Federal Bank: NRE SB Deposit account deregulated – Negligible impact: Reliance Securities

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NRE SB Deposit account deregulated – Negligible impact
 NRE SB Deposit account deregulated: The Reserve Bank of India (RBI) has
with an immediate effect deregulated interest rates of Non-Residential Rupee
(NRE) Deposits and Ordinary Non-Resident (NRO) Accounts. Earlier, interest
rates on Non-Resident (External) Accounts Scheme and Ordinary
Non-Resident Deposit under savings account were regulated by the RBI at 4%
per annum. The revised deposit rates, however, will apply only to fresh deposits
and on renewal of maturing deposits. Also, interest rates offered by banks on
NRE and NRO deposits cannot be higher than those offered by them on
comparable domestic rupee deposits.
 RBI’s stance on NIMs: RBI’s commentary in the annual performance review
about high NIMs earned by banks had raised concerns whether the regulator
would undertake measures that would result in a decline in NIMs. Recent
measures such as savings rate deregulation and the tougher norms of the
priority sector were indirect measures to bring down the banks’ NIM. Moreover,
the recent NRE deposit deregulation confirms the intention of the RBI to bring
down the NIMs of the banks to more reasonable levels. RBI believes that the
consequences could offset the impact of lower NIM through higher operating
efficiency and contribution from fee income.
 Federal Bank dominance over NRE accounts: Federal Bank, due to its strong
presence in Kerala receives a significant share of the country’s remittances.
Around 6-8% of remittances to India are routed through Federal Bank, which
results in a large NRE deposit base. NRE deposits make up ~15% of the bank’s
total deposits. These are low cost deposits and are typically priced at LIBOR
plus 175bp if maintained in foreign currency and at LIBOR plus 275bp if
maintained in Indian rupees. As a result, Federal Bank’s total low cost deposit
base (NRE plus CASA) is at ~40%, which is in line with the CASA base of new
private banks.
 Management interaction: We spoke to the management of Federal Bank
regarding the impact of NRE account deregulation on their margins. Since, the
deregulated interest rates would only apply on the fresh deposits, the impact is
negligible. Total NRE deposits as of 30 September 2011 stood at Rs6,622cr
(Savings NRE - Rs4,017cr, Fixed NRE - Rs1,072cr & FCNR - Rs1,533cr).
However, the management expects the savings NRE deposits which is at 4% to
get transferred to their fixed NRE accounts, which has now been revised to
6.5% from 3.6% earlier by the bank post the deregulation. We anticipate some
pressures on the margin front going forward. Also, the management was
cautious on the credit growth since the domestic as well as the global economy
has been jittery. We have lowered NIMs by 5-6bp to ~3.6% from 3.7% and
further expect the credit growth to be lower by 200bp to 17% yoy for FY2012E.
Outlook & Valuation
Federal Bank has been facing high GNPA issues since many quarters. We expect
Federal Bank to get re-rated on the back of higher recoveries, lower additions and
improving ROE, and thereby assign a target multiple of 1.3x FY2013E BV. At the
CMP of Rs360, the bank is trading at 1.0x FY2013E BV. We recommend a Buy on
Federal Bank with a target price of Rs462 (upside of ~28% from the CMP).