bank+ +skp+sec+ nr

8/9/2019 Bank+ +SKP+Sec+ Nr

1/10

5th

November, 2009

Federal Bank Ltd.Providing financial solutions for all

SKP Securities Ltd www.skpmoneywise.com Page1 of1

Key Share Data

Face Value (Rs.) 10

Equity Capital (Rs. crs) 171.03

Market. Cap. (Rs. Cr.) 4342.45

52-wk High / Low (Rs.) 270.00 / 110.50

Average Yearly Volume 147004

BSE code 500469

NSE code FEDERALBANK

Reuters code FED.BOBloomber code FB IN

Shareholding Pattern as on 30-09-2009

Inst i tut ion,

2 5%

Corp .

Hold. ,

12%

Others ,

20 % FII, 43%

Financials (Rs. Cr.

FY08 FY09 FY10E FY11E

Net Int. Inc. 868 1315 1365 1689NIMs (%) 3.44 4.18 3.69 3.83

Operat. Profit 794 1259 1288 1621

PAT 368 500 562 730

PAT Gr 26 36 12 30

EPS (Rs.) 22 29 33 43

BVPS (Rs.) 229 251 284 327

Key Financial RatiosFY08

FY09 FY10E FY11E

P/E 10.50 7.72 6.87 5.29

P/ABV 1.00 0.91 0.82 0.71

Cost to Income % 37.12 31.21 35.85 34.44

RoA% 1.37 1.51 1.45 1.59

RoE% 9.38 11.57 11.58 13.08

PAT Margin% 12.65 13.06 12.72 13.73

Spread % 3.25 3.82 3.54 3.77

NPA Coverage% 90.78 88.45 81.10 81.09

NNPAs / Advances% 0.23 0.31 0.51 0.51

One year performance comparison v/s BSE Bankex

-0.6

-0.4

-0.2

0

0.20.4

0.6

0.8

1

Feder al Bank BSEBANKEX

Analyst: Amandeep GorayaTel No.: +91 22 2281 9012 Mob: 9920104371Email: [email protected]

CMP: Rs.226 Target Price: Rs.284 Initiating Coverage: BUY

Company Profile

The Federal Bank Limited (FBL) (the erstwhile TravancoreFederal Bank Limited) was incorporated with an authorised capital

of Rs.5000 at Nedumpuram, a place near Tiruvalla in Central

Travancore in 28th April of the year 1931 under the TravancoreCompany's Act. Shri K.P.Hormis founded the Bank. It started

business of auction -chitty and other banking transactions

connected with agriculture and industry.

Investment Rationale:

Better low cost deposits mix:FBL has CASA at 25% and it plans to increase it up to 28% in a span of 3 years.

It has around 28% of its retail deposits as NRI deposits and to increase NRIdeposits, FBL is implementing new strategies. FBL is trying to increase the low

cost deposits which would help it to improve margins.

Healthy & high yielding loan book:FBL has very low exposure to sensitive sectors and it also is decreasing its

exposure to SME to shield against any unexpected economic downturn. FBL

has its own internal rating system and as per this system 90% of loans are in the

range of High & moderate safety.

Expansion along efficiency improvement:FBL has plans to increase the number of branches from 612 to 677 by the end of

current financial year. FBL has appointed BOSTON Consultancy Group to

review the current working of the bank and to come up with strategies to

improve the working and to increase the banking business.

Strong & Huge capital base:FBL has the highest CAR in the banking industry. CAR for 2009 was 20.14%

out of this 17% was Tier 1 capital. This would help bank by shielding it agains

any sudden deterioration of assets. Extra cash can also be used to ramp up the

banking activities.

Inorganic growth:FBL is in talk with Catholic Syrian bank for merger. If the merger is successful,

FBL would have more than 1000 branches and would be shielded against any

competition in its home state Kerala.

Outlook & Recommendation:FBL is set to emerge as a strong private bank through improved performance

and growth. FBL has taken various steps to achieve its objective to be the no.1

bank in Kerala. FBL has shown better performance than the industry in the past

and we expect it to continue the trend.

We hereby initiate coverage on Federal Bank Ltd. and recommend buy rating

with a target price of Rs.284 (25% upside) in 12 months implying1.02 x and

0.9 x to adj. Book value per share of FY2010 & FY2011 respectively.


2/10

Federal ank Ltd.


