Buy

Result Update Federal Bank Target Price

26th July 2021 Banking 100

Managing Macro Challenges Well; Maintain BUY (CMP as of July 23, 2021)

Q1FY22 operating performance (up 22%/28% YoY/QoQ) of Federal bank was led by cost CMP (Rs) 85
savings and a jump in non-interest income. Loan Book was up 7% YoY and Deposits up 9% Upside /Downside (%) 18%
YoY. However, earnings came down 8% YoY and 23% QoQ as provisions remained High/Low (Rs) 92/45
elevated. Asset quality was marginally higher with G/NNPAs at 3.5%/1.23%, largely through Market cap (Cr) 17,040
the restructured book. PCR was maintained at 66%. Slippages stood at 1.9% while the Avg. daily vol. (6m) Shrs. 65,62,500
restructured loans were at 2% of loans. No. of shares (Cr) 199.6
Most of the retail slippages came from home loans (~60%) and LAP. The management Shareholding (%)
indicated another Rs 4 Bn of loans may get restructured during Q2FY22 though most of the
Jun-21 Mar-21 Dec-20
restructured portfolio is secured. On its credit card business, the management expects that
Promoter 0.0 0.0 0.0
~10% of the bank’s existing ~8 Mn debit card customer base is eligible for pre-approved credit
FIIs 24.1 24.5 21.7
card products.
MFs / UTI 33.0 30.2 29.9
The bank has managed Covid-19 related stress quite well, similar to frontline banks. It is on Banks / FIs 10.9 11.8 14.1
track to improve its ROE profile through higher-yielding retail/CV/credit cards in its portfolio Others 32.1 33.5 34.4
mix. We maintain a BUY with a target price of Rs 100 (1.1x FY23EABV), implying an
upside of 18% from CMP. Financial & Valuations
Y/E Mar (Rs Mn) 2021 2022E 2023E
Result Highlights: NII 55,337 60,871 68,784

 NII up 9.4% YoY and flattish QoQ at Rs 14,184 Mn largely led by loan growth of 7% YoY PPOP 37,869 39,778 45,200
Net Profit 15,903 17,662 22,745
(1.6% down QoQ). Retail/Agri/Commercial book grew 15%/24%/10% YoY. NIMs stood at
EPS (Rs.) 7.97 8.86 11.42
~3.15% vs. 3.23% QoQ ABV 73.8 82.0 92.6
 Non-interest income was up 33%/40% YoY/QoQ to Rs 6,502 Mn. The sequential jump was P/ABV 1.2 1.0 0.9
led by treasury income, up from Rs 590 Mn to Rs 2,580 Mn. Fee income was up 45% YoY ROAA 0.6 0.8 1.0
NNPA (%) 1.2 1.1 1.0
and down 33.7% QoQ to Rs 2,140 Mn. This led to C-I ratio improvement to 45% from 53%
QoQ. Change in Estimates (%)

 FY22E FY23E
Y/E Mar
PPOP was up 21.8% YoY and 28.3% QoQ to Rs 1,135 Cr.

NII 0.0 0.0
Asset quality was in control with G/NNPAs at 3.5%/1.23% vs 3.4%/1.19% QoQ. Slippages
PPOP 0.0 0.0
stood at 6,400 Mn vs 5,980 Mn QoQ. Restructured book up by Rs 9,930 Mn to Rs 29,150 PAT 0.0 0.0
Mn. Covid Specific Restructuring is 1.82% of Loans. PCR was maintained at ~65%. Axis vs Consensus
 Provisions were up 62%/165% YoY/QoQ to Rs 6,420 Mn. EPS
2022E 2023E

Estimates
PAT was down 8%/23% YoY/QoQ to Rs 3,673 Mn.
Axis 8.9 11.4
Consensus 9.9 12.2
Key Concall Takeaways
Mean Consensus TP (12M) 103.0
Asset quality
ESG disclosure Score**
 G/NNPA were marginally higher at 3.5%/1.23% vs. 3.4%/1.19% QoQ, impacted due to Environmental Disclosure Score 4.5
mobility restrictions. PCR was maintained at 65.9%. Social Disclosure Score 40.0
 Collections bounced back in the month of Jun’21 after dropping to ~91% in Apr’21. Overall Governance Disclosure Score 48.2

collection efficiency for Q1FY22 stood at 95%, similar to Q3FY21 and Q4FY21. Total ESG Disclosure Score 24.6

