1. 1QFY2011 Result Update | Banking
July 31, 2010
Federal Bank ACCUMULATE
CMP Rs347
Performance Highlights Target Price Rs375
Particulars (Rs cr) 1QFY11 4QFY10 % chg (qoq) 1QFY10 % chg (yoy) Investment Period 12 Months
NII 413 410 0.9 290 42.5
Pre-prov. profit Stock Info
335 352 (4.7) 278 20.5
PAT 132 117 12.8 136 (3.3) Sector Banking
Source: Company, Angel Research Market Cap (Rs cr) 5,931
Beta 0.9
Federal Bank recorded net profit decline of 3.3% yoy and growth of 12.8% on a 52 Week High / Low 369/211
sequential basis to Rs132cr, lower than our estimate of Rs152cr mainly on
Avg. Daily Volume 1,25,040
account of lower-than-estimated non-interest income coupled with higher
Face Value (Rs) 10
provisioning expenses. Substantial spike in gross and net NPAs was the key
highlight of the results. We maintain an Accumulate rating on the stock. BSE Sensex 17,868
Nifty 5,368
Core performance below expectations with pressure on asset quality: For Reuters Code FED.BO
1QFY2011, advances growth and deposits growth was muted at 16.6% yoy and Bloomberg Code FB@IN
10.2% yoy, respectively. CASA deposits grew by 22.4% yoy, higher than overall
deposit growth, leading to improvement in CASA ratio to 29.0% (from 26.1% in
1QFY2010 and 26.2% in 4QFY2010). Growth in core non-interest income Shareholding Pattern (%)
excluding treasury gains was also disappointing at 4.3% yoy. The bank’s gross Promoters -
NPAs grew substantially in absolute terms by 27.1% qoq to Rs1,044cr and net
MF / Banks / Indian Fls 36.9
NPAs rose by 55.8% qoq to Rs201cr. The gross and net NPA ratios deteriorated to
FII / NRIs / OCBs 43.2
3.7% and 0.7% (as against 3.0% and 0.5%, respectively, in 4QFY2010),
respectively. The gross slippage spiked to Rs327cr, indicating an annualised Indian Public / Others 19.9
slippage ratio of 4.8%. Till date, loans worth Rs170cr have slipped into NPAs
from restructured accounts (14.9% of the total restructuring), of which Rs65cr
slipped during the quarter. Abs. (%) 3m 1yr 3yr
Sensex 1.8 16.1 17.1
Outlook and valuation: At the CMP, the stock is trading at attractive valuations of Federal Bank 18.8 45.8 29.2
1.02x FY2012E ABV. While lower leverage is leading to low RoEs at present, the
bank’s earnings quality is one of the best amongst peers at the core RoA level. We
recommend an Accumulate rating on Federal Bank, assigning a multiple of 1.10x
FY2012E ABV to arrive at a Target Price of Rs375.
Key Financials
Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E
NII 1,315 1,411 1,677 1,947
% chg 51.5 7.2 18.9 16.1 Vaibhav Agrawal
022 – 4040 3800 Ext: 333
Net Profit 500 465 620 794
vaibhav.agrawal@angeltrade.com
% chg 36.0 (7.2) 33.5 28.0
NIM (%) 3.8 3.5 3.6 3.4 Amit Rane
EPS (Rs) 29.3 27.2 36.3 46.4 022 – 4040 3800 Ext: 326
P/E (x) 11.9 12.8 9.6 7.5 amitn.rane@angeltrade.com
P/ABV (x) 1.4 1.3 1.1 1.0
RoA (%) 1.4 1.1 1.3 1.4 Shrinivas Bhutda
022 – 4040 3800 Ext: 316
RoE (%) 12.4 10.5 12.5 14.4
shrinivas.bhutda@angeltrade.com
Source: Company, Angel Research
Please refer to important disclosures at the end of this report 1
2. Federal Bank | 1QFY2011 Result Update
Exhibit 1: 1QFY2011 performance
% chg % chg
Particulars (Rs cr) 1QFY2011 4QFY2010 1QFY2010
(qoq) (yoy)
Interest earned 952 953 (0.1) 874 8.9
Interest expenses 538 543 (0.9) 584 (7.8)
NII 413 410 0.9 290 42.5
Non-interest income 110 131 (15.9) 147 (25.5)
Total income 523 540 (3.2) 437 19.6
Operating expenses 188 188 (0.3) 159 18.0
Pre-prov. profit 335 352 (4.7) 278 20.5
Provisions & cont. 133 98 36.2 52 156.7
PBT 202 254 (20.5) 226 (10.8)
Prov. for taxes 70 137 (48.8) 90 (22.1)
PAT 132 117 12.8 136 (3.3)
EPS (Rs) 7.7 6.8 12.8 8.0 (3.3)
Cost-to-income ratio (%) 35.9 34.9 36.4
Effective tax rate (%) 34.7 54.0 39.7
