Madhuchanda DeyMoneycontrol Research
Federal Bank doesn’t command the haloed valuation like its retail focused private peers. Nor is it neck deep in asset quality woes like its public sector counterparts. This middle-of-the-road mid-sized entity (market cap: Rs 21,167 crore, CMP: Rs 107) under the new savvy management has by and large crossed the asset quality problem. It has recently raised capital and looks set to accelerate growth.
However, after a stellar stock market run in the first half of 2017, the stock has corrected by close to 10 percent in the past six months and fallen by close to 18 percent from its 52-week high and quoting much lower than its QIP (qualified institutional placement) price. This period of consolidation provides an excellent entry point for long-term investors.
What’s going right?
The asset book is diversified
The current asset mix is 39 percent, 22 percent and 39 percent in favour of retail, SME and corporate, respectively and the bank is targeting a mix of one-third in each of this category. Federal Bank has stepped up hiring in the sales team and has been growing its high-rated exposure – share of A and above-rated loans has remained stable at ~70 percent from 51 percent about one year ago.
Gaining market share
The bank has been growing its book at a healthy clip when competition is saddled with asset quality issues. In the quarter gone by, while overall advances grew by 25 percent, the same was driven by wholesale advances that surged 36 percent while retail and SMEs grew by 18 percent.
In fact, the Federal Bank has been clearly garnering market share in the advances market. While its absolute share in system’s advance is still 1 percent, in the last one year, its share in incremental advances has improved over 100 basis points.
Focus on low cost liability – key to managing margin
On the liability side, while overall deposits grew by 13 percent in the September 2017 quarter, the retail and the CASA (current and savings account) portions grew much faster at 16 percent and 20 percent, respectively. Consequently, the share of low-cost deposits improved by close to 200 basis points to 33 percent. The better management of liability aided in protecting margin despite pressure on yield on advances.
Asset quality stable after the blip in the first quarter
Slippages that saw a spike in the first quarter of FY18 had the lagged impact of demonetization and slippage of one corporate account. Asset quality picture was a lot sober in the quarter gone by. Gross NPL (non-performing loan) ratio stood at 2.4 percent and net NPL at 1.3 percent and restructured loans at 1.7 percent. Provision coverage including write-offs was at 70 percent. The bank has the negligible impact of NCLT (national company law tribunal) referred NPA cases. Credit cost (provided against bad assets) should gradually decline from FY19 onwards.
Well capitalised
In the month of June 2017, Federal Bank raised close to Rs 2500 crore from institutional investors by issuing equity at Rs 116 per share. The capital adequacy ratio is healthy 14.63 percent (Tier I at 14.09 percent). This should aid the growth journey, going forward.
Attractively valued for the long term investors
While the concentration in Kerala and the share of NRI deposits at 39 percent remains the key risks, the stability in oil prices in recent times has reduced the Middle East linked overhang to some extent. The stock remains reasonably valued at 1.6X FY19 book.
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