Espirito Santo Securities has reduced FY13 estimates but retains bullish FY14 views. It also finds asset quality has deteriorated while CASA ratio has improved along with growth

Espirito Santo Securities (ESS) feels that Federal Bank, the Kerala-based regional bank with a strong management team, will face difficulties till March 2013 but is bullish over the longer term—till March 2014. It has It has said that the bank is worth Rs601 per share, or 1.4 times the projected book value. The report said, “While we reduce our FY13 estimates by 10%, our FY14 estimates have broadly remained stable”. Federal Bank reported 4% increased net profit to Rs210 crore for the December quarter, which was 13% below ESS’s estimates.
 

One of the main reasons for the downgrade was the deterioration of the bank’s asset quality, in terms of ‘slippages’ and quality of the loan book. ESS found out that as much as Rs2.15 billion (Rs215 crore), and that too was from a single creditor—NAFED. The bank restructured its loan book to the tune of Rs217 crore in the third quarter alone. Earlier, ESS had expected a far bigger number—Rs350 crore. Further, incremental ‘slippages’ were recorded at Rs136 crore, which is marginally lower than Rs147 crore in the September quarter. Net non-performing assets (NNPAs) increased by as much as 48% on a quarter-to-quarter basis. This suggests that the bank will need to do something extraordinary to stem the rot even though some loans were recovered.
 

As of third quarter ended December 2012, the 31% of the loan book was in the retail segment while the SME segment also contributed to 31% of the loan book. The remainder was taken up by the corporate sector.
 

The high growth was driven by retail and small & medium enterprises (SMEs) segments, two of the key segments for any bank. Retail advances grew by 23.6% year-on-year (y-o-y), surprisingly most were gold loans! On the other hand, the SMEs segment saw a solid 29% y-o-y growth rate and up 22.7% in the corresponding period last year.
 

As far as liabilities are concerned, the bank’s CASA ratio improved to 29.5%, mostly driven by more customers opening and depositing more money in their savings account. The bank did this without increasing the savings rate, according to ESS, which is an impressive feat. Current Account-Savings Account (CASA), is a ratio that measures the relationship between current accounts and savings account. If there are more current accounts, the bank will benefit as costs for current account is virtually nothing, whereas Federal Bank has to pay interests on savings accounts. It is used to measure cost of funds.
 

Despite higher slippages and asset deterioration worries, ESS feels that Federal Bank will do fine. It said, “Federal Bank has started to see the results of its transformation efforts and investments in the franchise over the past two years is started to yield results”. However optimistic this sounds, investors must also keep an eye on the asset books given that 2013 will be a difficult year and dependant on many external factors.