Federal Bank

 Expect NIMs to be in the range of 3.2-3.3% – Federal Bank

Update on the Indian Equity Market:

On Thursday, Nifty closed lower at 17,110 (-1%) in the highly volatile session after Federal Reserve in its policy outcome indicated interest rates hike soon.

PSU BANK (+5.1%), BANK (+0.7%), and MEDIA (+0.6%) were the top gainers and IT (-3.6%), CONSUMER DURABLES (-2.3%), and HEALTHCARE INDEX (-2.3%) were top losing sectors.

The top losers were HCLTECH (-3.9%), TECHM (-3.6%), and DRREDDY (-3.4%) while AXISBANK (+3.3%), SBIN (+2.8%) and CIPLA (+2.3%) were the top gainers.

 Expect NIMs to be in the range of 3.2-3.3% – Federal Bank

Edited excerpts of an interview with Mr. Shyam Srinivasan, Managing Director and Chief Executive Officer, Federal Bank with ETNow on 25th January 2022:

  • In 3QFY22, Federal Bank’s advances grew by 4.5% QoQ and 12% YoY. 3QFY22 showed all-around improvement. The performance was broad-based which is an encouraging sign. Some businesses were driven by economic activity and the bank’s gain in market share.
  • In 3QFY22:
    • Corporate business come back strongly, and
    • Retail, which has been trending well, gathered steam and kept its pace with the developments in the economy.
  • The overall numbers show credit growth and improvement in the quality of the book.
  • The credit quality of the Bank is normally in the top quartile and credit costs have been well managed across lengths of time because of disciplined lending.
  • In 3QFY22, Federal Bank recorded its best-ever net profit and ROA crossed 1%. It crossed the Rs 5,000 mn quarter mark in net profits. So, it has been a diversified, broad-based, and on-target performance.
  • Generally, Bank’s performance is ahead of the industry by a multiple. As the economy picked up pace in 3QFY22, Federal Bank saw a good pick up and its market share gain amplified. The bank is witnessing organic, structural, and holistic growth and it is not one-off bolstering performance.
  • The bank is confident of continuing its momentum in 4QFY22E provided the economy is moderately affected by Coronavirus third wave.
  • The bank believes that green shoots in the economy should play through and if it does, the bank’s market share gain will be even more pronounced.
  • Looking at the last two-three years of the incremental credit in the country, the bank’s share is higher than its normal market share.
  • The bank is gathering momentum across and believes as things improve in the economy, its market share gain should be visible across the spectrum.
  • The credit cost of the bank has reached its bottom at 22 bps and there is no scope for further improvement. Mr. Srinivasan thinks that a normalized credit cost on an annualized basis of around 50-60 bps in a steady state would be a good place to be in. The bank always tries to maintain a balance between the kind of business momentum, and credit cost.
  • Recovery upgrade for 3QFY22 was strong and close to Rs 3,000 mn. Slippages in 3QFY22 were Rs 3,300 mn and almost matched the slippages of the 2QFY22. The incremental recovery upgrades are doing well, and collection efficiency is strong.
  • The CEO expects to see a pick up in capex in 2HCY22 as capacities are getting built-in.
  • Bank’s share gain is visible as it doesn’t have the baggage of any adverse credit and companies are beginning to look at borrowing opportunities. For a greater part of CY21 corporates had other borrowing opportunities to meet their credit requirements but those are turning out to be a little more expensive. So, banking and bank credit are looking more attractive and as that happens, Federal Bank is well-positioned to gain share.
  • Sequentially, the corporate book grew ~7% in 3QFY22. The bank is confident that this will repeat as its strengths, reach out programs and appetite remains strong. Bank thinks as capex picks up, the corporate book will grow even faster.
  • The Bank has been giving NIMs guidance to be in the range of 3.2% to 3.3%. The bank is presently at 3.27% levels and sees room for improvement of another 5 odd basis points.
  • NIMs are impacted by the mix of the book, frequency of credit growth, the quantum of credit growth, and reversals in slippages. Bank has successfully controlled all these variables and demonstrated NIMs expansion. Typically, in a rising interest rate scenario, NIMs tend to expand for banks.

Asset Multiplier Comments

  • We think the Bank’s performance in terms of the advances growth, profitability, and asset quality has been strong.
  • We expect this momentum to continue considering the improving economic condition which will aid higher disbursements and better asset quality.

