3QFY2016 Result Update | Banking

January 13, 2016

Federal Bank

NEUTRAL

CMP

`50

Performance Highlights

Target Price

Particulars (` cr)

3QFY16 2QFY16

% chg (qoq) 3QFY15

% chg (yoy)

Investment Period

NII

605

608

(0.5)

587

3.1

Pre-prov. profit

325

337

(3.3)

397

(18.1)

Stock Info

PAT

163

161

0.9

265

(38.5)

Sector

Banking

Source: Company, Angel Research

Market Cap (` cr)

8,587

Federal Bank reported a weak set of numbers for 3QFY2016. Its NII grew 3.1%

Beta

1.1

yoy while profit declined on a yoy basis on account of decrease in non-interest

52 Week High / Low

79.7/47.4

income as well as higher provisions.

Avg. Daily Volume

46,42,224

Slippages at peak; NIM falls qoq

Face Value (`)

BSE Sensex

24,854

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

Nifty

7,562

SME books, which grew by 19.4% and 17.1% yoy, respectively, while the growth

Reuters Code

FED.BO

in the retail loan book was lower at 6.9% yoy. CASA deposits, with a growth of

Bloomberg Code

FB:IN

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%.

Shareholding Pattern (%)

The Reported NIM fell by 7bp qoq to 3.04%, due to interest reversal on account

Promoters

0.0

of higher slippages and base rate cut by the bank. Other income (excluding

MF / Banks / Indian Fls

30.6

treasury) growth was moderate as the quarter saw some softness in forex income,

FII / NRIs / OCBs

37.5

while core fee income remained stable. Treasury gains during the quarter came

Indian Public / Others

32.0

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

Abs. (%)

1yr

3yr

compared to 3.2% in 2QFY2016 and 2.2% in 3QFY2015. During the quarter,

Sensex

(7.2)

(9.1)

24.9

the bank registered the highest ever slippages of `571cr. 3 of the bank’s

(22.2)

(32.5)

(3.8)

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.

3-year price chart

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.

Source: Company, Angel Research

Key financials

Y/E March (` cr)

FY2014

FY2015

FY2016E

FY2017E

NII

2,229

2,380

2,457

2,861

% chg

12.9

6.8

3.2

16.4

Net profit

839

1,006

675

948

% chg

0.1

19.9

(32.9)

40.4

Vaibhav Agrawal

NIM (%)

3.2

3.1

2.8

2.9

022 - 3935 7800 Ext: 6808

EPS (`)

4.9

5.9

3.9

5.5

[email protected]

P/E (x)

10.2

8.5

12.7

9.0

P/ABV (x)

0.6

1.0

0.9

Chintan Shah

RoA (%)

1.2

1.3

0.8

0.9

022 - 4000 3600 Ext: 6828

RoE (%)

12.6

13.7

8.4

10.8

[email protected]

Source: Company, Angel Research; Note: CMP as of January 13, 2016

Please refer to important disclosures at the end of this report

Federal Bank | 3QFY2016 Result Update

Exhibit 1: 3QFY2016 performance

Particulars (` cr)

3QFY16

2QFY16

% chg (qoq)

3QFY15

% chg (yoy)

FY2015

FY2014

% chg

Interest earned

1,903

1,902

0.0

1,870

1.7

7,419

6,946

6.8

- on Advances / Bills

1,386

1,400

(1.0)

1,399

(1.0)

5,447

5,011

8.7

- on investments

446

424

5.3

449

(0.7)

1,836

1,777

3.3

- on balance with RBI & others

(13.0)

(19.6)

19.1

- on others

(8.1)

3,650.7

106

(29.7)

Interest Expended

1,298

1,294

0.3

1,283

1.1

5,039

4,717

6.8

Net Interest Income

605

608

(0.5)

587

3.1

2,380

2,229

6.8

Other income

183

182

0.6

220

(16.6)

878

694

26.6

- Other income excl. treasury

160

156

2.6

142

12.5

623

540

15.3

- Treasury Income

(11.5)

(70.3)

256

154

66.1

Operating income

789

791

(0.3)

807

(2.3)

3,259

2,922

11.5

Operating expenses

463

454

2.0

410

13.0

1,631

1,392

17.2

- Employee expenses

259

249

3.9

235

10.0

892

722

23.6

- Other Opex

204

205

(0.3)

175

17.1

739

671

10.2

Pre-provision Profit

325

337

(3.3)

397

(18.1)

1,628

1,530

6.4

Provisions & Contingencies

(13.9)

(1)

(9,259.8)

107

318

(66.5)

- Provisions for NPAs

127

(100.0)

204

228

(10.8)

- Provisions for Investments

(26)

