Federal Bank Limited Should Seek Support from Healthy Asset Quality and Credit Growth

Stable asset quality and reliable business strategy are expected to act as principal growth enablers. Gold loans saw a growth of 17% to reach INR18,469 crores in 1Q23, with retail advances growing 14% to reach INR49,872 crores year-over-year. Commercial banking advances saw 10.23% growth year-over-year to touch INR12,865.20 crores.

About Federal Bank Limited

Federal Bank Limited is being counted as a major Indian commercial bank carrying its operations in private sector. These are spread across a variety of states in India. It is being categorised as a pioneer from a pool of traditional banks in India in area of using technology to leverage operations. This bank was among first banks in India that was able to computerize its branches. This bank offers a variety of services including internet banking, mobile banking etc. as part of the bank’s strategy to position as financial super market and enhance customer convenience. Federal Bank is an important player in list of various commercial banks and it professes a set of values and these are being nurtured over years and are now principles of organisation.

Growth Enablers of Federal Bank Limited: 

·        Credit Growth and Deposit Growth Seen in 1Q23- Gross advances of Federal Bank Limited touched INR1,54,392 Cr as on Jun 30, 2022 from INR1,32,787 Cr as on Jun 30, 2021, exhibiting 16% growth. Agri Advances saw 19% growth to reach INR19,988 Cr from INR16,827 Cr., while business banking advances grew 18% to reach INR12,799 Cr. Deposits saw 8% growth to reach INR1,83,355 Cr as on Jun 30, 2022 from INR1,69,393 Cr as on Jun 30, 2021. Profits were supported by strong credit growth and overall management of costs.

·        Stable Asset Quality with Maintenance of Collection Efficiency: Gross NPA of Federal Bank Limited as at end of quarter was INR4,649.33 crores and this as a percentage of gross advances is 3.50%. Net NPA as on Jun 30, 2021 was INR1,593.24 crores, with Net NPA as percentage of net advances coming at 1.23%. Gross and net NPA saw impacts of mobility restrictions while PCR was 65.9%. Despite challenging environment, the bank was able to maintain collection efficiency at 95%. The bank’s corporate book has been holding well as no major accounts are in watch list. Federal Bank Limited is watchful and focuses on building loan mix skewed in favour of high-rated corporates and retail loans. Liability franchise of the bank is healthy and it has one of highest liquidity coverage ratio amongst other banks. Asset quality was managed well, despite pandemic. Gross NPA as on Jun 30, 2022 came at INR4,155 Cr., while gross NPA as a percentage to gross advances was 2.69%. Net NPA came at INR1,420 Cr. and Net NPA percentage was at 0.94% as on Jun 30, 2022.

·        Reliable Business Strategy Should Deliver Desirable Results: With onset of COVID-19, Federal Bank Limited focused on business continuity plans. Higher priority was given to ensure that customers get sufficient support, while maintaining business continuity. This bank initiated an analysis of situation from various other stand points, with several stress testing for capital, liquidity and asset quality. As extent of this pandemic is not known, strategy adopted for FY21 was to remain nimble yet flexible and deal with dynamic, ever-changing environment. Pandemic resulted in shift in business strategy as focus was on creating value through resilient growth.

Near term focus of Federal Bank Limited was on creation of flexible plans to deal with dynamic environment. Relentless emphasis was placed on digital migration and making internal processes digitised. Federal Bank Limited made sure that focus remains on higher margin business. With deposit franchise becoming stronger and granular, significant watch was kept on possible slippages and focus was placed on strengthening balance sheet. Strong operating performance supported the bank to increase coverage ratios and set aside higher provisions.

·        Favourable Industry Dynamics: Like any other sector, COVID-19 disruption and subsequent lockdowns in India saw significant pressure on multiple fronts in banking sector. Uncertainty arising out of its direct impact on the banks and impact on debt servicing ability of borrowers and challenges about asset quality impacted risk appetite of lenders, negatively affecting credit uptick. Since lifting of lockdowns in India, there was faster-than-expected rise in economic activities. This growth stemmed from pent-up demand, fuelled by festive season in year gone by. With economic growth being impacted, deposits saw a moderate growth rate of ~8% in FY20. Pandemic made customers conserve their money and reduce private consumption. FY21 saw deposits growth crossing 10% and registering 11.4% year-on-year growth for fortnight ended Mar 26, 2021.

·        Digital Adoption at Rapid Pace: In 1Q22, digital dominance of Federal Bank Limited was visible as there was launch of new initiatives. The bank launched credit card for ETB customers and there was seamless end-to-end digital onboarding. The bank topped digital scorecard which was published by Ministry of Electronics & Information Technology (MEITY) for Feb and Mar 2021. In FY21, digital share of transactions crossed 85%, of which corporate digital share of Federal Bank Limited reached 73.50%. 92% transactions were done by retail customers with help of digital channels. Total number of digital users of Federal Bank Limited were 27.83 Lakhs at FY21 end, with total number of merchants reaching 37.66 lakhs. Digital users went up by 21% year-over-year and monthly mobile banking volumes crossed INR10,000 crore mark during FY21 to reach INR10,645 crores as on Mar 31, 2021.  By end of 1Q23, digital share of transactions made 87.73% and Federal Bank Limited saw 232% year-over-year growth in UPI transactions.

Conclusion

Variety of stimulus measures globally is helping countries put economies back on growth track. Yet, recovery is uneven. In India, higher-than-expected growth of GDP of 1.6% in 4Q21 did moderate this challenge created by pandemic to some extent. At time of projecting revival for Indian economy to 9.3% growth in FY22, Moody’s Investor Services said that risks to country’s financial sector were exacerbated by 2^nd wave of pandemic. Led by focus on digital enablement and support from operational strength, Federal Bank Limited saw strong performance during FY21 to see exceptional numbers. Total business crossed landmark figure of INR3 lakh crores, exhibiting 10%+ growth, with net interest income growing 19% year-over-year to touch INR5,534 crores. Annual operating profit grew 18% over previous year, with low GNPA and NPA putting the bank in list of top-tier commercial banks in terms of credit quality.

Stock of Federal Bank Limited saw a strong run up of ~18.1% between Jun 29, 2022- Jul 29, 2022.

Despite opening up of Indian economy and lifting of restrictions, Bank Nifty failed to exceed returns delivered by stock of Federal Bank Limited. Bank Nifty saw a run up of ~12.1% between Jun 29, 2022- Jul 29, 2022. This highlights importance of stock selection and how important it is to analyse in depth. Stock of Federal Bank Limited is expected to see support from its market presence. As of 1Q23, bank had 1291 branches and 1860 ATM/recyclers.

Federal Bank Limited has cheap valuations, favouring long position on this stock. This stock currently trades at ~11.28x FY22 EPS, which is at a deep discount to sectoral average of ~19.21x.  

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