federal bank - initiating coverage 13-08-14

8/20/2019 Federal Bank - Initiating Coverage 13-08-14

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Financial summary

Y/E Mar (Rs mn) F12 F13 F14 F15e F16e

Net interest income 19,534 19,747 22,286 24,691 30,166

Operating profit 15,065 14,596 14,804 16,847 20,874

PAT 7,768 8,382 8,389 9,669 12,142

EPS (Rs) 9.1 9.8 9.8 11.3 14.2

ABV (Rs) 64.3 69.3 77.4 88.7 100.4

P/ABV (x) 1.8 1.7 1.5 1.3 1.1

Dividend yield (%) 1.6 1.6 1.7 1.7 1.7

RoE (%) 14.4 13.9 12.6 13.2 14.8

RoAA (%) 1.4 1.3 1.2 1.2 1.3

Source: Company, SSLe

SME and Retail to drive the growth; Improved asset quality

ahead

Federal Bank (FB) is a Kerala based Old-Generation Private sector Bank (OGPB) that

distinguishes itself from its peers through a strong liability profile (CASA - 30.8% and

Bulk – 2.75%), well distributed credit book, improving asset quality and healthy NIMs.

Focus on the SME and NR businesses will help sustain margins. We expect the

earnings quality to improve on the back of 1) pick-up in loan growth; 2) lower interest

reversals; and 3) lower NPA provisioning. We initiate coverage on FB with a BUY

rating and a TP of Rs141, valuing at 1.4x P/ABV F16e ABV of Rs100.4.

Business growth to re-emerge on SME and Retail lending: Post a period of

consolidation in which FB’s credit book grew at a meagre CAGR of 13.9% from F11-

14, de-growing in F14, FB is resuming its growth trajectory on the back of strong SME

and Retail lending. The bank has realigned its book from a Corporate-heavy to a well-distributed mix with the 3 core segments. Change in political scenario bodes well for

the overall economy, leading to pick-up in credit.

Core profitability to improve substantially in F16e: With advances growth picking

up and lower interest reversals courtesy of declining gross slippages in F15e/F16e,

we expect NII to grow at a CAGR of 20% from F14-F16e. Federal has maintained

higher-than-peer NIMs as a result of strong SME relationships. An improved liability

profile – higher CASA and reduced Bulk proportion – should support the margins. In

conjunction with lower NPA provisioning, we expect RoA of 1.3% in F16e, up from

1.2% in F14, and sustain there onwards.

Asset quali ty in a relatively bet ter shape: A balanced trade-off between growthand quality helped contain credit cost. Reduced underwriting in the big-ticket

corporate exposure, improvement in back-end processes and risk management

systems has resulted in a downward slippage trend. Federal has successfully brought

down its GNPAs from 3.5% in F12 to 2.5% in F14. The Bank’s PCR stands at 84%.

Though we remain conservative in our slippage estimates, we are building in

incremental restructuring of 1%, which brings the OSRB to below 5% from F15e.

BUY at current levels; initiate with TP of Rs141: We expect FB to deliver sustained

RoE of ~15% and RoA of 1.3% from F16e, one of the best among OGPBs. The

Bank’s median 6-month forward P/ABV has been at 1.3x. With strong return ratios

and an excellent tier-I of 13.2%, FB is a BUY at current levels. We initiate coverage

with BUY rating and TP of Rs141, valuing at 1.4x P/ABV F16e ABV Rs100.4.

Initiating Coverage BUY

Current price (12 Aug) RsTarget price Rs

Upside/(downside) % 23

Market data

Mkt capitalisation Rs bn 98.2Average daily vol '000 3903.6

52-week H/L Rs 136 / 44.25

Shares O/S mn 855.1

Free float mn 855.1Promotor holding % 0.0

Foreign holding % 38.7

Face value Rs 2.0

Price performance (%)

1m 3m 6m 1yr

Nifty (abs) 3.6 10.2 27.0 37.7

Stock (abs) 1.3 17.0 47.9 73.6Relative to Index (2.3) 6.9 20.9 35.9

Performance

115 141

(40)

(20)

0

20

40

60

30

60

90

120

150

Aug-13 Nov-13 Feb-14 May-14 Aug-14

Federal Bank (LHS) Rel . to Bankex (RHS)

(%)(Rs)

Source: Bloomberg, SSLe

August 13, 2014Banking | IndiaFederal BankFB IN; FED.BO

Divyanshi Dayanand+91 22 4227 [email protected]

Ravikant Bhat+91 22 4227 [email protected]

Anki t Ladhani+91 22 4227 [email protected]

Aayush Dur eha+91 22 4227 [email protected]


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Federal Bank SBICAP Securities Ltd

[email protected] I [email protected] I [email protected] I [email protected] 13 August 2014 | 2

Strong presence in Kerala augurs well for FB

One of the most socially developed states in India, Kerala has grown at a pace

much faster than India’s. In F13, the state economy grew at 8.2% vs India’s

growth at 4.5%. The State’s per capita income was Rs63,493 in F13 as compared

to a national average of Rs45,238.