Advances

42%

58%

Kerala outside Kerala

Deposits

51%

49%


Branches

388

254


The Federal Bank Limited (FBL) (the erstwhile Travancore Federal Bank Limited) was incorporated with an authorized capital of

rupees five thousand at Nedumpuram, a place near Tiruvalla in Central Travancore in 28th April of the year 1931 under the

Travancore Company's Act. Shri K.P.Hormis founded the Bank. It started business of auction-chitty and other banking

transactions connected with agriculture and industry. The bank though successful in the earlier periods, suffered set backs and

was on the verge of liquidation. As a largest traditional private sector bank in the country, FBL nurtured for more than seven

decades, gaining the reputation of being an agile, technology savvy and customer friendly bank and mostly built wide network of

branches, reaching out to cover all the major cities of the country.

FBL has its major presence in Kerala.

Out of the total advances as on 30-09-2009, 42% were from

Kerala.

Source: Company & SKP Research

FBL gets 51% of its total Deposits as on 30-09-2009 from

Kerala alone.

Source: Company & SKP Research.

Out of the total branches of 642, 388 branches are in Kerala.

Source: Company & SKP Research.

During the period of 2006-07, the bank entered into a joint venture agreement with IDBI Ltd & Fortis Insurance International N V

for incorporating a Life Insurance Company under the name of IDBI Fortis Life Insurance Company Ltd. During the year 2007-

08, FBL had opened its Representative office at Abu Dhabi, capital of U.A.E. for the gateway of the bank to the whole of Middle

East and also as an interface between its existing customers of GCC countries and its Branches /Offices in India.

Company Profile:


3/10

Federal ank Ltd.


25%

53%

22%

CASA Term Deposits CD & Bulk deposits

1. Better low-cost deposit mix way to maintain margins towards higher levels :

As on 30-09-09, FBLs CASA was 25%. FBL plansto expand its CASA deposits to 28% in

approximately period of 3 years. FBL plans to

increase its low cost deposits by way of expansion

of branches and acquiring more customers. Till now

51% of deposits came from Kerala alone (refer

graph on page no.2). FBL is opening its new

branches mainly outside Kerala, this will help to

bring in low cost deposits.

At present out of the total deposits, 22% are the CD

& Bulk deposits (Rs.5 Cr above). These deposits

command low cost than the retail deposits. Source: Company & SKP Research

At present out of the Total retail deposits, 28% is the NRI deposits. FBL has come up with new initiatives to increase the NRIdeposits. They are:

NRI branches have representative teams, which give special attention to the NRI customers.

FBL has representative office in middle-east. This helps to reach more NRI customers and this also helps thecustomers to easily deal with the bank, leading to better business for the bank.

FBL has recently started online money remittance facility. This is expected to serve NRI customers in better wayand attract new customers also.

New products are being launched for NRI customers as per the amount of deposit, to fulfill the NRI customersneeds.

FBL has tie-up with more than 40 exchange houses / banks for money remittance to India from abroad.

Going forward we expect Deposits to grow at 19% and 22% for FY2010-11FY2011-12 respectively.

25913.36

32198.19 38466.87

46859.6424%

20%

19%

22%

0.005000.00

10000.00

15000.00

20000.00

25000.00

30000.00

35000.00

40000.00

45000.00

50000.00

2008 2009 2010E 2011E

Rs.Cr

0%

5%

10%

15%

20%

25%

30%

Grothrate

Deposits Growth rate


Low cost deposit will help FBL to maintain its margin as well as to lend at competitive rates once the credit off-take reaches

its high growth rate again.

Investment Rationale:


4/10

Federal ank Ltd.


32%

29%

39%

SME Retail Corporate

59%

13%

1%

27%

Home Loans Gold Loans Personal Loans Other

2. Healthy and high yielding loan book:

FBLs loan book constitutes 32% and 29% of SME & Retail

loans respectively. These are the high yielding loans. FBL

has very low exposure to sensitive sectors.

As on 30-09-09, loans to commercial real estate and capital

markets were 2.78% and 1.11% of total advances

respectively.

FBL is decreasing its exposure to SME segment, to shield

against any major down turn in the economy.


Out of the retail loan, majority of the loans are secured

loans. Gold loans form a very relevant category of loans in

Kerala. FBL has 13% gold loans out of total retail loans.

These are high yielding and secured loans.

Only 1% is the personal loan.

FBL has experienced that even if some loans slip intoNPA categories, these loans are received after notice is

served to liquidate the collateral asset.


Going forward we expect FBLs loan book to expand by 23% for both years i.e. 2010 and 2011.