(100.0)

(59)

(100.0)

(80)

112

(171.4)

- Other Provisions

(14)

(647.4)

3,345.4

(41)

(35)

16.1

PBT

250

249

0.4

398

(37.1)

1,521

1,212

25.5

Provision for Tax

(0.4)

133

(34.3)

515

373

38.1

PAT

163

161

0.9

265

(38.5)

1,006

839

19.9

Effective Tax Rate (%)

35.0

35.3

(30)bp

33.5

148bp

33.9

30.8

309bp

Source: Company, Angel Research

January 13, 2016

Federal Bank | 3QFY2016 Result Update

Exhibit 2: 3QFY2016 performance

Particulars

3QFY16

2QFY16

% chg (qoq) 3QFY15

% chg (yoy)

Balance sheet

Advances (`cr)

52,753

50,867

3.7

48,026

9.8

Deposits (` cr)

74,792

73,783

1.4

65,550

14.1

Credit-to-Deposit Ratio (%)

70.5

68.9

159bp

73.3

(273)bp

Current deposits (` cr)

3,877

4,178

(7.2)

3,194

21.4

Saving deposits (` cr)

20,128

19,335

4.1

16,791

19.9

CASA deposits (` cr)

24,005

23,513

2.1

19,985

20.1

CASA ratio (%)

32.1

31.9

23bp

30.49

161bp

CAR (%)

14.3

14.7

(39)bp

14.5

(19)bp

Profitability Ratios (%)

Reported NIM

3.0

3.1

(7)bp

3.2

(16)bp

Cost-to-income ratio

58.7

57.4

129bp

50.8

796bp

Asset quality

Gross NPAs (` cr)

1,684

1,499

12.3

1,067

57.9

Gross NPAs (%)

3.15

2.9

25bp

2.2

96bp

Net NPAs (` cr)

876

675

29.8

333

163.1

Net NPAs (%)

1.7

1.3

33bp

0.7

97bp

Provision Coverage Ratio (%)

71.7

76.6

(493)bp

85.0

(1331)bp

Slippage ratio (%)

4.5

3.2

129bp

2.2

230bp

Source: Company, Angel Research, Note: *Basel III

Balance sheet growth moderate; NIM falls

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.

Deposits profile continues to be better with CASA inching higher to 32% of

deposits, while credit growth has been mainly from credit substitutes in the

corporate book. 82% of the incremental corporate advances were to the highly

rated corporates with a rating of A and above.

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%.

January 13, 2016

Federal Bank | 3QFY2016 Result Update

Exhibit 3: Business growth moderate in 3QFY2016

Exhibit 4: CASA ratio improves

Adv. yoy chg (% )

Dep. yoy chg (%)

CDR (%, RHS)

(%)

20.0

78.0

34.0

31.9

32.1

76.0

31.3

32.0

30.5

30.4

15.0

73.3

70.5

72.4

74.0

30.0

72.0

28.0

10.0

68.7

68.9

70.0

26.0

68.0

24.0

5.0

66.0

22.0

64.0

20.0

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

Source: Company, Angel Research

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.

Cost of deposits fell to 6.90% as against 6.98% in 2QFY2016 and is expected to

trend lower going ahead. The Management expects NIM to be in the range of

3.10-3.15% in FY2017.

Exhibit 5: NIM fell by 7bp qoq; 16bp yoy

(%)

3.4

3.31

3.2

3.12

3.11

3.04

2.8

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

Source: Company, Angel Research

Moderate performance in Non-interest income (excluding

treasury)

During the quarter, 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. The overall other income for the bank de-grew by 16.6% yoy.

January 13, 2016

Federal Bank | 3QFY2016 Result Update

Asset quality woes worsen, Slippages at the peak

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.

The bank has not undertaken any refinancing in 5/25 scheme nor participated in

SDR during this quarter.

Exhibit 6: Trends in Gross and Net NPA levels

Exhibit 7: Slippages at 4.5% during 3QFY2016

Gross NPAs (` cr)

Net NPAs (` cr)

PCR (%, RHS)

(%)

5.00

1,800

95.0

4.45

4.50

90.0

1,500

85.0

4.00

83.9

85.0

3.50

3.16

1,200

80.5

3.00

76.6

80.0

2.47

2.50

2.15

900

71.7

75.0

2.00

1.66

600

1.50

70.0

1.00

300

65.0

0.50

60.0

0.00

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

Source: Company, Angel Research

Exhibit 8: Opex trends

Exhibit 9: Opex-to-avg. assets trend

Staff exps (` cr)

Other opex (` cr)

CIR (%, RHS)

(%)

500

58.7

60.0

2.30

2.27

57.4

450

58.0

400

56.0

350

2.20

54.0

2.13

300

2.12

54.0

250

52.0

2.08

50.8

2.10

2.07

200

50.0

150

49.5

48.0

2.00

100

46.0

44.0

1.90

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

Source: Company, Angel Research

January 13, 2016

Federal Bank | 3QFY2016 Result Update

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.

