Q3FY19 Result Update

The Federal Bank Limited

Independent Equity Research

February - 2019

Equentis Wealth Advisory Services (P) Ltd

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  THE FEDERAL BANK LIMITED (FBL)
 Brief View
Recommendation Strong BUY
CMP Rs.84
Upside (15-18mths) 29-55% (Rs.109 to Rs.130)
Upside (5 years) 2.0-2.4-xs (Rs.170 to Rs.204)

 Q3FY19 Performance Snapshot

Particulars Q3FY18 Q2FY19 Q3FY19 9MFY18 9MFY19 Q4FY19E FY18 FY19E
Net interest income 9,500 10,225 10,773 26,496 30,798 11,742 35,828 42,540
-YoY % 20.0% 13.7% 13.4% 19.9% 16.2% 25.8% 17.4% 18.7%
-QoQ % 5.7% 4.3% 5.4% N.A N.A 9.0% N.A N.A
NIM % 3.12% 2.98% 3.02% 2.90% 2.88% 3.1% 2.72% 2.8%
Total Income 11,786 13,465 14,228 34,944 40,188 15,197 47,416 55,385
-YoY % 10.6% 13.5% 20.7% 17.1% 15.0% 21.8% 15.4% 16.8%
-QoQ % -0.6% 7.6% 5.7% N.A N.A 6.8% N.A N.A
CI Ratio 52.4% 48.1% 50.3% 51.3% 50.0% 50.0% 51.7% 50.0%
Total Provisions 1,624 2,888 1,901 5,756 6,781 2,302 9,472 9,083
Credit Cost (annualised) 0.53% 0.84% 0.53% 0.63% 0.63% 0.60% 0.72% 0.59%
Net Profit 2,600 2,672 3,336 7,337 8,621 3,475 8,785 12,096
-YoY % 26.4% 1.3% 28.3% 27.7% 17.5% 140.0% 5.7% 37.7%
-QoQ % -1.4% 1.6% 24.9% N.A N.A 4.2% N.A N.A
Balance Sheet Parameters
Networth 1,20,410 1,25,413 1,28,870 1,20,410 1,28,870 1,31,389 1,22,102 1,31,389
-YoY % 38.8% 6.9% 7.0% 38.8% 7.0% 7.6% 36.5% 7.6%
-QoQ % 2.6% 0.3% 2.8% N.A N.A 2.0% N.A N.A
Loans 8,49,530 10,09,409 10,55,500 8,49,530 10,55,500 11,21,881 9,19,575 11,21,881
-YoY % 22.0% 25.2% 24.2% 22.0% 24.2% 22.0% 25.4% 22.0%
-QoQ % 5.3% 7.0% 4.6% N.A N.A 6.3% N.A N.A
Gross NPLs to Loans (%) 2.51% 3.11% 3.14% 2.51% 3.14% N.A 3.00% N.A
Net NPLs to Loans (%) 1.36% 1.78% 1.72% 1.36% 1.72% N.A 1.69% N.A
BVPS (in Rs) 60.9 63.4 65.2 61.6 65.1 66.2 61.7 66.2
EPS (in Rs) 1.3 1.4 1.7 3.8 4.4 1.7 4.4 6.1

 Performance review- Strong performance

 Net Interest Income & NIMs- NII increased by 13.4% YoY and 5.4% QoQ. This was mainly led by loan book
growth of 24.2%. NIMs dropped on YoY basis by 9 bps to stand at 3.02% due to increase in cost of funds.
However, on sequential basis, NIMs improved by 4 bps.
 Total Income- Total income increased by a healthy 20.7% YoY and 5.7% QoQ to Rs. 14.2 bn. This was
supported by strong growth of 51.1% YoY in other income. Higher fee income (34% YoY growth) and forex
gains (90% YoY growth) led to the higher growth in other income.
 Advances- Net loan book grew by 24.2% YoY to Rs. 1,055 mn. Gross loan book at the end of the quarter stood
at Rs. 1,085 mn. Growth in loan book was seen across the segments. Corporate loan book grew by 27.6%, agri
loans by 21% and retail grew by 22.4%. Company has been consciously slowing its SME book, which grew by
only 9% (SME book now forms 19% of the book as against 21%, a year ago). While the focus remains on
growing the retail loan book, FBL has been growing its corporate book opportunistically, when the risk reward