18904.66

33954.89

22391.88

27530.99

27%

23%

18%

23%

0.00

5000.00

10000.00

15000.00

20000.00

25000.00

30000.00

35000.00

40000.00

2008 2009 2010E 2011E

Rs.Cr.

0%

5%

10%

15%

20%

25%

30%

%Growth

Advances Growth rate


FBL has internal credit rating system to rate its loans. As on March 2009, 90% of the banks advances are rated from highest

safety to moderate safety range.


5/10

Federal ank Ltd.


603 612677 727

532617

737

837

0

200

400

600

800

1000

2008 2009 2010E 2011E

Branches ATMs

3. Expansion along efficiency improvement:

FBL plans to take its number of

branches to 677 by the current FY

end. New branches are beingopened in states outside Kerala.

FBL has appointed Boston

Consultancy Group to review

existing working methods and to

formulate new strategies to

improve the working of the bank.

Some of the suggested strategies

have been implemented and are

expected to bring in improvement

in short span of time.


FBL is recruiting new talent and is concentrating on to bring in the local people in line with branch expansion.

The average employee age reduced from 43 years for 2008 to 42 years as on March 2009.

4. Strong and Huge capital base:

FBL has the highest CAR in the industry. As on March 2009, CAR was 20.14% and Tier 1 capital was 17.5%.

CAR% (March 2009)

20% 20%17% 16% 16% 15% 14% 14%

0%

5%

10%

15%

20%

25%

Federal

Bank

Kotak

Mahindra

Bank

Yes Bank ICICI Bank HDFC BOB PNB SBI

Source: Companies & SKP Research

Benefits of having high CAR are:

FBL is shielded against any major impact if there is any unexpected huge deterioration of assets in future.

This would help the bank to increase its business at high growth rate without the need to raise capital once the

economy revives completely.

Excess cash on balance sheet can be used to ramp up the business activities.


6/10

Federal ank Ltd.


5. Inorganic mode of expansion:

FBL is in talk with Catholic Syrian Bank (CSB) for a merger. Final decision over the merger is expected in short period.

Following are the business particulars of FBL and CSB:

As on March 2009 (Rs. Cr.) CSB Federal Bank

Branches 364 612

No. of employees 2676 7253

Business per employee 3.74 7.53

Profit per Branch 0.10 0.82

Profit per employee 0.01 0.07

Capital & Reserves 388 4326

Advances 3683 22391

Deposits 6332 32198

Net Profit 37 500

Cost to income ratio 70% 31%

CRAR% 12% 20%Source: CSB website, Company & SKP research

Bulls and Bears view over the merger:

Bulls say:

CSBs branches are under valued and post merger in a span of 1-2 years FBL can harness the potential in these branches.

Merger would take the number of branches of FBL to approximately 1000, which would make it the 3rd largest privatebank in India on basis of number of branches.

Merger would help FBL to become the no. 1 bank in its home state Kerala and would shield FBL from any competition.

Merger would help FBL to increase its customer base and pan India presence.

Bears Say:

Major concern is over the duplication of branches. CSB has its major presence in Kerala same as FBL. But the concernwould be only over branches in rural areas, which are about 60 branches. This would be taken care by way of relocation

or closer of branches.

The value which FBL pays for the takeover will be a concern.

The time taken by FBL to bring in the synergy post take-over.

Take-over might decrease the fair value of FBL.


7/10

Federal ank Ltd.


FBL has consistently given good performance. We expect FBL will continue registering a good show of performance based on

the steps taken from time to time to upgrade the banking operations and improve efficiency.

Total business for FBL has been growing at the rate of ~20% and going forward we expect it to grow by 21% and

22% for 2010 and 2011. Bank is increasing its branch presence and recruiting new employees to tap new markets and to retain and enhance good

relationship with the existing customers.

It is offering better and more convenient facilities. Trained Relationship Manager (RM) teams to provide customers timely and convenient services.

44818.02

65997.86

80814.53

54590.07

21%23%22%

22%

0.00

10000.00

20000.00

30000.00

40000.00

50000.00

60000.00

70000.00

80000.00

90000.00

2008 2009 2010E 2011E

Rs.Cr.

0%

5%

10%

15%

20%

25%

GrowthRate

Total business Growth rate

Source: Company & SKP research

FBL has been successful in growing its interest income at high growth rate. Going forward we expect this part of income to

grow but at slow pace due to high volatility in capital markets and decreased credit off-take due to financial crisis.

With economy reviving we expect in a span of 2 years FBL would register again high growth in the interest income.

We expect interest income to grow by 14% and 20% for 2010 and 2011 respectively.

