Centrum Broking
Federal Bank (Buy)
CMP: ₹96.65
Target: ₹135
The Federal Bank Ltd is a banking company. The company operates through four segments: Treasury, Corporate or Wholesale Banking, Retail Banking and other banking operations.
We initiate coverage on Federal Bank, with a Buy rating and TP of ₹135. 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.
The bank’s distribution network will enhance overall operating efficiency. Incremental flow to higher rated assets has maintained capital adequacy at healthy levels (CAR-13.3 per cent). Stressed asset ratio has substantially declined over FY14-Q2FY19 (best among regional peers) and we expect credit costs to recede. All these levers will enhance RoA / RoE to by 41bps / 520bps over FY18-21E to 1.1 per cent/ 12.6 per cent. Valuation at 1.1x FY21E ABV looks attractive. Buy.