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 ratio is favorable. Also, within corporate book, the bank has been careful about not deteriorating the quality of
the book while chasing growth. Lending to corporates with credit rating of A & above, stands at 72%.
 Cost/Income- C/I in the quarter stood at 50.3%. It has declined on YoY basis, but has increased on sequential
basis due to higher employee expenses. However, C/I is in line with management guidance of ~50% in FY19.
Since the bank has not added a single branch over the past 3 years, there is scope for improvement in C/I of
around 1-1.5% going forward, due to the benefits of operating leverage.
 Credit cost- Credit cost has remained flat on YoY level and has declined on sequential basis to 53 bps from 84
bps. Asset quality deteriorated in the quarter as GNPA increased by 3 bps to 3.14%. Slippages stood at Rs. 4.2
bn of which, Rs. 1 bn was related to NPAs from Kerala flood. Excluding the one-time impact of Kerala flood
related slippages, net slippages stand at around Rs. 3 bn, which is in line with the historical trend. Thus, the bank
has been able to control the incremental slippages from its book. NNPA declined from 1.8% to 1.7%.
 Net Profit- Net Profit increased by 28.3% YoY to Rs. 3.3 bn. This was led by strong growth in total income,
tight control on operating costs and provisioning.
 Outlook –Federal Bank has delivered strong set of results in the quarter. It has delivered on all three fronts:
Growth, asset quality and operating efficiency. It has been able to grow its business outside Kerala, thereby
reducing geographical risk. The impact of Kerala floods has been largely absorbed by the bank as it has
aggressively provided for the impacted loans. It has significantly improved its operating efficiency, with C/I
ratio declining from ~57% in FY16 to current ~50%. The bank has built itself ample levers for growth and it is
expected to reap the benefits of the strong foundation laid over the past few years. We believe the bank is
available at very attractively valuations. We therefore recommend a ‘STRONG BUY’ on the company from a
long term perspective.
 Key Moniterables:
 Control on stressed assets (Slippages plus restructured book) remains a key monitorable. Over the past 3 quarters,
asset quality of FBL has been impacted by one-time events like Kerala floods and stress on education loan book.
While the Bank has been adequately providing for these stressed assets, but any fresh build-up of stressed assets
can impact its asset quality and thereby credit cost.
 Continued geographical diversification, both on asset as well as liability side, to reduce dependence on Kerala.
 Traction in the retail loan book to grow it faster than the overall loan book.
 Reduction in C/I on the back of operating leverage.
 Continuity of Management, which is bringing about a structural change in the bank, is important.

BUY for 29-55% upside in 15-18 month

Valuation & Recommendation:
At the CMP of Rs. 84, FBL is trading at 1.3-xs Q3FY18 BV of Rs.63. Basis strong growth in book value going forward
and stable outlook on asset quality, we expect valuation for FBL to expand. Overall, we expect an upside of 29-55%
from current levels over the next 15 to18 month period by applying a multiple of 1.5 to 1.8-xs on FY20 BV of Rs. 72.

 Base Estimates
Particulars (Cons) 15-18 Month Valuation
FY18 FY19E FY20E
PAT (Rs. Mn.) 8,785 12,096 16,001
YoY (%) 5.7% 37.7% 32.3%
Share Count (Mn.) 1,983.9 1,983.9 1,983.9
EPS (Rs.) 4.43 6.10 8.07
Book Value (Rs.) 61.5 66.2 72.4
CMP (Rs.) 84 84 84
P/B (xs) @ CMP 1.4 1.3 1.2

 15-18 Month Target Price Range:

P/BV FY20BV Intrinsic Value Upside (%)
1.0 72.4 72 -14.0%
1.4 72.4 101 20.4%

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 P/BV FY20BV Intrinsic Value Upside (%)
1.5 72.4 109 29.0%
1.8 72.4 130 54.8%
2.3 72.4 167 97.8%
2.8 72.4 203 140.8%

 5-year Target Price Range:

Attach P/B Multiple (xs) Upside (xs)
FY18 BV (Rs.) BV CAGR FY23 BV(Rs.)
0.5 1.0 1.5 1.8 2.3 2.8 0.5 1.0 1.5 1.8 2.3 2.8
61.55 8% 90 45 90 136 163 208 253 0.54 1.07 1.61 1.93 2.47 3.01
61.55 10.0% 99 50 99 149 178 228 278 0.59 1.18 1.77 2.12 2.71 3.30
61.55 12.0% 108 54 108 163 195 249 304 0.64 1.29 1.93 2.32 2.96 3.61
61.55 14.0% 119 59 119 178 213 273 332 0.70 1.41 2.11 2.53 3.24 3.94
61.55 16.0% 129 65 129 194 233 297 362 0.77 1.54 2.30 2.76 3.53 4.30
61.55 18.0% 141 70 141 211 253 324 394 0.84 1.67 2.51 3.01 3.85 4.68
lower upper
5 yr avg 170 204
2.02 2.43

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