Date: 7 November, 2017
Price: Rs. 114.15
Founded in 1931, The Federal Bank Limited (“Federal Bank” or “Bank” or “Company”) is engaged in commercial banking activities in India. The Bank classifies its business in four segments:
1) Treasury; Corporate
2) Wholesale Banking
3) Retail Banking; and
4) Other Banking Operations
Apart from accepting deposits and providing loans, Federal Bank also provides life, health, and general insurance products; mutual funds, online trading facility and earns non-fee based inome from various other service offerings including national pension system, bank guarantee, bill discounting, merchant banking, cash management, depository, E-Commerce, trade finance, ATM, Internet and mobile banking, telephone banking, payment, fund transfer, electronic clearing, safe deposit locker, cash deposit machine, and online tax payment services.
As of March 31, 2017, Federal Bank operated through a network of 1,252 branches and 1,667 ATMs. The Company was formerly known as Travancore Federal Bank Limited and changed its name to The Federal Bank Limited in March 1947. The Company is headquartered in Aluva, India.
Total Deposits for the Bank have increased at a CAGR of 70% since FY 2013 with major spur in deposits during the period between FY 2016 and FY 2017.
Operating profit margin and Net Profit margin have reduced over time but is still better as compared to industry standards. In FY 2016-2017, operating profits grew by 16.58% and Net Profit by 74.90%.
Net Profit Margins
IMPROVING ASSET QUALITY
Non-Performing Assets (NPA) are currently weighing down most public as well as private sector banks. When compared with best of industry players, Federal Bank’s NPA levels have been pretty much under control.
In fact, only Federal Bank’s Gross NPA % has fallen as compared to FY 2013 (in FY 2017). For the rest, it has either risen or has remained same. ICICI, Axis, Yes Bank and Kotak Mahindra banks have all reported consistently higher NPAs.
IMPROVING NET INTEREST MARGINS (NIMS)
CASA ratio and NIMs are two very decisive factors for a bank. A higher CASA ratio is preferred as it reduces the liability of the banks to pay interest on the deposits. Similarly, a higher NIM is preferred as it reflects that interest income earned is higher than the interest paid out. On both the grounds, Federal bank proves to be very competitive in comparison to higher valued peers.
Low cost CASA Deposits for the company have increased by c.23% for the FY 2016 and 2017. Currently the CASA ration for the bank is 32.93%.
Federal Bank’s Net NPA% is also better than its Large cap peers in the likes of ICICI Bank, Axis Bank and Kotak Mahindra Bank.
Some of the highlighting features of the Bank based on recent activities are:
- Total Advances have increased by c.25% y-o-y
- Cost to Income Ratio has declined by 159bps from 52.4% to 50.8%
- Gross NPA has come down by 39bps to 2.39 and Net NPA has declined by 29 bps to 1.32 YOY
- In terms of Risk Analysis of the asset quality of loans, c.70% of the wholesale loan portfolio which constitutes c.39% of the total loan book is rated A & Above and c.18% is rated in BBB category
- Federal Bank’s Mobile based transactions have increased from Rs. 412 Cr. to Rs. 1214 Cr. showing a tremendous growth of c.196% y-o-y. Also customer base has increased from 5.96 lacs to 9.74 lacs during the same period
- Low cost CASA Deposits for the company have increased by c.23% for the FY 2016 and 2017. Currently the CASA ration for the bank is 32.93%.
- In the latest quarter (Q2 FY18), the company achieved its highest NII in a quarter of c. Rs. 899 crores.
As per the current trends and recent performance, Federal Bank stock is a good buy. With stronger profit growth, lower NPA% and expansionary developments in the online segment, the Bank is at a robust position. It is very competitive when compared with its large cap peers as well. Income growth is strong and continuous.
About the Author
Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.Follow @SanaSecurities