Emkay Global Financial Services is bullish on Federal Bank and has recommended accumulate rating on the stock with a target of Rs 425 in its October 18, 2011 research report.
“Federal Bank, historically, asset quality has been a weak area for the bank. Its GNPA increased from 2.5% in FY08 to 3.9% in Q1FY12, with slippage rate at ~3% and recoveries in the range of 10-29% of opening GNPA over FY08-11. We believe the GNPA’s has peaked out at 3.9% in Q1FY12, and will show steady improvement over FY12/13 with GNPA falling to 2.9% by FY13. Increased recovery efforts (recovery rate improved to 44% in Q1FY12), lower proportion of unseasoned book at 24%, and separation of the loan sourcing and underwriting functions are likely to bring about the desired improvement in asset quality.”
“Post capital infusion in FY08, the bank’s RoE came down significantly to 13.5% in FY08 from 21.3% in FY07, and since then, has been languishing in the range of 10-13%. However, as credit growth picks up driven by aggressive branch expansion plans in FY12/13 and softening of interest rate cycle in FY13/14, we expect the leverage to drive improvement in RoE’s from 12% in FY11 to 14% by FY13, and further to 18% by FY15. With 60% of the branch presence in Kerala alone, the bank was not able to grow to its true potential. However, now the bank plans to add 300 branches over FY12/13 with 75% of the new branches to be opened in Tamil Nadu, Karnataka, Punjab, Gujarat and Southern Maharashtra, which attract higher NRI and SME business. As a result, we expect the advances to grow at a CAGR of 22% over FY11-13, with low cost deposit improving further from 33% in FY11 to 38% in FY13.”
“We are enthused by the initiatives taken by the new management, which will not only help the bank to overcome its asset quality issues which has plagued the bank for long, but will also lend stability to the bank’s earnings profile. At CMP, the stock trades at 1x FY13 ABV, 20% below its last two years average valuations. We believe as the initiatives take by the management bring about the desired results over the course of next two years, the valuation multiple should reach back its last two years average of 1.2x. We initiate coverage with a ‘ACCUMULATE’ rating and TP of Rs 425,” says Emkay Global Financial Services research report.
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