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We met new MD and CEO KVS Manian and Consumer Banking Head Virat Diwanji (ex-KMB), who gave assurance of their unwavering focus on addressing Federal Bank (FB)’s long-time pain point (margin) mainly via CASA acceleration (to 36%, from 30% now) and portfolio mix toward medium-to-high yielding assets; this would help deliver a healthy 1.2-1.4% RoA. The management has given guidance of calibrated growth and higher cost-income ratio in the near term, as it builds its team, re-orients/expands liability franchisee and expand credit/fee product basket, and consequently prepare for the next leg of sustainable and profitable growth. Over the years, FB has emerged as a conservative and stable banking platform with virtually no accidents. However, we believe the time is ripe for it to up its game amid struggles at a few other banks (IIB, Yes) and with onboarding of a new credible management; retain BUY and TP of Rs240, implying 1.4x FY27E ABV, and subs value of Rs12/sh.

Re-orienting liability franchise; loan portfolio mix/pricing to drive up margin

The new management has given guidance for measured growth in the near term (14- 15%), with initial focus on re-orienting the portfolio mix toward medium-/high-yielding segments (to 60%, from 50% now) by scaling up used CVs, AHL, micro-LAP, tractors, mid-market corporates, real estate, and gold loans. FB has plans to re-orient its branch franchisee to enhance its appeal for new-gen customers, free-up branches from operationally-heavy tasks to focus on customer engagement/experience, and gradually expand to 400 branches (mainly in adjacent states and high-activity western/northern zones). The bank intends to enhance its CASA ratio, from 30% in FY25 to 36% by FY28, mainly led by improvement in its sub-optimal CA ratio to 10% from 7% which, coupled with loan portfolio orientation, should lift NIM by 20-25bps (net) from its low FY26E base.

Operational cost may remain elevated, though better margin/fee and contained LLP to support RoA expansion

The new management is actively engaging with employee unions, as it will be an important factor toward improving employee productivity to offset the otherwise higher IBA-oriented salary structure. We believe that the management needs to regulate a balanced mix of the old and new guard, to ensure smooth business transformation. The management believes that it has a good fintech-friendly and customer service tech platform; however, to expand organic sourcing and, more so, onboarding new-gen customers would call for incremental investment in its mobile App, branding, and branch revamp. The bank also aims to build its wealth management and transaction banking businesses which should drive up its otherwise lower fee pool, albeit call for heavy investment initially and an elevated cost-to-income ratio in the near term. However, the management believes that 25-30bps expansion in margin, coupled with improvement in fees and contained LLP, should help the bank deliver sustainably healthy RoA/RoE (1.4%/15%) in the medium term from the 0.9-1.3% range during the past 5 years.

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