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.
 Motilal Oswal Financial Services
Federal Bank
Asset quality to improve gradually; maintains healthy coverage ratio at
66.2% (incl. TWO)
FB has reported a sharp decline in net stressed loans to ~1.6% of average assets
from 3.4% in FY15. Also, there is no stress in corporate accounts above INR1b. It
thus expects corporate slippages to moderate significantly and cash recovery trends
to remain strong. Also, retail/agri/business banking trends are improving for last few
quarters, and thus NPAs in retail assets have improved to 1.8% from 2.1% in
3QFY18. FB maintains a healthy coverage ratio of 66.2% (incl. TWO), which will
facilitate controlled credit costs (our estimate: ~62bp over FY20-22).
Strong liability franchise; CASA + retail TD constitute ~91% of total deposits
Liability franchise has been holding up well, with term deposits growing at 20% YoY.
Also, CASA + retail term deposits constitute ~91% of total deposits. It has lower cost
of funds (5.8% as on 3QFY20) advantage compared to other mid-size banks. FB is a
strong player in NRI remittances – it has a market share of 6.1% in the pan-India NR
business and 15.7% in personal inward remittances. FB is focused on cross-selling
liability products to corporate clients to garner salary accounts.
Levers for RoA expansion; guides for exit RoA of 1.25% by FY21
Margins were impacted in the past due to lower yields and higher interest reversal
(~5bp impact in 3QFY20). However, moderating slippage trends and asset mix
change toward high-yield segments (such as business banking, disbursing higher
gold loans in semi-urban areas, expanding micro loans through BC model, CV/CE and
credit cards) will help in improving the margin trajectory by 10-15bp. Further, FB has
been working to improve productivity by adding branches in a calibrated manner
and placing a higher focus on leveraging the distribution channel through the RM
model. This will further drive an improvement in the C/I ratio. Also, high focus on
retail assets will help improve fee income, further supporting incremental RoAs.
Overall, the bank has guided for an exit RoA of 1.25% by FY21. It is looking for an
RoA increase of 25-30bp over the next 2-3 years.
Valuation view
In our view, FB is well placed to deliver RoA expansion led by moderating slippage
trends, which will facilitate controlled credit costs. Margin prospects appear
promising with the asset mix change toward high-yield segments. Also, the strong
liability franchise will enable lower cost of funds. The bank will add branches in a
calibrated manner and thus the C/I ratio is expected to improve to ~48% by FY22
from 50% in FY19. We slightly tweak our estimates and project earnings CAGR of
25% over FY20-22 with RoA/RoE of 1.2%/15.5% by FY22. We believe that the stock is
trading at inexpensive valuations (1.1x Sep’21E ABV) and thus offers ample scope of
re-rating. Maintain Buy with a TP of INR115 (1.4x for Sep’21E ABV).
26 February 2020
2
 Motilal Oswal Financial Services
Federal Bank
Key takeaways from session with top management
Session #1: Session with MD & CEO and Executive Directors
State of Play – Mr Shyam Srinivasan (MD & CEO)
RoAs are expected to
improve on the back of
higher NIM, strong fee
income growth, reduction
in cost ratios, and lower
credit cost.
The bank has an exit RoA target of 1.1% for FY20 and 1.25% for FY21
(improvement of 10-12bp every year). Overall, the bank is looking for an
increase in RoA of 25-30bp over the next 2-3 years.
RoA levers:
Improving CD ratio, higher NIM and fee income, cost control and a
reduction in credit cost.
NIM is expected to improve by 10-15bp, while credit cost could be lower by 8-
10bp. Fee income could further increase and support incremental RoA.
The bank guided for credit cost of 65-70bp for FY20.
FB is looking to factor in wage revision of ~15% by FY20 and will recognize the
remaining in 4Q. If the rate negotiation is higher, the wage-related provision
could increase going forward.
The focus for the bank remains on sustainable growth with an emphasis on
strengthening the core – leveraging data, digital and distribution.
Liability profile remains strong and is expected to reap benefits going forward.
The bank aims to pursue and scale up its new revenue streams with high yield
potential: microfinance, credit card, CV/CE and business banking.
It aims for a loan mix of 55:45 for retail:wholesale in the medium term.
Incremental share of bank in total business outside Kerala is panning out well
and remains on the higher side. The bank is constantly gaining market share.
Share of digital transaction increased from 40% in FY15 to 80% as on 3QFY20.
The bank plans to add 10-15 branches in FY20 and another 25 in FY21.
CoF for the bank is at ~5.7% which is amongst the lowest in the banking sector.