Consensus Estimate (Source: market screener website)

  •  The closing price of Federal Bank was ₹ 100/- as of 27-January-2022. It traded at 1.08x/0.98x/ 0.87x the consensus Book Value Per Share estimates of ₹ 88.4/ 98.1/ 110 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 118/- implies a PBVPS Multiple of 1.07x on FY24E BVPS estimate of ₹ 110/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”




May look to raise funds in 2HFY22E: Federal Bank

Update on Indian Equity Market:

On Wednesday, markets closed lower as Nifty ended the day 0.7% lower at 15,209. Within the index, HEROMOTO (3.5%), BPCL (2.9%), and SBIN (2.8%) were the highest gainers while NESTLEIND (-3.0%), ASIANPAINT (-2.6%), and MARUTI (-1.4%) were the laggards. Among the sectoral indices, PSUBANK (5.9%), MEDIA (2.2%), and AUTO (0.8%) led the gainers while PHARMA (-1.7%), IT (-1.3%), and FIN SERVICE (-1.1%) were the losing sectors.

Excerpts of an interview with Mr Shyam Srinivasan, MD & CEO, Federal Bank (FEDRALBNK) with CNBC -TV18 dated 16th February 2021:

  • Retail business is almost back to pre-COVID levels across category and geographies. He believes that the bank is expected to achieve growth in mid-teen percentage for CY21E in the loan book for this segment.
  • The worst is over from an economic standpoint and the banking industry is expected to deliver YoY growth of 10 percent in CY21E. The bank is expected to deliver above industry growth in the same period. FY21E loan book is expected to deliver 8% YoY growth.
  • The bank is applying conservative approach in capital consumption. The bank is well capitalized at the juncture. There might be an opportunity for a capital raise towards the second half of CY21E.
  • The bank is well placed on asset quality. The continued recovery in the economy is expected to provide better run for the asset quality in the future quarters. All indicators currently suggest that there will be a better outcome regarding asset quality.
  • He mentioned that collection efficiencies have picked up materially as the bank is reporting month-on-month recovery in collections. The bank foresees that trend to continue.
  • The Net Interest Margin (NIM) is expected to be in the current zone of 3.2-3.3% in the coming quarters. The blended cost of funds and yield on new assets resulted in expansion in NIM during 3QFY21 for the bank.

Asset Multiplier Comments:

  • With the pick-up in economic activities, the improvement in collection efficiency augurs well for the banking industry. This will strengthen the asset quality as per the expectation of management.
  • With the recent rally in the shares of banking stocks, the environment is favorable for capital raising as the dilution will be comparatively lesser.
  • The banks are currently getting benefit of lower cost of funds compared to a year ago, resulting in stable or increasing NIMs. Once the interest rates start moving up, banks could either see NIM compression or increase the yield on loans to maintain current levels.

Consensus Estimates (Source: market screener and investing.com websites):

  • The closing price of FEDERALBNK was ₹ 88/- as of 17-February-2021.  It traded at 1.1x/ 1.0x/ 0.9x the consensus book value estimate of ₹ 79.5/ 87.2/ 96.7 for FY21E/22E/23E respectively.
  • The consensus price target is ₹ 90/- which trades at 0.9x the book value estimate for FY23E of ₹ 96.7/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Growth not constrained by availability of either capital, geography or liquidity – Federal Bank

Update on the Indian Equity Market:
On Tuesday, Nifty50 ended 0.7% higher at 11,470 after the Supreme Court ordered telecom companies to pay their pending Adjusted Gross Revenue (AGR) dues to the Department of Telecommunications (DoT) over 10 years. Among the Nifty50 stocks, BHARTIARTL (+7.1%), JSWSTEEL (+6.5%), and HINDALCO (+5.3%) led the gainers. INFRATEL (-4.6%), ONGC (-2.9%), and AXISBANK (-2.0%) led the losers. METAL (+3.2%), PHARMA (+2.3%), and MEDIA (+1.4%) led the sectoral gainers. IT (-0.6%), PSU BANK (-0.2%), and PRIVATE BANK (-0.1%) were the only sectoral losers.

