Buy Federal Bank; target Rs 440: IIFL

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Buy Federal Bank; target Rs 440: IIFL

IIFL is bullish on Federal Bank and has recommended buy rating on the stock with a target price of Rs 440 in its November 25, 2011 research report.

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IIFL is bullish on Federal Bank and has recommended buy rating on the stock with a target price of Rs 440 in its November 25, 2011 research report.

"Federal Bank's loan book expanded by healthy 5% qoq in Q2 FY12 after being flat in Q1 FY12 due to organizational restructuring and employee issues. With substantial SME and corporate exposure, bank's credit growth typically accelerates in H2. The loan mix has been shifting towards corporate segment off-late with the bank lapping-up better-quality opportunities. Within the retail segment, mortgages and gold loans are likely to be the key drivers. We estimate a healthy 18% CAGR in advances over FY11-13. Regional loan mix is expected to become more diversified in the medium term with reduction in Kerala concentration."

"During H1 FY12 Federal Bank's NIM moderated to 3.8% from higher levels of 4%+ in FY11 impacted by tight liquidity, unfavorable shift in deposit mix and decline in C/D ratio. H2 FY12 outlook for NIM is sanguine as the favorable impact of recent lending rate hikes (more effective for bank as 90%+ advances are floating), improvement in C/D ratio would comfortably offset the headwinds of higher deposits cost (mainly from retail TDs) and shift in loan mix towards lower-yielding corporate segment. Justifiably, the bank has given a NIM guidance of 3.75-3.8%."

"Driven by substantial slippages in the SME segment, delinquency ratio was high in H1 at 3.5%. As macro credit environment continues to weaken, we don't foresee notable improvement here. However, strong recoveries and acceleration in loan growth would drive marginal improvement in GNPL ratio. Federal Bank's perturbing exposure to Kingfisher, Air India and SEBs (combined ~4%) is currently standard with restructuring not requested by borrowers. Bank's high PCR at 83% lends strength to the balance sheet and provides some leeway for commensurately lower LLP. We therefore expect credit cost at relatively modest 1.1-1.2% in H2. With net NPL ratio to be sustained at 0.6%, NNPL/Networth ratio (NPL risk) would continue to be one of the lowest in the industry at near 4%."

"Federal Bank's strong pricing and lean operating structure enabled it to earn respectable RoA even during tough times of 2008-09 despite higher LLP. RoA is estimated to sustain near 1.2% aided by lower credit cost and stable NIM. With Tier-1 capital at 14%, capitalization level is high and reassuring in current environment. Bank has underperformed most peers in past 3/6 months and valuation has corrected significantly to 1x rolling 1- yr fwd P/adj.BV. In our view, Federal Bank provides comfort on multiple fronts - diversified loan profile, robust provisioning cover, high capitalization, low NPL risk and attractive valuation vis-à-vis estimated RoA. Initiate coverage with BUY rating and 9-month target of Rs 440," says IIFL research report.

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To read the full report click on the attachment