Exhibit 1: FB’s market share in Kerala and outside Kerala
Source: MOFSL, Company
26 February 2020
3
 Motilal Oswal Financial Services
Federal Bank
Through the Financial Lens – Mr Ashutosh Khajuria (Executive Director &
CFO)
Retail deposits stand at
91%, while retail business is
expected to grow at a
higher pace.
Retail deposits for the bank constitute 91%, while NRI deposits account for 39%.
Of the total 1,255 branches, 656 branches are outside Kerala.
Asset quality remains stable with total stressed book to total assets declining
continuously – stands at 1.59% as on 3QFY20.
The focus is on improving RoRWA which is at 1.92% (annualized for 3QFY20).
Traction in fee income has started reaping benefits and expected to grow at the
current rate in excess of 30%.
The bank has an LCR ratio of 181% as on 9MFY20.
The retail business continues to do well with business banking and gold loans
growing in excess of 25%.
The chosen territories to grow outside Kerala were Tamil Nadu, Karnataka,
Maharashtra and Gujarat; it is gaining market share in those states.
Asset quality ratios for the bank are lower than the overall asset quality ratios of
total private sector banks.
Capital level remains healthy and is not looking to raise capital in near term.
Exhibit 2: FB is gaining market share in target states outside Kerala and is growing higher than industry
Source: MOFSL, Company
Operational Excellence and Right to Grow - Ms. Shalini Warrier
(Executive Director, Chief Operating Officer & Head – Retail)
Operational efficiencies and
digital offerings to drive a
reduction in cost income
ratios.
Growth and granularity in liabilities to be the “moat for the bank”. The bank will
continue to focus on improving granularization.
The bank was the first to link their loans to repo rates.
FB has a market share of 15.7% in personal inward remittances to India (~40%
from Kerala) and a market share of 6.1% in pan-India NR business
~17% of the business comes from non-GCC countries.
The bank has a wholly owned subsidiary ‘FedServ’ looking after the operations
of the bank which is expected to provide ~2%-3% benefit in the C/I ratios.
26 February 2020
4
 Motilal Oswal Financial Services
Federal Bank
Exhibit 3: FB offerings through digital channels
Source: MOFSL, Company
Session #2: Wholesale Banking – Mr Harsh Dugar (Country Head - Corporate
& Institutional Banking), Mr Nanda Gopalan (SVP & Head – LCH), Mr
Lakshmanan V (Head – Treasury Sales) and Mr Pitchai Mahalingam (Head –
Transaction Banking)
84% of the book is rated A
& above, while BBB &
below rated book stands at
~4%.
Wholesale banking has a total book of INR630b with corporate & institutional
banking constituting 80% and commercial banking accounting for 20%.
The bank has gained a market share from ~76bp to 118bp in three years -
growing at ~4% of incremental credit.
~96% of the book is of investment grade with 84% rated A & above v/s 55% in
FY15. BBB & below rated book stands at ~4%.
The bank has been able to maintain yields despite economic challenges while
trade volumes also have increased.
Average ticket size:
CIB (INR640m) and CB (INR70m)
Corporate banking has a team of 50 members.
Wholesale banking has a full bouquet of products which are margin accretive.
Incremental client addition:
CIB (333) and CB (656) which comprises ~45% of
total o/s customers.
Fees have grown 3x over the past three years.
The bank has ~38% penetration in the salary base which has been achieved over
the past three years.
Levers of growth
– Group penetration, sector expertise, mid-market expansion,
deeper geography and peer bank relationships.
Mid-market segment is expected to grow at a much higher pace than the large
corporate segment.
26 February 2020
5
 Motilal Oswal Financial Services
Federal Bank
The bank has adopted more of working capital loans and cash flow approach
which resulted in lower stress and avoided exposure to the current stress
names.
The credit risk management department is well oiled for further growth.
Treasury:
The bank has a 28-member team in treasury.
Growth has been supported by a widened product suite such as long-dated
forwards, large swap deals, wallet maximization, foreign currency funding, etc.
All the above have resulted in widening of customer base and an increase in
volumes.
The bank has a market share of 3-4% in inter-bank FX spot.
Transaction banking:
The focus is on creating competitive advantage through
cash management services, supply chain finance, trade finance, escrow services
etc.
The bank provides product specialists in account planning/wallet sizing and
customer advisory.
FB has built dedicated corporate client service centers for operational support
and focused customer service.
