Growth not constrained by availability of either capital, geography or liquidity – Federal Bank

Update on the Indian Equity Market:
On Tuesday, Nifty50 ended 0.7% higher at 11,470 after the Supreme Court ordered telecom companies to pay their pending Adjusted Gross Revenue (AGR) dues to the Department of Telecommunications (DoT) over 10 years. Among the Nifty50 stocks, BHARTIARTL (+7.1%), JSWSTEEL (+6.5%), and HINDALCO (+5.3%) led the gainers. INFRATEL (-4.6%), ONGC (-2.9%), and AXISBANK (-2.0%) led the losers. METAL (+3.2%), PHARMA (+2.3%), and MEDIA (+1.4%) led the sectoral gainers. IT (-0.6%), PSU BANK (-0.2%), and PRIVATE BANK (-0.1%) were the only sectoral losers.

Excerpts of an interview with Mr. Shyam Srinivasan, MD & CEO, The Federal Bank with ET Now on 31st August 2020:
• Since the moratorium ended on August 31, 2020, no material changes are expected in September and the real picture would become clearer as they go into 3QFY21.
• The net moratorium at the end of 1QFY21 was 24%. Despite banks calculating moratorium in different ways, the Federal bank has been very strict with defining moratorium. If three or more payments were received, those borrowings were out of moratorium. All indications so far suggest the impact of the moratorium end would be as per planned and provided for by the bank.
• The gold loan performance is quite well. 1Q saw 9.5% growth in this segment and that growth is going to be very strong in the year. Gold being anti-cyclical and people resort to gold borrowing when there are any challenges in the economy.
• Businesses like auto loans in select geographies Karnataka, Kerala seem to have picked up in terms of monthly volumes while parts of Maharashtra are not doing as well.
• Typically, the NIMs (Net Interest Margin) are influenced by the margin of businesses, and reversals and low-cost funds. Strong growth in low-cost funds coupled with no material slippages helped, good growth in gold loan helped achieve good NIMs.
• The slippages in September are predictable. The NIMs for 2Q would be around the same levels as 1Q. 3Q and 4Q would depend on the slippages. The guidance for the full year remains at ~3.1%.
• They have an enabling provision for Rs 10bn of equity raise. Right now, they are not looking at raising any money and capital adequacy is looking reasonably good.
• It would be wise to see how 3Q pans out before plunging into any M&A and portfolio expansion opportunities. The growth is not constrained by the availability of either capital, geography, or liquidity, all of which are in abundance with the bank.
• Mr. Srinivasan’s term as the bank’s CEO & MD ends in September 21. With a well-thought-out succession planning in place, there is not a lack of continuity or lack of candidate and by April 21, there will be clarity on his successor.
• There is a high CASA flow from Dubai and the Middle East where oil prices have moved and job losses have happened. Whenever there is any kind of dislocation in these geographies, the bank has been a net beneficiary due to physical presence, large diaspora base, and the client base are not great shoppers and must send money home. It is not a singularly large destructive area. In the last 10 years, they have been able to diversify their business across geographies and product streams.

Consensus Estimate: (Source: market screener and investing.com websites)
• The closing price of The Federal Bank was ₹55/- as of 01-September-2020. It traded at 0.7x/ 0.7x/ 0.6x the consensus book value estimate of ₹ 77.4/83.8/90.4 for FY21E/ FY22E/FY23E respectively.
• The consensus target price of ₹ 66/- implies a PB multiple of 0.7x on FY23E BV of ₹ 90.4/-.

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