Unlike its neighbouring states where manufacturing is strong, Kerala has

traditionally relied on agriculture and tourism to run its economy. Additionally, the

state is heavily dependent on inflow remittances from abroad, leading to Kerala

being occasionally termed as the “Remittance economy” or “Money Order

economy”. Recent statistics indicate that one out of six Keralites is working

abroad, mainly in Persian Gulf. High presence of NRIs has made the regional

banks offer a range of assets and liabilities products for NRIs. Owing to strong in-

state presence (586 branches), Federal has a market share of 8.6% of India’s

remittances, up from 7% in F11.

Federal Bank (FB) is a Kerala based OGPB with ~80% of the business coming

from Kerala and 5 focus states – Tamil Nadu, Karnataka, Maharashtra, Gujarat

and Punjab. The bank has predominantly concentrated on the SME and NR

businesses. Future growth will depend on its competitiveness in these segments,

along with Retail.

Exhibit 1: Kerala’s growth rate and per-capita income exceeds national average

0.0

2.5

5.0

7.5

10.0

F09 F10 F11 F12 F13

( % )

GSDP Growth rate at constant pr ices

30,000

40,000

50,000

60,000

70,000

F09 F10 F11 F12 F13

( R s )

India Kerala

Source: Government of Kerala, SSLe


3/20



Consolidation phase over, credit growth to re-emerge

In an environment where general economic downturn has meant poor credit off-

take and slower repayments for the broader banking industry, Federal

deliberately took its foot off the gas. The Bank realigned its credit profile in F14 to

mitigate risks emanating from the large corporate book and improve the share of

SME and Retail. FB’s underlying portfolio has improved significantly courtesy of

sustained focus for the past few quarters. The mix is currently well distributedbetween Retail - 32%, SME & Agri - 37% and Corporate - 31%.

Exhibit 2: De-bulked the credit book wi th a shif t away from Corporate segment

Retail30%

SME & agr i18% Agri

10%

Corporate42%

F13

Retail32%

SME & agri25%

Agri12%

Corporate31%

F14


Exhibit 3: Expect a revival in loan growth post consolidation phase

(8)

0

8

15

23

0

150,000

300,000

450,000

600,000

F09 F10 F11 F12 F13 F14 F15e F16e

( % )

( R s m n )

Advances (LHS) Advances growth (RHS)


Challenging economic environment and resultant stress in the corporate book led FBto consciously taper this segment by in F14. Consequently, the credit book marginally

declined by 1.5% during F14. The management shall await sustained economic

environment to re-grow its corporate book and expects the new stable government to

put in place a set of progressive policy steps during 2HF15. The bank has already

sanctioned Rs30-40bn worth of corporate loans. Although the bank has guided for a

credit growth of ~20%, we remain slightly cautious towards our estimates due to a lack

of improvement in economic activity at the ground level. We expect the bank to grow

its loan book in F15 by 15.3% and by 18.1% in F16, with the proportion of Retail and

SMEs inching up further.


4/20



Exhibi t 4: Break-up of SME book Exhibit 5: Break-up of Corporate book

Hotels &restaurant

s3%

Education4% Textiles

5%Basic

Metals

5%

Foo d &

beverages9%

Construction o thers

8%

RetailTrade

11%

Wholesaletrade

16%

Others39%

NBFC13%

Wholesaletrade

12%

Power 10%

Basicmetals

8%Roadbridges

railways7%

Real estate- HFC

3%

Retail trade4%

Electricitygas

3%

Food &beverages

3%

Others37%


SME business to drive earnings

Federal’s core strength remains conventional SME lending. SME offers high growth

potential and is showing steadiness in asset quality. Bank’s strategy has been to openbranches in regions, within and outside Kerala, that are active in SME and Retail

lending. The bank has its own skill-sets and products in SME and over the years has

reduced its exposure to risky SMEs. Since F13, the bank has scaled up its SME

proportion by ~700bps to 25.4%. The current stress witnessed in the SME loan

portfolio relates to legacy accounts and not pertains to recent advances.

