Slippages in the restructured book took away the sheen from an otherwise decent show of Federal Bank. However, not all is lost. Management feels that post this slippage, such unexpected shocks are unlikely. The bank, well-capitalised post the Rs 2500 crore capital raise is now focusing on building a solid brand and grabbing market share. It will be hard to ignore Federal Bank as it embarks on this journey.
The quarterly performance was a tad disappointing as the slippage of one account of Rs 105 crore impacted the Net Interest Income (the difference between interest earned and interest expenses), Net Interest Margin, provision as well as the non-performing assets. In addition, there were interest reversals on account of slippages of few SME (small and medium enterprise) accounts as well. Finally, some impact of conversion of loans from base rate to MCLR (marginal cost based lending rate) had to be endured in the quarter.
Non-interest income continued to be a bright spot with a decent 27% growth in core fees and robust recovery from written off accounts. Cost head was manageable despite the bank taking a massive initiative to focus on enhancing distribution. But what stands as a testimony to changing times, Federal is relying more on people and technology rather than physical branches to expand reach.
However, despite the 31% growth in profits before provisions, the sharp jump in provisions led to a modest 26% growth in profit.
The stock had a stellar run in the past one year. Markets had started believing that the worst is over. Is this quarter a blip in an otherwise upwards trajectory or a derailment?
We would go with the former and there are ample reasons for the same.
Restructured book unlikely to be a shocker: The lumpy slippage this quarter was from the restructured book. The outstanding figure now includes Rs 190 crore exposure that were restructured under various dispensations (SDR, S4A, 5/25 scheme) as well. Federal doesn’t foresee the quarterly slippage to exceed 18%-20%, more or less in the vicinity of the quarterly run rate of slippages seen in recent quarters.
According to the management, the remaining restructured exposure comes from variety of sectors and includes names like Air India. While lumpy slippages are unlikely, Federal Bank, nevertheless guided to stress emanating from farm loan portfolio lingering on for couple of more quarters.
The bank is unlikely to face incremental provisioning burden on account of the stressed cases that are now being referred to NCLT (National Company Law Tribunal) as three out of the six exposures have been sold to ARC, two have been written off and a single account warrants provision to the tune of Rs 23 crore. According to the management, the bank’s existing exposures are unlikely to feature in the next fifty troubled accounts.
Participating in the market share game: The bank has grown its books while battling bad assets. In the quarter, advances and deposits have grown by 29% and 18% respectively. In the past one year, the bank has improved its market share in deposits from 0.8% to 0.9% as it grabbed a share of 1.4% in incremental deposits. Similarly in incremental advances, its market share stands at an impressive 3.9% that aided in improving its overall market share in system’s credit to 1% from 0.8%.
Cautious commentary: Federal has a well- diversified lending book and sounded cautious about increasing exposure to SME on account of myriad disruptions like demonetisation and GST. It is also treading carefully in its key market of Kerala and is watchful of developments in the Gulf that has a bearing on the state’s economy. The bank is also closely monitoring other key segments of the state’s economy like rubber, cashew and tourism. It is comforting to note that close to 70% of the outstanding wholesale assets of Federal Bank are rated A and above.
Well capitalised to take advantage of the emerging opportunity: The bank has recently raised Rs 2500 crore and has got a comfortable Capital Adequacy Ratio of 15.3%. The liquidity will have a positive rub off on margins and the bank expects an improvement in its return ratios over the course of the year. It is also confident of growing its books by at least 20%.
Incidentally, the bank has re-energised the team. It has implemented a compensation structure for the senior management that is linked to performance thereby partially shedding the image of an “old private sector” bank.
The strategy, capital position and emerging opportunities make Federal Bank an interesting investment proposition even at the current valuation of 2X FY18 adjusted book. Any result linked weakness should be viewed as an opportunity.