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Achievable aspirations

Federal Bank presented a coherent strategy to enhance its return ratios that would make it comparable to frontline private banks by FY2028. None of the levers have a high individual contribution but are driven by better mix, pricing and monitoring. We are not building these improvements into our estimates until we have definite signs that imply the scope for earnings upgrades is material, if executed well. We maintain BUY with an unchanged FV.

A 12-point plan to improve RoA closer to the top banks

The Federal Bank analyst meet had the following takeaways: (1) Work toward an RoA/RoE closer to the top 3 banks and decisively move away from its current identification as a regional player by FY2028; (2) RoA improvement would be led by NIM expansion and higher fee income growth; and (3) the plan for improvement includes: (a) NIM enhancement, (b) product portfolio expansion, (c) higher fee income contribution, (c) branch expansion and changing the role of branches, (d) reinvesting in brand and (e) investments in digital, compliance and employees while keeping a tight control on costs.

Credible plan at play as levers look achievable by FY2028

Management presented a compelling investment argument, asserting its ability to enhance RoA/RoE to levels comparable with the top banks and within three years. While the focus remains on revenue maximization, there is now a stronger emphasis on improving the liability mix, alongside the ongoing efforts to enhance loan yields through mix and pricing adjustments. It is not uncommon for a new management to request time and allow cost ratios to rise initially as it rebuilds the team and expand its presence on the ground to execute new strategies. However, this management has committed to closely monitoring cost growth and expressed confidence in the current leadership team's capability to implement this strategy effectively. Management has also underscored the importance of employees, both in Kerala and beyond, adapting to a more profitability-focused environment. The new scorecards introduced are designed to capture the essence of achieving these financial ratios. As always, even the best-laid plans can encounter challenges. Management has acknowledged this and emphasized the need for a collective effort to meet the profitability targets.

Maintain BUY: Simple execution and monitoring can lead to earnings upgrades

We maintain BUY with an unchanged FV of Rs225. We are not revising our estimates to factor in the possible outcomes of RoA/RoE improvement, as we are yet to see definite signs. We are building in 1.1% RoA for FY2027E, while management is looking at >1.5% (frontline private banks). The bank does not need capital at this stage to execute its current plan. We would see a partial rerating even if the metrics of convergence are not fully achieved. Execution and monitoring should lead to most of the earnings upgrades. Fewer mistakes during downcycles should capture the rest of the re-rating. However, that would take more time, and a cycle is needed to test the thesis.

During the analyst meet, Mr KVS Manian, MD and CEO, indicated that the bank has a good opportunity to create a national franchise. The management team has charted a new strategy for the bank based on 12 themes. This strategy has been drafted after spending the last few months listening to different stakeholders in the bank. At an overall level, management has shared an objective of enhancing the bank’s profitability (RoA) significantly in the next three years. Management has identified levers of improvement across all parts of the RoA tree

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