Exhibit 6: Credit quality of the SME book healthy

FB19%

FB230%

FB350%

FB49%

Others2%


Thrust towards gold-loan and mortgage to continueFederal believes that the Retail business is more sustainable and predictable. An

aggressive attitude towards home loans and gold loans has led to a healthy growth

path for the Retail book. The current growth rate of 25% (F14) is higher than the

industry average. Despite a decline in the gold loan book, the retail proportion has

moved up from 27.4% in F13 to 32% in F14. Focus will continue to remain on housing

and mortgages, which have grown ~780bps since F12 to 53.6% of the Retail portfolio.


5/20



Exhibit 7: Housing and mortgage have gained traction since F13

38 40 40 40 42

32 30 29 27 25

22 22 22 23 21

8 8 9 10 12

0%

25%

50%

75%

100%

4QF13 1QF14 2QF14 3QF14 4QF14

Housing Gold Mortgage Others


The bank plans to regain its impetus towards the gold business in F15. Volatility in

gold prices led to a sharp reduction in gold loans during 9MF14 as the portfolio shrank

Rs6.7bn during the period. However, 4Q did see an addition of Rs3.6bn to thatportfolio and the management expects the steady state run-rate of Rs1-1.5bn per

month incremental in F15. Further expansion in Karnataka, Tamil Nadu and home

market should help towards this cause.

Strong foothold in NR business

With 50% of its branches in Kerala, a state that has the highest proportion of NRIs, FB

has a significant amount of low cost NR deposits and they account for 34.55% of the

total deposits. High NR deposits also enhance CASA as NR SA deposits comprises

43.8% total SA. Post RBI’s swap rules that allowed banks to raise funds from foreign

markets, FB raised Rs4bn of FCNR deposits during 3QF14. FCNR deposits, with post-

average cost of ~8.75%, are mobilized by the bank towards export credit and foreign

currency requirements of clients. The bank will continue to have sustained NRbusiness over the years and this should continue to provide cushions to the margins.

Higher CASA, lower Bulk – the story of Federal’s liability prof ile

Federal bank has consistently managed healthy margins on the back of a strong

deposit profile. Higher than peer-average CASA, high proportion of NR deposits and a

declining bulk deposit book help keep the cost of funds under control and make

Federal’s liability franchise stand apart from its competitors. Branch addition in SME

and NRI regions, in Kerala and other Southern geographies, has improved the liability

profile as well. The bank is currently 93% retail funded as opposed to 70% in F10.

Exhibit 8: Improving CASA and declining Bulk strengthenliability franchise Exhibit 9: Retail Deposit proportion at 93%

22.6 25.314.6 14.7

2.8

40.0 37.5

44.7 41.4

43.1

11.5 10.7 13.317.0

23.4

25.9 26.5 27.4 26.9 30.8

0%

25%

50%

75%

100%

F10 F11 F12 F13 F14

CASA NRI TD Resident retail TD Bulk

75

80

85

90

95

100

4QF13 1QF14 2QF14 3QF14 4QF14

( % )



6/20



FB has been growing its deposits at a CAGR of 13.2% from F09 to F14, which is tad

lower than the industry average. The bank’s strategy has been to reduce its

dependence on bulk deposits. The proportion of bulk deposits is now down from

25.3% in F11 to 2.75% in F14, which has helped contain the cost of funds.

Exhibit 10: Deposits have grown much slower than the industry

0

8

15

23

30

0

220,000

440,000

660,000

880,000

1,100,000

F09 F10 F11 F12 F13 F14 F15e F16e

( % )

( R s m n

)

Dep osits (LHS) Dep osits g rowth (RHS)


Concerted efforts on SME and Retail has led to the bank growing handsomely on the

Savings side. Bank’s sustainable focus on SA has ensured that CASA remains

370bps higher than the peer-average. While the peer CASA has remained flat YoY at

23.6%, FB has seen it improve from 23.5% in F13 to 30.8% in F14. The

management’s plan to open ~200 new branches in F15 and F16 will further aid in

CASA growth. The bank had been guiding for 30%+ CASA for 1HF14 and has

achieved that target. We expect CASA to be 31.1% in F15 and 32.2% in F16 and

CASA/ branch to improve to Rs192mn/ branch, by F16e, from the current Rs159mn/

branch.

