Federal Bank Q1 FY23 Conference Call Highlights | Strong Set of Results From Federal Bank on account of Lower Provisions, Asset Quality improvement in Q1 FY23, Net Profit up 63% YoY in Q1 FY23

Company:

It is a major Indian Private sector bank headquartered in Aluva, Kochi. The bank has more than 1,291 branches as of the end of the June 2022 quarter, spread across different states in India. It also has its Representative Offices abroad in Abu Dhabi, Qatar, Kuwait, Oman, and Dubai.

+In 2021, it partnered with Fi, a Bengaluru-based neobank for salaried millennials, which will enable banks to issue a savings account, equipped with a debit card, in under three minutes.

+Bank has a mission to be “the most admired bank” which is digitally enabled with a sharp focus on Micro, Medium, and Middle market enterprises.

+Federal bank has almost 25-30% market share of foreign money sent back to Kerala. It has almost ~18-19% (as of the end of March 2022 quarter) share of all the foreign remittances across the country.

– Bank has concentrated its focus on the state of Kerala. Out of the total 1,291 branches, 596 branches are in Kerala itself.

+Bank has huge NRI Customers in terms of savings accounts. These NRI customers are sticky customers which is a good sign for the bank as it improves the CASA ratio, a low-cost base for the bank.

+Bank has a total of 2.45 lakhs Nonresident customers in FY21, registering a growth of 25 Y-o-Y growth in client count. The non-Resident business grew by 12% and the Non-Resident CASA grew by 19%.

+Bank has tied up with auto giant Maruti Suzuki, Honda Motors, Toyota, Tata Motors, and Hyundai to increase its presence in Auto Segment.

-Most of the Non-Resident customers are in Gulf countries. Any impact or any issues regarding oil prices, owing to layoffs of Indian Residents can significantly damage Banks’ CASA ratio.

Industry:

+Public sector banks losing market share to Private share banks

+Financialisaton of Savings – As of FY22, 64% of India’s Household Savings are into Physical assets and just 36% are into financial assets such as Stocks, mutual funds, insurance, Fixed Deposits. This ratio is expected to improve further on account of financial literacy of population towards financial products.

+Key Drivers for Indian Banking Sector: Big Growth Opportunities available – Organic & Inorganic, an added edge for Consolidation opportunities, Infrastructure spending, Favourable Government Policy, Rising Disposable Income & increased Consumerism, Easier access to credit

+ RBI’s Monetary Stance:

Rate Hike Cycle to Augur Well for Banking Industry With the building up of Inflation, RBI Hiked Policy Repo Rate 2 times in FY22 Off-cycle Rate Hike in May 2022 & in June 2022 MPC Meet, expected to raise Repo Rate in August 2022 Bi-monthly MPC Meet. So, Early Pass on of Rate Hike to Borrowers by raising interest rates

Delay in Passing on the Rate Hike Impact on Liability-side – Interest Rate on Savings Ac Deposits & FDs Expansion in Net Interest Margin

Thus, Rate Hike Cycle is the Strong Earnings Season for the Banks on Tailwinds through Core NII Growth

+ Credit Growth Catching up Fast in line with Economic Recovery: Bank Credit grew by 9.6% in FY22 vs 5.6% in FY21

Retail loans have emerged as the primary driver of bank credit in FY22 and have now the largest share (28.4%) in outstanding credit of All SCBs, displacing industrial loans (26.7%)

Outlook for bank credit growth is expected to remain positive due to Economic Expansion, Rise in government and private capital expenditure, Rising commodity prices, Retail Credit Push – Key Growth Lever for IDFC First Bank

+Aggregate Deposit Growth slowed down to 8.9% in FY22 vs 11.40% in FY21, due to base effect, lower interest rates and a flight to Capital Markets/ Digital Asset classes in the expectation of higher returns

+Digitalisation – Next Growth Impetus for Indian Banking – Robust Growth in Digital transaction in FY22 with strong expansion in Retail Payments in FY22

+Key Positive Developments:

Sectors benefitting from PLI scheme expected to see an Increase in Capex in FY23

Good prospects of Rabi output augur well for rural demand

Conflict in Ukraine opened up New Opportunities for India notably in Agri Sector

Free Trade Agreements with Australia & UAE to create a number of growth opportunities

Reordering of global supply chains presents a unique opportunity to India, a proposition that holds tremendous potential

-Key Risks for Banking Sector:

Geopolitical Tensions & subsequent Sanctions —–> Supply Chain Risk —–> Commodity Inflation – Crude Oil, Agricultural Commodities, Energy Products, Metals ——> Cascading Impact on Global Economy ——> Poses Risk for Overall Banking Sector

Governance:

– Bank has no promoter holding

+FII holds 26.01% and DII holds 43.25% as of the end of the March 2022 quarter.

+High Institutional Holding as a % of Free Float: 69.26 as on 31 March-22, as compared with peer private banks

(Shareholding pattern for June 2022 quarter has not come out yet)

+No pledging of shares.

Financials:

+ Revenue growth during the past 5 years is 10% CAGR and 3-year Revenue growth is 7% CAGR.

+Net Profit Growth during the past 5 years is 18% CAGR and 3-year growth is 15% CAGR.

+Interest Earned at 3,629 Crores in Q1 FY23 vs 3,356 Crores in Q1 FY22, a growth of 8% YoY.

+Net Interest Income at 1,605 Crores in Q1 FY23 vs 1,418 Crores in Q1 FY22, up 13% YoY.

-Total Income at 2,058 Crores in Q1 FY23 vs 2,066 Crores in Q1 FY22, a de-growth of 1% YoY.

+Net Profit at 601 Crores vs 367 Crores, growth of 64% YoY.

+Return on Assets at 1.10% in Q1 FY23 vs 1.03% in Q4 FY22.

+Net Interest Margin at 3.32% in Q1 FY23 vis a vis 3.16% in Q4 FY22.

+Cost to Income Ratio at 52.68 in Q1 FY23 vs 59.89% in Q4 FY22.

-Capital Adequacy Ratio at 14.57% in Q1 FY23 which was 15.77% in Q4 FY22.

+Gross NPA at 2.69% in June 2022 vs 2.80% in March 2022 quarter.

+Net NPA at 0.94% in Q1 FY23 vs 0.96% in Q4 FY22.

-Provision Coverage Ratio at 65.03% in Q1 FY23, and it was 65.54% in Q4 FY22.

Valuations:

+Stock is trading at 10.40 times P/E vs the 3-year average of 10.45, current PE is at a discount of 9% to its 3-year Median PE valuation and 5 Year median PE of 11.27 a discount of ~10% to its 5-Year historic valuations.

+Stock is at 1.06 times P/B currently vs 3 Year Median PB of 1.10, which is at a discount of ~4% discount to its 3-Year Median PB. With and 5-year Median PB of 1.30, the Current PB is at a discount of 18% to 5-Year Median historic valuations.