Volumes have grown at ~85% with 2.2m transactions per month
Exhibit 4: Robust and contemporary credit architecture
Source: MOFSL, Company
Exhibit 5: Transaction banking: Product capabilities
Source: MOFSL, Company
26 February 2020
6
 Motilal Oswal Financial Services
Federal Bank
Session #3: Retail Bankng – Ms Nilufer Mullanfiroze (SVP – Retail Business),
Mr Divakar Dixit (SVP – Credit) and Mr Damodaran C (Head – Corporate
Planning & Analytics)
Retail business is growing
well and will continue to
grow by leveraging
technology and cross-sell.
Bank has a full suite of offerings under retail business which is growing at ~25%.
Retail for the industry is growing at ~15% which has resulted in an increase in
market share for the bank.
Market share:
Housing loans (5%), auto loans (2%), LAP (4.5%) and PL (0.6%).
75% of book is low margin while 25% is a higher margin book v/s 90:10 in FY11.
NPA in retail stands at 1.8% in 3QFY20.
New to bank customers:
Housing loans (50%), LAP (38%), Auto loans (35%) and
personal loans (1%).
The bank will soon launch its credit cards.
The bank has six retail credit centers across India which uses extensive data
analytics for better credit underwriting.
The process is structured to provide customized solutions.
The bank is using touch and fees (personal discussion) for mortgage loans while
using digital loan processing for personal and auto loans.
The credit decisions are based on the estimation of cash flows.
The focus is on improving TAT and ensuring lower slippages.
The mortgage loan book for the bank is quite granular.
The bank uses both external and internal data in decision making process.
Extensive use of analytics to cross sell/up sell and providing pre-approved offers.
The bank is managing risk through PD, LGD and credit risk models.
Continuously monitors the model on an on-going basis and uses behavioral
finance for managing the customers in a better way.
The bank is geared up for transitioning to Ind-AS model (ECL model).
Exhibit 6: Engagement via debit card, the core strategy for sticky deposits as well as deep analytics for cross-sell
Source: MOFSL, Company
26 February 2020
7
 Motilal Oswal Financial Services
Federal Bank
Session #4: Margin Enhancers – Mr Rathish R (Head – Business Banking), Mr
Mohan K (Country Head – Agri, Micro & Rural Banking) and Mr Srinvasan K
(Country Head – CV/CE)
Business banking is growing
in excess of 25% with the
bank constantly gaining
market share
The bank has started MFI
and CV/CE book which is
expected to show healthy
traction.
The business banking book stands at INR104b – it is a high yielding, high RoA
business with ~36k customers across the country.
The bank has witnessed ~400bp increase in home market share with the book
growing in excess of 25%.
The segment has a total of 113 RMs catering to 150+ branches and looking to
scale up in more geographies.
The focus is on leveraging the RM model to further acquire business.
Total MSME lending market share increased to 11.6% in the home market with
an incremental business share of 22.2%.
The Agri, micro and rural banking has a book of INR150b with ~0.9m customers.
Gold loan comprises ~INR90b, while the rest is traditional Agri business.
Yield on traditional agri business has increased from 9% to ~10%.
Share of metro-urban v/s semi-urban in gold loans increased from 30:70 in FY18
to 36:64 in FY20.
Gold loans have a yield of ~10%. Overall agri loans have a yield of 10.5% v/s
9.8% in FY19.
The focus is on improving the share of gold loans in semi-urban areas as they are
high-yielding businesses.
The bank is witnessing ~30% growth in gold loans with the share of high-yielding
loans increasing at a constant pace. This is likely to increase the yield to ~11%.
The bank is disbursing ~INR1.1b per month with aspiration to increase to
INR2.5b per month in next financial year.
Micro finance business is small and looking to expand it in a risk-calibrated
manner. It has a book of ~INR500m with ~13k customers. The focus is on
expanding business through multiple BCs.
The bank started CV/CE business in FY19 and has a team of 25 members.
The bank selected two geographies with high potential (Tamil Nadu and
Maharashtra) and the focus is on lending toward purchase of new vehicles.
The bank has a target to exit FY20 with a book of INR6b-6.5b.
Delinquency level in the CV/CE business remains very low.
Session #5: Subsidiaries and Progress – Mr. Ashutosh Khajuria (Executive
Director & CFO)
FedFina:
Started operations in 2010
The loan book stood at INR9b in FY17, INR14b in FY18, INR20b in FY19 and is
expected to reach INR40b by FY20.
It is rated AA-; however, cost of debt is reasonable given strong parentage.
Business includes gold loans, LAP with ticket size of INR7.5m and INR1.5m and
unsecured segments with a ticket size of INR2m.
It had a branch count of 150 in FY19, expected to have ~300 by FY20 and will
add another 100 branches in FY21.