Exhibit 10: Recommendation summary

CMP

Tgt. Price

Upside

FY2017E

FY15-17E

FY2017E

Company

Reco.

(`)

(%)

P/ABV (x)

Tgt. P/ABV (x)

P/E (x)

EPS CAGR (%)

RoA (%)

RoE (%)

HDFCBk

Buy

1,059

1,262

19.2

3.2

3.8

17.4

22.4

1.9

19.7

ICICIBk*

Buy

239

304

27.3

1.6

1.7

9.8

13.5

1.6

14.7

YesBk

Buy

683

825

20.8

1.8

2.2

9.8

20.5

1.6

19.6

AxisBk

Buy

406

531

30.6

1.6

2.2

9.3

18.4

1.8

18.9

SBI*

Buy

201

237

17.7

1.0

8.2

17.8

0.7

12.8

FedBk

Neutral

0.9

1.0

9.0

(2.9)

0.9

10.8

SIB

Neutral

0.7

5.8

21.6

0.7

11.6

BOB

Neutral

132

0.7

6.2

17.5

0.6

10.6

PNB

Neutral

0.5

3.6

28.5

0.7

12.0

BOI

Neutral

100

0.3

0.8

3.0

14.0

0.3

7.6

IndBk

Neutral

0.3

3.3

19.4

0.6

8.6

Vijaya Bank

Neutral

0.4

4.8

14.1

0.4

8.8

OBC

Neutral

116

0.2

0.3

2.6

65.5

0.5

9.4

Allahabad BankNeutral

0.3

2.2

56.2

0.6

11.9

UnionBk

Neutral

128

0.4

3.3

18.1

0.6

11.4

CanBk

Neutral

199

0.3

2.8

12.0

0.6

11.2

AllBk

Neutral

0.3

0.4

2.2

56.2

0.6

11.9

IDBI#

Neutral

0.5

4.9

61.6

0.6

9.3

Source: Company, Angel Research; Note: *Target multiples=SOTP target price/ABV (including subsidiaries); ^# Without adjusting for SASF

January 13, 2016

Federal Bank | 3QFY2016 Result Update

Income statement

Y/E March (` cr)

FY11

FY12

FY13

FY14

FY15 FY16E FY17E

NII

1,747

1,953

1,975

2,229

2,380

2,457

2,861

- YoY growth (%)

23.8

11.8

1.1

12.9

6.8

3.2

16.4

Other income

517

532

664

694

878

821

927

- YoY growth (%)

(2.7)

3.0

24.8

4.4

26.6

(6.5)

12.8

Operating income

2,263

2,486

2,639

2,922

3,259

3,279

3,787

- YoY growth (%)

16.6

9.8

6.2

10.7

11.5

0.6

15.5

Operating expenses

836

979

1,180

1,442

1,631

1,861

2,073

- YoY growth (%)

23.5

17.1

20.5

22.3

13.1

14.1

11.4

Pre-prov. profit

1,427

1,506

1,460

1,480

1,628

1,418

1,714

- YoY growth (%)

12.8

5.6

(3.1)

1.4

9.9

(12.9)

20.9

Prov. & cont.

525

337

266

268

106.7

385

265

- YoY growth (%)

29.6

(35.9)

(21.1)

1.0

(60.2)

261.0

(31.3)

PBT

902

1,170

1,194

1,212

1,521

1,032

1,449

- YoY growth (%)

4.9

29.7

2.1

1.5

25.5

(32.1)

40.4

Prov. for taxation

315

393

356

373

515

357

502

- as a % of PBT

34.9

33.6

29.8

30.8

33.9

34.6

PAT

587

777

838

839

1,006

675

948

- YoY growth (%)

26.4

32.3

7.9

0.1

19.9

(32.9)

40.4

January 13, 2016

Federal Bank | 3QFY2016 Result Update

Balance sheet

Y/E March (` cr)

FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

Share Capital

171

343

Reserves & Surplus

4,938

5,535

6,194

6,780

7,566

8,082

8,811

Deposits

43,015

48,937

57,615

59,731

70,825

80,741

93,659

- Growth (%)

19.3

13.8

17.7

3.7

18.6

14.0

16.0

Borrowings

1,582

3,935

4,957

5,458

2,084

4,071

4,402

Tier 2 Capital

306

230

224

219

213

Other Liab. & Prov.