Excerpts of an interview with Mr. Shyam Srinivasan, MD & CEO, The Federal Bank with ET Now on 31st August 2020:
• Since the moratorium ended on August 31, 2020, no material changes are expected in September and the real picture would become clearer as they go into 3QFY21.
• The net moratorium at the end of 1QFY21 was 24%. Despite banks calculating moratorium in different ways, the Federal bank has been very strict with defining moratorium. If three or more payments were received, those borrowings were out of moratorium. All indications so far suggest the impact of the moratorium end would be as per planned and provided for by the bank.
• The gold loan performance is quite well. 1Q saw 9.5% growth in this segment and that growth is going to be very strong in the year. Gold being anti-cyclical and people resort to gold borrowing when there are any challenges in the economy.
• Businesses like auto loans in select geographies Karnataka, Kerala seem to have picked up in terms of monthly volumes while parts of Maharashtra are not doing as well.
• Typically, the NIMs (Net Interest Margin) are influenced by the margin of businesses, and reversals and low-cost funds. Strong growth in low-cost funds coupled with no material slippages helped, good growth in gold loan helped achieve good NIMs.
• The slippages in September are predictable. The NIMs for 2Q would be around the same levels as 1Q. 3Q and 4Q would depend on the slippages. The guidance for the full year remains at ~3.1%.
• They have an enabling provision for Rs 10bn of equity raise. Right now, they are not looking at raising any money and capital adequacy is looking reasonably good.
• It would be wise to see how 3Q pans out before plunging into any M&A and portfolio expansion opportunities. The growth is not constrained by the availability of either capital, geography, or liquidity, all of which are in abundance with the bank.
• Mr. Srinivasan’s term as the bank’s CEO & MD ends in September 21. With a well-thought-out succession planning in place, there is not a lack of continuity or lack of candidate and by April 21, there will be clarity on his successor.
• There is a high CASA flow from Dubai and the Middle East where oil prices have moved and job losses have happened. Whenever there is any kind of dislocation in these geographies, the bank has been a net beneficiary due to physical presence, large diaspora base, and the client base are not great shoppers and must send money home. It is not a singularly large destructive area. In the last 10 years, they have been able to diversify their business across geographies and product streams.

Consensus Estimate: (Source: market screener and investing.com websites)
• The closing price of The Federal Bank was ₹55/- as of 01-September-2020. It traded at 0.7x/ 0.7x/ 0.6x the consensus book value estimate of ₹ 77.4/83.8/90.4 for FY21E/ FY22E/FY23E respectively.
• The consensus target price of ₹ 66/- implies a PB multiple of 0.7x on FY23E BV of ₹ 90.4/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

We will be very sensible in our lending – Federal Bank

Update on the Indian Equity Market:

On Friday, NIFTY ended up 162 pts (+1.51%) at 10,902. Among the sectoral indices, FIN SERVICE (+1.94%), PSU BANK (+1.84%) and AUTO (+0.73%) were top gainers while IT(-0.62%) was the only loser. Among the stocks, BPCL (+12.43%), ONGC (+5.84%) and INFRATEL (+4.32%) were the top gainers. HINDALCO (-1.90%), BRITANNIA(-1.86%) and NESTLEIND (-1.47%) were the top losers.


Edited excerpts of an interview with Mr. Shyam Srinivasan, Managing Director & Chief Executive Officer, Federal Bank with Economic Times dated 16th July, 2020:

We have grown ahead of the market for the last 14-16 quarters: Shyam Srinivasan

  • Comments on 1QFY21 result: 1QFY21 numbers are quite encouraging. It is quite a balanced outcome. There is no one area that has outdone or given unique benefits but it is spread out between both credit and deposits. Credit grew by 8% YoY. Federal Bank did have businesses like gold loan parts of retail and parts of commercial banking did very well, in particular, gold loan had a remarkably good quarter it grew by 10% QoQ and 36 % YoY. Good credit growth in the higher-margin products and low-cost deposits resulted in 12% income growth YoY. CASA deposit ratio has moved from 30.5% to 32%, So, the 150 bps increase in CASA is driven by sequential growth of 7% in savings. It is an improvement consistent with what the bank has been working on for many quarters and that is why the interest income was at an all-time high of Rs 12,970 mn.
  • Outlook on PCL (provision for credit losses) ratio he said that he would like the coverage ratio including technical written off to be well above 70% and currently it at 75%. Everything depends on how the next 2-3 quarters shape up, given all that is going on in the environment and the challenges that we are all facing. The bank wants to keep coverage portfolio well covered much higher than the likely loss given default. He added that when the bank’s loss given default was in the early 40s, they had a coverage ratio closer to 47-48. When they visualized that the environment is getting stickier and the loss given default might go up, they took the coverage up to almost 59. Depending on how things shape up, Federal Bank will be well provisioned.
  • On the NPA (Non-performing Assets) he stated that we are all part of the same economy so we cannot be totally insulated from all the challenges that globally everybody is facing, given the COVID situation. Federal Bank’s portfolio generally is more secured and a relatively higher credit standard book. For very long, net NPA is at 1.22. In fact, it had a 20 quarter low. This gives confidence that the bank is better placed now to face the likely challenges that may arise over the next six months-nine months. The provisions have been made and will keep increasing the coverage at every available opportunity and post the moratorium liftoff when you can really make sense of how the credit books of everybody is performing, the visible impact will be in September-20 and in the December-20 quarter. He further added that he won’t be able to guess the exact level of deterioration but the bank is ensuring and is in continuous dialogue with customers and expects the deterioration to be manageable.
  • Comments on declining operating profits: The sequential number on operating profit may not reflect the reality because last quarter there was a significant one-off gain on the treasury and the sale of investments was not there in 1QFY21. Rs 9,320 mn of operating profit in 1QFY21 and Rs 9,590 mn in 4QFY20, both are by way of record, the highest the bank has ever done. But Rs 9,590 mn had some larger one-off gains because of the sale of investments which do not repeat itself. In that context, Rs 9,320 mn 1QFY21 is a more sustainable credible consistent number. Operating cost efficiency increase is the productivity drive of the bank. There are many elements of activity going on and that will continue to improve. The Bank is centralizing, standardizing, renegotiating, and deferring a bunch of stuff to maintain the costs.
  • Guidance on NIMs (Net Interest Margin) going forward: In the last three quarters, margins have been moving up sequentially between 4 bps one quarter 3 bps in the next quarter. In the normal course of events, a similar kind of rate of increase could be seen, but we are in a relatively low-interest environment. To that extent, margin expansion does not happen significantly. Second, as credit slippages increase which is likely to happen after the moratorium is lifted off, there certainly will be impairment which will have revenue impact as well. He said that he cannot comment on NIMs but expects to keep the current level of margins which is their top priority and number one effort. For improvement on this, we will have to see how things shape up.

Consensus Estimate: (Source: market screener, investing.com websites)

  • The closing price of The Federal Bank was ₹ 52/- as of 17-July-20. It traded at 0.68x/0.62x the consensus BV estimate of ₹ 77/83.4 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 67.8/- implies a PB multiple of 0.81x on FY22E BV of ₹ 83.4/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”




Growth is bound to come – Shyam Srinivasan, Federal Bank

Excerpts from an interview of Mr Shyam Srinivasan, MD & CEO, Federal Bank with CNBC TV-18 dated 21-01-2020:

Update on the Indian Equity Market:

On Wednesday, NIFTY closed -0.5% lower. Among sectoral indices NIFTY Metal (-1.5%), NIFTY PVT Bank (-1.0%), NIFTY Auto (-0.9%) closed lower. While Nifty Media (1.7%), NIFTY IT (+1.0%), NIFTY FMCG (+0.02%) closed on a positive note. The biggest gainers were Zeel (+4.9%), Grasim (+2.6%), Nestle (+1.8%) whereas ONGC (-5.3%), Cola India (-5.2%) and NTPC (-3.9%) ended with losses.

  • It was a weak third-quarter for Federal Bank as loan growth and net interest margins came in at an all-time low.
  • Mr Srinivasan says, there are no significant issues except for the two housing accounts which are under stress. Other granular businesses are showing marked progress and it will continue.
  • He says they don’t have a single case above 100 cr which is dodgy and therefore the outlook is positive.
  • Speaking about their non-corporate book, he says, their portfolio is significantly secured. Banks that celebrated unsecured success over many quarters had the gains and now have to face some pain.
  • As the portfolio is secured, between now and next 3-4 quarters, the bank does not expect any large formation of stress on the secured side unless property prices get crash.
  • On loan growth, he says, retail is looking north of 24-25 per cent. The large tickets are okay, so the blended margins as the bank exit FY20 will be between 14%- 15%.
  • The gold loan book is expected to grow at 25%. The bank is also gaining share in the auto loan segment, particularly in Mumbai, Kerala and south.
  • Agriculture is seeing pain across banks due to waivers announced by various states.
  • He says growth is bound to come. It cannot keep the system in paise mode. So, the focus will be on getting credit cost down.

Consensus Estimate (Source: market screener and investing.com website)

  • The closing price of Federal Bank was ₹ 93.70/- as of 22-January-20. It traded at 1.2x / 1.1x / 1.0x the consensus Book Value for FY20E / 21E / 22E of ₹ 73.0/81.5/90.6 respectively.
  • Consensus target price of ₹ 112/- implies a Price to Book multiple of 1.2x on FY22E Book Value of ₹ 90.6.