Buy Federal Bank, target price Rs 65: Motilal Oswal

Motilal Oswal has given a buy rating to Federal Bank with a target price of Rs 65 based on 0.8 times FY’22E ABV. Federal Bank business growth moderated in the fourth quarter affected by the weak environment. The bank made higher Covid-19 related provisions of Rs 930 million, which dragged earnings in the quarter. Pre-provision operating profit (PPoP) was strong at 27% year on year (aided by treasury gains) while the moratorium book stood at 35%. Lower slippages and higher provisions resulted in overall improvement in asset quality/PCR.

The brokerage has cut its FY21E estimates sharply by 19%, factoring in higher credit cost and slight moderation in business growth. However, it largely maintains its FY22E estimates.


Investment Rationale

Federal Bank has reported moderation in business growth, reflecting a challenging economic environment impacted by the Covid-19 outbreak. The brokerage expects overall loan growth to get affected due to reduced economic activity and the ongoing lockdown.

Despite lower quantum of stressed assets, the brokerage expects credit cost to stay elevated due to Covid-19 related provisioning. Federal Bank has been taking a cautious approach in building the loan mix toward high-rated corporates and retail loans. Also, the bank’s liability franchise remains strong with CASA + Retail term deposits of 91% and one of the highest LCR amongst banks. The brokerage cut its FY21E estimates sharply by 19% as it factored in the higher credit cost and slight moderation in business growth while maintaining the FY22E projections. It estimates the bank will report RoA/RoE of 0.9%/10.9% by FY22E.

Financials

For the quarter ended March 31, 2020, the company reported consolidated interest income of Rs 2867.78 Crore, up 2.94 % from last quarter Interest Income of Rs 2786.01 Crore and up 15.31 % from last year same quarter Interest Income of Rs 2487.06 Crore. The bank has reported net profit after tax of Rs 302.95 Crore in the latest quarter.

Promoter/FII Holdings

FIIs held 33.31 per cent stake in the company as of March 31, 2020, while DIIs held 37.11 per cent and public and others 29.59 per cent.