All round healthy performance

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1 IEA Report 18 July 2018 RATING CMP Price Target Previous Target Potential Upside 52wk Range H/L Mkt Capital (Rs Cr) Free float (%) Avg. Vol 1M (,000) No. of Shares (Crore) Promoters Pledged % BUY % 128/74 17, % 9, Key Highlights Federal bank has up fronted its loan book growth by an average of 26% in last 2 years. Refraining itself from lending riskier large corporate loans in last few years, management is focused towards better rated corporate, retail and SME portfolio. Moreover, this approach has also helped to improve its assets quality with declining stress in the balance sheet. Strong tier 1 capital at 14% and PSU banks issues provide tremendous growth opportunity for FB. Industry Bloomberg BSE Code NSE Code All round healthy performance BANKING FB IN FEDERALBNK Slippages during the quarter declined sequentially. Management guidance for slippages of about cr and credit cost between bps were maintained in the current quarter. C/I ratio trend downward in Q1FY19. The bank has fully provided provision on unamortised gratuity of 54 cr during this quarter. C/I ratio is expected to decline going forward. Recently bank acquired a strategic minority stake of 26% in Equirus Capital Pvt Ltd to augment its client and fee income base. Further its subsidiary Fedbank Financial Services Limited has issued fresh equity to True North Enterprise Private Limited diluting the stake of FB by 26%. 1Q FY19 Result: PAT beat our expection by 6% and NII were in line. FB net profit for Q1FY19 grew by 25% yoy to Rs 263 cr backed by lower provisioning for bad loans. NII grew robust by 22% yoy led by decline in cost of fund. NIM improved marginally by 1 bps sequentially to 3.12% due to stable yield and dip in cost of fund. Other income declined by 18% yoy and 14% qoq led by lower treasury gain. Operating expenses grew by 13% yoy, while total other income grew by only 10% which led the cost to income (C/I) ratio to increase to 51.8% vs 50.6% in the corresponding quarter a year back. Operating profit grew by only 8% yoy led by lower other income and higher opex. View and Valuation After disappointing FY18 numbers, Federal Bank has started with solid performance in 1QFY19. NIM remained stable during the quarter but concern still remains on increasing cost of fund. Slippages improved sequentially and management holds its guidance for full year slippages. Total stress assets declined by 27 bps sequentially. Management also maintained its credit cost guidance for full year at bps in FY19. C/I ratio also showed sign of improvement and we expect downward movement in C/I ratio. Advances growth continues to remain healthy at 24% led by corporate loan growth but deposits growth has remained muted thus raising concern. We increase our FY19 PAT estimates by 2%. Management has also maintained its guidance to exit 1% RoA in FY19 which gives us certainty on our estimates, hence we increase our target multiple to 1.4x P/BV on FY20e and arrive at target price of Rs 104. Maintain BUY. Key Risks to our rating and target Significant increase in bond yields implying a rise in cost of funds Higher opex growth rate than that of income growth. KEY FINANCIAL/VALUATIONS FY16 FY17 FY18 FY19E FY20E NII PPP PAT NIM % EPS (Rs) EPS growth (%) ROE (%) Research Analyst ROA (%) DEEPAK KUMAR BV Deepak.kumar@narnolia.com P/B (X) P/E (x) The views expressed above accurately reflect the personal views of the authors about the subject companies and its(their) securities. The authors have not and will not receive any compensation for providing a specific recommendation or view. Narnolia Financial Advisors Ltd and other Narnolia group companies does and seeks to do business with companies covered in its research reports. As a result investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 1Q FY 19 Results Above expectation Strong performance Financials Interest Inc. Interest Exp. NII Other Income Total Income Ope Exp. PPP Provisions PBT Tax Net Profit 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY % QoQ% FY17 FY18 YoY % 2,324 2,380 2,501 2,548 2, % 4.7% 8,677 9, % 1,523 1,481 1,551 1,615 1, % 4.5% 5,625 6, % % 5.0% 3,053 3, % % -13.8% 1,082 1, % 1,130 1,186 1,179 1,247 1, % 0.3% 4,134 4, % % -1.6% 2,210 2, % % 2.4% 1,925 2, % % -46.4% % % 86.0% 1,307 1, % % 95.8% % % 81.2% % NIM improved. NIM improved marginally by 1 bps qoq due to reduction in the cost of fund. However, increase in CD ratio to 85% also contributed in the improvement of NIM. Yield on advances declined by 2 bps qoq and 88 bps yoy. Cost of deposit declined by 12 bps qoq( 45 bps yoy). we expect cost of fund to rise and NIM will remain under marginal pressure going forward. Management expect NIM to be around 3.2% in FY19. Other Income declined Other income dipped 18% yoy due to lower profit on sale of securities. Fee based income grew by 15% yoy due to increase in forex transactions profit and loan processing fee. Net Profit on Forex Transactions grew by 38% yoy, while loan processing charges grew by 11% yoy. Healthy loan book growth continues Advances grew by 24% yoy backed by a strong corporate advances growth of 32% yoy and across all the segments.the Retail advances grew by 19% yoy and SME grew by 17% yoy. Retail + SME form around 47% of its loan book while corporate holds around 43% of the advances. Kerala book and outside Kerala book grew by 18% and 40% respectively. The distribution towards AAA/AA rated corporate book declined to 71% ( from 76% quarter back), while below BBB & others rated corporate increased by 16% (from 9% quarter back). Deposits during the quarter grew by 16% yoy, which does not matched with the advances growth. Retail deposits constitute of 96% of the total deposits in Q1FY19. CASA ratio remained stable at 33.5%. Slippages declined. FB s asset quality remained stable on sequential basis. GNPA for Q1FY19 remained same as previous quarter at 3%. Whereas NNPA increased marginally by 3 bps at 1.72% as against 1.69% qoq due to the provisioning of 66 cr on NPA. Slippages for the quarter stood at Rs 482cr as against 892 cr a quarter back. Corporate and retail slippages amounts to Rs 207 cr & 109 cr respectively. Management is expecting another cr slippages going forward. Total slippages from restructured book amounts to Rs 163 cr. Stressed book to total average assets declined to 2.01% vs 2.28% on qoq basis. Credit cost during the quarter was 52 bps lower at 0.71% on qoq basis. PCR remained stable at 64.71%. Concall Highlights : Management foresees credit growth of 24% sustainable going forward. Corporate slippages is 207 cr out of 461 cr. The management is expecting another cr slippages which will be split into same ratio. Operating expenses increased. Operating expenses grew by 13% YoY led by 16% rise in the employee expenses mainly on account of recent circular by Government on gratuity provisioning. C/I ratio declined to 51.8% from 52.8% on qoq basis. The bank has fully provided provisions of Rs 54 cr on account of gratuity. We expect downward movement in C/I ratio going forward. Management maintain the initial slippages guidance for FY19 at Rs Cr.Under restructured account barring AIR INDIA there is no chunky stress loan. Management maintained credit cost guidance for FY19 at bps. Management thinks IDBI-Federal insurance deal to take place in another 3-4 weeks. Net stress assets on total assets is expected to decline to 1.7%-1.75% in FY19. Subsidiary Fed Fina got strategic partner and deal will be announced within a coming few days. Management maintain the initial slippages guidance for FY19 at Rs Cr and credit cost guidance for FY19 at bps.

