Rupee being counted. (Photographer: Dhiraj Singh/Bloomberg)

Federal Bank Shares Fall The Most In Over Two Years On Weak Earnings

Shares of Federal Bank Ltd. fell nearly 13 percent, the most in over two years, after the Kerala-based lender’s profit declined and bad loan provisions rose.

Net profit for the quarter ended March fell 44 percent to Rs 145 crore, lower than the Bloomberg consensus estimate of Rs 287 crore. Provisions more than doubled over the previous quarter to Rs 371 crore.

Slippages during the reporting three months rose to Rs 870 crore from Rs 411 crore in the preceding quarter mainly to comply with the Reserve Bank of India’s stipulations that had tightened norms for bad loan resolution.

Key highlights of Q4

  • Gross non-performing assets ratio rose from 2.5 percent in the quarter ended December to 3.0 percent—the highest in at least last eight quarters.
  • About 75 percent of the corporate slippages came from restructured accounts largely in power and infrastructure. The outstanding restructured book now stands at Rs 800 crore.
  • The management has guided for a normalised run-rate of Rs 300 crore for 2018-19.
  • Credit costs to remain high in 2018-19 on ageing NPAs and enhancement of provision coverage ratio (at 44 percent).
  • Operating metrics were also weak leading to lower core income growth. Net interest margins were down 21 basis points quarter-on-quarter. Fee income profile was weak.
  • Cost-to-income ratio was high at nearly 53 percent due to the impact of gratuity and is likely to see only a modest improvement.
  • About Rs 54 crore residual unamortised gratuity provision needs to be provided in financial year 2019, implying costs will remain elevated and operating leverage will play out slower than expected.

The bank’s management is also expected to announce a 26 percent stake sale in subsidiary Fedfina in the next few days. The divestment in Fedfina and IDBI Federal Life Insurance would help the company to shore up provisions.

While most brokerages retained their stance on Federal Bank, some of them trimmed their price targets.

Prabhudas Lilladher

  • Slippages from small and medium enterprise and agri loans is a negative as they continue trend higher every quarter.
  • The lender should start seeing respite in these segments.
  • Corporate slippages will remain high even in the ongoing financial year.

Edelweiss

  • Federal Bank is well placed given upfronting of stress recognition and ample growth levers (with adequate capital).
  • Limited scope for NIM improvement and sustained higher cost are key monitorables.
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