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Buy Federal Bank Ltd For Target Rs.100

Focus on transition from ‘presence to prominence’

Key takeaway from Federal Bank’s (FB) FY21 annual report is its continued commitment to structural transition away from ‘typical old generation regional bank mindset’. The commitment is reflected in its aim to become the ‘first choice’ bank for all stakeholders and pursue initiatives to enhance its status from ‘presence’ to ‘prominence’ in ‘rest of India’.

Further, taking cognisance of industry-leading FY21 performance, FB aims to scale up all its business segments over next 3-4 years and achieve the ‘right to win’ in most lending segments with focus on sustained earnings during high-growth periods. Other key takeaways are: 1) collection efficiency at >95% as at Mar’21; 2) launch of India’s first-of-itskind digital credit card in Mar’21, offered to existing customers as of now; 3) focus on ESG; 4) ~22% of incremental business loans were disbursed to ‘new to bank’ customers; and 5) it is the fifth-largest private sector bank in terms of monthly debit spend. Maintain BUY.

* Steady improvement in business market share over past 5 years. Over past 3-4 years, FB had focused on breaking the ‘typical old generation regional bank mindset’ and build capabilities to enhance its status from ‘presence’ to ‘prominence’ in ‘rest of India’. To achieve this goal, it has strengthened its digital capabilities and revamped business architecture by adopting a verticalised approach in most businesses. The strategy has started yielding positive results as reflected in steady improvement in its credit / deposit market share to 1.1% / 1.2% respectively as at Mar’21 from 0.9% / 0.94% in Mar’17. Total customer base as at Mar’21 crossed the 10mn mark, offering huge cross-selling opportunity.

* Balance sheet granularisation continued. During FY21, while it continued to focus on tapping available opportunities, balance sheet granularisation remained on track. The share of retail assets increased to 54% and retail deposits contribute 90% to total deposits. Further, the share of top-20 depositors at 4.8% (6% in FY20) is amongst the lowest in industry. Incremental credit growth in FY21 was largely driven by gold loans (up 70% YoY).

* Digital journey progressing well. FB integrated its mobile banking app, FedBook and BHIM UPI into a single application, and added a host of new features and services to make it a one-stop shop for all banking needs enabling users to access and manage their accounts from anywhere, anytime and undertake banking as well as non-banking transactions. As a result, the share of digital transactions increased to 86% and nearly 90% of incremental savings accounts were opened digitally. Further, it pioneered the use of ‘tab banking’ in sourcing auto loans. The solution, GoNoGo, is designed for simplicity and speed and is used at the point of sale (i.e. the car dealer’s location) to facilitate approval and opening of car loans.

* Sustained strong growth in NR business. FB’s non-resident (NR) deposit franchise remained undisrupted even through the covid-induced challenges – NR business grew 12% YoY, NR CASA grew 19%, and FB got a lion’s share in personal inward remittances business at 17.5% as at Mar’21.

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