 Slippage stood at ~1.9% for Q1FY22 compared to 1.5% for FY21. The management
guided that slippages in FY22 would be within 10% of the historical number of ~Rs 18 Bn
Source: Bloomberg, Scale: 0.1-100
**Note: This score measures the amount of ESG data a company reports publicly
and does not measure the company's performance on any data point. All scores
are based on 2020 disclosures

per year. Most of the retail slippages came from home loans (~60%) and LAP. Relative performance
200
Financials (Standalone)
150
(Rs Mn) FY20 FY21 FY22E FY23E
100
NII 46,489 55,337 60,871 68,784
PPOP 32,047 37,869 39,778 45,200 50
Net Profit 15,427 15,903 17,662 22,745 0
EPS (Rs.) 7.8 8.0 8.9 11.4 Jul-20 Nov-20 Mar-21 Jul-21
ABV 64.9 73.8 82.0 92.6 Federal Bank Sensex
P/ABV 1.3 1.2 1.0 0.9
Source: Capitaline, Axis Securities
ROAA 0.9 0.6 0.8 1.0
NNPA (%) 1.3 1.2 1.1 1.0
Siji Philip
Source: Company, Axis Research
Sr. Research Analyst
Call: (022) 4267 1738
email: siji.philip@axissecurities.in
1
Key Concall Takeaways (Contd…)

 In addition, the bank holds standard restructured advances of ~Rs 25.7 Bn (~1.9% of loans). Covid-related restructuring
amounts to ~1.8% of total advances. Rs 8.5 Bn was restructured during Q1FY22. The management indicated that another Rs
4 Bn of loans could get restructured during Q2FY22.
 Most of the restructured portfolio is secured. About 50% of the restructured portfolio of the bank is in Kerala.
 The overall SMA book for the bank was almost flat sequentially at ~4.6% with further improvement seen in Jul’21.
 The management had earlier indicated that it would continue to maintain a coverage ratio of ~65% on NPAs going forward,
sufficient given its historical LGDs and low unsecured portfolio prop.

Loan Book

 Loan growth of 8% YoY was driven by Retail/Agri, up 15%/24% YoY. The corporate loan book was down 4% YoY.
Sequentially, most segments excluding Agri (up 5% QoQ) saw a decline in the loan growth.
 Gold loan growth remained strong at 54% YoY (flattish QoQ) to Rs 158 Bn. The management indicated that the growth has
resumed in Q2FY22 and is expected to grow by ~30% YoY in FY22E.
 FB’s personal loan book comprises of existing bank customers and is largely originated digitally. In its credit card business, the
bank will first target pre-approved customers. The management believes that ~10% of the bank’s existing ~8 Mn debit card
customer base is eligible for this pre-approved credit card product. So far, ~20,000 credit cards have been onboarded.

Liability franchise

 Deposits grew ~9% YoY but declined by 1.9% QoQ. Retail deposits grew 11%/1% YoY/QoQ and form ~93% of overall
deposits. NR deposits forming ~39% of total deposits grew ~10%/3% YoY/QoQ. The remittance market share has improved
consistently and stood at ~18%.
 CASA ratio was up ~100 bps QoQ to ~35%, meeting the management’s target of 35%.
 FB has engaged in partnerships with neo-banks (Epifi and Jupiter), which is helping the banks to garner deposits. The bank is
currently able to add ~1,500 new accounts through these fintech partnerships, primarily focused on salaried millennials.
Furthermore, the bank continues to build on its strong market share in Kerala with probably the second highest market share,
even as growth outside the state is also quite strong.

Operational metrics

 Reported NIM was down marginally by ~10 bps QoQ to ~3.2%. The decline in margins was driven by a ~10 bps impact from
interest reversal of ~Rs650 mn during the quarter on account of slippages. ~32%of the bank’s loan portfolio is linked to EBLR,
28% is linked to MCLR and ~32% is fixed rate book.
 The Cost of Funds has benefitted from deposit re-pricing over the past few quarters. The management indicated that the cost
of funds is likely to have bottomed out now and is unlikely to decline further.
 Opex was up 9.5% YoY driven by a 6.5% YoY increase in staff expenses. C-I ratio improved to 45.1% from 53.1%/47.8%
QoQ/YoY on lower disbursement-related expenses and higher non-interest income due to recoveries and treasury income.
The management expects the C-I ratio to be in the range of 45-50% and normalize to 48% in the near-term
 Non-interest income was up ~33% YoY driven by higher recoveries from write-offs (aviation account).
 The banks maintain a comfortable capital position with a Tier-1 ratio at 13.9% and CAR at 14.6%.

