Federal Bank Ltd - Initiating Coverage (Keynote Capitals)

Visit http://indiaer.blogspot.com/ for complete details �� ��

Initiating Coverage report on Federal Bank Ltd, one of the best old private sector bank headquartered in Kerala. (Market cap `78.01bn).

Federal Bank Ltd (FBL), with excellent track record of growth and quality, has 672 branches and 732 ATMs spread all over India as of March, 2010. As a largest traditional private sector bank in the country, FBL nurtured for more than seven decades, gaining the reputation of being an agile, technology savvy and customer friendly bank. Relative to its old private-bank peers, Federal Bank offers its customers a better value proposition in terms of advanced technology, a wider product range and a stronger network.

Executive Summary

§  Healthy Business growth: Robust business growth over the years due to increase in deposits and uptake of credit because of revival in economy, resulting in the highest market share of 16.4% amongst the old private-sector banks.

§  Increase in Low-cost deposits: The strategy of shedding high cost deposits and increasing CASA ratio has led the bank to maintain the low-cost deposits mix (including NRI deposits) around 46% of the total deposits.

§  Highest NIMs among its peers: Geographical advantages, branch expansion, use of advanced technology and introduction of new schemes and products have resulted in excellent deposit-mix enabling the bank to maintain margins towards higher levels.

§  High-yielding loan book: Maintaining the market share in Advances portfolio around 17% through well diversified loan book and giving more thrust on Retail and MSME sectors to earn high returns.

§  Comfortable CAR: The bank has a capital adequacy ratio (as per Basel II) of 18.4% in FY10 is well above RBI’s minimum requirement of 9%. Its rating profile has resulted in reduction in risk-weighted assets, leading to improvement in CRAR that is best amongst banks in old private sector groups.

§  Well managed Cost-efficiencies leading to increase in productivity ratios: Cost-to-income ratio of 34.9% as of FY10, lowest amongst its peers reflects the efficiency of the bank and is expected to maintain better productive ratios in future.

Valuations:

Ø  At CMP of `456.10, the stock is trading at 1.7x FY10 price to adjusted book. Considering the overall growth prospects of the bank, we recommend a ‘Buy’, assigning a multiple of 1.7x FY12E price to adjusted book to arrive at the target price of `555 per share.