Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Federal Bank (FED.BO)
Healthy Valuations, Possible Future Rerating
Raising Target Price to Rs460, maintain Buy — We are raising our EVA-based
target price for Federal Bank to Rs460 (from Rs437 earlier). Our target price is
also benchmarked to 1.3x 1yr Fwd P/BV (Sep’12). We maintain our Buy/Medium
Risk recommendation on the stock, as we believe that key operating parameters
are stabilizing and the franchise is turning (albeit slowly). We also adjust earnings
marginally (-2%/-1% for FY12-13E) on account of slightly lower fee income.
Candidate for Re-rating — Federal Bank remains a strong prospect for rerating,
given its new management team, which is now in place and has taken several
steps for structural improvements in: a) Risk management; b) Customer focus; c)
Performance incentivisation; and d) Core business. All these measures should
start yielding operational benefits in the medium term. Federal Bank’s valuations
also look cheap (trades at 1.1x 1yr Fwd P/BV) and we remain positive on the
longer-term prospects of the business.
Quant View: Attractive — As per our quantitative methodology, Federal Bank
currently lies in the Attractive quadrant of our Value-Momentum map. The stock's
recent correction (down 17% in last 3months) makes valuations attractive and
momentum also remains strong.
Federal Bank currently lies in the Attractive quadrant of our Value-Momentum map
with strong value and momentum scores. The stock has moved from the Glamour
quadrant to the Attractive quadrant in the past 3 months indicating improving
valuations while momentum remains strong due to improving analyst estimates.
Compared to its peers in the Banks sector, Federal Bank fares worse on the
valuation metric and on the momentum metric. On the other hand, compared to its
peers in its home market of India, Federal Bank fares better on the valuation metric
and on the momentum metric.
From a macro perspective, Federal Bank has a low beta to the region, so can be
expected to hold its own given a decline in the regional market. It is also likely to
benefit from small-cap outperformance, falling EM yields, and a weaker US Dollar.
Federal Bank
Company description
Federal Bank is an 'old' private-sector bank. It, along with other old private- sector
banks, is positioned between the well-valued as well as popular new private-sector
banks, and the scaled and profitable but modestly valued government banks. Old
private-sector banks exhibit, in some measure, characteristics of private ownership,
in terms of returns, service levels and relatively aggressive management. But due to
their own vintage, old staff and beginnings in a government-controlled sector, they
carry some of the operational and structural rigidity of the government banks. The
old private-sector banks represent a modest 8% of the sector and account for
around 20 of the medium-scale banks. Federal Bank is the second-largest bank in
this profitable segment. Among old private-sector banks, we see consolidation as
being driven by scale, and geography and capital considerations.
Investment strategy
We rate Federal Bank as Buy/Medium Risk (1M). Federal Bank has the
characteristics of a regional bank: it is geographically concentrated in Kerala and is
a major beneficiary of the strong non-resident-Indian community from the state. The
bank also has high asset yields and a low-cost structure compared with the industry
average, and generates above industry margins. Federal has a niche and low cost
deposit franchise, private ownership and is attractive as an acquisition target. We
believe, in addition to the growth and franchise opportunities, its strong capital
cushion also positions it as a clean acquisition play and could likely be stock and
valuation driver. Its asset book, however, has come under recent pressure and
NPLs have moved ahead of industry levels, though coverage levels remain high.
This is largely due to its relatively concentrated mid-market exposures, which have
seen recent asset quality pressures. However, Federal’s new management team is
implementing better underwriting, origination and recovery practices to reduce NPL
accretion. We believe this should result in improvements in its quality and return
profile going ahead, though gains are likely to be more gradual than front-ended.
Valuation
We value Federal Bank based on our EVA model, which we believe captures the
long term value of the business and is also a standard valuation measure for our
India banking coverage. We factor in a risk-free rate of 8.0%, a lower-than-industry
cost income ratio at 35%, and above industry average spreads (270bps). This
translates to a target price of Rs460. We also benchmark our target price on a 1.3x
1yr Fwd PBV (Sep'12), which values the bank at Rs458. Our fair-value PBV multiple
is at par with larger government banks but at a 10% discount to best of breed
government banks, reflecting its higher asset concentration in SME and retail.
Risks
We rate Federal Bank shares as Medium Risk, even as our quantitative risk-rating
system, which tracks 260-day historical share-price volatility, suggests Low Risk.