Change in Estimates (Rs Cr)

Revised Old %Change
FY22E FY23E FY22E FY23E FY22E FY23E
NII 60,871 68,784 60,871 68,784 0.0 0.0
PPOP 39,778 45,200 39,778 45,200 0.0 0.0
PAT 17,662 22,745 17,662 22,745 0.0 0.0
EPS 8.9 11.4 8.9 11.4 0.0 0.0

Source: Company, Axis Securities

2
Valuation & Outlook

FB has been taking a cautious approach in building the loan mix toward high-rated corporates and retail loans. The bank’s liability
franchise remains strong with CASA plus Retail TD of ~90% and one of the highest LCR amongst banks. FB has managed asset quality
well despite the pandemic. Key positives are a) Improved business mix, b) Adequate CAR, c) Liability franchise, and d) Incremental
lending to better-rated borrowers. New focus segments such as the MFI, CV portfolio, and Credit Cards will gradually aid in margin
improvement, though the management intends to take a calibrated approach in growing these segments. While restructuring was on the
higher side at ~2%, the nature of the book is secured and mostly from HL which is manageable. We maintain BUY with a TP of Rs 100
(1.1x FY23E ABV).

Result Update (Standalone) (Rs Mn)

Y/E March Q1FY22 Q1FY21 % YoY Q4FY21 % QoQ
Net Interest Income 14,184 12,964 9.4 14,204 -0.1
Non-Interest Income 6,502 4,884 33.1 4,654 39.7
Operating expenses 9,334 8,524 9.5 10,007 -6.7
Staff Cost 5,283 4,959 6.5 5,252 0.6
Pre provision profits 11,352 9,324 21.8 8,851 28.3
Provisions and contingencies 6,418 3,946 62.6 2,423 164.9
PBT 4,934 5,378 -8.3 6,428 -23.2
Provision for Tax 1,261 1,370 -8.0 1,650 -23.6
PAT 3,673 4,008 -8.4 4,778 -23.1

Deposits (Rs Bn) 1,675 1,549 8.1 1,726 -3.0

Advances (Rs Bn) 1,298 1,213 7.0 1,319 -1.6
CD ratio (%) 77.5 78.3 76.4

NIM (%) 3.2 3.1 3.2

Cost-Income ratio (%) 45.1 47.8 53.1

Gross NPAs (%) 3.5 3.0 3.4

Net NPAs (%) 1.2 1.2 1.2
Coverage ratio (%) 65.7 59.6 65.9
Source: Company, Axis Securities

3
Financials (Standalone)
Profit & Loss (Rs Mn)
Y/E March FY20 FY21 FY22E FY23E
Net Interest Income 46,489 55,337 60,871 68,784
Other Income 19,314 19,449 17,310 18,694
Total Income 65,803 74,786 78,181 87,478
Total Operating Exp 33,756 36,917 38,402 42,278
PPOP 32,047 37,869 39,778 45,200
Provisions & Contingencies 11,722 16,496 15,911 14,464
PBT 20,325 21,373 23,867 30,736
Provision for Tax 4,898 5,470 6,205 7,991
PAT 15,427 15,903 17,662 22,745
Source: Company, Axis Securities

Balance Sheet (Rs Mn)

Y/E March FY20 FY21 FY22E FY23E
SOURCES OF FUNDS
Share Capital 3,985 3,992 3,985 3,985
Reserves 1,45,176 1,57,244 1,73,405 1,94,450
Shareholder's Funds 1,49,161 1,61,236 1,77,390 1,98,435
Total Deposits 15,22,901 17,26,445 19,45,703 22,08,373
Borrowings 1,03,724 90,685 1,29,555 1,47,045
Other Liabilities & Provisions 34,579 35,308 38,850 38,850
Total Liabilities 18,10,365 20,13,674 22,91,498 25,92,703

