>FEDERAL BANK

Recommendation: Buy
Price target: Rs522
Current market price: Rs405

Q1 results in line with expectation at NII level

Result highlights

• Federal Bank's Q1FY2013 results were in line with our expectation at the net interest income (NII) level (NII up 6.9% year on year [YoY]). But the performance was slightly short of expectation at the net profit level (net profit up 30% YoY to Rs190 crore). This was due to a slower growth in the non-interest income and an increase in the provision expenses.
• The net interest margin (NIM) declined by 14 basis points quarter on quarter (QoQ) to 3.42% in Q1FY2013 due to a marked-to-market (MTM) impact on the foreign exchange (forex) borrowings, the reversal of the income on the slippages and a drop in investment yields. The bank continued to focus on the better rated corporate advances.
• The advances grew at a healthy rate (up 22.5% YoY and 3.8% QoQ) driven by the corporate advances (up 23.9% YoY). The deposits also grew by 17.8% YoY while the current account and savings account (CASA) ratio expanded to 28.7% from 27.5% in Q4FY2012.
• The asset quality deteriorated mainly due the slippages of a large account (about Rs100 crore) while the slippages in the retail and small and medium enterprises (SME) sectors were lower. The bank restructured Rs207 crore of advances during the quarter, taking the total restructured book to 6.4% of the total advances.
• The non-interest income reported a muted growth of 6.4% YoY due to lower treasury and recovery incomes. However, the fee income growth was steady-the fee income grew by 9.5% YoY. The cost/income ratio increased to 43.7% from 38.6% in Q1FY2012.

Valuation and outlookBarring a few one-offs (slippages and NIMs) Federal Bank's Q1FY2013 results were stable. The management's focus on risk adjusted returns by shifting to better rated loans and shedding the bulk deposits has had a positive impact on the bank's performance. With traction in the CASA deposits and the non-resident Indian (NRI) deposits the liability base has been strengthened which could keep the margins stable. Further, the moderation in the slippages (mainly in the retail and SME sectors) and a higher provision coverage offer comfort with regard the asset quality. We expect the bank's earnings to grow at a compounded annual growth rate (CAGR) of 16% (FY2012-14). We maintain our Buy rating with a price target of Rs522.

 RISH TRADER