Federal Bank - Strengthening liability muscle; fees & charges revised upwards - ICICI Securities

Federal Bank has revised some fees and charges upwards in various banking services effective 1st Oct'20 to ensure further balance stickiness, discipline and realigning with market dynamics. Key changes in liability related charges include: i) Charges on non-maintenance of AMB revised upwards by 20/48%; ii) account closure charges (if closed between 6M to 12M - which no bank charges) revised further to Rs100-300 vs Rs50-100 earlier and iii) locker charges revised upwards in the range of 8-13%. We see two-fold effect of this development: Firstly, it would further strengthen the liability franchise with improved balance stickiness and discipline. Secondly, it supports traction in non-interest income particularly from services (currently contributes ~25% to core fee income, up from ~20% since last revision in charges in Sep'19). Strength and resilience of its liability franchise reflects in 13bps improvement in deposit market share over past two years. Valuations at 0.7x FY22E offer favourable risk-reward. Maintain BUY.

- Focus on digital penetration. Upward revision in charges on cash handling and per cheque leaf above free limits, while no change in IMPS/NEFT/Net Banking charges, reflects the bank's commitment towards improving digital penetration amongst existing customer base. Charges per cheque leaf (above free limits) in regular Saving Accounts revised upwards by 50% to Rs3 per leaf from Rs2 earlier, while per leaf charges remain same for Current Account holders. Similarly, to encourage digital payments (Fed-e-business), Federal Bank proposed three revisions - A) on Saving Account - minimum free cash handling limit reduced to Rs10mn vs Rs15mn earlier, and B) on Current Account - free limit doubled to Rs30mn but charges revised upwards by ~25% (Rs4.25 per Rs1,000) and maximum charges to Rs20,000 from Rs15,000 earlier.

- Strong liability franchise to ensure undisrupted flow of deposits despite charges revision. Retail deposits of >90%, strong NR deposit base, best-in-class digital platform and incremental peak FD rates closer to large banks and savings rates at the lowest end at 2.5% - but still gaining deposit market share talks of its deposits franchise. Leveraging the brand and inherent geographical advantage, it now focuses on further strengthening liability muscle by revising AMB charges and account closure charges upwards. The same is likely to offer dual advantage of - A) higher income from services if customer fails to maintain stipulated minimum balance or B) higher SA balance if customer starts adhering to minimum balance requirements to avoid higher penal charges.

- Valuation and outlook. Favourable asset mix as reflected in moratorium at ~24% (12th July'20) and 11/12% adjusted for partial payments, strong liability franchise and boost to core fee income (though marginal) would ensure Federal Bank navigating the current cycle effectively than peers. In current circumstances, 0.7x FY22E BV seems factoring in lot of pessimism rending risk-reward favourable. We maintain BUY with an unchanged TP of Rs70.

Shares of FEDERAL BANK LTD. was last trading in BSE at Rs.52.7 as compared to the previous close of Rs. 53.55. The total number of shares traded during the day was 823137 in over 1887 trades.

The stock hit an intraday high of Rs. 53.85 and intraday low of 52.4. The net turnover during the day was Rs. 43604002.

Source : Equity Bulls

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