APPLICATION OF FUNDS
Cash & Bank Balance 1,25,746 1,95,914 2,73,283 3,19,284
Investments 3,58,927 3,71,862 4,14,301 4,44,301
Advances 12,22,679 13,18,786 14,70,446 16,68,957
Fixed Assets & Other Assets 1,03,013 1,27,112 1,33,467 1,60,161
Total Assets 18,10,365 20,13,674 22,91,498 25,92,703
Source: Company, Axis Securities

4
Ratio Analysis (%)
Y/E March FY20 FY21 FY22E FY23E
VALUATION RATIOS
EPS 7.8 8.0 8.9 11.4
Earnings Growth (%) 23.8 2.1 11.3 28.8
DPS 1.0 0.7 1.0 1.0
BVPS 72.8 80.8 88.0 98.6
Adj. BVPS 64.9 73.8 82.0 92.6
ROAA (%) 0.9 0.6 0.8 1.0
ROAE (%) 10.8 7.8 9.6 12.1
P/E (x) 10.9 10.7 9.6 7.4
P/ABV (x) 1.3 1.2 1.0 0.9
Dividend Yield (%) 1.2 0.8 1.2 1.2

PROFITABILITY
NIM (%) 2.9 3.2 3.1 3.2
Cost-Income Ratio 51.3 49.4 49.1 48.3

BALANCE SHEET STRUCTURE RATIOS

Loan Growth (%) 10.9 7.9 11.5 13.5
Deposit Growth (%) 12.8 13.4 12.7 13.5
C/D Ratio (%) 80.3 76.4 75.6 75.6
CAR 14.3 14.2 14.1 14.1
CAR Tier I 13.3 13.2 13.2 13.3

ASSET QUALITY
Gross NPLs (%) 2.8 3.4 3.2 3.0
Net NPLs (%) 1.3 1.2 1.1 1.0
Coverage Ratio (%) 53.2 65.0 65.6 66.7

ROAA TREE
Net Interest Income 2.7 2.5 2.6 2.8
Non Interest Income 1.1 1.0 0.8 0.8
Operating Cost 2.0 1.9 1.8 1.8
Provisions 0.5 0.8 0.5 0.4
Tax 0.3 0.3 0.3 0.3
ROAA 1.1 0.5 0.8 1.1
Leverage (x) 12.2 12.5 12.8 12.9
ROAE 11.1 8.3 9.2 10.1
Source: Company, Axis Securities

5
 Federal Bank Price Chart and Recommendation History

(Rs)

Date Reco TP Research

01-Jan-21 BUY 81 Top Picks
21-Jan-21 BUY 93 Result Update
03-Feb-21 BUY 93 Top Picks
01-Mar-21 BUY 93 Top Picks
01-Apr-21 BUY 93 Top Picks
03-May-21 BUY 93 Top Picks
19-May-21 BUY 95 Result Update
01-Jun-21 BUY 100 Top Picks
14-Jun-21 BUY 100 Pick of the week
01-Jul-21 BUY 100 Top Picks
05-Jul-21 BUY 100 Company Update
26-Jul-21 BUY 100 Result Update

Source: Axis Securities

6
About the analyst

Analyst: Siji Philip

Contact Details: siji.philip@axissecurites.in

Sector: BFSI

Analyst Bio: Siji Philip is MBA (Finance) from NMIMS with over 15 years of research experience in the
Banking/NBFC sector and stock markets.

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as defined in the
Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of various financial products. ASL is a
subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company and one of India’s largest private sector bank and has its various subsidiaries
engaged in businesses of Asset management, NBFC, Merchant Banking, Trusteeship, Venture Capital, Stock Broking, the details in respect of which are
available on www.axisbank.com.
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4. I/We, Siji Philip, MBA - (Finance), author/s and the name/s subscribed to this report, hereby certify that all of the views expressed in this research report
accurately reflect my/our views about the subject issuer(s) or securities. I/We (Research Analyst) also certify that no part of my/our compensation was, is, or will
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7
 DEFINITION OF RATINGS

Ratings Expected absolute returns over 12-18 months

BUY More than 10%

HOLD Between 10% and -10%

SELL Less than -10%

NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

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