1,445

1,742

1,883

2,224

1,980

2,323

2,630

Total Liabilities

51,456

60,627

71,050

74,594

82,851

95,778

1,10,058

Cash Balances

2,935

2,424

2,743

3,104

3,380

4,037

4,683

Bank Balances

813

1,108

977

1,425

1,401

1,619

1,860

Investments

14,538

17,402

21,155

24,118

24,409

29,951

33,765

Advances

31,953

37,756

44,097

43,436

51,285

57,439

66,629

- Growth (%)

18.6

18.2

16.8

-1.5

18.1

12.0

16.0

Fixed Assets

290

326

397

425

467

523

583

Other Assets

927

1,610

1,681

2,086

1,910

2,208

2,537

Total Assets

51,456

60,627

71,050

74,594

82,851

95,778

1,10,058

- Growth (%)

17.8

17.2

5.0

11.1

15.6

14.9

January 13, 2016

Federal Bank | 3QFY2016 Result Update

Ratio analysis

Y/E March

FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

Profitability ratios (%)

NIMs

3.8

3.6

3.1

3.2

3.1

2.8

2.9

Cost to Income Ratio

36.9

39.4

44.7

49.3

50.1

56.8

54.7

RoA

1.2

1.4

1.3

1.2

1.3

0.8

0.9

RoE

12.0

14.4

13.9

12.6

13.7

8.4

10.8

B/S ratios (%)

CASA Ratio

26.9

27.5

27.2

31.2

29.4

29.3

29.2

Credit/Deposit Ratio

74.3

77.2

76.5

72.7

72.4

71.1

CAR

16.8

16.6

14.7

15.3

15.6

14.8

14.1

- Tier I

15.6

15.9

14.1

14.6

14.8

14.1

13.5

Asset Quality (%)

Gross NPAs

3.5

3.3

3.4

2.5

2.0

2.2

2.0

Net NPAs

0.6

0.5

1.0

0.7

0.6

Slippages

3.2

2.1

1.2

1.7

2.1

1.5

Loan Loss Prov./Avg. Assets

1.0

0.4

0.3

0.4

0.2

Provision Coverage

83.4

84.7

72.2

70.4

64.8

67.8

68.5

Per Share Data (`)

EPS

3.4

4.5

4.9

5.9

3.9

5.5

ABVPS

59.7

66.7

73.8

80.6

89.0

48.6

52.9

DPS

8.5

9.0

10.0

11.0

4.0

5.5

Valuation Ratios

PER (x)

14.6

11.0

10.2

8.5

12.7

9.0

P/ABVPS (x)

0.8

0.7

0.6

1.0

0.9

Dividend Yield

17.0

18.0

20.0

22.0

8.0

11.0

DuPont Analysis (%)

NII

3.7

3.5

3.0

3.1

3.0

2.8

(-) Prov. Exp.

1.1

0.6

0.4

0.1

0.4

0.3

Adj. NII

2.6

2.9

2.6

2.7

2.9

2.3

2.5

Treasury

0.1

0.3

0.2

0.3

0.2

Int. Sens. Inc.

2.7

3.0

2.9

3.2

2.5

2.7

Other Inc.

1.0

0.8

0.7

0.8

0.7

Op. Inc.

3.7

3.8

3.6

4.0

3.2

3.4

Opex

1.8

1.7

1.8

2.0

2.1

2.0

PBT

1.9

2.1

1.8

1.7

1.9

1.2

1.4

Taxes

0.7

0.5

0.7

0.4

0.5

RoA

1.2

1.4

1.3

1.2

1.3

0.8

0.9

Leverage (x)

9.7

10.4

10.9

10.7

11.1

11.7

RoE

12.0

14.4

13.9

12.6

13.7

8.4

10.8

January 13, 2016

Federal Bank | 3QFY2016 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,

Bombay Stock Exchange Limited and Metropolitan Stock Exchange of India Limited. It is also registered as a Depository Participant with

CDSL and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is

a registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number

INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing

/dealing in securities Market. Angel or its associates including its relatives/analyst do not hold any financial interest/beneficial

ownership of more than 1% in the company covered by Analyst. Angel or its associates/analyst has not received any compensation /

managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. Angel/analyst

has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity

of the company covered by Analyst.

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment

decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should

make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the

companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine

the merits and risks of such an investment.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's

fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable

sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this

document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way

responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.

Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot

testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.

While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be

regulatory, compliance, or other reasons that prevent us from doing so.

This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,

redistributed or passed on, directly or indirectly.

Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from

or in connection with the use of this information.

Note: Please refer to the important ‘Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the

latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may

have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement

Federal Bank

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

January 13, 2016