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JM Financial
Federal Bank (Buy)
CMP: ₹89.05
Target: ₹105
Federal Bank, at its Analyst Day 2020, provided key updates on the operations and business segments. Federal Bank also showcased the key digital initiative undertaken by the bank over the years including open banking with API infrastructure — leading to new third-party collaborations, increased use of data analytics in decision making and enhanced app-based solutions customised for different customer segments.
Management guided for RoA (return on assets) expansion by 25-30 bps to 1.25-1.30 per cent over next 2-3 years supported by a) increase in C-D ratio; b) expansion in NIMs; c) improvement in fee income; d) moderation in opex; and e) moderation in credit costs.
Management indicated that the focus on retail banking will continue (further bolstered by new higher yielding products — margin enhancers which are explained in detail later). Accordingly, the loan mix is expected to continue its shift in favour of retail assets. Management also indicated that the increased use of data analytics has aided in better and enhanced credit underwriting and risk monitoring which in turn should lead to better credit quality. We believe downside maybe limited at CMP as Federal Bank now trades at inexpensive valuation of 1x FY22E adjust BVPS (book value per share).
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