Exhibit 11: CASA momentum to sustain Exhibit 12: Low-cost deposit proportion much higher than peer-average

120

140

160

180

200

0

75,000

150,000

225,000

300,000

F10 F11 F12 F13 F14 F15e F16e

( R s m n

)

( R s m n

)

CASA (LHS) CASA/ Branch (RHS)

0

10

20

30

40

City UnionBank

DCB Bank INGVysya

KarnatakaBank

KarurVysya

Bank

FederalBank

SouthIndian

Bank

( % )


Exhibi t 13: CASA Trend

F14 Proportion Growth (%)

Kerala (CA) 12,500 6.8 14

Non-Kerala (CA) 18,660 10.1 11

Kerala (SA) 117,270 63.7 21

Non-Kerala (SA) 35,580 19.3 18



7/20



Declining slippages; caution sti ll maintained

A disciplined attitude towards portfolio growth and proactive management of new

accounts has borne well for the Bank’s asset quality. A balanced trade-off between

growth and quality helped contain credit cost. Gross NPAs have also boosted courtesy

of sale of assets to ARCs.

F14 witnessed a marked reduction in NPAs as also better recoveries. Federal endedF14 on an encouraging note largely on the back of some disciplined credit lending that

it has been doing for 8-10 quarters. The reduction in NPAs is all the more laudable as

the bank did not grow its credit book in F14. Sequentially for almost 10 quarters —

barring one in which a large quasi government account created a one-off impact —

slippages have consistently come down.

Exhibit 14: Lower slippages and sales to ARCs help credit quality

0

1

2

3

4

0

4,500

9,000

13,500

18,000

F09 F10 F11 F12 F13 F14 F15e F16e

( % )

( m n

)

GNPA (LHS) NNPA (LHS) GNPA (RHS) NNPA (RHS)


To contain slippages, Federal has consciously reduced underwriting in the big-ticketcorporate exposure and has trimmed its large corporate portfolio. This has borne quite

well for the bank as it is now witnessing lower stress in the segment.

Exhibi t 15: Segment-wise NPAs

0%

2%

3%

5%

6%

Agri culture & alli edactivities

Industry (Micro,small, medium and

large)

Services Personal Loans


As per the management, the underwriting standards have dramatically improved

courtesy of concerted efforts towards creating a stable portfolio. Furthermore,

improvement in back-end processes and risk management systems has resulted in a

downward slippage trend in SME and Retail. The SME + Agri slippages reduced byRs610mn YoY to Rs3.26bn in F14. The Gross NPA of 2.46% is now the best the bank

has had post-2008. Provision Coverage Ratio (PCR), including technical write-offs

(TWO), increased from 80.9% to 84.2% YoY in F14.


8/20



Exhibit 16: Declining slippage trend encouraging Exhibit 17: Significant improvement in Retail and SME slippages

0

1000

2000

3000

4000

4 Q F 1 2

1 Q F 1 3

2 Q F 1 3

3 Q F 1 3

4 Q F 1 3

1 Q F 1 4

2 Q F 1 4

3 Q F 1 4

4 Q F 1 4

( R s

m n

)

Retail SME & Ag ri Co rporate

0.0

0.5

1.0

1.5

2.0

1 Q F 1 2

2 Q F 1 2

3 Q F 1 2

4 Q F 1 2

1 Q F 1 3

2 Q F 1 3

3 Q F 1 3

4 Q F 1 3

1 Q F 1 4

2 Q F 1 4

3 Q F 1 4

4 Q F 1 4

( % )

SME Retail


We remain slightly conservative in our assessment of Federal’s credit quality as we

feel that stress has not entirely abated. With the economy not completely recovered,there exists risk of slippages from the large corporate segment. Accordingly, we

expect gross slippages to be 1.2% during F15-F16. However, a strong PCR of 84%

limits the downside risk to our estimates.

Exhibit 18: Asset quality showing signs of revival; PCR strong

70

75

80

85

90

0.0

0.3

0.6

0.9

1.2

F09 F10 F11 F12 F13 F14 F15e F16e

(

% )

( % )

Credit cost (LHS) PCR (RHS)


Higher sale of assets to ARCs has led to an accretion of Rs6.05bn of SRs on bank’s

books. Failure to recover these assets impacts bank’s future profitability. The fact that

the bank will start creating provisions on these SRs from 3QF15 onwards eases someof our concerns.

The restructured book currently stands at 5.8%, which is on the higher side amongst

OGPBs. However, the combined exposure to Air India and SEBs is 2%. As the current

pipeline for restructuring is insignificant in nature, we expect incremental restructuring

at 1% of gross advances and outstanding restructured assets below 5% of the book.


9/20



Earnings quality to sustain

With focus on Retail, SME and Gold, Federal has enjoyed best profitability amongst

all Kerala based banks and remains better placed than peers in terms of quality of

earnings. Last 3 years have been challenging for the bank from the earnings

perspective. RoA was impacted in F14 because of decline in NII, higher operating

costs and elevated credit cost. Lower balance sheet growth and higher interest

reversals led to subdued core earnings. FB’s NII has grown at a CAGR of 8.5%from F11-F14. De-bulking of the corporate book, balance sheet growth and lower

interest income reversals from NPAs should bode well in future. We anticipate NII to

grow at a CAGR of 16.3% from F14-F16.

