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UBS Investment Research
Federal Bank
O n track
Event: Q4 earnings in line with UBSe, higher than consensus
Federal Bank reported net profit of Rs 1.7 bn (47% Y/Y) in line with UBSe while
well ahead of consensus however NII came slightly below estimates at Rs 4.5 bn
(UBSe Rs 4.7bn). Key highlights of the quarter were 1) Asset quality trends
stabilized as expected, GNPA flat, credit costs declining and provisioning coverage
improved to 83% 2) NIMs decline 30 bps q/q as loan mix changed along with cost
of fund increase 3) Balance sheet growth improves strongly in Q4 at 19% y/y.
Impact: NIM estimates revised down slightly given the loan mix
Current quarter reinforces our view that Federal under the new leadership is
steadily moving towards a higher quality growth. Concerns on low growth and
high NPL additions should allay given current trends. Due to higher focus on large
corporate NIMs would come down further however profitability would be
supported by decline in credit costs and higher fee income. We expect 31% EPS
CAGR over next two years with RoE to improve to 16% from 12% currently.
Action: Reiterate BUY, one of our preferred picks in the sector
At 1.2x FY12E book, valuations are at a significant 50-60% discount to private
sector peers. While direct comparisons with new generation private banks might
not be appropriate, we also view such a steep valuation discount as unreasonable.
We believe Federal Bank’s fair valuation lies between PSU & new Pvt banks.
Valuation: PT of Rs 600- 49% upside potential
We derive our PT of Rs 600 using a residual income model which implies
1.8xFy12E book.
Federal Bank
Federal Bank, established in 1931, is the largest old private sector bank in India
in terms of assets. It was listed on the National Stock Exchange in 1998. At end-
2010, it had a total asset base of Rs462bn and 737 branches in 24 states
(approximately 60% in Kerala). It had a deposit base of Rs369bn and a loan
book of Rs282bn. Non-resident Indians (NRIs) contributed 26% of retail
deposits and the bank's CASA ratio stood at 29%. Federal Bank also holds 26%
equity in a JV life insurance company with IDBI Bank and Fortis Insurance
International. FIIs held a 38% stake in the bank as at December 2010.
Statement of Risk
We believe a sustained economic slowdown could impact the banking and
finance sector on several fronts, leading to a slowdown in credit and increased
NPL risk, as well as impacting fee income and exerting pressure on NIM.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Federal Bank
O n track
Event: Q4 earnings in line with UBSe, higher than consensus
Federal Bank reported net profit of Rs 1.7 bn (47% Y/Y) in line with UBSe while
well ahead of consensus however NII came slightly below estimates at Rs 4.5 bn
(UBSe Rs 4.7bn). Key highlights of the quarter were 1) Asset quality trends
stabilized as expected, GNPA flat, credit costs declining and provisioning coverage
improved to 83% 2) NIMs decline 30 bps q/q as loan mix changed along with cost
of fund increase 3) Balance sheet growth improves strongly in Q4 at 19% y/y.
Impact: NIM estimates revised down slightly given the loan mix
Current quarter reinforces our view that Federal under the new leadership is
steadily moving towards a higher quality growth. Concerns on low growth and
high NPL additions should allay given current trends. Due to higher focus on large
corporate NIMs would come down further however profitability would be
supported by decline in credit costs and higher fee income. We expect 31% EPS
CAGR over next two years with RoE to improve to 16% from 12% currently.
Action: Reiterate BUY, one of our preferred picks in the sector
At 1.2x FY12E book, valuations are at a significant 50-60% discount to private
sector peers. While direct comparisons with new generation private banks might
not be appropriate, we also view such a steep valuation discount as unreasonable.
We believe Federal Bank’s fair valuation lies between PSU & new Pvt banks.
Valuation: PT of Rs 600- 49% upside potential
We derive our PT of Rs 600 using a residual income model which implies
1.8xFy12E book.
Federal Bank
Federal Bank, established in 1931, is the largest old private sector bank in India
in terms of assets. It was listed on the National Stock Exchange in 1998. At end-
2010, it had a total asset base of Rs462bn and 737 branches in 24 states
(approximately 60% in Kerala). It had a deposit base of Rs369bn and a loan
book of Rs282bn. Non-resident Indians (NRIs) contributed 26% of retail
deposits and the bank's CASA ratio stood at 29%. Federal Bank also holds 26%
equity in a JV life insurance company with IDBI Bank and Fortis Insurance
International. FIIs held a 38% stake in the bank as at December 2010.
Statement of Risk
We believe a sustained economic slowdown could impact the banking and
finance sector on several fronts, leading to a slowdown in credit and increased
NPL risk, as well as impacting fee income and exerting pressure on NIM.
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