Federal Bank rides out Kerala floods but growth metrics need to sustain
Analysts say sizeable improvement in stressed assets is needed for Federal Bank’s stock to get rerated, given that its loan book growth was not just fuelled by corporate loans, but unsecured personal loans in the retail space as well.
Federal Bank Ltd’s investors are happy that the massive floods in Kerala did not capsize the lender’s boat, despite more than half of its business originating from the state. The bank’s shares rose about 4% since it announced its results for the September quarter.
The private sector lender reported 26% loan growth in the quarter, and the management has given a positive guidance for the remaining part of the year. Analysts say that the risk of the bank not meeting its growth targets is very low.
Investors expected the lender’s growth to be adversely affected following the floods in Kerala, which had derailed normal business transactions. In contrast, Federal Bank reported 14% year-on-year rise in its core income and 19% expansion in its balance sheet.
Of course, the effects of the Kerala floods were visible in the increase in bad loans and in the lender’s overall stressed assets. It had to make a provisioning of ₹420 crore, which is 27% higher year-on-year.
The management indicated that the overhang of the floods on its asset quality would be felt in the next two quarters as well. Despite that, the lender hopes to keep its overall slippages for the entire fiscal year at ₹1,450 crore.
However, analysts say sizeable improvement in stressed assets is needed for Federal Bank’s stock to get rerated, given that its loan book growth was not just fuelled by corporate loans, but unsecured personal loans in the retail space as well. Also, in the past, delinquencies have been volatile and HDFC Securities Ltd notes that the slippages target for the fiscal year could be breached.
The lender’s delinquencies from the small and medium enterprises portfolio have been rising consistently over the past two years. The floods will exacerbate the pressure on the asset quality of its loan book.
“We believe that for the stock to get re-rated, we need more of such operating performance,” analysts at brokerage firm Jefferies India Pvt. Ltd said in a note. Federal Bank may have ridden out the floods, but it remains to be seen how the ripples would be felt in the coming quarters.
Given that much of the pain from the Kerala floods was priced into the Federal Bank stock, it’s understandable that the stock rose after the results came out. The stock trades at a multiple of 1.2 times its estimated book value for FY20, far cheaper than most of its peers such as IndusInd Bank Ltd and Yes Bank Ltd, and pointing to investors’ concerns about the future.