LKP Research's research report on The Federal Bank
The bank has reported sturdy results in the recent quarter led by a) strong NII growth (12% YoY) with NIMs improvement to 3.07%. b) Healthy business growth (credit: 8.3% YoY and deposits: 16.9% YoY). c) Better operating performance with C/I ratio 47.8% v/s 51.3% in FY20. d) Improvement in moratorium book (24% against 35% declared earlier). Federal Bank has one of the best liability franchise among private sector banks with LCR of 220% and CD ratio of 78%. Furthermore, the bank sees no further equity dilution as CET 1 is 13% of RWA. Under base case scenario, we estimate the bank’s FY22E ROA and ROE at ~1% and ~13% respectively. An inexpensive valuation (P/Adj. BV: 0.87x) makes the bank lucrative. Thus we recommend BUY.
Despite substantial improvement in all major operating matrix, profitability may remain under pressure in FY21 led by the higher provision for LuM. We have incorporated higher provision requirement along with steady growth in balance sheet and thus expect it to deliver RoA/ RoE of ~1%/~13% by FY22E. In our view, maximum negatives are in the price and thus we recommend BUY with a TP of ?71 (based on 0.8x FY22E Adj. BVPS); a potential upside of 27%.
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