Federal Bank – Quarterly Results Update

Federal Bank was established in 1931 as the Travancore Federal Bank Limited in Kerala, India. It was later renamed Federal Bank Limited in 1947. Over the years, the bank has grown and expanded its operations to become one of the leading private-sector banks in India.

 Result Highlights

Net Interest Income stood at Rs. 1,919 crores in Q1FY24, showing a nominal growth of 0.5% QoQ / up 19.5% YoY. Pre-provision operating profit (PPOP) stood at Rs. 1,302 crores in Q1FY24, showing a decline of 2.5% QoQ / up 33.9% YoY. Provisions rose to Rs. 165 crores in Q1FY24 from Rs. 125 crores in Q4FY23 and Rs. 175 crores in Q1FY23. The bank’s quarterly net profit of Rs. 854 crores in Q1FY24 was down by 5.5% QoQ / up 42.1% YoY, surpassing market expectations of Rs. 839 crores. The cost-to-income ratio stood at 50.87% in Q1FY24 from 49.51% in Q4FY23 and 52.68% in Q1FY23 because of ECL provisioning and increased technology spending.

NIM stood at 3.15% in Q1FY24, down 16bps QoQ / down 7bps YoY, mainly because of the rise in the cost of funds. Gross NPA stood at 2.38% in Q1FY24, up two bps QoQ up 31 bps YoY. Net NPA stood at 0.69% in Q1FY24, remaining constant sequentially while down 25bps YoY. Credit Cost for Q1FY24 stood at 0.40%, up 21bps QoQ on account of additional provisioning. The Capital Adequacy Ratio decreased and stood at 14.28% in Q1FY24 compared to 14.81% in Q4FY23 and 14.57% in Q1FY23.

Gross Deposits showed a decent growth at Rs. 2,22,513 crores in Q1FY24, up 4.3% QoQ and up 21.4% YoY. Gross Advances stood at Rs. 1,86,593 crores in Q1FY24, up 5.2%

QoQ / up 20.9% YoY. CASA declined at 31.85% in Q1FY24 from 32.68% in Q4FY23 and 36.84% in Q1FY23.

 Concall Highlights

• For the first time, the bank witnessed a slow quarter in its history.
• On the economic front, the management indicated that credit growth opportunities, particularly for a bank like Federal Bank, remain intact and grow quite well. The company sees credit demand sustaining in Q2FY24, with many credit opportunities to grow.
• Non-Resident remittances and deposits, which remained neutral in FY23, have shown signs of an uptick and are regaining market share and momentum.
• The bank remains intact with its earlier guidance that the credit growth will be 18-20%.
• The NIMs were below expectations in Q1FY24. However, the bank’s management expects it to pick up in Q2FY24. The bank’s management is confident there will be margin expansion as the advance yield has increased to 9.2%. In comparison, the cost of deposits stands at 5.34% and is moderating, thereby benefiting spreads.
• The bank is strongly focusing on growing retail books as they have high yields, improving the bank’s profitability.
• Though there were higher slippages on account of the retail book in Q1FY24, this was due to the past moratorium of March 31, 2021, within the credit cost of 40bps.
• For the first time, the bank is a net seller in PSL and had a gain of Rs.52 crores in Q1FY24.
• In Q2FY24, the bank’s overall cost of funds will increase from 5.30% to 5.40%. But the yield on advances expansion will be higher, which will help the bank in margin expansion.
• The bank has a stable granular liability franchise. The bank is engaged in partnerships with Epifi and Jupiter, which is helping the bank in increasing its deposits. These partnerships have progressed well and will further contribute to the incremental deposit acquisition.

 Valuation and Outlook

Federal Bank reported decent numbers in Q1FY24 and surpassed street expectations on the net profit front. As we had mentioned in our preview, the bank faced the brunt of NIM compression. However, the bank’s management continues to guide that NIM will be in the range of 3.3-3.35%. The bank’s asset quality was primarily stable, as seen in its NPAs. In MSME disbursements, the bank is sector agnostic and is spread across geographies. Some places where they are comfortable are FMCG suppliers, vendors and suppliers, dealers to some of the large OEMs and sectors like chemicals and white goods. However, these sectors may face slippages and affect the asset quality. The bank’s focus on increasing its retail book, backed by business growth through branch expansion, will help it show decent performance in the forthcoming quarters. Thus, with a proper balance sheet and an increase in non-interest income, the bank should be able to increase its overall profitability and be less affected by NIM compression. Thus, our outlook remains positive, provided the bank adopts to right product mix and focuses on asset quality.

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