Share Market Update on Federal Bank for 1QFY2012

Share Market Update on FederalBank for 1QFY2012 with a Buy recommendation and a Target Price of `478 (12 months).

For 1QFY2012, Federal Bank recorded net profit growth of 10.8% yoy (down 14.9% qoq), below our estimates, mostly due to higher provisioning expenses than built in by us. Management has attributed the rise in NPAs (slippages at `323cr) during the quarter to one-off employee-related issues, which led to a spurt in slippages in the retail book. Fee income according to management also suffered due to this one-off event. We recommend a Buy rating on the stock.

CASA ratio improves; however, asset-quality woes continue: For 1QFY2011, advances grew by 0.1% qoq to `31,972cr, while deposits declined by 0.2% qoq to `42,936cr. Although total deposits declined during the quarter, the bank was able to sequentially grow its savings and current account deposits by 3.5% and 4.2%, respectively, leading to a 96bp increase in CASA ratio to 27.2%.  Including NRE deposits, total low-cost deposits constituted 32.8% of total deposits. Cost of deposits increased by 103bp qoq, leading to a 13bp qoq decline in reported NIM to 3.9%. Slippages for 1QFY2012 stood at `343cr (annualised 4.0%), driven by higher slippages on the retail (~`140cr) and SME (~`140cr) front. Management has attributed the increase in slippages on the retail side to one-off employee-related issues that cropped up during the quarter, leading to slackness on the recovery front. During 1QFY2012, non-interest income declined by 17.2% qoq (up 6.4% yoy), mainly due to sluggishness in fee-related initiatives and recoveries on the retail side (recoveries were down by 42.6% qoq), as per management.

Outlook and valuation: Post the recent correction, the stock is trading at 1.1x FY2013E ABV. While lower leverage is leading to low RoE at present, the bank’s core RoA is relatively high and should improve further as asset-quality pressures start moderating. We recommend Buy on the stock with a target price of `478.

Stock Market Update on Yes Bank for 1QFY2012

StockMarket Update on Yes Bank for 1QFY2012 with an Accumulate recommendation.

For 1QFY2012, Yes Bank reported a strong performance with net profit growth of 38.2% yoy (6.2% qoq) to `216cr, marginally above our estimate of `212cr. Profit growth was driven by sequentially stable NIMs and a sharp drop in provisioning expenses (due to write-back of `15cr), which offset the lower-than-expected non-interest income. The bank seemed to have moderated growth for maintaining NIMs. We maintain our Accumulate recommendation on the stock.

Business growth moderates; steady NIMs and strong asset quality: During the quarter, the bank seemed to have moderated its balance sheet growth to maintain NIMs, as evident from the sequential decline in advances of 3.7%. Consequently, deposit accretion also declined by 5.1% qoq. CASA deposits continued to grow at a brisk pace of 49.8% yoy, leading to an improvement in CASA ratio to 10.9% from 10.5% in 1QFY2011. The bank surprised positively with sequentially stable NIMs at 2.8% on the back of a 90bp rise in yield on advances, which offset the 70bp qoq increase in cost of funds. With advances growth moderating, non-interest income growth came down to 14.9% yoy. Asset quality of the bank continued to be in a sweet spot, with best-in-the-industry gross and net NPA ratios of 0.17% and 0.01%, respectively, coupled with provision coverage (excluding technical write-offs) of 95.2%. Branch expansion plans were on track, with addition of 41 branches to take the network to 255 branches.

Outlook and valuation: Structurally, as the bank’s balance sheet continues to grow rapidly, we believe there may be downside risks to the bank’s RoA. On the liabilities side, building a savings deposit franchise involves execution risks. However, as we believe that we are very close to the peak of the current interest rate cycle and as liquidity has improved compared to the extreme tightness during the last few quarters, the environment is expected to be relatively more conducive for banks such as Yes Bank. The stock is trading at of 2.0x FY2013E ABV. We maintain Accumulate on the stock with a target price of `353.

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