We believe Federal’s relatively smaller size, its geographic concentration and its
higher dependence on SME lending increase its risk profile. The downside risks to
our target price include: a) small size and geographical concentration, which could
lead to higher asset quality pressures in a slow growth environment; b) high
dependence on the NRI segment, which is exposed to global, regulatory and
competitive risks; c) a bond portfolio that could depreciate if interest rates rise; and
d) aggressive acquisitions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Federal Bank (FED.BO)
Healthy Valuations, Possible Future Rerating
Raising Target Price to Rs460, maintain Buy — We are raising our EVA-based
target price for Federal Bank to Rs460 (from Rs437 earlier). Our target price is
also benchmarked to 1.3x 1yr Fwd P/BV (Sep’12). We maintain our Buy/Medium
Risk recommendation on the stock, as we believe that key operating parameters
are stabilizing and the franchise is turning (albeit slowly). We also adjust earnings
marginally (-2%/-1% for FY12-13E) on account of slightly lower fee income.
Candidate for Re-rating — Federal Bank remains a strong prospect for rerating,
given its new management team, which is now in place and has taken several
steps for structural improvements in: a) Risk management; b) Customer focus; c)
Performance incentivisation; and d) Core business. All these measures should
start yielding operational benefits in the medium term. Federal Bank’s valuations
also look cheap (trades at 1.1x 1yr Fwd P/BV) and we remain positive on the
longer-term prospects of the business.
Quant View: Attractive — As per our quantitative methodology, Federal Bank
currently lies in the Attractive quadrant of our Value-Momentum map. The stock's
recent correction (down 17% in last 3months) makes valuations attractive and
momentum also remains strong.
Federal Bank currently lies in the Attractive quadrant of our Value-Momentum map
with strong value and momentum scores. The stock has moved from the Glamour
quadrant to the Attractive quadrant in the past 3 months indicating improving
valuations while momentum remains strong due to improving analyst estimates.
Compared to its peers in the Banks sector, Federal Bank fares worse on the
valuation metric and on the momentum metric. On the other hand, compared to its
peers in its home market of India, Federal Bank fares better on the valuation metric
and on the momentum metric.
From a macro perspective, Federal Bank has a low beta to the region, so can be
expected to hold its own given a decline in the regional market. It is also likely to
benefit from small-cap outperformance, falling EM yields, and a weaker US Dollar.
Federal Bank
Company description
Federal Bank is an 'old' private-sector bank. It, along with other old private- sector
banks, is positioned between the well-valued as well as popular new private-sector
banks, and the scaled and profitable but modestly valued government banks. Old
private-sector banks exhibit, in some measure, characteristics of private ownership,
in terms of returns, service levels and relatively aggressive management. But due to
their own vintage, old staff and beginnings in a government-controlled sector, they
carry some of the operational and structural rigidity of the government banks. The
old private-sector banks represent a modest 8% of the sector and account for
around 20 of the medium-scale banks. Federal Bank is the second-largest bank in
this profitable segment. Among old private-sector banks, we see consolidation as
being driven by scale, and geography and capital considerations.
Investment strategy
We rate Federal Bank as Buy/Medium Risk (1M). Federal Bank has the
characteristics of a regional bank: it is geographically concentrated in Kerala and is
a major beneficiary of the strong non-resident-Indian community from the state. The
bank also has high asset yields and a low-cost structure compared with the industry
average, and generates above industry margins. Federal has a niche and low cost
deposit franchise, private ownership and is attractive as an acquisition target. We
believe, in addition to the growth and franchise opportunities, its strong capital
cushion also positions it as a clean acquisition play and could likely be stock and
valuation driver. Its asset book, however, has come under recent pressure and
NPLs have moved ahead of industry levels, though coverage levels remain high.
This is largely due to its relatively concentrated mid-market exposures, which have
seen recent asset quality pressures. However, Federal’s new management team is
implementing better underwriting, origination and recovery practices to reduce NPL
accretion. We believe this should result in improvements in its quality and return
profile going ahead, though gains are likely to be more gradual than front-ended.
Valuation
We value Federal Bank based on our EVA model, which we believe captures the
long term value of the business and is also a standard valuation measure for our
India banking coverage. We factor in a risk-free rate of 8.0%, a lower-than-industry
cost income ratio at 35%, and above industry average spreads (270bps). This
translates to a target price of Rs460. We also benchmark our target price on a 1.3x
1yr Fwd PBV (Sep'12), which values the bank at Rs458. Our fair-value PBV multiple
is at par with larger government banks but at a 10% discount to best of breed
government banks, reflecting its higher asset concentration in SME and retail.
Risks
We rate Federal Bank shares as Medium Risk, even as our quantitative risk-rating
system, which tracks 260-day historical share-price volatility, suggests Low Risk.
We believe Federal’s relatively smaller size, its geographic concentration and its
higher dependence on SME lending increase its risk profile. The downside risks to
our target price include: a) small size and geographical concentration, which could
lead to higher asset quality pressures in a slow growth environment; b) high
dependence on the NRI segment, which is exposed to global, regulatory and
competitive risks; c) a bond portfolio that could depreciate if interest rates rise; and
d) aggressive acquisitions.
No comments:
Post a Comment