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UBS Investment Research
Federal Bank
Multiple catalysts ahead
„ New management may cause a turnaround
The company has just hired a senior executive to head its wholesale banking
business and plans to hire another senor level executive to head its treasury
division. We believe these hires will enhance the fee and corporate banking
franchise of the bank.
„ Asset quality to turn around; well capitalised franchise with Tier 1 at 15%
The bank has struggled with high NPA additions and slow balance sheet growth
over the past two years. However, we believe this will improve as new
management takes corrective measures to fill gaps in the bank’s risk management
process. We expect above-industry loan growth of 22% in FY12, driven by a
greater focus on high-quality corporates and SMEs.
„ Improvement in franchise to support earnings momentum
We believe the bank’s high credit cost of 1.9% offsets its high NIM and high
CASA of 37%. We forecast ROA and ROE to expand from 1.3%/12% in FY11 to
1.45%/16% in FY13 and for an EPS CAGR of 31% in FY11-13, driven by lower
credit costs and strong fee income growth.
„ Valuation: maintain Buy and price target of Rs600
The stock trades at 1.3x FY12E P/BV and 10.0x FY10E PE, and is at a significant
discount of 40-60% to private bank peers. We value the bank using a residual
income model and assume terminal return on equity and cost of equity of 14.1%.
Federal Bank remains our preferred pick in the Indian banking sector. We believe
the bank is also a potential acquisition candidate given its private sector status and
new progressive management.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Federal Bank
Multiple catalysts ahead
„ New management may cause a turnaround
The company has just hired a senior executive to head its wholesale banking
business and plans to hire another senor level executive to head its treasury
division. We believe these hires will enhance the fee and corporate banking
franchise of the bank.
„ Asset quality to turn around; well capitalised franchise with Tier 1 at 15%
The bank has struggled with high NPA additions and slow balance sheet growth
over the past two years. However, we believe this will improve as new
management takes corrective measures to fill gaps in the bank’s risk management
process. We expect above-industry loan growth of 22% in FY12, driven by a
greater focus on high-quality corporates and SMEs.
„ Improvement in franchise to support earnings momentum
We believe the bank’s high credit cost of 1.9% offsets its high NIM and high
CASA of 37%. We forecast ROA and ROE to expand from 1.3%/12% in FY11 to
1.45%/16% in FY13 and for an EPS CAGR of 31% in FY11-13, driven by lower
credit costs and strong fee income growth.
„ Valuation: maintain Buy and price target of Rs600
The stock trades at 1.3x FY12E P/BV and 10.0x FY10E PE, and is at a significant
discount of 40-60% to private bank peers. We value the bank using a residual
income model and assume terminal return on equity and cost of equity of 14.1%.
Federal Bank remains our preferred pick in the Indian banking sector. We believe
the bank is also a potential acquisition candidate given its private sector status and
new progressive management.
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