2515.44

3781.49

4540.90

3315.38

40%

32%

14%

20%

0.00

500.00

1000.00

1500.00

2000.00

2500.00

3000.00

3500.00

4000.004500.00

5000.00

2008 2009 2010E 2011E

Rs.Cr

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Growthrate

Interest Income Grow th rate

Source: Company & SKP research

Life insurance business:IDBI Fortis Life Insurance Company Ltd, is a joint venture between the IDBI Bank, Federal Bank and Fortis Insurance

International. FBL has 26% share in the JV Company. The JV Company intends to increase the number of its agency branches in

the country to 100 by March 2010, at present it has 33 branches. Similarly, the number of insurance advisors is proposed to be

doubled to 15,000 from 7500 at present. The company having presence in tier-I cities, is in the process of moving out to smaller

cities, to tap the huge potential. The JV Company will also leverage the organic growth of the partner banks which have about

500 branches each to achieve the objective to grow business. Insurance products of the JV company are being distributed at all

branches of FBL.

Financial performance and valuation:


8/10

Federal ank Ltd.


FBL has started FED-e-TRADE. It is a online trading facility which can be accessed from anywhere at any time. As the economy

is reviving, we expect to see huge activity in equity markets. This would help FBL to bring in more income by way of depository

income.

We expect fee based income to grow by 25% and 22% for year 2010 & 2011.

394.99

515.78

642.79

783.64

31% 31%

22%25%

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

2008 2009 2010E 2011E

Rs.Cr.

0%

5%

10%

15%

20%

25%

30%

35%

Growthrate

Fee based income Growth rate


FBL has been able to maintain its cost to income ratio at lower levels than the industry levels, but going forward we expect the

cost to income ratio to go up at around 35% due to the increased operational expenses in line with its expansion plans.

We expect the cost to income ratio to be 35.85% and 34.44% for year 2010 and 2011 respectively.

851.49719.83468.89 571.46

37.12%

31.21%

18%

26%

22%

15%

34.44%

35.85%

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

2008 2009 2010E 2011E

Rs.

Cr.

0%

5%

10%

15%

20%

25%

30%

35%

40%

Growthrate

Operating Expenses Op. Exp.Growth rate Cost to Income rateio


PBV band chart:

0

50

100

150

200

250

300

350

400

4/1/2004

8/1/2004

12/1/2004

4/1/2005

8/1/2005

12/1/2005

4/1/2006

8/1/2006

12/1/2006

4/1/2007

8/1/2007

12/1/2007

4/1/2008

8/1/2008

12/1/2008

4/1/2009

8/1/2009

Source: Capital line & SKP Research

At present FBL is trading at 0.91x Adj. Book value of FY2008-09. Our target price of Rs.284 is 1.02x and 0.9x to Adj

Book value per share of FY2010& FY2011 respectively.

We hereby initiate coverage on Federal Bank and recommend buy rating with a target price of Rs.284 /- (25% upside) in 12

months.

1.0x

0.8x

0.6x

0.4x

0.2x


9/10

Federal ank Ltd.


Income Statement

Rs.Cr. FY08 FY09 FY10E FY11E

Interest Income 2515.44 3315.38 3781.49 4540.90

Interest Expenses 1647.42 1999.92 2416.26 2851.88

Net Interest Income 868.02 1315.45 1365.23 1689.03

Fee based Income 90.53 101.28 121.54 139.77

Treasury Income 108.84 134.01 180.91 235.19

Misc. Income 195.62 280.48 340.33 408.68

Other Income 394.99 515.78 642.79 783.64

Operating Income 1263.01 1831.23 2008.02 2472.66

Staff Cost 271.23 317.45 369.97 447.65Other OperatingExp. 197.65 254.00 349.85 403.84OperatingExpenses 468.89 571.46 719.83 851.49

Operating Profit 794.12 1259.77 1288.19 1621.18

Provisions 293.97 466.76 394.96 460.98

Profit before Taxes 500.15 793.01 893.22 1160.19Taxes 132.10 292.52 330.49 429.27

PAT 368.05 500.49 562.73 730.92

Balance Sheet

Rs. Cr. FY08 FY09 FY10E FY11E

LIABILITIES

Capital 171.03 171.03 171.03 171.03

Reserves & Surplus 3754.66 4154.84 4687.47 5418.40

Deposits 25913.36 32198.19 38466.87 46859.64

Borrowings 791.95 748.94 921.14 1151.43

Other Liabilities 1875.45 1577.86 1769.71 2129.82Total 32506.46 38850.86 46016.23 55730.31

