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Well charted out strategy; All eyes on execution ahead

Key Points

* Federal Bank held an analyst meet represented by Mr. K V S Manian, MD & CEO; Ms. Shalini Warrier, ED and head of retail banking; Mr. Harsh Dugar, ED and head of wholesale banking; Mr. Venkatraman Venkateswaran, Group president and CFO; Mr. Souvik Roy, Head - Investor Relations.

* The bank unveiled its new strategy and discussed its roadmap for the next 3 years up to FY28. It has identified twelve key themes under its new strategy, where it is benchmarking itself with top 6 private sector banks and aims to position itself in between the best 3 private banks and the next 3 private banks on various parameters. ? Some of the key focus areas for the bank include: (1) NIM improvement through focus on CASA and retail term deposits and increasing the share of medium yield / high yield assets, (2) Focus on becoming SME bank of choice and on the wholesale side focus is on mid-market borrowers; (3) Fee enhancement, (4) Selective geographic expansion through addition of 400-450 branches by FY28; the branches will be made more liability centric, (5) Streamlining processes at branches to free up time for customer acquisition, servicing and engagement, (6) The Brand and branches to be redesigned and brand ambassador to be appointed, (7) Further digitalization to reduce TAT, (8) Achieve a balance between partner led sourcing and own sourcing for credit cards, PL and savings accounts, (9) Foster culture of collective focus on P&L, (10) Expansion of NRI clients beyond GCC nations (11) Cost optimization by improving productivity, leveraging tech subsidiary Fedserv and the use of AI and other technology, (12) Expand organically or inorganically in microfinance, insurance, wealth management, AMC and broking.

* In our view, the bank has come out with a well-crafted strategy of focusing on leveraging its existing strengths and taking it forward from here by aiming to close the gaps in terms of products, new businesses, customer segments and geographies. However, execution will be key here. We continue to maintain 'BUY' on Federal Bank with an unchanged target price (TP) of Rs226 (valued at 1.4x December 2026E ABV plus subsidiary value per share of Rs8.6). Our target multiple of 1.4x is at a 37% premium to the past 5-year average multiple of 1x ABV, which adequately captures our loan/earnings CAGR estimates of 14.6%/13.7% over FY24-FY27E, which will lead to 1.3% RoA in FY27E.

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