Structural improvement in liability profile (reduced proportion of bulk to 2.75% and

93% book retail funded), stable CASA (30.8%) and improved share of SME credit

(36%YoY growth in F14) will provide cushion to the margins. Cost of funds has

remained largely stable for Federal mainly owing to a portfolio shift on the liabilities

front from a bulk heavy to a CASA heavy book. The bank’s strength in retail

deposits portfolio gives it the ability to keep the cost of borrowings in check.

Exhibit 19: Funding costs remain in check

0

4

8

12

16

F09 F10 F11 F12 F13 F14 F15e F16e

( % )

Yield on advances Cost of Deposits


Strong growth of SME credit (18.4% in F13 to 25.4% in F14) bodes well for NIMs.

SME products typically earn ~100bps higher yields than corporate loans and ~50bps

higher than Retail. Federal’s strategy was to bring down the NIMs to balance the risk

generating from its vintage SME portfolio. With improved risk management systems

and better underwriting standards, the quality of SME portfolio has amended. The

Bank can achieve its NIM target of 3.3-3.35% on the back of increased volumes,

better CASA and lower credit cost.


10/20



Exhibit 20: Substantial network expansion in the past 3 years

1.0

1.1

1.2

1.3

1.4

0

500

1,000

1,500

2,000

F09 F10 F11 F12 F13 F14e F15e F16e

( %

)

( N o

s . )

Branches (LHS) ATMs (LHS) ATM/Branch ratio (RHS)


Substantial network investment during F12-F14 - 224 branches added – should help in

profitable growth in coming years. With no capital infusion plans in place, Federal aims

to expand its RoE by ~400bps by F16 with the help of lower cost of deposits, lower

interest reversals, lower NPA provisions and higher yields generated through SME

and Retail products. We expect RoA to improve to 1.3% in F16.

Fee income could p rovide positive surpr ise to earnings

Fee income has historically been an area of weakness for Federal as it has

consistently lagged advances growth. Fee income as a percentage of assets has

declined from 0.87% in F11 to 0.57% in F14. The bank did not show any material

improvement in the other income during F14 and it remains an area of concern. With a

solid branch network of 1174 branches (4th best amongst private banks), the bank

intends to leverage its distribution capabilities and garner third party distribution fees.

The bank has set-up a new Sales vertical which has taken a series of new initiatives

on the product front. An improvement in fee income can offer a positive earnings

surprise. We envisage other income to grow by 20.9 % in F15 and 15.5% in F16.

Exhibit 21: Loan growth and third-party sales to drive non-interest income growth

0.0

0.4

0.8

1.2

1.6

F09 F10 F11 F12 F13 F14 F15e F16e

( % )

Non-interest income/ average assets Fee income/ average assets



11/20



Cost-income may remain a dampener

Federal’s escalating cost-income has been a cause for concern since F13. High C/I

has been a resultant effect of lower income growth. Heavy branch expansion, pension

cost, wage revision and employee addition have led to C/I ratio rise 9.9% since F12.

With the addition of 224 branches from F12-F14, Federal already has strong

distribution capabilities. It has the largest branch network among its peers and 4th

largest among private banks, bettered only by ICICI Bank, HDFC Bank and Axis Bank.

The bank should start soon reaping benefits from the heavy investments in the

distribution channels. We expect to see an improvement in the fee-cost gap from F16

onwards. We expect the opex growth to continue in F15 and our estimates lead us to

a C/I of 49.1% in F15 and 47.6% in F16.

Exhibit 22: Higher cost remains a concern

50

52

54

56

58

0

13

26

39

52

F09 F10 F11 F12 F13 F14 F15e F16e

( % ) ( %

)

C/I Ratio (LHS) Staff co st/Exp enses (RHS)

0.00

0.50

1.00

1.50

2.00

F09 F10 F11 F12 F13 F14e F15e F16e

( % )

Opex/ assets


Expansion in focus states should improve productivityWith a large balance sheet and distribution strength in place, Federal has the ability to

improve its productivity in F15 and F16. The bank has previously faced several issues

from employee unions which have impacted its productivity. Business per branch has

traditionally been Rs200mn worse off in Kerala as compared to out-of-state. As

incremental branch expansion is expected to be focused more towards the focus

markets (Tamil Nadu, Karnataka, Maharashtra, Gujarat and Punjab), we expect

business per branch to improve.