Yields stood at ~14.5% and cost of funds at ~9% with NIMs of ~7.5%.
The subsidiary has an RoA of 8.5% for the current year with a target to increase
it further in the coming years.
26 February 2020
8
 Motilal Oswal Financial Services
Federal Bank
Story in charts
Exhibit 7: Net stress loans decline to 2.3% of total loans
No big-ticket corporate
loans above INR1b in the
watch-list.
Total NSL (INRb)
as a % of loans
Exhibit 8: Retail GNPA stable; corporate NPAs improving
Retail
6.0%
5.7%
6.2%
6.6%
SME
6.3%
Corporate
6.6% 6.6%
6.1%
Exhibit 9: Slippage ratio/credit cost to moderate
3.7
Slippage Ratio (%)
Credit cost (%)
2.7
2.1%
2.1%
2.3%
2.2%
2.2%
2.2%
1.9
2.2%
2.0%
1.9%
1.8%
2.1%
1.6%
2.1%
1.8%
2.0%
1.9%
1.3
0.9
1.1
1.6
1.7
1.5
1.3
0.8
0.7
0.6
0.6
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 10: Operating leverage kicking in for the bank
CI ratio (%)
2.1
1.9
1.8
1.7
Opex to avg assets (%)
Exhibit 11: RoA/RoE to improve to 1.2%/15.5% in FY22
ROE (%)
1.3
1.7
13.7
0.5
9.9
6.0
ROA (%)
1.0
12.3
1.1
14.1
1.2
15.5
1.8
1.7
0.8
0.7
8.3
0.8
9.8
57.1
53.4
51.7
50.0
51.2
49.1
47.5
Source: MOFSL, Company
Source: MOFSL, Company
Valuation and view
Net stressed loans decline to 2.3% of loans:
FB has reported a sharp decline in
net stressed loans (NNPA + standard restructured + net SRs) to ~2.3% of loans
v/s 5.4% in FY16. Going ahead, the bank has no big-ticket (>INR1b) account in its
watch-list. We thus expect corporate slippages to moderate sustainably. This
will likely drive controlled credit costs and a consistent improvement in its
coverage ratio.
26 February 2020
9
 Motilal Oswal Financial Services
Federal Bank
Strong liability franchise:
CASA + retail term deposits constitute ~91% of total
deposits. The bank has lower cost of funds advantage compared to other mid-
size banks and is focused on cross-selling liability products to corporate clients
to garner salary accounts.
Lending toward better-rated corporates:
FB is taking a cautious approach in
building the loan mix toward high-rated corporates and secured retail loans. The
proportion of retail loans has improved to ~30% in 3QFY20 from 27.4% in FY18.
Buy with a target price of INR115:
In our view, FB is well placed to deliver RoA
expansion led by moderating slippage trends, which will facilitate controlled
credit costs. Margin prospects appear promising with the asset mix change
toward high-yield segments. Also, the strong liability franchise will enable lower
cost of funds. The bank will add branches in a calibrated manner and thus the
C/I ratio is expected to improve to ~48% by FY22 from 50% in FY19. We slightly
tweak our estimates and project earnings CAGR of 25% over FY20-22 with
RoA/RoE of 1.2%/15.5% by FY22. We believe that the stock is trading at
inexpensive valuations (1.1x Sep’21E ABV) and thus offers ample scope of re-
rating. Maintain Buy with a TP of INR115 (1.4x for Sep’21E ABV).