Net NPA (%) 0.7 0.5 0.3
Source: Company, Angel Research
Exhibit 2: 1QFY2011 Actual v/s Angel estimates
Particulars (Rs cr) Actual Estimates Var. (%)
Net interest income 413 402 2.8
Non-interest income 110 127 (13.8)
Total income 523 530 (1.2)
Operating expenses 188 184 1.9
Pre-prov. profit 335 345 (2.9)
Provisions & cont. 133 115 16.2
PBT 202 230 (12.4)
Prov. for taxes 70 78 (10.5)
PAT 132 152 (13.3)
Source: Company, Angel Research
July 31, 2010 2
3. Federal Bank | 1QFY2011 Result Update
Advances growth below industry
Advances growth was muted at 16.6% yoy (against average industry growth of
20% during the quarter) to Rs27,144cr. Deposits stood at just 10.2% yoy to
Rs34,983cr in 1QFY2011 (against average industry growth of 14.0% during the
quarter). CASA deposits grew by 22.4% yoy, higher than overall deposit growth,
leading to improvement in CASA ratio to 29.0% (from 26.1% in 1QFY2010 and
26.2% in 4QFY2010).
Exhibit 3: Trend in advances and deposits
Advances Deposits Credit-Deposit ratio
(Rs cr) (%)
40,000 84.0
30,000 78.0
20,000 72.0
10,000 66.0
- 60.0
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
Source: Company, Angel Research
Exhibit 4: Trend in CASA deposits
CA SA Term Deposits
100%
80%
60% 75.5 73.9 74.2 74.1 73.8 71.0
40%
20% 23.6
20.0 21.3 21.0 21.0 21.1
0% 4.5 4.8 4.8 4.9 5.1 5.4
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
Source: Company, Angel Research
Non-interest income disappoints
Non-interest income declined 25.5% yoy to Rs110cr, driven by a 71.4% yoy
reduction in treasury gains. Growth in core non-interest income excluding treasury
gains was also disappointing at 4.3% yoy. Management attributed this to low
business growth during the quarter.
July 31, 2010 3
4. Federal Bank | 1QFY2011 Result Update
Asset quality under pressure
Federal Bank’s gross NPAs increased substantially in absolute terms by 27.1% qoq
to Rs1,044cr and net NPAs rose by 55.8% qoq to Rs201cr. Gross and net NPA
ratios deteriorated to 3.7% and 0.7% (as against 3.0% and 0.5%, respectively, in
4QFY2010), respectively. The bank’s provision coverage ratio including technical
write-offs stood at 80.0% (83.4% in 4QFY2010 and 88.4% in 1QFY2010). The
bank has restructured Rs46cr of its loans during the quarter, taking the cumulative
restructured loans to Rs1,140cr (4.2% of loans, 24% of the net worth). The gross
slippage spiked to Rs327cr, indicating an annualised slippage ratio of 4.8%.
During the quarter loans of Rs65cr slipped into NPAs from the restructured loans,
taking the cumulative slippages from restructured loans to Rs170cr (14.9% of the
total restructuring).
Exhibit 5: Trend in asset quality
Gross NPAs Net NPAs Coverage ratio (RHS)
(Rs cr) (%)
1,200 90.0
85.0
900
80.0
600 75.0
70.0
300
65.0
- 60.0
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
Source: Company, Angel Research; Note: NPA coverage % excluding technical write-offs upto 3QFY2010
Increased NPA provisions
Due to pressure on asset quality, the bank had to make a provision of Rs136cr
towards NPAs in 1QFY2011, up 45.7% from Rs93cr in 1QFY2010. There was a
write-back of Rs4cr towards provision for investments.
Investment details
The bank’s SLR stood at 26.0%. Out of the total investment book of Rs12,019cr,
the bank’s AFS portfolio constituted 22.1%. The modified duration of overall book
of the bank stood at 5.5 years.
Operating costs rise
Employee cost increased by 8.6% sequentially to Rs105cr. The estimated liability is
expected to be Rs130cr–140cr for the bank. Other operating expenses increased
by 24.4% yoy to Rs83cr. As a result, total operating cost increased by 18.0% yoy to
Rs188cr. The bank's cost-to-income ratio stood at 35.9% (from 34.9% in
4QFY2010 and 36.4% in 1QFY2010).
