Federal Bank Q2 results: Poised for a likely re-rating

Despite a muted business growth, Kerala based Federal Bank posted a 12.5% increase in net profits in the quarter ended September on the back of treasury profits and improved asset quality. SME and retail loans which constitute the bulk of the advances should drive the growth in the future aided by branch expansion and increased penetration.

The advances grew at a slow rate of 8% year-on-year due to de-growth of about 3% in the corporate loan book. However, retail and SME grew by a healthy 18% and 15% respectively. Gold loans and home loans - key growth areas also grew substantially. Deposits were muted growing at only 4.8% due to slowdown in high cost wholesale deposits which now comprises only 11% of total deposits.

The net interest margin- difference between cost of funds and yield on advances improved by 16 basis points quarter-on-quarter on the back of a stable CASA ratio of over 28% and increase in cost of funds. The non-interest income of the bank increased 19% year-on-year, due to 155% increase in treasury profits.

The asset quality of the bank was robust. The slippage rate for the bank halved from the last quarter to 1.6%. This was due to zero slippages in the corporate sector. Additionally, the bank has a very high provision coverage ratio for bad loans compared to its peers. This should help it to maintain its asset quality in the quarters going ahead.

The bank is currently trading at a 1-year forward price-to-book value of 1.8. Given the asset quality and the growth prospects of the bank post consolidation, the stock is geared for a likely re-rating.