Federal Bank
BSE SENSEX
39,889
S&P CNX
11,679
26 February 2020
Update | Sector: Financials
CMP: INR85
TP: INR115 (+35%)
Buy
Asset quality turning better; RoA expansion to continue
Asset mix improving; liability franchise remains top-class
Stock Info
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
FB IN
1,992
169.5 / 2.4
110 / 79
-8/-4/-7
1187
100.0
Financials Snapshot (INR b)
Y/E Mar
FY19 FY20E FY21E
NII
41.8 46.4 54.6
OP
27.6 30.8 38.2
NP
12.4 17.1 21.7
NIM (%)
3.1 3.0
3.1
EPS (INR)
6.3 8.6 11.0
EPS Gr. (%)
32.2 37.2 27.0
BV/Sh. (INR) 66.9 73.5 82.1
ABV/Sh. (INR) 59.1 64.2 71.6
Ratios
ROE (%)
9.8 12.3 14.1
ROA (%)
0.8 1.0
1.1
Payout (%)
19.1 22.4 22.0
Valuations
P/E(X)
13.5 9.9
7.8
P/BV (X)
1.3 1.2
1.0
P/ABV (X)
1.4 1.3
1.2
Div. Yield (%) 1.4 2.3
2.8
FY22E
63.8
46.4
26.8
3.1
13.5
23.3
92.7
81.3
15.5
1.2
21.4
6.3
0.9
1.0
3.4
We attended Federal Bank (FB) Analyst Day, wherein the bank discussed the recent
trends and opportunities, along with the key levers for RoA expansion.
FB has identified new revenue streams such as micro finance, credit card, CV/CE and
business banking for margin expansion. It has set a target of achieving a
retail:wholesale loan mix of 55:45 over the medium-to-long term.
The bank reiterated that there is no residual stress in corporate accounts above
INR1b. It thus expects the slippage trend to moderate significantly, which in turn will
drive controlled credit cost.
Work is happening to improve productivity by adding branches in a calibrated
manner and a high focus is placed on leveraging the distribution channel through
the RM model. This will drive a further improvement in the C/I ratio.
FB has guided for an exit RoA of 1.25% by FY21. Overall, the bank is aiming to
increase RoA by 25-30bp over the next 2-3 years.
We believe that the stock trades at inexpensive valuations (1.1x Sep’21E ABV) and thus
offers ample scope of re-rating as the earnings cycle recovers. We thus project earnings
CAGR of 25% over FY20-22 with RoA/RoE of 1.2%/15.5% by FY22. Maintain Buy with a
target price of INR115 (1.4x for Sep’21E ABV).
Focus on sustainable growth; retail loan mix to improve gradually
FB has been looking for sustainable loan growth with a strong focus on growing
the retail book at 25% YoY while consciously slowing down in the wholesale
segment due to the current challenging environment. The bank has been gaining
market share in chosen segments like Housing (~5% of pvt. sector), Auto (~2%) and
Personal loans (0.6%) and has also identified new revenue streams such as micro
finance, credit card, CV/CE and business banking. The core focus is to shift the
asset mix toward high-yielding segments. It has set a target of achieving a
retail:wholesale loan mix of 55:45 over the medium-to-long term.
Shareholding pattern (%)
As On
Dec-19 Sep-19 Dec-18
Promoter
0.0
0.0
0.0
DII
37.4
34.8
29.5
FII
33.6
36.1
38.3
Others
29.0
29.1
32.2
FII Includes depository receipts
Stock Performance (1-year)
Federal Bank
Sensex - Rebased
120
100
80
60
Wholesale lending: Watch-list dissolution nearly complete; ~96% of
portfolio of investment grade
The bank has improved its rating profile in the wholesale book over the last few
years (~96% of wholesale book is of investment grade v/s 74% in FY15). It
reiterated that there is no residual stress in corporate accounts above INR1b,
mainly led by the higher focus on working capital loans and cash flow-based
lending, which resulted in lower stress on the incremental portfolio. Further, the
bank expects the mid-corporate segment to grow at a higher pace compared to
large corporate lending.
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 6129 1542 |
Himanshu Taluja
(Himanshu.Taluja@motilaloswal.com);
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 6129 1526 |
Yash Agarwal
(Yash.Agarwal@motilaloswal.com); +91 22 6129 1571
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.