July 31, 2010 4
5. Federal Bank | 1QFY2011 Result Update
Exhibit 6: Trend in productivity
(%) Cost-to-Income ratio
45.0
36.4 35.0 34.9 35.9
32.3 32.4 33.4
30.5 30.0
30.0
15.0
-
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
Source: Company, Angel Research
Comfortable capital adequacy
The bank’s CAR was strong at 17.9% as compared to 18.4% in 4QFY2010. Tier-I
capital component was reported at 16.6% in 1QFY2011.
Exhibit 7: Comfortable capital adequacy
(%) Tier-I CAR Tier-II CAR
21.0
18.0
15.0
12.0
9.0
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
Source: Company, Angel Research
July 31, 2010 5
6. Federal Bank | 1QFY2011 Result Update
Investment Arguments
Healthy deposit mix: Federal Bank’s CASA deposits grew at a 20.6% CAGR during
FY2005–09, leading to a stable 25% CASA ratio. Further, a key differentiator for
the bank is the low-cost NRI deposits base, which constitutes 16.5% of total
deposits. Thus, effectively, low-cost deposits as a proportion of total deposits stand
at around 41%, which are expected to underpin NIMs of about 3.1% in FY2012E,
even as the bank grows its advances faster than the industry to leverage its large
net worth.
Impact of Dubai crisis within manageable limits: The stock has been an
underperformer due to concerns over the impact of the Dubai crisis on the bank’s
business model, which benefits meaningfully from Middle East NRI clients.
However, as indicated by the management, the bank has a very low direct loan
exposure of about Rs350cr (1.3% of loan book) to these clients. Hence, the impact
of the crisis on asset quality is expected to be within manageable limits.
Reasonable valuations: At the CMP, the stock is trading at attractive valuations of
1.02x FY2012E ABV. While lower leverage is leading to low RoEs at present, the
bank’s earnings quality is one of the best amongst peers at the core RoA level. We
recommend an Accumulate on the stock, assigning a multiple of 1.10x FY2012E
ABV to arrive at a Target Price of Rs375.
July 31, 2010 6
7. Federal Bank | 1QFY2011 Result Update
Exhibit 8: Key assumptions
Earlier estimates Revised estimates
Particulars (%)
FY2011E FY2012E FY2011E FY2012E
Credit growth 23.0 24.0 23.0 24.0
Deposit growth 23.0 24.0 23.0 24.0
CASA ratio 24.5 22.5 24.5 22.5
NIM 3.6 3.4 3.6 3.4
Other income growth 2.2 21.3 0.3 21.3
Growth in staff expenses 18.4 19.2 18.4 19.2
Growth in other expenses 18.4 19.2 18.4 19.2
Slippages 3.5 2.7 3.5 2.7
Coverage ratio 72.7 69.8 76.0 76.2
Treasury gain/(loss) (% of investments) 0.1 0.1 0.1 0.1
Source: Company, Angel Research
Exhibit 9: Change in estimates
FY2011E FY2012E
Particulars (Rs cr) Earlier Revised Earlier Revised
% chg % chg
estimates estimates estimates estimates
NII 1,677 1,677 - 1,947 1,947 -
Non-interest income 542 533 (1.8) 658 646 (1.8)
Total income 2,219 2,210 (0.4) 2,604 2,593 (0.5)
Operating expenses 801 801 - 955 955 -
Pre-prov. profit 1,418 1,408 (0.7) 1,649 1,637 (0.7)
Provisions & cont. 468 468 - 434 434 0.1
PBT 950 940 (1.0) 1,215 1,203 (1.0)
Prov. for taxes 323 320 (1.0) 413 409 (1.0)
PAT 627 620 (1.0) 802 794 (1.0)
Source: Company, Angel Research
Exhibit 10: P/ABV band
Price 0.60x 0.80x 1.10x 1.30x 1.60x
(Rs)
600
500
400
300
200
100
0
Jun-03
Jun-10
Jan-04
Jul-07
Jan-11
Apr-02
Apr-09
Aug-04
Feb-08
Mar-05
Sep-08
Nov-02
Nov-09
May-06
Dec-06
Oct-05
Source: Company, Angel Research
July 31, 2010 7
11. Federal Bank | 1QFY2011 Result Update
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement Federal Bank
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.
Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
July 31, 2010 11