ASSETS

Balances with RBI 2115.21 1993.91 1969.40 2400.55

Balances with bank 630.28 1443.19 3277.97 3560.00

Advances 18904.66 22391.88 27530.99 33954.89

Investments 10026.59 12118.97 12232.14 14733.38

Fixed Assets 232.84 280.78 342.08 389.29

Other assets 596.87 622.15 663.64 692.19

Total Assets 32506.46 38850.86 46016.23 55730.31

Ratios

FY08 FY09 FY10E F

Spread analysis (%)

Yield on advances 10.81% 12.42% 11.25%

Yield on investments 7.49% 6.49% 7.72% Yield on interest-earningassets 9.97% 10.53% 10.22%

Cost of deposits 6.42% 6.45% 6.75%

Cost of funds 6.72% 6.71% 6.68%

Spread 3.25% 3.82% 3.54%

Profitability ratios (%)

RoAA 1.37% 1.51% 1.45%

ROE 9.38% 11.57% 11.58%

NIM 3.44% 4.18% 3.69%

Operating Profit Margin 27.29% 32.88% 29.12%

Net Profit Margin 12.65% 13.06% 12.72%

Cost to Income 37.12% 31.21% 35.85%

Asset Quality (%)

Gross NPAs 468.59 589.54 728.15

Net NPAs 43.20 68.12 137.65

NPA Coverage 90.18% 87.34% 81.10%

Net NPA as % to Networth 1.10% 1.59% 2.83%

Delinquency Rate 1.39% 2.58% 2.28%

Valuation ratios (x)

EPS 21.52 29.26 32.90

BV per share 229.52 251.17 284.07

P/E 10.50 7.72 6.87

P/BV 0.98 0.90 0.80

Business Ratio

Credit Deposit ratio 72.95% 69.54% 71.57%

Investment Deposit ratio 38.69% 37.64% 31.80%

SLR to Investment ratio 77.88% 68.47% 80.53%

CASA ratio 25.09% 24.50% 25.50%

Cash Flow Statement

FY08 FY09 FY10E

Net profit before Tax & Provisions 794.12 1259.77 1288.19 1

Cash profit before change in WC 823.09 1302.04 1335.59 1

Cash Profit from Operations. -1466.72 1233.90 2345.24 1

Taxes paid -59.15 -315.80 -330.49 Net Cash flow from operating -1525.86 918.11 2014.74

Net Cash flow from investing -137.47 -155.76 -115.06

Net Cash flow from Financing 2095.68 -70.74 -85.52

Net Increase/(decrease) in Cash 432.35 691.61 1814.17 Cash and Equivalent as on 1stApril 2313.14 2745.49 3437.09 5Cash and Equivalent as on 31stMarch 2745.49 3437.09 5247.37 5


10/10

Federal ank Ltd.


The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg, Thomson First Call & Investext Myiris, Moneycontrol and ISI Securities

DISCLAIMER : This document has been issued by SKP Securities Ltd (SKP), a stock broker registered with and regulated by Securities & Exchange Board of India, for the information of its clients/potential clients and business associates/affiliates onlyand is for private circulation only, disseminated and available electronically and in printed form. Additional information on recommended securities may be made available on request. This document is supplied to you solely for your information and nomatter contained herein may be reproduced, reprinted, sold, copied in whole or in part, redistributed or passed on, directly or indirectly, to any other person for any purpose, in India or into any other country without prior written consent of SKP. Thedistribution of this document in other jurisdictions may be strictly restricted and/ or prohibited by law, and persons into whose possession this document comes should inform themselves about such restriction and/ or prohibition, and observe any such

restrictions and/ or prohibition. If you are dissatisfied with the contents of this complimentary document or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using the document and SKP shall not be responsible and/ or liable inany manner. Neither this document nor the information or any opinion expressed therein should be construed as an investment advice or offer to anybody to acquire, subscribe, purchase, sell, dispose of, retain any securities or derivatives related to such

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SKP Securities LtdContacts Research Sales

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Member: NSE BSE NSDL CDSL NCDEX* MCX* MCX-SX FPSB *Group EntitiesINB/INF: 230707532, BSE INB: 010707538, CDSL IN-DP-CDSL-132-2000, DPID: 021800, NSDL IN-DP-NSDL: 222-2001, DP ID: IN302646, ARN: 0006, NCDEX: 00715, MCX: 31705, MCX-SX: INE 260707532

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