Federal Bank - Focus on transition from 'presence to prominence' - ICICI Securities

Key takeaway from Federal Bank's (FB) FY21 annual report is its continued commitment to structural transition away from 'typical old generation regional bank mindset'. The commitment is reflected in its aim to become the 'first choice' bank for all stakeholders and pursue initiatives to enhance its status from 'presence' to 'prominence' in 'rest of India'. Further, taking cognisance of industry-leading FY21 performance, FB aims to scale up all its business segments over next 3-4 years and achieve the 'right to win' in most lending segments with focus on sustained earnings during high-growth periods. Other key takeaways are: 1) collection efficiency at >95% as at Mar'21; 2) launch of India's first-of-its-kind digital credit card in Mar'21, offered to existing customers as of now; 3) focus on ESG; 4) ~22% of incremental business loans were disbursed to 'new to bank' customers; and 5) it is the fifth-largest private sector bank in terms of monthly debit spend. Maintain BUY.

- Steady improvement in business market share over past 5 years. Over past 3-4 years, FB had focused on breaking the 'typical old generation regional bank mindset' and build capabilities to enhance its status from 'presence' to 'prominence' in 'rest of India'. To achieve this goal, it has strengthened its digital capabilities and revamped business architecture by adopting a verticalised approach in most businesses. The strategy has started yielding positive results as reflected in steady improvement in its credit / deposit market share to 1.1% / 1.2% respectively as at Mar'21 from 0.9% / 0.94% in Mar'17. Total customer base as at Mar'21 crossed the 10mn mark, offering huge cross-selling opportunity.

- Balance sheet granularisation continued. During FY21, while it continued to focus on tapping available opportunities, balance sheet granularisation remained on track. The share of retail assets increased to 54% and retail deposits contribute 90% to total deposits. Further, the share of top-20 depositors at 4.8% (6% in FY20) is amongst the lowest in industry. Incremental credit growth in FY21 was largely driven by gold loans (up 70% YoY).

- Digital journey progressing well. FB integrated its mobile banking app, FedBook and BHIM UPI into a single application, and added a host of new features and services to make it a one-stop shop for all banking needs enabling users to access and manage their accounts from anywhere, anytime and undertake banking as well as non-banking transactions. As a result, the share of digital transactions increased to 86% and nearly 90% of incremental savings accounts were opened digitally. Further, it pioneered the use of 'tab banking' in sourcing auto loans. The solution, GoNoGo, is designed for simplicity and speed and is used at the point of sale (i.e. the car dealer's location) to facilitate approval and opening of car loans.

- Sustained strong growth in NR business. FB's non-resident (NR) deposit franchise remained undisrupted even through the covid-induced challenges - NR business grew 12% YoY, NR CASA grew 19%, and FB got a lion's share in personal inward remittances business at 17.5% as at Mar'21.

- Focus on HNI segment; would help improve cross-sell. FB's launch of a special segment named 'The Celesta' in Oct'20, targeting High Networth Individuals (HNIs), was a key feature of the year under review. The Celesta segment, designed to cater to the special needs of HNIs, comes with a Celesta savings account (for both residents and NRs). This account is clubbed with the premium Celesta debit card variant and offers a host of exclusive offerings like family banking program, customised wealth management services, and personalised offers and benefits including concierge services, dual RM support, etc. Since launch, the scheme gained much popularity within a short period - added 6,500+ customers with total savings balance of Celesta reaching Rs19.2bn. As a result, CASA share from the HNI segment improved to 45.25% in FY21 vs 40.7% in FY20. Total number of HNI profiled customers stands at 245,000 in FY21 (up 25% YoY).

- Margin expansion remains key strategy. As highlighted on multiple occasions, FB is initiating various measures to improve margins on a sustainable basis. One of the strategies is to focus on scaling up high yield products like credit card, CV, business banking, MFI, etc. During FY21, it launched its own credit card and registered strong growth in CV/CE business.

- Credit card: FB launched India's first-of-its-kind complete digital card in Mar'21 to existing customers. The card is activated through a 3-click process. The virtual card is delivered to the applicant through FedMobile within seconds, followed by a physical card.

- Commercial vehicle financing: FB commenced the CV/CE financing business in FY19 focusing on single unit owners, fleet operators and strategic clients in new and used CVs and CEs. Initially, it started the CV business in Tamil Nadu and Kerala in view of its strong presence in these regions and, during last 2 years, gradually expanded reach to cover southern and western India. During FY21, it consolidated its teams in business acquisition, credit underwriting, and collections. Despite industry challenges led by covid, CV/CE loans grew by a strong 58% YoY and stand at Rs9.1bn with robust asset quality. It also signed MoUs with commercial vehicle OEMs like Tata Motor, Daimler India, and Mahindra Truck & Buses to be a preferred financier for them.

- Business Banking: This segment (offering loans up to Rs50mn) caters to mainly to micro, small and medium enterprises. The segment registered growth of 13%, disbursing 11,000+ loans (excluding GECL and FITL) during FY21, of which 22% were disbursed to 'new to bank' customers. A DSA arrangement for sourcing from unexplored markets was initiated in FY21, which is expected to reap results in FY22.

- ESG. As part of its endeavour to foster the ethos of ESG across the organisation, FB is coming out with an ESG theme, in line with the principles of UN Sustainability Development Goals (SDGs), to ensure that every employee is aware of the importance of ESG and the need to move forward towards its goals responsibly.

- Key risks. a) Stress unfolding higher than expected, and b) NIM compression if the corporate segment drives incremental growth.

Shares of FEDERAL BANK LTD. was last trading in BSE at Rs.87.25 as compared to the previous close of Rs. 85.35. The total number of shares traded during the day was 1986365 in over 6662 trades.

The stock hit an intraday high of Rs. 87.5 and intraday low of 85.35. The net turnover during the day was Rs. 172346539.

Source : Equity Bulls

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