Ashika Monthly Insight August 2016

STRONG ON CONSUMPTION
ratio also remains strong at 32.83%. Federal bank enjoys
a strong presence in the state of Kerala with nearly 50%
of branches accounting from Kerala. The bank holds
market share of 13.9% in Kerala and there has been
constant effort on the part of the management to improve
pan India presence and also build strong markets in certain
non-south states. However, Federal Bank also has a strong
NRI client base due to its locational advantage in NRI
stronghold south India which is supporting the deposit and
advance momentum. NRE deposits account for 38% of
Federal Bank’s deposit mix. Over the period from FY12-16,
share of total NRI remittances made through Federal bank
increased by 506 bps from 7.49% to 12.55%.
Stable net interest margins
Net Interest income grew at a CAGR of 8% between FY11
& FY16 while the net interest margins have been above
3% mark during this time frame. Strong margins have
been driven by continuously improving CASA ratio from
28.5% in FY13 to 32.5% by FY16, thus resulting in
declining cost of funds. Going ahead, further reduction in
interest rates will help federal bank owe its dependence
on deposits as source of funds (more than 95%).
Asset quality concerns contained
Asset quality over the years has remained stable until the
past three to four quarters incidental with its exposure to
SME and corporate loans. On the asset quality front, post
higher slippages in the last three or four quarters, GNPA
slippages eased at Rs 280 crore in Q1FY17. On a
sequential basis, decline in slippages has seen across
segment with slippages in corporate book at Rs 45 crore
vs. Rs 254 crore in Q4FY16, Slippage in SME book has
also lowered at Rs 134 crore in Q1FY17 vs. Rs 154 crore
in Q4FY16. Besides, Federal bank continues to be
conservative on building its corporate portfolio over the
last three years and continues to stay away from risky
large ticket infrastructure loans.
Healthy Capital Adequacy ratio
Federal Bank has a comfortable capital adequacy ratio of
13.6%, considerably higher than the RBI stipulated 9%.
This reduces risks of dilution in equity in the near future.
Decent return ratios
Over the years, Federal Bank’s return on assets (ROA) have
hovered ~1.3% mark while return on equity (ROE) ~13%
mark until from FY09-15. However, higher provisions have
dented return ratios for FY16 and the same is reflected
with ROE and ROA both declining to 6% and 0.5%
respectively. However, post AQR, the worst is behind as far
as the asset quality is concerned and the return ratios are
expected to get a fillip from here on.
Key Risks
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Slowdown in credit offtake
Higher concentration in South India
Increase in interest rates
Valuation
Federal Bank Limited is a private commercial bank
headquartered at Aluva, Kerala having more than thousand
branches and ATMs spread across 25 States and 5 Union
Territories in India. The bank is primarily centered in Kerala
with market share of 13.9% and contributes to more than
50% of total business. Federal bank has built a strong
retail franchise over the years and it has been the key
driving force of the bank’s deposits and advances growth
over the years. The bank has grown its credit at a modest
pace of 13.9% CAGR in FY10-16 while deposit growth has
always been maintained better than industry growth rate.
Net Interest income grew at a CAGR of 8% between FY11
& FY16 while the net interest margins have been above
3% mark during this time frame. Strong margins have
been driven by continuously improving CASA ratio from
28.5% in FY13 to 32.5% by FY16, thus resulting in
declining cost of funds. Federal Bank also has a strong NRI
client base due to its location advantage in NRI stronghold
south India which is supporting the deposit and advance
momentum. NRE deposits account for 38% of Federal
Bank’s deposits mix. Asset quality over the years has
remained stable until the past three to four quarters
incidental with its exposure to SME and corporate loans.
However, asset quality issues are thing of the past since
the management has provided more than adequate
provisions and as of Q1FY17, the bank has curtailed down
on fresh slippages. At the CMP, the scrip trades at
1.18xFY18E BV and investors are advised to BUY the scrip
for a target of Rs 78 from a perspective of 12-18 months.
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