Federal Bank: Only investors with risk appetite should consider the stock

June quarter results beat expectations, but nearly 12% of its loan book is not in receipt of even one installment

Federal Bank’s results in the quarter ended June 30 of financial year 2020-21 (Q1FY21) have many positives for investors, including good traction in deposits, lower moratorium book, and reduction in stressed assets.
 

Thus, the stock, which initially reacted negatively on Wednesday, gained 4.4 per cent on Thursday, outperforming the 1.2 per cent rise in the Nifty Bank index. However, a closer look at the bank’s moratorium book indicates potential risk to asset quality, which could put pressure on its financials and the stock.

Though the share of loans under moratorium in the overall loan book has reduced to 24 per cent as on July 12, from 35 per cent in May, customers accounting for around half the moratorium book (11-12 per cent of total loan book) haven’t paid a single instalment, which the bank’s management is also worried about.

Bunty Chawla, analyst at IDBI Capital, says, “We like Federal Bank’s strong deposit traction and no major stress from chunky accounts, which should fare better. However, given the current situation and 11-12 per cent of bank’s book has not paid any instalment, there is a risk of higher credit cost going forward.” Chawla currently has ‘buy’ rating on the lender, mainly because of attractive valuations of 0.7 times FY21 estimated book value.

While the bank has made additional provisioning for Covid-19 in Q1 and its provision coverage ratio has improved to 58.5 per cent, from 53.4 per cent in the March quarter, analysts at JM Financial believe Covid-19 related provisions (Rs 186 crore or 15 basis points of loan book) is still lower than comfort levels.

JM Financial has a ‘sell’ rating on the stock and expects Federal Bank’s slippages ratio (accounts turning bad as a percentage of advances) to deteriorate to 3 per cent in FY21 from 1.8 per cent in FY20.

In Q1, apart from making provisions for two large corporate accounts, Covid-19 provisioning of Rs 93 crore led to over two-fold jump in provisioning and contingencies. However, treasury gains of around Rs 300 crore, lower operating cost, and 19 per cent year-on-year (YoY) growth in low-cost current and savings account deposits helped the bank post better-than-expected profits in the quarter.

Though the bank’s profit before tax fell by about 9 per cent YoY to Rs 537.8 crore, it was 36 per cent higher than consensus estimate of Rs 396 crore. Advances at Rs 1,23,437 crore were up 8.5 per cent YoY.

Overall, only those investors with an appetite for risk should consider the stock as valuations are attractive at 0.7 times book value (on the basis of trailing 12 months), say analysts.