Federal Bank's first quarter results suggest strength in SME business

Topics Federal Bank Q1

Federal Bank
Federal Bank, with a 40 per cent concentration in retail loans and loans to small and medium enterprises (SMEs), is often seen as good indicator of demand from these segments, particularly in South India.

With 18 per cent growth in net interest income (Rs 1,154 crore) and 46 per cent net profit growth year-on-year (YoY) to Rs 384 crore, the numbers suggest there is little cause for worry. Also, with retail and SME loans growing by 26 and 12 per cent, respectively, in the first quarter (Q1), and the overall loan book up by 19 per cent YoY, investors won’t be disappointed.

However, the Street hasn’t warmed up to the bank’s results. The bank’s stock closed with less than a per cent gains despite good results. Analysts say a part of the positive business trend is already captured in the stock, which has risen by 9 per cent in three months. That said, there are some fundamental factors, too, which could have put a lid on the stock price.

For one, while provisioning has risen 17 per cent YoY, slippages or fresh accounts indicating stress increased 62 per cent sequentially in Q1. That doesn’t bode well, especially when the overall trend is towards better asset quality. Slippages were particularly high in retail loans, up 110 per cent, compared to the March 2019 quarter. Even on a YoY basis, retail slippages rose by 29 per cent. SME loans also saw a similar movement in slippages.

While Q1’s strong loan growth has overshadowed the overall asset quality, which remained similar to the year-ago numbers, the increase in slippages does warrant some caution. Darpin Shah of HDFC Securities says this spike in slippages may be a seasonal factor, as the overall asset quality trend is still positive. Gross and net non-performing asset ratios at 2.99 per cent and 1.49 per cent, respectively, haven’t changed much, compared to last year’s levels. 

For investors, this essentially means that while the present situation isn’t alarming, it may be prudent to keep track of how these SME loans shape up. Currently, with the bank sticking to 60-basis points credit cost, the overall growth prospects appear stable. Valuations, too, at 1.4x its 2019-20 book remain attractive for investors.

 

 



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