Recommendation From Banks Sector

Federal Bank has presence over all geographies of India (1252 branches and 1551 ATM) and is improving its footprint. Its home base Kerala (~50% of the branches) is continuing its dominance with 5 per cent gain in market share led by wholesale (39% rise) and NR business (24% rise). Also, the loan book is well diversified with corporate contributing 35% to the pie followed by SME (25%), retail (20%) and agriculture (10%).

In fiscal year 2016, interest income component grew by 4.38 per cent; total deposits grew by 11.78 per cent to Rs.79171.71 crore; CASA,NR and retail deposits displayed growth of 19.28 per cent, 25.42 per cent and 11.78 per cent respectively; total advances stood at Rs.58090.14 crore. Its overall business posted consistent growth of 9.31 per cent.

Looking at 1QFy17, gross and net NPA marginally increased by 8 bps and 4 bps to 2.92 and 1.64 in Q1FY17 on QoQ basis. Provision ratio of the bank is at 72.09 per cent which is above the prescribed minimum level of 70 per cent by RBI. Capital adequacy ratio of the bank is reduced to 13.59 per cent in Q1FY17 as compared to 13.93 per cent in Q4FY16 and it is still much higher than limit set at 9 per cent by RBI; which gives safer cushion to the bank. Also we see that NPAs are slowly decelerating and the same have benefitted the net profit which spiked up by whopping 1530 per cent to Rs.167 crore in first quarter of FY17.

Cost to income ratio is down by 259 bps points to 54.19 per cent in Q1FY17 on QoQ basis, a consistent show of efficiency from 59 per cent in Q3FY16. Net interest income (NII) is consistently growing from Rs.510 crore in to Rs.692 crore over two years. Federal Bank has successfully reduced its expenditure by 2 per cent and improved operating profit by 8 per cent in Q1FY17 on QoQ basis. Net interest margin (NIM) is marginally down 3 bps points to 3.28 per cent in Q1FY17. Its CASA and retail deposit grew by 18 per cent and 12 per cent in Q1FY17 on QoQ basis. The CASA ratio of the bank has risen substantially to 32.83 per cent from 26.94 per cent in last five years which is positive sign of marketing depth. Additionally, the bank is adding to customer base since Q1FY16 to make it 76.42 lacs in Q1FY17. Deposits and advances have risen by 2 per cent in Q1FY17 on QoQ basis. Credit growth witnessed an improvement in Q1FY17 at 19.3% vs. 13.2% in Q4FY16.

We can see more accelerated growth after slippages in loan quality taper off. Federal Bank restructuring is pacing up as we see balanced NPAs are reduced to 491 in Q1FY17 vs 598 of Q4FY16. With diversified credit portfolio we see consistent growth in FY17. On valuation front, the bank's share looks more attractive with TTM EPS of 2.92 trading at P/E of 21.9x as compared to IDFC bank (38x), IndusInd bank (28x). So we recommend our reader-investors to BUY this scrip.