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Federal Bank reported a weak set of numbers for 3QFY2016. Its NII grew 3.1% yoy while profit declined on a yoy basis on account of decrease in non-interest income as well as higher provisions.
Slippages at peak; NIM falls qoq
During 3QFY2016, the bank witnessed a loan growth of 9.8% yoy, while deposits grew by 14.1% yoy. Growth in advances was led by the Corporate and SME books, which grew by 19.4% and 17.1% yoy, respectively, while the growth in the retail loan book was lower at 6.9% yoy. CASA deposits, with a growth of 20.1% yoy, outpaced deposit growth, led by growth in both the current and savings deposits. As a result, the CASA ratio improved by 161bp yoy to 32.1%. The Reported NIM fell by 7bp qoq to 3.04%, due to interest reversal on account of higher slippages and base rate cut by the bank. Other income (excluding treasury) growth was moderate as the quarter saw some softness in forex income, while core fee income remained stable. Treasury gains during the quarter came in much lower at `23cr as against `77cr in 3QFY2015.
On the asset quality front, the annualized slippage ratio was higher at 4.5% as compared to 3.2% in 2QFY2016 and 2.2% in 3QFY2015. During the quarter, the bank registered the highest ever slippages of `571cr. 3 of the bank’s accounts amounting to `225cr were sold to ARCs (1 account in the shipping industry [`109cr] and 2 accounts falling in the metals segment). There is no pending stress on these lines as far as the list from the RBI is concerned. Recoveries and upgrades were higher at `108cr during the quarter, partially offsetting the impact of higher slippages in terms of absolute Gross NPAs which rose by 12.3% qoq to `1,684cr. Higher slippages led to an increase in the Gross NPA ratio by 25bp qoq to 3.15%, whereas the Net NPA ratio increased by 33bps qoq to 1.66%. The provision coverage ratio fell by 1,331bp yoy and 493bp qoq to 71.7% as of 3QFY2016.
Outlook and valuation: Earnings were affected due to decline in non-interest income, higher cost-income ratio and poor asset quality. Given the increasing uncertainty in the corporate books in the industry as a whole, we remain watchful of the bank’s near-term performance on the asset quality front. At the current market price, the stock trades at 0.9x FY2017E ABV. We maintain our Neutral rating on the stock.
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