Centrum Broking

Federal Bank (Buy)

CMP: ₹88.1

Target: ₹135

The Federal Bank operates through four segments, namely, treasury, corporate or wholesale banking, retail banking and other banking operations. The treasury operations include trading and investments in government and corporate debt instruments, equity and mutual funds, derivative trading and foreign exchange operations on account and for customers.

Federal Bank is evolving to a more prolific private banking franchise on the back of its balance sheet size, quality growth trajectory, pan India expansion strategy, branch light–distribution heavy model, digital architecture and senior management pedigree.

The talent arbitrage that earlier existed between larger private banks and its regional peers, no longer holds for Federal Bank, since in the recent past, it has hired several senior persons across various businesses. Productivity in network-2 locations will enhance overall operating efficiency.

Capital adequacy is at healthy levels (CAR-13.0 per cent). Stressed asset ratio has substantially declined over FY14-Q3FY19 (best among regional peers) and we expect credit costs to recede over FY18-21. All these levers will enhance RoA / RoE by 41bps/ 520bps over FY18-21E to 1.1 per cent / 12.7 per cent respectively. Valuation at 1.1x FY21E ABV looks attractive.

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