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India Equity Research Reports, IPO and Stock News
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With the RBI looking at issuing new bank licenses, competition in the banking industry is expected to heat up. In such a situation the future of old private banks which are smaller in size and geographically concentrated appears uncertain. In our opinion one of two scenarios are likely to play out 1) old private banks especially those with poor profitability and asset quality concerns could become takeover targets for new private sector banks and 2) larger old private banks could scale up operations and re-engineer business processes to bridge the gap between themselves and new private banks. This in turn could lead to a re-rating in the stock price of these banks. Given its large size and proactive management, we believe that Federal bank is amongst the best placed old private sector banks to make the transformation into a new generation bank.
Maintaining focus on traditional products… The banks management has stated that while it is attempting to revamp operations in order to compete with new private banks, it will continue to maintain its focus on regional products such as gold loans, NRI deposits and SME advances which have allowed it to maintain superior NIMs. NIM in FY11 was at 3.98% second only to HDFC bank in the private banking space. Going ahead however we expect Federal Banks NIM to moderate to ~3.86% in FY12 due to difficulty in passing on higher interest rates to consumers coupled with a shift in lending to less risky segments. Subsequently in FY13 we are factoring in a 5 bps improvement in the NIM as cost of funds is likely to come off due to an expected decline in cost of bulk deposits and an improvement in the CASA ratio.
…while making the transformation into a new generation bank: The bank has appointed the Boston Consulting Group to help it in its transformation into a new generation bank. BCG has suggested several structural and cultural changes. In order to implement these changes as well as put forward additional measures the bank has brought in certain key personnel from foreign banks. The new management is in the process of making several changes which include establishing a pan India presence, concentration on raising fee based income, improving visibility, changing HR practices to improve employee productivity and improving asset quality through centralizing risk management systems and stepping up focus on collections and recoveries.
Return ratios to improve: The new changes implemented by management are expected to result in increased fee income growth (fee income to improve from 0.4% of average advances in FY11 to 0.5% in FY13), lower credit costs (from 1.6% in FY11 to 1.2% in FY13 as slippages come off from 3.2% in FY11 to 2.5% in FY13) and as the bank leverages on its equity base (from 10.1x in FY11 to 11.4x in FY13), we expect ROE to increase to 15% in FY13 and ROA to improve to 1.3%.
Initiate coverage with a Buy rating and target price of ` 465: At the current market price of ` 359, Federal Bank trades at 1.1x and 1.0x its FY12E and FY13E ABV respectively. At these valuations the bank trades largely in line with its long term average P/ABV multiple. As the bank continues on its transformation to bridge the gap between itself and new generation private banks, we believe that the discount between its trading multiples and that of other new generation banks would narrow over the medium to long term. We believe Federal Bank is a Structural Buy Idea due to its transformation along the similar lines of IndusInd Bank. We initiate coverage on Federal Bank with a BUY rating and a target price of ` 465 (1.3x Its FY13E ABV).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
With the RBI looking at issuing new bank licenses, competition in the banking industry is expected to heat up. In such a situation the future of old private banks which are smaller in size and geographically concentrated appears uncertain. In our opinion one of two scenarios are likely to play out 1) old private banks especially those with poor profitability and asset quality concerns could become takeover targets for new private sector banks and 2) larger old private banks could scale up operations and re-engineer business processes to bridge the gap between themselves and new private banks. This in turn could lead to a re-rating in the stock price of these banks. Given its large size and proactive management, we believe that Federal bank is amongst the best placed old private sector banks to make the transformation into a new generation bank.
Maintaining focus on traditional products… The banks management has stated that while it is attempting to revamp operations in order to compete with new private banks, it will continue to maintain its focus on regional products such as gold loans, NRI deposits and SME advances which have allowed it to maintain superior NIMs. NIM in FY11 was at 3.98% second only to HDFC bank in the private banking space. Going ahead however we expect Federal Banks NIM to moderate to ~3.86% in FY12 due to difficulty in passing on higher interest rates to consumers coupled with a shift in lending to less risky segments. Subsequently in FY13 we are factoring in a 5 bps improvement in the NIM as cost of funds is likely to come off due to an expected decline in cost of bulk deposits and an improvement in the CASA ratio.
…while making the transformation into a new generation bank: The bank has appointed the Boston Consulting Group to help it in its transformation into a new generation bank. BCG has suggested several structural and cultural changes. In order to implement these changes as well as put forward additional measures the bank has brought in certain key personnel from foreign banks. The new management is in the process of making several changes which include establishing a pan India presence, concentration on raising fee based income, improving visibility, changing HR practices to improve employee productivity and improving asset quality through centralizing risk management systems and stepping up focus on collections and recoveries.
Return ratios to improve: The new changes implemented by management are expected to result in increased fee income growth (fee income to improve from 0.4% of average advances in FY11 to 0.5% in FY13), lower credit costs (from 1.6% in FY11 to 1.2% in FY13 as slippages come off from 3.2% in FY11 to 2.5% in FY13) and as the bank leverages on its equity base (from 10.1x in FY11 to 11.4x in FY13), we expect ROE to increase to 15% in FY13 and ROA to improve to 1.3%.
Initiate coverage with a Buy rating and target price of ` 465: At the current market price of ` 359, Federal Bank trades at 1.1x and 1.0x its FY12E and FY13E ABV respectively. At these valuations the bank trades largely in line with its long term average P/ABV multiple. As the bank continues on its transformation to bridge the gap between itself and new generation private banks, we believe that the discount between its trading multiples and that of other new generation banks would narrow over the medium to long term. We believe Federal Bank is a Structural Buy Idea due to its transformation along the similar lines of IndusInd Bank. We initiate coverage on Federal Bank with a BUY rating and a target price of ` 465 (1.3x Its FY13E ABV).
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