Federal Banks operating profits grew ~30% yoy led by 23% yoy growth in revenues and 17% yoy cost growth.

Chirag Batavia • 25 January 2021

Federal Bank

 Federal Bank reported ~8% yoy earnings decline despite a solid 30%  yoy operating profit growth primarily on account of higher provisions
with most of the provisions driven to improve coverage ratio which is  ~55% on overall stress loans in 3QFY21.

 Operating profits grew ~30% yoy led by 23% yoy growth in revenues  and 17% yoy cost growth. Net Interest Income grew 24% yoy while  Net Interest Margin improved marginally qoq at ~3.2%.

 Slippages at ~2% of loans and restructured loans at 1-1.5% are  trending well and show that the bank should be able to come out of  Covid with a much lower impact. Gross and net NPLs declined qoq to  2.7% and 0.6% respectively.

 We are forecasting flat earnings for FY21 and 14% & 45.3% growth in  FY22E & FY23E on the back of marginal growth in loan book of ~5%  in FY21-22 and ~11% in FY23. We expect Net interest margins of 3.2%  throughout FY23E.

Federal Banks trades at quite undemanding valuation of ~0.8X FY23E  Book value & ~5.9X FY23E Earnings per share & and does not reflect  the strength of the franchise. We are valuing the bank at 1x book and  8x FY23E EPS for Return on equities inching higher to 11% levels.

Federal Bank: BUY
Dated: 25th January 2021
CMP: Rs.73 
Fair Value: Rs.90 
Potential Upside: 23.3%
Time Frame: 12 months

Note: The above is a brief note on the company, based on the inputs of KIE  research report dated 20th January 2021, which is available on their website  at: https://www.kotaksecurities.com/ksweb/ResearchCall/Fundamental.
Disclaimer: http://bit.ly/2n5AxIE


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