We recently met the senior management of Federal Bank which is one of the old private sector banks with a distribution network of 1252 branches (48% Kerala) and asset base of INR 1.2tn. The bank has an exposure to insurance and NBFC business through its joint venture with IDBI (26% share) and wholly owned subsidiary Fedbank Financial Services Ltd respectively. The bank has a presence in 25 states, Delhi and 4 Union territories.
No major concerns on asset quality
The bank's strategy of de-bulking corporate loans in FY14 and pushing hard on small ticket size and relatively safer retail and SME loans has worked well for the bank. The bank now has a well diversified portfolio with no exposure towards highly leveraged groups. The bank is unlikely to see any major shocks on the asset quality front and has guided ~60-65bps credit costs for FY19E. The bank currently has ~22% exposure towards SME portfolio which is experiencing turbulence due to GST transition; however the management remains confident of managing the asset quality issues. Most of their legacy problems in the corporate segment have already been recognized.
Strong growth in corporate book; Growth in SME/Retail book outside Kerala picking up
Loan book stood at INR 859.2 bn (5% q-o-q & 22% y-o-y) led by corporate book of INR 343.6 bn (7% q-o-q & 30% y-o-y). SME book outside Kerala (53% of the total SME book) grew by 40% y-o-y to INR 95bn; whereas the overall SME book grew by 20% y-o-y to INR 184.9bn. The bank focused on improving its C/D ratio (~73% in FY16 to ~85% in Q3 FY18) by acquiring high quality corporate customers, especially in the mid-corporate space which is the focus area of the bank. As on Q3 FY18, ~72% of its corporate book which has grown at 44% CAGR for last 2 years is rated A and above. The bank is committed to its strategy of calibrating its loan mix towards SME and retail lending. Their push towards digital banking is also expected to reap benefits in the future.
CASA modest at 33%; Share of retail deposits at 96%
The bank registered CASA growth of 4% y-o-y to 33%, driven by 6% growth in SA deposits. CA outside Kerala is ~54% of the overall CA deposits. Total NR deposits are ~40% of the overall deposits. The proportion of retail deposits stood at 96.1% (one of the best within the banking system). 80% of loan book is linked to MCLR and the base rate has not been reduced in the last two years.
Outlook & Valuation
The bank is well placed given upfront recognition of stressed assets. The management's focus on improving processes and digital footprint is positive as it will bring down the C/I ratio (currently ~51%) going ahead. However, limited scope for NIMs improvement (currently ~3.3%) and high dependence on NRI segment (currently ~40% of the overall deposits) remains a key monitorable. The stock is valued at 1.6x TTM P/BV.
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