Federal Bank Q3 Results Review - Further Re-Rating Remains Justified: Yes Securities

Yes Securities Report

Federal Bank Ltd.'s gross slippage ratio has now averaged 1.0% over the past 10 quarters: There was a slightly chunky account worth Rs 0.7 billion that slipped, and this has happened after a long gap. The reason for this account slipping was a fire in their factory and it is expected that the account will be upgraded in Q4.

Provisions were Rs 0.9 billion, up by 108% QoQ but down -54% YoY, translating to calculated annualised credit cost of 19 basis points. However, the low credit cost was aided by a Rs 1.12 billion provision reversal on standard assets.

The restructured book provisions were reviewed and some provisions on the restructured book were reversed as far as RF1 is concerned.

The intention to preserve NIM at current levels looks largely achievable:

Federal Bank would aim to bring credit-deposit ratio down to 80% over calendar year 2024, which would exert some downward pressure on NIM, all other things remaining constant.

No rise in deposit rates is expected except perhaps in a few buckets. The overall cost of deposits is expected to remain broadly stable and eventually inch lower.

At this point in time, unsecured loans are not being grown as fast as capacity but this would be enhanced at some point.

We maintain ‘Buy’ rating on Federal Bank, which has been one of our top picks since June 2021, with an unchanged price target of Rs 195:

We value the standalone bank at 1.3 times FY25 price/book value for an FY24E/25E/26E return on equity profile of 14.9%/15.0%/15.5%.

We assign a value of Rs 16.1 per share to the subsidiaries, on SOTP.

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