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We met the new MD & CEO of Federal Bank (FB IN, Mkt Cap US$1.6b, CMP Rs435, Buy), Mr Srinivasan who has a tenure of five years, to understand strategy of the bank under his leadership. Key takeaways:
- With large balance sheet, capabilities and distribution strength already in place, key focus will be on improving risk management systems and processes (to tackle NPA issues and have quality growth ahead).
- Balance sheet growth will remain moderate till back end processes improve. Federal Bank will continue to focus on Retail and SME as the prime growth drivers.
- SME regions will be the focus areas for branch expansion. Planning to scale up branch network to 1,000 branches in next 2 years from ~700 currently.
- Once branch expansion and investment in technology/manpower picks up, C/I ratio will increase to 40%+ vs 35% reported in FY10.
- While RoA of the bank will remain strong at ~1.3%, RoE is likely to remain in mid teens till FY12 as growth moderates.
About Mr Shyam Srinivasan:
- Mr Srinivasan has taken charge as Managing Director & CEO of Federal Bank with effect from 23rd September 2010.
- He joined Federal Bank after having worked with leading multinational banks in India and overseas across Middle East, India and South East Asia, where he has worked in retail lending, wealth management and SME banking.
- Before joining Federal Bank, Shyam Srinivasan was with Standard Chartered Bank, where he was responsible for strategy, development and management of the bank's Consumer Banking Business spread across a large network of branches in India employing over 6,000 people.
- Prior to that, he was Country Head of Standard Chartered Bank's consumer franchise in Malaysia.
- Mr Srinivasan is an alumnus of IIM Kolkata and Regional Engineering College, Tiruchirapally. He has completed a Leadership Development Program from the London Business School and has served on the Global Executive Forum (the top 100 executives) of Standard Chartered Bank from 2004 to 2010.
Improving systems and process for quality growth ahead
- Under the leadership of Mr Srinivasan, key focus of the bank is to improve risk management systems and processes to tackle asset quality issues.
- For retail loans, bank is in the process of improving recovery mechanism by introducing scorecard system. 13 regional retail hubs are already in place, however, not operating at the optimal levels. Recently, bank has withdrawn sanctioning power at the branch level.
- For growing large corporate loans, newer products and high end corporate systems to be placed to garner new business.
- Mr Srinivasan mentioned that the bank will continue to focus on Retail and SME loans as the growth drivers.
Branch expansion and employee related strategy
- New branch expansion will be made based on opportunity to grow SME loans (SME hubs) and current account deposits. Planning to scale up branch network to 1,000 branches in next 2 years from ~700 branches as on 1QFY11.
- More than 95% staff of the bank is unionized; focus of the management will be to increase conversation and transparency to improve productivity.
- The bank is looking to hire 1,000+ employees in FY11 to its existing staff strength of 7,800+. More than 30% of the staff is recruited in last three years. This coupled with natural attrition will bring down average age of employees.
- Large scale top management change is not expected and bank will look at internal and external talent for key positions.
Branch network (nos.)
Growth to remain moderate
- Immediate focus of Federal Bank is to improve systems and process for quality growth ahead. In the process, it is not averse to moderating growth.
- In the near term, management expects to grow in line with or marginally lower than industry.
- On the liability side, the bank will remain focused on CASA (29% as of 1QFY11) and NRI deposits (16% as of 1QFY11).
- On the non interest front, immediate focus of the bank will be to improve forex, treasury and third party distribution income.
Trend in loan growth
Valuations and view: Execution remains a challenge; Return ratio in mid teen till FY12
- While distribution network and systems are in place, successful execution of strategies in a highly unionized set up will remain a challenge, in our view.
- We estimate EPS of Rs36 in FY11 and Rs43 in FY12 i.e. FY10-12 EPS CAGR of 25%. We expect RoA to remain strong at 1.3%+ over FY10-12. However, excess capital will keep RoE in FY10-12 lower at 13-14%.
- The stock trades at FY12E P/E of 10x and P/BV of 1.3x. Maintain Buy with a revised target price of Rs505 (1.5x FY12E BV of Rs337).
Federal Bank: Valuation Summary
Comparative valuations
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