Exhibit 13: One-year forward P/E
Max (x)
-1SD
1.9
1.2
0.6
1.1
31.0
24.0
17.0
10.0
3.0
4.8
17.0
12.2
7.4
8.4
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
23.9
Exhibit 12: One-year forward P/BV
2.3
1.8
1.3
0.8
0.3
P/B (x)
Min (x)
1.5
1.0
Avg (x)
+1SD
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 14: DuPont Analysis: We expect return ratios to remain modest
Y/E March
Interest Income
Interest Expense
Net Interest Income
Core Fee Income
Trading and others
Non-Interest income
Total Income
Operating Expenses
Employee cost
Others
Operating Profits
Core Operating Profits
Provisions
PBT
Tax
RoA
Leverage (x)
RoE
FY15
9.42
6.40
3.02
0.66
0.46
1.12
4.14
2.07
1.13
0.94
2.07
1.61
0.14
1.93
0.65
1.28
10.7
13.7
FY16
8.89
6.01
2.88
0.68
0.25
0.93
3.81
2.17
1.21
0.96
1.63
1.39
0.81
0.83
0.28
0.55
11.0
6.0
FY17
8.41
5.45
2.96
0.70
0.35
1.05
4.01
2.14
1.13
1.01
1.87
1.51
0.60
1.27
0.46
0.81
12.1
9.8
FY18
7.70
4.87
2.83
0.73
0.19
0.92
3.74
1.94
0.98
0.95
1.81
1.62
0.75
1.06
0.37
0.69
12.0
8.3
FY19
7.67
4.87
2.81
0.75
0.15
0.91
3.71
1.86
0.93
0.93
1.86
1.70
0.58
1.28
0.45
0.84
11.7
9.8
FY20E
7.67
4.95
2.72
0.85
0.13
0.98
3.70
1.90
0.95
0.95
1.80
1.67
0.48
1.32
0.33
0.99
12.2
12.1
FY21E
7.66
4.88
2.78
0.92
0.12
1.04
3.82
1.88
0.93
0.94
1.94
1.83
0.47
1.48
0.37
1.11
12.7
14.1
FY22E
7.61
4.83
2.78
0.98
0.10
1.08
3.85
1.83
0.91
0.92
2.02
1.92
0.46
1.56
0.39
1.17
13.2
15.5
Source: MOFSL, Company
26 February 2020
10
 Motilal Oswal Financial Services
Federal Bank
Financials and Valuations
Income Statement
Y/E March
Interest Income
Interest Expense
Net Interest Income
Growth (%)
Non-Interest Income
Total Income
Growth (%)
Operating Expenses
Pre Provision Profits
Growth (%)
Core PPP
Growth (%)
Provisions (excl. tax)
PBT
Tax
Tax Rate (%)
PAT
Growth (%)
Balance Sheet
Y/E March
Equity Share Capital
Reserves & Surplus
Net Worth
Deposits
Growth (%)
of which CASA Deposits
Growth (%)
Borrowings
Other Liabilities & Prov.
Total Liabilities
Current Assets
Investments
Growth (%)
Loans
Growth (%)
Fixed Assets
Other Assets
Total Assets
Asset Quality
GNPA
NNPA
GNPA Ratio
NNPA Ratio
Slippage Ratio
Credit Cost
PCR (Excl. Tech. write off)
FY15
74,195
50,391
23,804
6.8
8,783
32,587
11.5
16,309
16,278
10.0
13,721
3.6
1,067
15,210
5,153
33.9
10,057
19.9
FY15
3,427
73,955
77,381
708,250
18.6
217,835
16.7
23,082
19,791
828,505
47,800
205,688
-14.7
512,850
18.1
4,666
57,500
828,505
FY16
77,482
52,404
25,077
5.3
8,082
33,159
1.8
18,921
14,238
-12.5
12,963
-5.5
7,041
7,197
2,440
33.9
4,757
-52.7
FY16
3,438
77,474
80,912
791,717
11.8
260,526
19.6
21,766
19,905
914,300
54,198
222,175
8.0
580,901
13.3
5,200
51,826
914,300
FY17
86,774
56,247
30,526
21.7
10,818
41,345
24.7
22,095
19,249
35.2
16,163
24.7
6,184
13,065
4,757
36.4
8,308
74.7
FY17
3,448
84,108
87,556
976,646
23.4
320,528
23.0
58,973
26,594
1,149,769
74,522
281,961
26.9
733,363
26.2
4,895
55,029
1,149,769
FY18
97,529
61,701
35,828
17.4
11,591
47,419
14.7
24,509
22,910
19.0
20,521
27.0
9,472
13,439
4,650
34.6
8,789
5.8
FY18
3,944
118,158
122,102
1,119,925
14.7
376,867
17.6
115,335
25,777
1,383,140
92,034
307,811
9.2
919,575
25.4
4,574
59,146
1,383,140
FY19
114,190
72,427
41,763
16.6
13,510
55,274
16.6
27,643
27,631
20.6
25,347
23.5
8,559
19,073
6,634
34.8
12,439
41.5
FY19
3,970
128,760
132,730
1,349,543
20.5
437,314
16.0
77,813
33,313
1,593,400
100,668
318,245
3.4
1,102,230
19.9
4,720
67,537
1,593,400
FY20E
130,766
84,414
46,351
11.0
16,753
63,104
14.2
32,325
30,778
11.4
28,495