Exhibit 23: Out-of-state expansion should aid productivity

0.0

5.0

10.0

15.0

20.0

25.0

770

840

910

980

1,050

F11 F12 F13 F14 F15e F16e

( % )

( N o s . )

Business per branch NII Growth



12/20



Strong capital position should support the near-term growth ambitions

Federal Bank has sufficient capital to withstand any asset quality shocks and pursue a

credit growth of 25-30% till F17. Capital adequacy of 14.2% is second best amongst

peers (after ING Vysya Bank) and should comfortably suffice growth requirements for

another 3 years. In 4QF14, Federal received government clearance to hike the foreign

equity participation in the bank from 56.16% to 74% - sub-limits of 49% for FIIs and

24% for NRIs.

Exhibi t 24: CAR (%)

F10 F11 F12 F13 F14 F15e F16e

Tier I 16.77 15.45 15.86 14.09 13.19 12.81 13.15

Tier II 1.56 1.22 0.78 0.64 0.97 0.80 0.77

CAR 18.33 16.67 16.64 14.73 14.16 13.61 13.92

Leverage (Asset/NW) (x) 9.32 10.08 10.63 11.17 10.74 10.80 10.60



13/20



Valuations and recommendations

With advances growth picking up and lower interest reversals courtesy of declining

gross slippages in F15e/F16e, we expect NII to grow at a CAGR of 16.3% from F14-

F16e. Federal has maintained higher-than-peer NIMs as a result of strong SME

relationships. An improved liability profile – higher CASA (30.8%) and reduced Bulk

proportion (2.75%) – should support the margins. In conjunction with lower NPA

provisioning, we expect RoA of 1.3% in F16e, up from 1.2% in F14, and sustain thereonwards.

As the Bank will not raise capital at least for the next 7-8 quarters, we expect an

increase in RoE to 14.8% by F16e. With 224 new branches in the past 8 quarters, we

expect operating leverage to kick in during F15e.

Exhibi t 25: Much improved RoE from F16e

0.0

4.0

8.0

12.0

16.0

0.0

0.4

0.8

1.2

1.6

F10 F11 F12 F13 F14 F15e F16e

( % )

( % )

RoA (LHS) RoE (RHS)


At CMP of Rs 115, the stock is currently trading at 1.15x F16e ABV of Rs100.4, whichis at a discount to the median valuations. We value the Bank at 1.4x F16e P/ABV on

the bank of an improving RoE trend. We arrive at a price target of Rs141, a potential

upside of 23%. Initiate coverage on Federal Bank with a BUY rating.

Exhibit 26: Better performance metrics amongst peers

4QF14 Advances Deposits CASA CAR (Tier I) NIM RoA RoE GNPA NNPA PCR % Restructured C/I ratio

City Union Bank 160,968 220,169 16.7 14.5 3.3 1.3 17.1 1.8 1.2 62.0 1.7 47.7

DCB Bank 81,402 103,252 25.0 12.9 3.6 1.3 13.8 1.7 0.9 80.5 - 62.4

ING Vysya 358,289 412,168 33.4 14.6 3.7 1.0 10.3 1.8 0.3 84.2 1.6 55.2

J&K Bank 463,846 693,359 39.1 11.2 4.1 1.4 18.9 1.7 0.2 90.3 3.4 40.7

Karnataka Bank 283,455 405,828 25.4 10.7 2.4 0.7 10.5 2.9 1.9 - - 75.5Karur Vysya Bank 342,260 437,580 20.6 11.6 3.1 1.4 20.6 0.8 0.4 75.0 4.1 57.6

Federal Bank 434,361 597,313 30.8 14.6 3.6 1.5 16.3 2.5 0.7 84.1 5.8 47.7

South Indian Bank 362,299 474,911 20.7 10.9 3.0 1.0 14.8 1.2 0.8 62.7 4.8 55.6



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Exhibi t 27: Median P/ABV for the last 6 months at 1.31x

0.0

0.5

1.0

1.5

2.0

A p r -

0 5

S e p - 0

5

F e

b - 0

6

J u

l - 0 6

D e c - 0

6

M a y - 0

7

O c

t - 0 7

M a r -

0 8

A u g - 0

8

J a n - 0

9

J u n - 0

9

D e c - 0

9

M a y - 1

0

O c

t - 1 0

M a r -

1 1

A u g - 1

1

J a n - 1

2

J u n - 1

2

N o v - 1

2

A p r -

1 3

S e p - 1

3

F e

b - 1

4

A u g - 1

4

( x )

