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Turnaround in the offing; Focused NRI strategy
Increasing leverage; SME and Retail loans to drive growth
Ever since Mr S Srinivasan has taken charge as CEO of Federal Bank, his focus on strengthening
back-end processes and risk management systems to tackle asset quality issues has started yielding
results. Management has identified Retail and SME loans as key growth drivers, and carved out
specific strategies for further inroads into the NRI business. The bank is planning to scale up its
branch network to 1,000 in the next two years from 746 in 1QFY12. Fee income growth remains
muted, and can provide positive surprises, given heightened efforts by the top management.
Margins to remain strong at 3.5%+: High share of low-cost deposits (33-34%, including low cost NRI
deposits) and high yielding retail and SME loans will keep Federal Bank (FB) margins strong at 3.5%+
over FY12 and FY13. The management aims to increase its share of low-cost deposits to 40% led by new
products and improved efficiency. We model in margins to decline by 20bp in FY12 and 15bp in FY13.
Asset quality improvement on cards: With the change at the helm of affairs, new management's
immediate focus was on improving risk management and loan recoveries. As systems and processes are
in place, slippages and credit costs are expected to decline significantly, driving profitability. Over FY09-
11, while FB reported significantly above-average slippages of 3.2%, management also kept PCR at a
high of 80%+ which led to higher credit cost of 1.7%.
Capitalizing on niche SME presence: The management plans to aggressively grow its SME loan
portfolio in Punjab, Maharashtra, Gujarat, Karnataka and Tamil Nadu. The management expects to grow
loans by 18-20% YoY.
Triggers in place; execution key: Expect all-round improvement in FB's operations: (1) pick-up in loan
growth, (2) improving fee income profile, and (3) sharp improvement in asset quality. With a large balance
sheet and distribution strength in place, strong operating leverage (via higher productivity) over FY12 and
FY13 can boost RoA. Expect FB to post earnings CAGR of 16% over FY11-13. While RoA is likely to be
1.2%+, RoE is expected to be muted at ~13% due to higher capitalization. We maintain Buy with a target
price of INR540.
Margin among the best; excess capital to keep RoE subdued
Historically FB kept NIMs at the higher level
despite high share of bulk deposits led by access
to low cost NRI deposits and CASA deposits
and high yielding retail and SME portfolio. NIMs
improved considerably in FY11; however we
expect some moderation ahead as growth picks
up.
Driven by asset quality issue post sharp loan
growth during FY06-08, FB moderated its loan
growth. With the new management at helm,
organization restructuring and systems in place
we expect growth to accelerate with focus on
SME and retail loans.
Post sharp increase in slippages over FY09-11,
slippages are likely to decline with improved risk
management and heightened efforts by
management for recoveries. Fall in slippages to
lead to lower credit cost and higher RoAs.
Improvement in key operating parameters,
coupled with improving growth will lead to
improving RoEs. Higher fees contribution and
credit cost can surprise positively.
1QFY12: Improving loan growth; slippages disappoint, but expected to decline
Faced with asset quality issues, growth had
moderated in the past. With the new
management at the helm of affairs, growth has
picked up and we expect it to be in the line with
the industry.
Despite consolidation, higher capital led to
higher margins for FB. As FB leverages its
balance sheet and large corporate growth is
likely to pick up we expect margins to moderate
ahead.
In our view, large pain in terms of the asset
quality is behind us and when the industry is
expected to report strain on asset quality, FBs
performance will stand out in our view
Performance on asset quality was disappointing
in 1QFY12 with an annualized slippage ratio of
4.3% (slippage ratio of 3%+ over FY08-11).
However slippages in 1QFY12 were largely
technical in nature. PCR remains superior at
80%+
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Turnaround in the offing; Focused NRI strategy
Increasing leverage; SME and Retail loans to drive growth
Ever since Mr S Srinivasan has taken charge as CEO of Federal Bank, his focus on strengthening
back-end processes and risk management systems to tackle asset quality issues has started yielding
results. Management has identified Retail and SME loans as key growth drivers, and carved out
specific strategies for further inroads into the NRI business. The bank is planning to scale up its
branch network to 1,000 in the next two years from 746 in 1QFY12. Fee income growth remains
muted, and can provide positive surprises, given heightened efforts by the top management.
Margins to remain strong at 3.5%+: High share of low-cost deposits (33-34%, including low cost NRI
deposits) and high yielding retail and SME loans will keep Federal Bank (FB) margins strong at 3.5%+
over FY12 and FY13. The management aims to increase its share of low-cost deposits to 40% led by new
products and improved efficiency. We model in margins to decline by 20bp in FY12 and 15bp in FY13.
Asset quality improvement on cards: With the change at the helm of affairs, new management's
immediate focus was on improving risk management and loan recoveries. As systems and processes are
in place, slippages and credit costs are expected to decline significantly, driving profitability. Over FY09-
11, while FB reported significantly above-average slippages of 3.2%, management also kept PCR at a
high of 80%+ which led to higher credit cost of 1.7%.
Capitalizing on niche SME presence: The management plans to aggressively grow its SME loan
portfolio in Punjab, Maharashtra, Gujarat, Karnataka and Tamil Nadu. The management expects to grow
loans by 18-20% YoY.
Triggers in place; execution key: Expect all-round improvement in FB's operations: (1) pick-up in loan
growth, (2) improving fee income profile, and (3) sharp improvement in asset quality. With a large balance
sheet and distribution strength in place, strong operating leverage (via higher productivity) over FY12 and
FY13 can boost RoA. Expect FB to post earnings CAGR of 16% over FY11-13. While RoA is likely to be
1.2%+, RoE is expected to be muted at ~13% due to higher capitalization. We maintain Buy with a target
price of INR540.
Margin among the best; excess capital to keep RoE subdued
Historically FB kept NIMs at the higher level
despite high share of bulk deposits led by access
to low cost NRI deposits and CASA deposits
and high yielding retail and SME portfolio. NIMs
improved considerably in FY11; however we
expect some moderation ahead as growth picks
up.
Driven by asset quality issue post sharp loan
growth during FY06-08, FB moderated its loan
growth. With the new management at helm,
organization restructuring and systems in place
we expect growth to accelerate with focus on
SME and retail loans.
Post sharp increase in slippages over FY09-11,
slippages are likely to decline with improved risk
management and heightened efforts by
management for recoveries. Fall in slippages to
lead to lower credit cost and higher RoAs.
Improvement in key operating parameters,
coupled with improving growth will lead to
improving RoEs. Higher fees contribution and
credit cost can surprise positively.
1QFY12: Improving loan growth; slippages disappoint, but expected to decline
Faced with asset quality issues, growth had
moderated in the past. With the new
management at the helm of affairs, growth has
picked up and we expect it to be in the line with
the industry.
Despite consolidation, higher capital led to
higher margins for FB. As FB leverages its
balance sheet and large corporate growth is
likely to pick up we expect margins to moderate
ahead.
In our view, large pain in terms of the asset
quality is behind us and when the industry is
expected to report strain on asset quality, FBs
performance will stand out in our view
Performance on asset quality was disappointing
in 1QFY12 with an annualized slippage ratio of
4.3% (slippage ratio of 3%+ over FY08-11).
However slippages in 1QFY12 were largely
technical in nature. PCR remains superior at
80%+
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