3 Profitability Matrix C/I Ratio % Empl. Cost/ Tot. Exp. % Other Exp/Tot. Exp.% Provision/PPP % Tax Rate % Int Exp./Int Inc. (%) Other Inc./Net Inc. % PAT/ Net Income % RoE % RoA % 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY (+/-) QoQ (+/-) Margin Performance Margin % 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY (+/-) QoQ (+/-) Yield on Advances Yield (Total Assets) Cost of Deposits Cost Of Funds NIM Exhibit: Yield and Cost Overall yield improved and cost increased Exhibit: Net Interest Margin Marginal improvement in NIM Yield on Total Assets Cost Of Funds 3.42 NIM Other Income Break Up- smart growth in distribution income 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Loan Processing Fee Commission, Exchange, Brokerage Net Profit on Forex Transactions Total Fee-Based Income Growth YoY % Profit on sale of securities Recovery from assets written off & Other Other Income Growth YoY %

4 Exhibit: Fee Income/Advances % Exhibit: Other Income/ Total Income % Fee Income/ Advances % Other Income/ Total Net Income % Asset Quality GNPA (Rs in Cr) GNPA % NNPA (Rs in Cr) NNPA % Slippages (Rs in Cr) Restructured Assets % Net Stress Asts. (Rs in Cr) Specific PCR % Credit Cost % Prov/Avg Adv% (Annl.) 3QFY1 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY (+/-) QoQ (+/-) 1, ,727 1,868 1,949 2,161 2,796 2,869 54% 3% , ,061 1,066 1,157 1,552 1,620 53% 4% % -46% % -8% Slippage Contribution (%) 1QFY1 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Retail Agriculture SME Wholesale Total Exhibit: Asset Quality Assets quality improved. Exhibit: Provisions Healthy PCR GNPA % NNPA % PCR % Prov/Avg Adv% (Annl.)

