MOSL: FEDERAL BANK (Buy)-Asset quality turning better; RoA expansion to continue
(FB IN, Mkt Cap USD2.4b, CMP INR85, TP INR115, 35% Upside, Buy)
We attended Federal Bank (FB) Analyst Day, wherein the bank discussed the recent trends and opportunities, along with the key levers for RoA expansion.
** FB has identified new revenue streams such as micro finance, credit card, CV/CE and business banking for margin expansion. It has set a target of achieving a retail:wholesale loan mix of 55:45 over the medium-to-long term.
** The bank reiterated that there is no residual stress in corporate accounts above INR1b. It thus expects the slippage trend to moderate significantly, which in turn will drive controlled credit cost.
** Work is happening to improve productivity by adding branches in a calibrated manner and a high focus is placed on leveraging the distribution channel through the RM model. This will drive a further improvement in the C/I ratio.
** FB has guided for an exit RoA of 1.25% by FY21. Overall, the bank is aiming to increase RoA by 25-30bp over the next 2-3 years.
We believe that the stock trades at inexpensive valuations (1.1x Sep’21E ABV) and thus offers ample scope of re-rating as the earnings cycle recovers. We thus project earnings CAGR of 25% over FY20-22 with RoA/RoE of 1.2%/15.5% by FY22. Maintain Buy with a target price of INR115 (1.4x for Sep’21E ABV).
Focus on sustainable growth; retail loan mix to improve gradually
FB has been looking for sustainable loan growth with a strong focus on growing the retail book at 25% YoY while consciously slowing down in the wholesale segment due to the current challenging environment. The bank has been gaining market share in chosen segments like Housing (~5% of pvt. sector), Auto (~2%) and Personal loans (0.6%) and has also identified new revenue streams such as micro finance, credit card, CV/CE and business banking. The core focus is to shift the asset mix toward high-yielding segments. It has set a target of achieving a retail:wholesale loan mix of 55:45 over the medium-to-long term.
Federal Bank is a commercial banking entity based in India. Co. is engaged in offering its customers private and commercial banking, leasing and merchant banking services, through its head office in Aluva and its 422 branches. Co. maintains a full range of delivery channels including, Internet Banking, Mobile Banking and Alerts, Any Where (Branch) Banking, Interconnected Visa enabled ATM network, E-mail Alerts, Telephone Banking and a Centralised customer Call Centre with toll free number. Co. offers its customers 24 hour banking service from various service channels. As of Mar 31 2003, Co.'s total assets and deposits amounted to IRs122,011,685,000 and IRs109,460,167,000, respectively.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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