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Last Updated : Feb 27, 2020 12:58 PM IST | Source: Moneycontrol.com

Brokerages turn bullish on Federal bank, see 27-35% upside in a year

Federal Bank has identified new revenue streams such as micro finance, credit card, CV/CE and business banking for margin expansion.

 
 
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Market experts seem to be bullish on Federal Bank as they see a 27-35 percent upside in the stock in next one year. Brokerages cite the likely operational efficiencies and retail version plan 2.0 as the reasons for the positive view.

Emkay Global maintained a buy call on the stock, and overweight rating in its Emkay Alpha Portfolio (EAP) with a target price of Rs 112 (implying 31.69 percent upside from current levels) due to its strong retail re-orientation, improving return on assets (RoAs) (from 0.8 percent in FY19 to 1.1 percent in FY22), inexpensive valuations and healthy capital position.

Federal Bank on its Analyst Day highlighted the structural improvement undertaken at the bank to drive in operational/structural efficiencies and its retail version plan 2.0, including high yielding revenue streams (urban gold loans, commercial vehicle (CV)/commercial equipment (CE), MFI, Cards and Business banking).

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The bank has identified new revenue streams such as micro finance, credit card, CV/CE and business banking for margin expansion. It has set a target of achieving a retail : wholesale loan mix of 55:45 over the medium-to-long term.

The bank reiterated that there is no residual stress in corporate accounts above Rs 100 crore. It thus expects the slippage trend to moderate significantly, which in turn will drive controlled credit cost.

Work is happening to improve productivity by adding branches in a calibrated manner and a high focus is placed on leveraging the distribution channel through the RM model.

This will drive a further improvement in the cost to income ratio, said Motilal Oswal which believes that the stock trades at inexpensive valuations (1.1x Sep’21E ABV) and thus offers ample scope of re-rating as the earnings cycle recovers.

Despite several asset-quality/margin hiccups, the bank delivered on guided RoA trajectory (around 1-1.1 percent) in nine-month of FY20 and aspires for 20-25bps expansion in RoA over next 1-2 years to 1.2-1.25 percent (levels seen before FY16), pinning its hope on higher retail-orientation and better cost efficiencies.

"Going ahead, in the next 2-3 years, target of 1.25 percent RoA will be led by increasing share in high yielding assets, no large escalation in opex and maintained credit cost of 60bps," said Prabhudas Lilladher while retaining buy call with a target price of Rs 108 (unchanged, implying 27 percent potential upside from current levels) based on 1.4x Sep-21 ABV.

Motilal Oswal projects earnings CAGR of 25 percent over FY20-22 with RoA/RoE of 1.2 percent/15.5 percent by FY22. "We maintain buy with a target price of Rs 115, implying 35.21 percent potential upside from current levels."

Emkay feels net interest margin (NIM) remains a key enabler, while it has been able to do slightly better on fees (0.9 percent of assets currently from 0.7 percent in FY13) but still has higher room.

Bank's product suite in wholesale in complete, while in retail bank is ready to scale commercial vehicle/commercial equipment, unsecured lending, MFI & business banking for future growth, it said.

Federal Bank is now well positioned to scale ahead with strong product offering across product segments, better pricing and strongly built feet on street in last few years (across wholesale/treasury/retail).

Bank is highly focused on digital delivery and leveraging data & analytics. Bank is well positioned on capital with Tier-I at 12.6 percent as of 9MFY20 (no raising for next 2 years), gradual profitability improvement led by recovering NIMs, strong fee income growth and steady cost to asset.

"The bank has guided for one-off wage revision-related provisioning of Rs 48 crore in Q4, which should be partly offset by better NIMs/lower LLP with lumpy corporate stress largely behind," Emkay said.

The board plans to re-apply to extend the term for current MD & CEO Mr. Srinivasan, beyond Sep’20, otherwise being extended for just one year by the RBI.

The stock was quoting at Rs 85.15, up Rs 0.10, or 0.12 percent on the BSE at 1028 hours IST.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Feb 27, 2020 12:58 pm
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