5 Financial Details Balance Sheet Y/E March FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Share Capital >> Equity Capital >> Preference Capital Reserves & Surplus 6,194 6,780 7,567 7,747 8,598 11,816 13,223 14,633 Networth 6,365 6,951 7,738 8,091 8,942 12,210 13,223 14,633 Deposits 57,615 59,731 70,825 79,172 97,665 1,11,992 1,31,520 1,61, >> CASA Deposits 15,519 18,401 21,550 25,705 31,838 37,252 45,374 56, Borrowings 5,187 5,688 2,308 5,115 5,897 11,534 13,139 12,329 Other Liabilities & Provisions 1,883 2,601 2,268 2,204 2,473 2,578 4,227 5,194 Total Liabilities 71,050 74,970 83,140 94,581 1,14,977 1,38,314 1,62,504 1,94,131 Cash & Bank 3,720 4,529 4,780 5,420 7,452 9,204 9,438 10,157 Investments 21,155 24,118 24,409 25,155 28,196 30,781 32,880 40, Advances 44,097 43,436 51,285 58,090 73,336 91,957 1,13,107 1,35, (1) Fixed Assets Other Assets 1,681 2,462 2,199 5,396 5,503 5,915 6,576 7,297 Total Assets 71,050 74,970 83,140 94,581 1,14,977 1,38,314 1,62,504 1,94,131 Income Statement Y/E March FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E Interest income 6,168 6,946 7,419 7,745 8,677 9,753 11,560 14,347 Interest expended 4,193 4,717 5,039 5,240 5,625 6,170 7,316 9,153 Net Interest Income 1,975 2,229 2,380 2,504 3,053 3,583 4,244 5, Other Income ,082 1,159 1,211 1, (10.5) >> Core Fee Income ,137 >> Treasury Income >> Others Total Net Income 2,639 2,922 3,259 3,291 4,134 4,742 5,455 6,633 Operating Expenses 1,180 1,442 1,631 1,867 2,210 2,451 2,747 3, >> Employee Expenses ,053 1,164 1,242 1,410 1,649 Pre-provisioning Profit 1,460 1,480 1,628 1,424 1,925 2,291 2,708 3,407 (3.1) (12.5) Provisions (21.1) 1.0 (60.2) (12.2) 53.2 (14.6) 4.1 PBT 1,194 1,212 1, ,307 1,344 1,899 2,565 Tax Profit After Tax , ,250 1, (52.7)

6 Financial Details Key Ratios Y/E March FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Balance Sheet Metrics Loan Growth (%) 16.8 (1.5) Deposit Growth (%) C/D Ratio (%) CASA (%) Investment/Deposit (%) CRAR (%) >> Tier 1 (%) >> Tier 2 (%) Assets Quality Metrics Gross NPA Gross NPA (%) Net NPA Net NPA (%) Slippges (%) Provision Coverage (%) Provision/Average Advances (%) 1,554 1,087 1,058 1,668 1,727 2,796 3,057 3, ,552 1,651 1, Margin Metrics Yield On Advances (%) Yield On Investment (%) Yield on Earning Assets (%) Cost Of Deposits (%) Cost Of Funds (%) Spread (%) NIM (%) Profitability & Effeciency Metrics Int. Expense/Int.Income (%) Fee Income/NII (%) Cost to Income (%) Cost on Average Assets (%) Tax Rate (%) Valuation Ratio Metrics EPS (Rs) ROAE (%) ROAA (%) Dividend Payout (%) Dividend yield (%) Book Value (Rs) ABVPS (Rs) P/B (X) P/E (X) (52.9) 74.1 (7.5)

7 Exhibit: DuPont Analysis Interest Income Interest expended Net Interest Income Non-Fund Based Income >> Core Fee Income >> Trading and Other Income Core Operating Income Total Income Total Operating Expenses >> Employee Expenses >> Other Expenses Operating Profit Provisions Others PBT Tax PAT/RoA >> Equity Multiplier (x) RoE Financial Details FY14 FY15 FY16 FY17 FY18 FY19E FY20E

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