12.4
8,267
22,512
5,387
23.9
17,125
37.7
FY20E
3,970
142,056
146,026
1,551,975
15.0
501,288
14.6
80,095
39,975
1,818,071
114,245
356,434
12.0
1,262,053
14.5
5,051
80,289
1,818,071
FY21E
150,623
95,973
54,650
17.9
20,438
75,088
19.0
36,880
38,208
24.1
35,924
26.1
9,146
29,061
7,315
25.2
21,747
27.0
FY21E
3,970
159,017
162,987
1,815,811
17.0
601,033
19.9
88,104
47,171
2,114,072
129,466
406,335
14.0
1,476,602
17.0
5,404
96,265
2,114,072
(INRm)
FY22E
174,691
110,924
63,767
16.7
24,730
88,497
17.9
42,076
46,421
21.5
44,137
22.9
10,594
35,827
9,018
25.2
26,809
23.3
FY22E
3,970
180,083
184,053
2,142,657
18.0
758,500
26.2
96,914
55,662
2,479,286
143,333
463,222
14.0
1,742,390
18.0
5,783
124,558
2,479,286
10,576
3,733
2.0
0.7
1.9
0.5
64.7
16,677
9,500
2.8
1.6
3.7
1.3
43.0
17,270
9,412
2.3
1.3
1.9
0.9
45.5
27,956
15,520
3.0
1.7
2.7
1.1
44.5
32,607
16,262
2.9
1.5
1.6
0.8
50.1
37,378
20,056
2.9
1.6
1.7
0.65
46.3
42,967
22,352
2.9
1.5
1.5
0.62
48.0
46,703
24,059
2.6
1.4
1.3
0.60
48.5
26 February 2020
11
 Motilal Oswal Financial Services
Federal Bank
Financials and Valuations
Ratios
Y/E March
Yield and Cost Ratios (%)
Avg. Yield-Earning Assets
Avg. Yield on loans
Avg. Yield on Investments
Avg. Cost-Int. Bear. Liab.
Avg. Cost of Deposits
Avg. Cost of Borrowings
Interest Spread
Net Interest Margin
Capitalization Ratios (%)
CAR
Tier I
Tier II
Business and Efficiency Ratios (%)
Loans/Deposit Ratio
CASA Ratio
Cost/Assets
Cost/Total Income
Cost/Core Income
Int. Expense/Int. Income
Fee Income/Net Income
Non Int. Inc./Net Income
Emp. Cost/Op. Exp.
Investment/Deposit Ratio
Valuation
RoE
RoA
RoRWA
Book Value (INR)
Growth (%)
Price-BV (x)
Adjusted BV (INR)
Price-ABV (x)
EPS (INR)
Growth (%)
Price-Earnings (x)
Dividend Per Share (INR)
Dividend Yield (%)
FY15
10.4
11.5
7.4
7.3
7.1
10.3
3.2
3.3
FY16
10.0
10.4
8.2
6.8
6.7
8.0
3.2
3.2
FY17
9.3
10.0
7.1
6.1
6.1
5.5
3.2
3.3
FY18
8.4
9.1
6.6
5.4
5.5
5.1
3.0
3.1
FY19
8.4
9.0
6.6
5.4
5.5
5.2
2.9
3.1
FY20E
8.4
8.9
6.7
5.5
5.6
4.6
2.9
3.0
FY21E
8.4
8.9
6.7
5.4
5.5
4.5
3.0
3.1
FY22E
8.4
8.9
6.6
5.4
5.4
4.7
3.0
3.1
15.5
14.8
0.7
13.9
13.4
0.6
12.4
11.8
0.6
14.9
14.4
0.5
14.4
13.7
0.8
13.4
12.7
0.6
12.8
12.3
0.5
12.0
11.5
0.4
72.4
30.8
2.0
50.0
54.3
67.9
15.8
27.0
54.7
29.0
73.4
32.9
2.1
57.1
59.3
67.6
17.8
24.4
55.6
28.1
75.1
32.8
1.9
53.4
57.8
64.8
17.4
26.2
52.7
28.9
82.1
33.7
1.8
51.7
54.4
63.3
19.4
24.4
50.7
27.5
81.7
32.4
1.7
50.0
52.2
63.4
20.3
24.4
49.8
23.6
81.3
32.3
1.8
51.2
53.1
64.6
22.9
26.5
49.9
23.0
81.3
33.1
1.7
49.1
50.7
63.7
24.2
27.2
49.8
22.4
81.3
35.4
1.7
47.5
48.8
63.5
25.4
27.9
49.8
21.6
13.7
1.3
2.0
45.2
11.2
43.7
5.9
19.7
1.1
6.0
0.5
0.8
47.1
4.2
43.5
2.8
-52.9
0.7
9.9
0.8
1.1
50.8
7.9
1.7
47.2
1.8
4.8
74.1
17.7
1.1
1.3
8.3
0.7
1.0
61.9
21.9
1.4
54.4
1.6
4.8
-1.3
17.9
1.1
1.3
9.8
0.8
1.3
66.9
8.0
1.3
59.1
1.4
6.3
32.2
13.5
1.2
1.4
12.3
1.0
1.5
73.5
10.0
1.2
64.2
1.3
8.6
37.2
9.9
1.9
2.3
14.1
1.11
1.7
82.1
11.6
1.0
71.6
1.2
11.0
27.0
7.8
2.4
2.8
15.5
1.17
1.7
92.7
12.9
0.9
81.3
1.0
13.5
23.3
6.3
2.9
3.4
26 February 2020
12
 Motilal Oswal Financial Services
Federal Bank
Explanation of Investment Rating
Investment Rating
Expected return (over 12-month)
BUY
>=15%
SELL
< - 10%
NEUTRAL
< - 10 % to 15%
UNDER REVIEW
Rating may undergo a change
NOT RATED
We have forward looking estimates for the stock but we refrain from assigning recommendation
*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within
following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.
