Rakesh Jhunjhunwala Rekha Jhunjhunwala, bought additional 2,10,00,000 shares or 1.01 per cent stake in the private lender during the quarter.
Motilal Oswal Securities finds the stock worth Rs 130. ICICI Securities has revised its rating on the stock to Rs 125 from Rs 100. Nirmal Bang Institutional Equities sees it at Rs 124.
Signs of predictability is settling in over Federal Bank’s asset quality, said Edelweiss while suggesting a target of Rs 130 on the stock.
The price targets suggest a potential upside of up to 25 per cent over Friday’s closing price of Rs 104.05 on BSE.
The lender on Friday reported a near 50 per cent jump in net profit at Rs 460 crore for September quarter compared with Rs 308 crore in the year-ago period, thanks to 54 per cent lower provisions and improvement in asset quality.
Net interest income (NII), the difference between interest earned and interest expended, rose about 7 per cent at Rs 1,479 crore. Net interest margin (NIM) for the quarter rose to 3.2 per cent from 3.13 per cent in the year-ago period. Gross non-performing assets ratio came in at 3.24 per cent for the quarter compared with 3.50 per cent a quarter ago.
“The management’s encouraging asset quality narrative (collections at 96 per cent, SMA pool at less than 4 per cent, credit cost estimate of 70 bps), strong liability franchise, focus on high-yielding products for incremental growth, and fintech tie-ups would help the bank improve its RoA in FY22 and FY23. Considering the improving visibility on Federal Bank crossing 1 per cent RoA by FY23, we maintain BUY on the stock,” ICICI Securities said.
The target does not factor in value unlocking opportunities from any of the bank’s subsidiaries.
With 80 per cent of the restructured loans having security cover of over 75 per cent, Nirmal Bang believes the restructured portfolio should not present significant asset quality risks.
The provision coverage ratio at 65 per cent, it said, seems adequate to cover the existing stock of NPAs.
“Bank is on track to achieve a NIM target of 3.2-3.3 per cent and FY22 exit RoA of 1 per cent. The leadership is stable with Shyam Srinivasan having received a 3-year period reappointment last quarter. Fintech partnerships are also expected to yield cross-sell opportunities in the near-to-medium term,” the brokerage said.
With uncertainty around the top management resolved, consistent earnings delivery will be key, said Edelweiss which believes valuation at 1 time FY23 price to book value lends some comfort, as do improving bank collections.
