We will be very sensible in our lending – Federal Bank

Update on the Indian Equity Market:

On Friday, NIFTY ended up 162 pts (+1.51%) at 10,902. Among the sectoral indices, FIN SERVICE (+1.94%), PSU BANK (+1.84%) and AUTO (+0.73%) were top gainers while IT(-0.62%) was the only loser. Among the stocks, BPCL (+12.43%), ONGC (+5.84%) and INFRATEL (+4.32%) were the top gainers. HINDALCO (-1.90%), BRITANNIA(-1.86%) and NESTLEIND (-1.47%) were the top losers.

Edited excerpts of an interview with Mr. Shyam Srinivasan, Managing Director & Chief Executive Officer, Federal Bank with Economic Times dated 16^th July, 2020:

We have grown ahead of the market for the last 14-16 quarters: Shyam Srinivasan

• Comments on 1QFY21 result: 1QFY21 numbers are quite encouraging. It is quite a balanced outcome. There is no one area that has outdone or given unique benefits but it is spread out between both credit and deposits. Credit grew by 8% YoY. Federal Bank did have businesses like gold loan parts of retail and parts of commercial banking did very well, in particular, gold loan had a remarkably good quarter it grew by 10% QoQ and 36 % YoY. Good credit growth in the higher-margin products and low-cost deposits resulted in 12% income growth YoY. CASA deposit ratio has moved from 30.5% to 32%, So, the 150 bps increase in CASA is driven by sequential growth of 7% in savings. It is an improvement consistent with what the bank has been working on for many quarters and that is why the interest income was at an all-time high of Rs 12,970 mn.
• Outlook on PCL (provision for credit losses) ratio he said that he would like the coverage ratio including technical written off to be well above 70% and currently it at 75%. Everything depends on how the next 2-3 quarters shape up, given all that is going on in the environment and the challenges that we are all facing. The bank wants to keep coverage portfolio well covered much higher than the likely loss given default. He added that when the bank’s loss given default was in the early 40s, they had a coverage ratio closer to 47-48. When they visualized that the environment is getting stickier and the loss given default might go up, they took the coverage up to almost 59. Depending on how things shape up, Federal Bank will be well provisioned.
• On the NPA (Non-performing Assets) he stated that we are all part of the same economy so we cannot be totally insulated from all the challenges that globally everybody is facing, given the COVID situation. Federal Bank’s portfolio generally is more secured and a relatively higher credit standard book. For very long, net NPA is at 1.22. In fact, it had a 20 quarter low. This gives confidence that the bank is better placed now to face the likely challenges that may arise over the next six months-nine months. The provisions have been made and will keep increasing the coverage at every available opportunity and post the moratorium liftoff when you can really make sense of how the credit books of everybody is performing, the visible impact will be in September-20 and in the December-20 quarter. He further added that he won’t be able to guess the exact level of deterioration but the bank is ensuring and is in continuous dialogue with customers and expects the deterioration to be manageable.
• Comments on declining operating profits: The sequential number on operating profit may not reflect the reality because last quarter there was a significant one-off gain on the treasury and the sale of investments was not there in 1QFY21. Rs 9,320 mn of operating profit in 1QFY21 and Rs 9,590 mn in 4QFY20, both are by way of record, the highest the bank has ever done. But Rs 9,590 mn had some larger one-off gains because of the sale of investments which do not repeat itself. In that context, Rs 9,320 mn 1QFY21 is a more sustainable credible consistent number. Operating cost efficiency increase is the productivity drive of the bank. There are many elements of activity going on and that will continue to improve. The Bank is centralizing, standardizing, renegotiating, and deferring a bunch of stuff to maintain the costs.
• Guidance on NIMs (Net Interest Margin) going forward: In the last three quarters, margins have been moving up sequentially between 4 bps one quarter 3 bps in the next quarter. In the normal course of events, a similar kind of rate of increase could be seen, but we are in a relatively low-interest environment. To that extent, margin expansion does not happen significantly. Second, as credit slippages increase which is likely to happen after the moratorium is lifted off, there certainly will be impairment which will have revenue impact as well. He said that he cannot comment on NIMs but expects to keep the current level of margins which is their top priority and number one effort. For improvement on this, we will have to see how things shape up.

Consensus Estimate: (Source: market screener, investing.com websites)

• The closing price of The Federal Bank was ₹ 52/- as of 17-July-20. It traded at 0.68x/0.62x the consensus BV estimate of ₹ 77/83.4 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 67.8/- implies a PB multiple of 0.81x on FY22E BV of ₹ 83.4/-.

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