Disclosures
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
Motilal Oswal Financial Services Ltd. (MOFSL) is a SEBI Registered Research Analyst having registration no. INH000000412. MOFSL, the Research Entity (RE) as defined in the
Regulations, is engaged in the business of providing Stock broking services, Investment Advisory Services, Depository participant services & distribution of various financial
products. MOFSL is a subsidiary company of Passionate Investment Management Pvt. Ltd.. (PIMPL). MOFSL is a listed public company, the details in respect of which are
available on www.motilaloswal.com. MOFSL (erstwhile Motilal Oswal Securities Limited - MOSL) is registered with the Securities & Exchange Board of India (SEBI) and is a
registered Trading Member with National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange Limited (BSE), Multi Commodity Exchange of India Limited (MCX) and
National Commodity & Derivatives Exchange Limited (NCDEX) for its stock broking activities & is Depository participant with Central Depository Services Limited (CDSL) National
Securities Depository Limited (NSDL),NERL, COMRIS and CCRL and is member of Association of Mutual Funds of India (AMFI) for distribution of financial products and Insurance
Regulatory & Development Authority of India (IRDA) as Corporate Agent for insurance products.
Details of associate entities of Motilal Oswal Financial Services Limited are
available on the website at
http://onlinereports.motilaloswal.com/Dormant/documents/List%20of%20Associate%20companies.pdf
MOFSL and its associate company(ies), their directors and Research Analyst and their relatives may; (a) from time to time, have a long or short position in, act as principal in, and
buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other
compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have
any other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the
specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOFSL even
though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report
MOFSL and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, the recipients of this report
should be aware that MOFSL may have a potential conflict of interest that may affect the objectivity of this report. Compensation of Research Analysts is not based on any specific
merchant banking, investment banking or brokerage service transactions. Details of pending Enquiry Proceedings of Motilal Oswal Financial Services Limited are available on the
website at
https://galaxy.motilaloswal.com/ResearchAnalyst/PublishViewLitigation.aspx
A graph of daily closing prices of securities is available at
www.nseindia.com, www.bseindia.com.
Research Analyst views on Subject Company may vary based on Fundamental
research and Technical Research. Proprietary trading desk of MOFSL or its associates maintains arm’s length distance with Research Team as all the activities are segregated
from MOFSL research activity and therefore it can have an independent view with regards to Subject Company for which Research Team have expressed their views.
Regional Disclosures (outside India)
This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability
or use would be contrary to law, regulation or which would subject MOFSL & its group companies to registration or licensing requirements within such jurisdictions.
For Hong Kong:
This report is distributed in Hong Kong by Motilal Oswal capital Markets (Hong Kong) Private Limited, a licensed corporation (CE AYY-301) licensed and regulated by the Hong
Kong Securities and Futures Commission (SFC) pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) “SFO”. As per SEBI (Research Analyst
Regulations) 2014 Motilal Oswal Securities (SEBI Reg No. INH000000412) has an agreement with Motilal Oswal capital Markets (Hong Kong) Private Limited for distribution of
research report in Hong Kong. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity
to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these
securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The Indian Analyst(s) who compile this report is/are not
located in Hong Kong & are not conducting Research Analysis in Hong Kong.
For U.S.
Motilal Oswal Financial Services Limited (MOFSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under
applicable state laws in the United States. In addition MOFSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers
Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any
brokerage and investment services provided by MOFSL , including the products and services described herein are not available to or intended for U.S. persons. This report is
intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as
"major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which
this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration
provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange
Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOFSL has entered into a chaperoning agreement with a U.S. registered broker-
dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this
chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S.
registered broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public
appearances and trading securities held by a research analyst account.