Source: Bloomberg, SSLe

Exhibit 28: Key AssumptionsY/E Mar (Rs mn) F15e F16e

Balance Sheet Assumptions

Credit Growth (%) 15.3 18.0

Deposits Growth (%) 16.0 21.8

Investments (%) 22.5 21.2

CD Ratio (%) 72.2 70.0

Asset Qual ity Assumpt ions

Slippage Ratio (%) 1.2 1.2

Net Recovery Ratio (Reductions as % of slippages) 40.0 40.0

Provisioning Cover (%) 82.8 85.3Source: SSLe


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Key concerns

Delayed economic revival may result in higher credit costs – Federal’s asset

quality has shown a marked improvement towards 2HF14. While slippage rate of SME

and Retail has dropped from 1.5% and 0.5% respectively in F11 to 0.6% and 0.2% in

F14, we remain cautious towards the corporate book. In case economic revival takes

longer than expected, we may revisit our credit cost estimates for the Bank.

Stronger currency can dampen remittances – Kerala’s economy, which is hugely

reliant on inward remittances, has historically benefited from a weaker currency.

During 1HF14, Federal Bank had seen a surge of inflows in f ixed deposits and savings

accounts from NRIs because of weakness of the rupee. A further strengthening of INR

may have an adverse impact on NR deposits.


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Company description

Federal Bank is one of the leading private sector banks headquartered at Aluva,

Kerala. The Bank has an exceptionally strong grip in its home state and has been

targeting Tamil Nadu, Karnataka, Maharashtra, Gujarat and Punjab for the past few

years. The bank primarily focuses on SME, Retail and NRI customers.

As of F14, the bank had a balance sheet size of ~Rs746bn. It has the 4

th

largestbranch network among private banks with 1174 branches. 50% of its branches are in

Kerala and 33% in five focus states. The bank has a wide network of ATMs – 1,359 –

in onsite and offsite locations.

Exhibit 29: Branch distribution

Metro15%

Urban18%

Semi-urban57%

Rural10%


Key Management

Mr. Shyam Srinivasan, MD & CEO

As the CEO of the Bank since September 2010, Mr. Srinivasan has been instrumental

in increasing the presence of the Bank to a national level, creating capabilities within

the Bank to reinvent customer-centric processes and focusing on the under-writing

quality at every stage. In a career that spans over 20 years, he has gained significant

expertise in SME banking, retail lending and wealth management. Mr. Srinivasan is an

alumnus of IIM, Kolkata and REC, Tiruchirapally.

Mr. Abraham Chacko, ED

Mr. Abraham Chacko joined Federal in 2011 as ED in charge of Wholesale Banking.

Mr, Chacko has over thirty years of banking experience across MNCs such as HSBC

and ABN AMRO, and in regions such as Dubai, Sri Lanka and Singapore, apart fromIndia. Mr. Chacko has done his post-graduate studies in business management from

XLRI.


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Financials

Income statement Ratios

Y/E Mar (Rs mn) F12 F13 F14 F15e F16e Y/E Mar (Rs mn) F12 F13 F14 F15e F16e

Interest earned 55,584 61,676 69,461 73,571 87,715 Per share data (Rs)

Interest expended 36,050 41,929 47,175 48,880 57,549 EPS 9.1 9.8 9.8 11.3 14.2

Net interest income 19,534 19,747 22,286 24,691 30,166 Book value per share 66.7 74.4 81.2 90.2 102.0

Growth (%) 11.8 1.1 12.9 10.8 22.2 Adjusted book value 64.3 69.3 77.4 88.7 100.4

Other income 5,323 6,644 6,938 8,389 9,692 Dividend per share 1.8 1.8 2.0 2.0 2.0

Fee-based income 2,516 3,047 3,338 4,006 4,807 Asset qu ali ty (%)

Forex income 842 794 1,251 1,564 1,955 Gross NPAs 3.4 3.4 2.5 1.9 1.6

Treasury income 821 2,058 1,562 1,640 1,722 Net NPAs 0.5 1.0 0.7 0.3 0.2

Other miscellaneous income 1,145 746 787 1,178 1,208 NPA coverage 84.7 72.2 70.4 82.8 85.3

Operating income 24,858 26,391 29,225 33,079 39,859 NNPA/networth (%) 3.5 6.8 4.6 1.7 1.6

Growth (%) 9.8 6.2 10.7 13.2 20.5 Profitability ratios (%)

Operating expenses 9,793 11,795 14,421 16,233 18,985 RoE 14.4 13.9 12.6 13.2 14.8

