Jan 01, 2013, 05.54 PM | Source: Moneycontrol.com
Nirmal Bang has maintained hold rating on Federal Bank with a target price of Rs 580 in its January 1, 2013 research report.
, Nirmal Bang |
"Federal Bank - As per the Management, recent initiatives from Government of India have led to an improvement in overall market sentiment leading to a sharp rally in the banking indices. However, the crucial factor which needs to be watched out going forward is the step taken by the RBI in its policy meet. Management expects the credit growth to be driven largely post the rate cut announcement by the RBI. Management seems to be comfortable with a growth rate of 15-16% for FY13E with focus more on the quality of the loan book as compared to the quantum of the loan book. This reflects the conscious efforts taken by Management to de bulk its book and reduce corporate exposure (stress is not yet over; do not expect asset quality issues peaking out before Q4FY13) and focusing more on the retail and SME . One noteworthy point to be considered is that the bank has not witnessed any significant stress in its newly acquired (post management change) corporate loans as compared to the stress seen in the legacy corporate book. This further strengthens our belief in the Management. Fee income is the area where the bank is lagging behind and Management is consistently making efforts to improve it with focus on new business lines such as channel financing, export import business and so on.
Federal Bank enjoys an attractive franchise, characterized by higher employee and branch productivity against most of its regional peers. It is currently undergoing a restructuring phase, placing people and processes in place in order to enhance productivity and growth while maintaining high credit standards. We believe that the management’s strategy to strengthen the book and focus more on better rated corporates augur well for the bank. H2FY13 is expected to be better as compared to H1FY13 in terms of advance growth, NIMs and non interest income, with an improvement in cost to income ratio. On the asset quality front, the bank will be making a provision on the NAFED account. However, the bank does not expect any major negative surprise on the SME and retail portfolio. Given the improvement in the bank’s earnings and the structural improvements in the balance sheet, we expect the bank’s profitability to grow at 13% CAGR over FY12-FY14E.
At CMP, the stock is trading at 1.49x and 1.32x FY13E and FY14E Adj BVPS and 10.95x and 9.27x FY13E and FY14E EPS respectively. The stock has already appreciated 31% since our recommendation dated 07th August 2012 and achieved our target price. Moreover, we do not see substantial improvement immediately in H2FY13, therefore we suggest investors to book partial profit at current levels and continue to HOLD the remaining from a long term perspective. The improvement efforts are expected to yield results from FY14E onwards and thus we assign a P/ABV multiple of 1.4x to FY14E Adj BV (still lower as compared to its peers; the reason being lower return ratios) and arrive at a revised target price of Rs 580; a further upside of 7.8% from current levels," says Nirmal Bang research report.
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