For Singapore
In Singapore, this report is being distributed by Motilal Oswal Capital Markets Singapore Pte Ltd (“MOCMSPL”) (Co.Reg. NO. 201129401Z) which is a holder of a capital markets
services license and an exempt financial adviser in Singapore.As per the approved agreement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP 289) and
Paragraph 11 of First Schedule of Financial Advisors Act (CAP 110) provided to MOCMSPL by Monetary Authority of Singapore. Persons in Singapore should contact MOCMSPL
in respect of any matter arising from, or in connection with this report/publication/communication. This report is distributed solely to persons who qualify as “Institutional Investors”,
of which some of whom may consist of "accredited" institutional investors as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore (“the
SFA”). Accordingly, if a Singapore person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and
inform MOCMSPL.
Specific Disclosures
1 MOFSL, Research Analyst and/or his relatives does not have financial interest in the subject company, as they do not have equity holdings in the subject company.
2 MOFSL, Research Analyst and/or his relatives do not have actual/beneficial ownership of 1% or more securities in the subject company
3 MOFSL, Research Analyst and/or his relatives have not received compensation/other benefits from the subject company in the past 12 months
4 MOFSL, Research Analyst and/or his relatives do not have material conflict of interest in the subject company at the time of publication of research report
5 Research Analyst has not served as director/officer/employee in the subject company
6 MOFSL has not acted as a manager or co-manager of public offering of securities of the subject company in past 12 months
7 MOFSL has not received compensation for investment banking/ merchant banking/brokerage services from the subject company in the past 12 months
8 MOFSL has not received compensation for other than investment banking/merchant banking/brokerage services from the subject company in the past 12 months
9 MOFSL has not received any compensation or other benefits from third party in connection with the research report
10 MOFSL has not engaged in market making activity for the subject company
26 February 2020
13
 Motilal Oswal Financial Services
Federal Bank
********************************************************************************************************************************
The associates of MOFSL may have:
- financial interest in the subject company
- actual/beneficial ownership of 1% or more securities in the subject company
- received compensation/other benefits from the subject company in the past 12 months
- other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the
specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOFSL even
though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report.
- acted as a manager or co-manager of public offering of securities of the subject company in past 12 months
- be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the
company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies)
- received compensation from the subject company in the past 12 months for investment banking / merchant banking / brokerage services or from other than said services.
The associates of MOFSL has not received any compensation or other benefits from third party in connection with the research report
Above disclosures include beneficial holdings lying in demat account of MOFSL which are opened for proprietary investments only. While calculating beneficial holdings, It does not
consider demat accounts which are opened in name of MOFSL for other purposes (i.e holding client securities, collaterals, error trades etc.). MOFSL also earns DP income from
clients which are not considered in above disclosures.
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the
research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.
Terms & Conditions:
This report has been prepared by MOFSL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and
may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent
of MOFSL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in
nature. The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty,
representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The
report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial
instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. MOFSL will not treat recipients as
customers by virtue of their receiving this report.
Disclaimer:
The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or
distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for
informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing
in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances.
The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this
document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this
document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views
expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade
securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of
the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and
should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make
modifications and alternations to this statement as may be required from time to time without any prior approval. MOFSL, its associates, their directors and the employees may from
time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to
perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a
separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of
information that is already available in publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the analyst, and the Company may or
may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on,
directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or
entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law,
regulation or which would subject MOFSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in
all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.
Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost
revenue or lost profits that may arise from or in connection with the use of the information.
The person accessing this information specifically agrees to exempt MOFSL or any of its
affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOFSL or any of its affiliates or employees responsible for any such
misuse and further agrees to hold MOFSL or any of its affiliates or employees free and harmless from all losses, costs, damages,
expenses that may be suffered by the person
accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263;
Website
www.motilaloswal.com.CIN
no.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road,
Malad(West), Mumbai- 400 064. Tel No: 022 7188 1000.
Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst:
INH000000412. AMFI: ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579;PMS:INP000006712. Motilal Oswal Asset Management Company
Ltd. (MOAMC): PMS (Registration No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth
Management Ltd. (MOWML): PMS (Registration No.: INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is
a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt.
Ltd. which is a group company of MOFSL. Private Equity is offered through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL.
Research & Advisory services is backed by proper research. Please read the Risk Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no
assurance or guarantee of the returns. Investment in securities market is subject to market risk, read all the related documents carefully before investing. Details of Compliance
Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.
* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National
Company Law Tribunal, Mumbai Bench.
26 February 2020
14