Staff cost 5,439 6,265 7,715 9,244 10,668 ` RoA 1.4 1.3 1.2 1.2 1.3

Other operating expense 3,788 4,744 5,766 5,997 7,128 NIM 4.1 3.5 3.6 3.7 3.8

Depreciation 567 787 939 991 1,189 Operating profit margin 24.7 21.4 19.4 20.6 21.4

Pre-provision profits (PPP) 15,065 14,596 14,804 16,847 20,874 Net profit margin 12.8 12.3 11.0 11.8 12.5

Growth (%) 5.6 (3.1) 1.4 13.8 23.9 C/I ratio 39.4 44.7 49.3 49.1 47.6

Provisions 3,370 2,658 2,684 2,834 3,162 C/I (excl. treasury gain 40.7 48.5 52.1 51.6 49.8

Profit before taxes 11,695 11,938 12,120 14,013 17,713

Taxes 3,927 3,556 3,731 4,344 5,571 Earning ratios

Tax rate (%) 33.6 29.8 30.8 31.0 31.5 Y/E Mar F12 F13 F14 F15e F16e

Profit after taxes 7,768 8,382 8,389 9,669 12,142 Yield on advances 12.0 11.3 11.4 10.8 11.1

Growth (%) 32.3 7.9 0.1 15.3 25.6 Yield on investments 11.4 10.5 11.0 11.3 10.6

Yield on IEA 11.7 11.0 11.4 11.0 11.0

Balance sheet Cost of deposits 7.2 7.2 7.2 7.3 7.3

Y/E Mar (Rs mn) F12 F13 F14 F15e F16e Cost of IBL 7.4 7.2 7.4 6.8 6.7

LIABILITIES Spread 4.4 3.8 4.0 4.2 4.3

Capital 1,710 1,711 1,711 1,711 1,711

Reserves & surplus 55,299 61,884 67,745 75,419 85,567 Valuations

Deposits 489,371 576,149 597,313 692,883 843,585 Y/E Mar F12 F13 F14 F15e F16e

Borrowings 42,410 51,870 56,880 88,344 93,764 P/E 12.7 11.7 11.7 10.2 8.1

Other liabilities & provisions 17,423 18,831 22,243 21,921 22,774 P/BV 1.7 1.5 1.4 1.3 1.1

Total liabilities 606,268 710,496 745,941 880,328 1,047,450 P/ABV 1.8 1.7 1.5 1.3 1.1

Dividend yield (%) 1.6 1.6 1.7 1.7 1.7

ASSETS

Cash on hand & with RBI 24,241 27,425 31,043 51,793 68,349

Money at call and short notic 11,084 9,775 14,251 14,251 14,251 Capital adequacy rati o

Advances 377,560 440,967 434,361 500,735 590,922 Y/E Mar F12 F13 F14 F15e F16e

Investments 174,025 211,546 241,179 295,547 358,243 Tier-I (%) 15.9 14.1 13.2 12.1 11.8

Fixed assets 3,261 3,975 4,250 4,867 5,880 Tier-II (%) 0.8 0.6 1.0 0.8 0.8

Other assets 16,096 16,808 20,859 13,135 9,805 Total (%) 16.6 14.7 14.2 12.9 12.6

Total assets 606,268 710,496 745,941 880,328 1,047,450 Leverage (Asset/NW) 10.6 11.2 10.7 11.4 12.0



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RoAA decompositi on

Y/E March (%) F12 F13 F14 F15e F16e

Interest earned 9.92 9.37 9.54 9.05 9.10

Interest expended 6.43 6.37 6.48 6.01 5.97

Net interest income 3.49 3.00 3.06 3.04 3.13

Other income 0.95 1.01 0.95 1.03 1.01

Fee-based income 0.65 0.58 0.57 0.64 0.62

Forex income 0.15 0.12 0.17 0.19 0.20

Treasury income 0.15 0.31 0.21 0.20 0.18

Other miscellaneous income 0.00 0.00 0.00 0.00 0.00

Operating income 4.44 4.01 4.01 4.07 4.14

Operating expenses 1.75 1.79 1.98 2.00 1.97

Staff cost 0.97 0.95 1.06 1.14 1.11

Other operating expense 0.68 0.72 0.79 0.74 0.74

Depreciation 0.10 0.12 0.13 0.12 0.12

Pre-provision profits (PPP) 2.69 2.22 2.03 2.07 2.17

Provisions 0.60 0.40 0.37 0.35 0.33

Profit before taxes 2.09 1.81 1.66 1.72 1.84

Taxes 0.70 0.54 0.51 0.53 0.58

Profit after taxes 1.39 1.27 1.15 1.19 1.26



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