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Initiating Coverage | Federal Bank Ltd. | Consolidation phase behind, poised for growth.. | CMP: Rs.118 | Rating : BUY | Target : Rs.137




IndiaNivesh Securities Pvt Ltd


03 Jun 2014





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Initiating Coverage | Federal Bank Ltd. Consolidation phase behind, poised for growth…. CMP: Rs.118 | Rating : BUY | Target : Rs.137 Company Background Federal bank, headquartered in Kerala, is the mid sized private sector bank founded in 1945. Initially the bank was named as Travancore Federal bank which was later on changed to Federal bank in 1947. Since then the bank has become one of the strongest and most stable bank in the country with loan book of Rs 434 bn as on March 2014. The bank has total network of 1174 branches and 1359 ATMs throughout the country with customer base of over 6 mn. Investment Rationales SME / Retail to drive loan growth, liability franchise skewed toward low cost deposits: Federal bank’s loan book has registered a CAGR of 19% in last one decade. Baring FY14 (when the bank has adopted the strategy of consolidation due to stress in economy), the loan growth has been maintained at high teen rate consistently with CAGR of 22% in FY05-13. Federal bank’s expertise in Retail and SME segment in south India is now expanded to other parts of the country. Management is looking for loan growth of high teens (~20% yoy for FY15) as against 16.6% CAGR factored for FY14-16E. Focus of increase in low cost deposits also played well for Federal bank with CASA deposit CAGR of 19% in last one decade as against total deposit growth of 16% over the same period. CASA ratio improved to 31% in FY14 from 26% in FY10 mainly driven by SA deposits (19% CAGR in FY10-14). Margins to remain stable: NIMs (calc) of Federal bank were stable in FY14 at 3.3%. However in past, the bank was having higher NIMs of 3.8-4% till FY12. Recently margins got impacted due to higher slippages and increase of interest rates on NR deposits which have resulted in lower interest income growth. Although NIMs might improve marginally from hereon due to 1) increasing retail loans and 2) likely benefit of strong CASA deposits growth in FY13/FY14, but we are not expecting any significant increase in NIMs and expect it to remain at 3.4% both for FY15E and FY16E. No fret on Asset quality: In FY13, Asset quality of Federal bank was impacted due to stress in the economy which is inline with other banks. However in FY14, Asset quality has shown improvement mainly due to 1) sell of NPAs to Asset Reconstruction Company (ARC) to the extent of Rs 1.5 bn (0.34% of loan book) in Q4FY14 and 2) control on fresh impairments. We don’t expect any significant change in asset quality and expect Net NPA of 0.7% both for FY15E and FY16E respectively ROE was depressed due to lower growth… however likely to come back to normal run rate of 14% by FY16E: We expect pick-up in loan book from hereon which will help bottom line to increase by 16.6% CAGR over FY14-16E and ROE to improve to 14% by FY16E as against management guidance of mid teen ROE. Valuation We prefer Federal Bank in mid sized banks amongst private sector banking space and would like to highlight it as top pick in midcap space. We are positive on the bank due to increasing penetration outside Kerala which is likely to help growing its assets base in key strength of Retail and SME. Increasing proportion of retail (ex gold) loans and SME along with strong traction in low cost deposits will help margins going forward. Further we are not worried on asset quality front as retail segment continues to do well for overall industry and strong provision coverage ratio of 84% gives us more comfort. At CMP of Rs 118, the stoc...

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