Buy Federal Bank - CMP: Rs.490, TP: Rs.580 - Prabhudas Lilladher

Expansion in ROE's; we expect ROE's to improve to ~15.5-16% over FY13-15 from the 12-15% range seen over the past five years. The expansion in ROE's is underpinned by improvement in asset quality and operating margins.

Credit systems overhaul done; positives to follow: Aggressive growth over FY06-08 led to significant inch-up in slippages for FB in FY08-11. The new management over the last two years has (1) centralized the credit appraisal process, especially in SME/retail (2) consolidated FB's high delinquency mortgage book and increased share of gold loans in the retail portfolio and (3) improved quality of underwriting in large/mid corporate. Management initiatives are being reflected in lower slippages in SME/Retail and with the legacy corporate book running off, we expect slippages to come off from +3% to ~2% in FY13/14.

Closing in on aggressive network expansion: With Federal bank nearing its target of 1100 branches ( 1028 branches as on 3QFY13), we expect opex growth to moderate.

Valuation: The stock is currently trading at 1.2x FY14 P/B, we have a BUY on the stock with March-14 target price of Rs 580 per share.

Source : Equity Bulls

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