Federal Bank Stock Analysis | Latest Quarter Result Analysis

COVID-19 Impact on Federal Bank on Q4FY20

Introduction

Federal Bank Q4 FY20 Net Profit declined 21% to Rs.301 Cr mainly on account higher provisions of Rs.658 Cr including COVID provisions of Rs.93 Cr. Lets analyse the Q4 FY20 results and the COVID Impact on Federal Bank.

Federal Bank Q4 FY20 Results Analysis

Q4 FY20 Results

Net Interest Income (NII)

• NII = Interest Income – Interest Expenses
• Net Interest Income (NII) rose 11% YoY at Rs.1,216 Cr in Q4 FY20 versus Rs.1,0967 Cr in Q4 FY19.
• The QoQ growth in NII is 5% from Rs.1,155 Cr in Q3 FY20 mainly on account of flat growth in Interest Expenses QoQ.

Pre-provisioning Operating Profit (PPOP)

• PPOP = (Total Operating Income – Operating Expenses)
• Pre-provisioning Operating Profit is increased by 27% YoY and 29% QoQ on account of :
  • Robust growth in other income, which stood at Rs.711 Cr in Q4 FY20 up by 73% YoY & 74% QoQ
  • It is mainly due to Profit on sale of securities in Q4 FY20 is at Rs.369 Cr grew by 401% YoY

Provisions

• Total Provisions were up 63% YoY and 117% QoQ to Rs.658 Cr in Q4 FY20.
• Of the total provisions, COVID-Related provisions were Rs.93 Cr which were higher than the Rs.30 Cr required under RBI regulations.
• While, the other Provisions and contingencies surged 219.25% to Rs.568 Cr in Q4 FY20 from Rs.178 Cr in Q4 FY19. 

Net Profit

• Federal Bank’s net profit dropped 21% to Rs.301 Cr in Q4 FY20 from Rs.382 Cr in Q4 FY19 and Rs.441 Cr in Q3 FY20.
• The fall in Net Profit QoQ as well as YoY is mainly on account of :
  1. Subdued growth in Net Interest Income
  2. Rise in Operating Expenses
  3. Significant increase in Provisions in Q4 FY20

Analyzing the Balance sheet Q4 FY20

Balance sheet Size

• Bank’s balance sheet size has increased by almost 13.4% YoY on account of :
  1. Deposit growth of 13%
  2. Advances growth of 11%
• Hereon, the bank’s key focus is to build the quality balance sheet with higher Retail share in Advances as well as Deposit Mix.

Advances

• The Bank’s Net Loan Book aggregated to Rs.1.22 Lakh Cr as of March 31, 2020, with a rise of 11% as compared to Rs.1.10 Lakh Cr as of March 31, 2019.
• As far as, Advances mix is concerned, Retail : Wholesale Advances % share is 49% : 51%.
• The detailed break-up loan book is shown above, where Segment-wise % share in the total loan book is :
  • Retail : 31%
  • Agri : 10%
  • Business Banking : 9%
  • Commercial Banking : 10%
  • Corporate Banking : 41%

Deposits

• Bank’s deposits aggregated to approximately Rs.1.52 Lakh Cr as of March 31, 2020, a rise of 14% as compared to Rs.1.34 Lakh Cr as of March 31, 2019.
• The low cost CASA deposits grew by just 7% YoY. With this subdued CASA deposits growth, the CASA ratio is stood at 30.5% in Q4 FY20 from 31.46% in last quarter and 32.15% in same quarter last year.
• Whereas, the NRE Deposits, grew by 14% YoY to Rs.57,223 Cr from Rs.50,109 Cr last year.

COVID Impact on Federal Bank – Loans under Moratorium

Around 35% of the bank’s total loan book is under Moratorium. The detailed break-up of segment-wise loans under moratorium and their respective % is shown in the above table.

Key Ratios

Asset Quality

• Bank’s Gross NPA ratio (The Ratio of Gross NPAs to Gross advances) stood at 2.84% as on Q4 FY20 as against 2.99% as on Q3 FY20 and 2.92% as on Q4 FY19.
• Net NPA ratio (Net NPAs to Net advances) stood at 1.31% as on Q4 FY20 as against 1.63% as on Q3 FY20 and 1.48% as on Q4 FY19.
  • Thus the asset quality of the Bank has improved substantially, which is a positive sign.
• Provision coverage ratio (PCR) of the bank was at 72.48% as on Q4 FY20. PCR is improved significantly YoY as well as QoQ on account of higher provisions in this quarter.
  • We can see that the bank has increased the provisions substantially to face any unfavorable situation that may arise due to the pandemic and strengthened the balance sheet.

• Net Interest Margin (NIM)
  • NIM of the bank eroded YoY from 3.17% in Q4 FY19 to 3.04% in Q4 FY20. However, it is improving QoQ from 3.00% in Q3 FY20.
• Cost to Income Ratio
  • The ratio is improved sequentially QoQ from 52.40% in Q3 FY20 to 50.22% in Q4 FY20.
• Capital Adequacy Ratio
  • It is improved QoQ as well as YoY and at 14.35% in Q4 FY20.
• Return on Assets (ROA)
  • Bank’s ROA is deteriorated to 0.69% from 1.04% last quarter.
• Return on Equity (ROE)
  • Whereas, ROE is also declined to 8.41% in Q4 FY20 from 12.50% in Q3 FY20 and 11.86% in Q4 FY19.

Current Valuation

• The current Price to Earnings Ratio of the Federal Bank is around 5.8. Whereas, bank’s Historical Median PE ratio is at 13.6.
• Thus, we can clearly see that Federal Bank is currently trading at almost 130% discount to its historical valuation.
• In addition, Bank’s Price to Book Ratio (P/B) is 0.69, which indicates that the current valuation of the bank is much below its book value also.
• However, the higher % of Wholesale loan in Total loan book is a worrisome sign for the bank.
  • The cumulative % exposure towards NBFC, Housing Finance Companies (HFC) and Real Estate is around 17-18%.
  • It adds the a great risk to the bank’s credit portfolio in current uncertain COVID outlook.