Federal Bank Ltd

India Infoline News Service | Mumbai |

We estimate Federal Bank’s advances to be flat yoy in FY14 and thereafter register 19% CAGR over the next two years.

CMP Rs84, Target Rs104, Upside 24.1%
 

After transition, set to pursue profitable growth 

Federal Bank consciously underwent a transition of de-bulking corporate book and pushing hard on relatively safer retail and SME loans. The shift in deposits mix complimented the change in loan mix with share of bulk funding declining materially. While this exercise entailed sacrifice of growth, it has stabilized margin and asset quality and lowered risk to profitability. On the cost side, bank has slowed down branch addition thereby moderating the opex growth. Better control on operations and substantial network investments during FY12/13 should enable Federal Bank to pursue profitable growth in coming years when credit environment is expected to improve. 

 

RoA poised to recover; capitalization is robust 

A combination of NIM decline, higher cost growth and elevated credit cost adversely impacted Federal Bank’s RoA during FY13/14. With these determinants having started to improve, the RoA is on the mend and is expected to recover to 1.25% by FY16. Earnings growth is estimated to sharply rebound from -1.6% pa over FY12-14 to 25.7% pa over FY14-16. Tier-1 capital at 14.2%, one of the highest in the industry, should comfortably suffice growth requirements for the coming three years and also provides comfort amid current challenging conditions. 

 

Valuation at <1x FY16 P/ABV is extremely attractive 

Federal Bank is trading at 1x 1-yr fwd rolling P/ABV and at 0.9x FY16 P/ABV which is extremely attractive in the context of improving RoA and subsiding risks to earnings. Surprisingly, Federal Bank trades at par with large PSU Banks despite its superior loan franchise, profitability, growth prospects and capitalization. There are upside risks to our growth and RoA estimates in case of a reasonably strong economic recovery. 1-yr fwd rolling P/ABV is currently at 6-year mean but the bank has traded materially above its mean during healthy credit conditions. So it is quietly likely that valuation could re-rate to 1.2-1.3x over the next 6-9 months provided asset quality trends remain assuaging.


Financial summary
Y/e 31 Mar (Rs m)
FY13
FY14E
FY15E
FY16E
Total operating income
26,391
28,404
32,913
39,483
Yoy growth (%)
6.2
7.6
15.9
20.0
Operating profit (pre-provisions)
14,596
14,839
17,517
21,547
Net profit
8,382
7,514
9,295
11,876
yoy growth (%)
7.9
(10.4)
23.7
27.8

 
 
 
 
EPS (Rs)
9.8
8.8
10.9
13.9
Adj. BVPS (Rs)
69.3
76.4
84.4
94.8
P/E (x)
8.6
9.6
7.7
6.1
P/Adj.BV (x)
1.2
1.1
1.0
0.9
ROE (%)
13.9
11.3
12.7
14.6
ROA (%)
1.27
1.02
1.14
1.24
CAR (%)
14.7
15.4
14.2
13.3
Source: Company, India Infoline Research
BSE 106.95 0.20 (0.19%)
NSE 107.10 0.25 (0.23%)

***Note: This is a NSE Chart

 

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