Federal Bank

Investors can consider fresh investments in the Federal Bank stock in the light of its attractive valuations and strong growth.

An excellent net interest margin (NIM) of 5.03 per cent for Q3FY09, better efficiencies (cost-income ratio 30 per cent), strong capitalisation, a well-diversified loan book and high provision coverage for non-performing assets are the key positives for the bank.

Federal Bank may be also be a key beneficiary from the stimulus measures that allow higher interest rates on NRI deposits. That may enhance remittances, which now constitute 26 per cent of the bank’s total retail deposits.

At current market price, the stock is trading at just 0.6 times its December 31, 2008 book value and five times its trailing one-year earnings. Though it is one of the better performers, its P/BV is at a discount to most of the listed banks.

The bank’s advances growth in the December quarter slowed down to 23 per cent year-on-year from more than 30 per cent over past quarters. However, the profit growth has still been better than expected, at 98 per cent due to higher net interest margins, higher fee and treasury income, provision write-backs and lower operating cost.

The bank’s cost of funds was flat owing to a higher proportion of deposits and inflows in the form of NRI deposits. The yield on assets improved from 9 per cent to 10.1 per cent, boosting the NIM of the bank by more than 180 bps in a year.

Going forward, NIMs may moderate as there may be slowdown in advances and the yield on investments decline, but may still remain healthy.

The bank’s advances are well-diversified with 33 per cent of advances being retail (only 1 per cent is unsecured personal loans). Though slippage in asset quality is a concern, it may be limited as the unsecured portion of advances is small and the most of the advances are investment graded. The net NPA/ advances stood at just 0.33 per cent due to 88 per cent provision coverage. The bank’s capital adequacy ratio of 19.8 per cent is healthy and has been shored up by a Rs 2,150-crore rights issue last January.

In terms of risks, a continuing slowdown in the real economy may lead to further slippage in asset quality. The bank has a concentrated presence in the South, especially Kerala, with almost 60 per cent of the total branches in this State. The possible acquisition of a stake in Catholic Syrian Bank may pose integration issues.