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Federal Bank
Operational restructuring- next delta…
RoE expansion- A turnaround story
• Federal Bank is a turnaround story of optimum financial leverage
bolstered by operational restructuring under way leading to
improvement in RoE from 13.5% currently to over 17%
• It is a leader among south based old private sector banks (across
all parameters like branch network, NIM, efficiency and size)
serving through 743 branches. The bank is shedding the regional
tag and aiming at a pan-India presence
• The bank is in the process of successfully implementing the
business transformation roadmap suggested by the Boston
Consultancy Group (BCG). This is expected to help the bank in
cementing its position as a new generation private sector bank
• One of the leanest cost structures among peers (CI ratio of 36%)
Going ahead
• The bank’s credit disbursal policy and improving loan monitoring
system will moderate asset quality concern ahead. We, therefore,
see lower provisioning cost enabling healthy PAT growth
• RoE deteriorated during FY10 (@10%) due to low business
growth and unutilised funds raised through rights issue in FY08-
09. Healthy business growth (above industry average) is expected
to help the bank retain its position among top five private players
in the country
• The story will revolve around the leadership of CEO Shyam
Srinivasan. This is expected to take the bank to the next level of
high growth, which would improve the RoE
• The kicker to the NII growth would come from healthy loan
growth of 20% and controlled cost structure. PAT growth would
remain healthy in the backdrop of restrained credit cost
• NIM, which is healthy at 4%, is expected to stay within a range of
3.5-4% on account of low cost deposit franchise of 35-40% (CASA
and NRI deposits) and asset growth focused towards SME and
retail segment where margins are better
Valuation
We believe the bank’s return ratios are set to improve (RoE of 17%+)
supported by healthy business growth of 20-25% CAGR over the coming
years. Management capability and higher capital adequacy ratio at 16.7%
will be key triggers, going ahead.
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