EdelStar - Buy Federal Bank Ltd

CMP: Rs. 416 Target Price: Rs. 465

Federal Bank (FEDBAN), is a Kerala-based private sector bank. It has an asset base of ~INR 606bn as on Q4FY12 and a market cap of Rs. 71bn, branch network of over 950 (57% in Kerala), an ~900 ATMs. SME and retail lending are the bank's focus areas and constitute 29% and 28%, respectively, of its loan book. The bank's merger with Ganesh Bank has added 32 branches to its existing network, increasing its foothold in western India.. Bank also has a joint venture agreement with IDBI Ltd & Fortis Insurance International N V for a Life Insurance Company under the name of IDBI Fortis Life Insurance Company Ltd. During the year 2007-08, FEDBAN has opened its Representative office at Abu Dhabi, Capital of U.A.E. for the gateway of the bank to the whole of Middle East.

After a subdued FY12 where banks were beaten down for multiple reasons like high interest rates and inflation, going forward earnings trajectory is expected to pick up over the next two years for following reasons. (1)Utilisation of excess capacity and pent up demand will boost corporate capex, reviving credit demand in FY13; (2) multiple levers for margins improvement: continued re-pricing of high cost liabilities, improving CD ratio and, stable bond spreads; (3) improvement in asset quality. We expect banks core earnings (ex-treasury) to increase by 15 - 20% over FY12-14.

Federal Bank is one of the best regional-based private banks in the country. We like the bank for its strong regional presence, good technology network, possible M&A play, robust loan growth and best in class margins. SME and retail loans, which constitute a bulk of the bank's loan book, are likely to continue to lead its growth in future. The loan book is expected to grow at 18-20% (CAGR) over the next two years through network expansion and increased penetration.

Federal Bank enjoys an attractive franchise, characterized by high return ratios and employee/branch productivity against regional peers. It is currently undergoing a restructuring, putting people and processes in place to further enhance productivity and growth while maintaining high credit standards. After touching a peak of 1.5x, the stock has significantly corrected and is currently trading at 1.1x FY13E ABV. We believe, as benefits of restructuring flow in, it has the potential to deliver stronger returns and trade closer to 1.6-1.8x book.

Source : Equity Bulls

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