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Federal Bank (FB)
Banks/Financial Institutions
Better times ahead. We expect Federal Bank to see all round improvement, with a
pick-up in loan growth, improving fee income profile and a sharp improvement in asset
quality. This is likely to propel very strong earnings momentum – expect 30% CAGR
growth over FY2011-13E and expect RoEs to improve to about 16% by FY2013E. The
new management is working hard on improving processes, front end, and service
quality, while keeping the interests of the employee unions in mind. Federal Bank is our
top pick in the mid-cap space with a target price of `500.
Trends on slippages turning positive with changed processes and improving macros
The slippages trend should see further improvement over the coming few quarters - improving
over the performance showed in the past three quarters thanks to recent initiatives taken by the
management and a gradual recovery in economic conditions. The past three quarters have seen
slippages (annualized) from the retail and SME loans declining to about 2.5% from over 4.5% in
1QFY11. (1) Call centers (outsourced model) are actively monitoring ‘past due’ portfolios unlike
the earlier mechanism to recover only after slipping into NPLs; (2) management has deployed
resources at the senior level specifically to monitor the slippages/recovery trend; and (3) loan
origination is moving through a hub-and-spoke delivery model. Initial results from these changes
appear encouraging and sustained improvement could result in lower loan loss provisions than our
current estimates. We are building slippages of 2.3% in FY2012-13E and loan loss provisions of
1.2% as compared to slippages of 4% and loan loss provisions of 1.8% in FY2011.
Focus on process and credit delivery; results to reflect from FY2012E
The management highlighted that changes made at the margin should result in a better earnings
profile (1) Credit delivery: The hub-and-spoke model (13 centers) is fully functional as against a
decentralized model earlier. Branches to act as originating agents for nearly all products;
(2) training has been completed for more than 120 employees on credit appraisal; (3) branch
managers are being trained on fee income products; and (3) medium-term projects have been
given to consultants to improve scoring models on loan appraisal and streamline process delivery.
Working on an effective model; keeping interests of all stakeholders in mind
The management highlighted that large scale changes are unlikely at all levels, which is
positive for Federal Bank given the strength of the employees in the decision making
processes. However, the bank is likely to fill few key roles from external sources, especially in
risk, corporate and treasury departments – mainly to build expertise in these areas. The bank
is hiring to meet its growth requirements and replace retired employees (average age to be
reduced, currently near 41 years). Investments will continue on training employees to
improve cross sell ratios. The bank is also likely to complete its ESOP program (5% of capital)
in FY2012, which will be given across the board and unlikely to be top heavy.
Loan growth ahead of industry; NIMs may moderate gradually
We expect Federal Bank to gradually shift focus to loan growth in FY2012E from managing
slippages – which should help to leverage its excess capital better.
Loan growth is likely to be ahead of the industry average - we are modeling a 23% CAGR
for FY2011-13E.
Focus to continue in retail and SME space.
Within retail, apart from housing, the bank would build a marginally higher share in gold
loans given the large opportunity within Kerala and Tamilnadu (acts as a substitute for
personal loans).
Large corporate lending is likely to be through consortium lending or for top rated
corporates.
Contribution from fee income to improve sharply in FY2012-13E
Federal Bank is likely to see stronger contribution from fee income to overall revenues post
significant investments, especially on training, made in recent months.
NRI business will be a primary driver as they are likely to capture a better share of fee
income through wealth management products (rather than only forex commissions)
within India (once money is transferred) and outside.
Lateral hires in corporate banking and treasury should enable the bank generate higher
fee income from these segments too.
We are building fee income to grow by 35% CAGR for FY2011-13E (primarily on the
back of a lower base as contribution of fee income to assets is about 1% of assets in
FY2011).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Federal Bank (FB)
Banks/Financial Institutions
Better times ahead. We expect Federal Bank to see all round improvement, with a
pick-up in loan growth, improving fee income profile and a sharp improvement in asset
quality. This is likely to propel very strong earnings momentum – expect 30% CAGR
growth over FY2011-13E and expect RoEs to improve to about 16% by FY2013E. The
new management is working hard on improving processes, front end, and service
quality, while keeping the interests of the employee unions in mind. Federal Bank is our
top pick in the mid-cap space with a target price of `500.
Trends on slippages turning positive with changed processes and improving macros
The slippages trend should see further improvement over the coming few quarters - improving
over the performance showed in the past three quarters thanks to recent initiatives taken by the
management and a gradual recovery in economic conditions. The past three quarters have seen
slippages (annualized) from the retail and SME loans declining to about 2.5% from over 4.5% in
1QFY11. (1) Call centers (outsourced model) are actively monitoring ‘past due’ portfolios unlike
the earlier mechanism to recover only after slipping into NPLs; (2) management has deployed
resources at the senior level specifically to monitor the slippages/recovery trend; and (3) loan
origination is moving through a hub-and-spoke delivery model. Initial results from these changes
appear encouraging and sustained improvement could result in lower loan loss provisions than our
current estimates. We are building slippages of 2.3% in FY2012-13E and loan loss provisions of
1.2% as compared to slippages of 4% and loan loss provisions of 1.8% in FY2011.
Focus on process and credit delivery; results to reflect from FY2012E
The management highlighted that changes made at the margin should result in a better earnings
profile (1) Credit delivery: The hub-and-spoke model (13 centers) is fully functional as against a
decentralized model earlier. Branches to act as originating agents for nearly all products;
(2) training has been completed for more than 120 employees on credit appraisal; (3) branch
managers are being trained on fee income products; and (3) medium-term projects have been
given to consultants to improve scoring models on loan appraisal and streamline process delivery.
Working on an effective model; keeping interests of all stakeholders in mind
The management highlighted that large scale changes are unlikely at all levels, which is
positive for Federal Bank given the strength of the employees in the decision making
processes. However, the bank is likely to fill few key roles from external sources, especially in
risk, corporate and treasury departments – mainly to build expertise in these areas. The bank
is hiring to meet its growth requirements and replace retired employees (average age to be
reduced, currently near 41 years). Investments will continue on training employees to
improve cross sell ratios. The bank is also likely to complete its ESOP program (5% of capital)
in FY2012, which will be given across the board and unlikely to be top heavy.
Loan growth ahead of industry; NIMs may moderate gradually
We expect Federal Bank to gradually shift focus to loan growth in FY2012E from managing
slippages – which should help to leverage its excess capital better.
Loan growth is likely to be ahead of the industry average - we are modeling a 23% CAGR
for FY2011-13E.
Focus to continue in retail and SME space.
Within retail, apart from housing, the bank would build a marginally higher share in gold
loans given the large opportunity within Kerala and Tamilnadu (acts as a substitute for
personal loans).
Large corporate lending is likely to be through consortium lending or for top rated
corporates.
Contribution from fee income to improve sharply in FY2012-13E
Federal Bank is likely to see stronger contribution from fee income to overall revenues post
significant investments, especially on training, made in recent months.
NRI business will be a primary driver as they are likely to capture a better share of fee
income through wealth management products (rather than only forex commissions)
within India (once money is transferred) and outside.
Lateral hires in corporate banking and treasury should enable the bank generate higher
fee income from these segments too.
We are building fee income to grow by 35% CAGR for FY2011-13E (primarily on the
back of a lower base as contribution of fee income to assets is about 1% of assets in
FY2011).
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