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Last Updated : May 24, 2019 11:23 AM IST | Source: Moneycontrol.com

Weekly Tactical Pick: Federal Bank has room for a re-rating

While the performance is commendable in most areas, garnering low-cost deposits remains an area of focus

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Todays L/H

We are recommending Federal Bank as our weekly tactical pick. While the stock has done reasonably well, we feel there is still headroom for a re-rating.

The bank posted a strong Q4 FY19 earnings, largely putting to rest concerns about the quality of its book due to the bad loan crisis in the corporate space and impact of Kerala floods. As guided, it achieved a Return of Assets (RoA) of a percent in the quarter gone by.

Asset quality showed remarkable improvement. Slippage declined significantly in the quarter under review and recovery was strong.


The bank’s largest exposure to IL&FS (Rs 210 crore) is in an operating asset and other smaller ones (little over Rs 32 crore) carry sufficient provision. The management has clarified that it has no exposure to Essel group, Jet Airways or Reliance Anil Dhirubhai Ambani Group (ADAG).

Core performance remained satisfactory with non-interest income providing a solid support. The strategic focus on improving non-interest income (stake in Equirus Capital - a boutique investment firm and getting a partner in its non-banking subsidiary FedFina to scale up the business) should stand in good stead.

While margin has remained stable around 3.17 percent, the bank is taking initiatives to counter the falling yields by foraying into relatively high margin businesses like unsecured retail credit and commercial vehicle (CV ) financing, While keeping an eye on quality of the book.

Business growth remains healthy. While the bank has an absolute share of 1.1 percent in system’s advances and deposits, its share of the incremental market is higher, thereby pointing to market share gains.

The management targets to have a balanced portfolio between retail, corporate and SME (small & medium enterprises). While growing in a balanced manner, the book is getting de-risked, which is evident from the decline in the ratio of risk weighted assets-to-total assets.

Lower capital consumption has resulted in a healthy Capital Adequacy Ratio of 14.14 percent, which can take care of its growth for the next couple of years without raising fresh capital.

While the performance is commendable in most areas, garnering low-cost deposits (current account-savings account share 32.2 percent) remains an area of focus.

We see upside from current valuation at 1.3 times FY21 estimated price-to-book.
First Published on May 24, 2019 11:15 am