Book Profit Now - Federal Bank

Federal Bank was recommended by us in our first issue of 2010 in the article titled ‘Where To Invest In 2010’ at Rs 236. Post this recommendation the counter went up to hit its 52-week high of Rs 354.80, thus yielding a return of 50 per cent. Currently the scrip is trading at Rs 314.9, which is 33 per cent above the recommended price. The reasons we recommended Federal Bank was due to its good asset quality with higher provision coverage ratio and attractive valuation. With inflation already raising its ugly face and being a shade above 10 per cent for the month of May 2010, the RBI may increase the key policy rates to partly control this monster. This will adversely affect the banking sector as a whole.  Moreover the bank’s yearly performance was not up to the mark and it failed to perform on various financial parameters. Its total income increased by just 9.74 per cent and its net profit declined by 7.18 per cent. Even its net interest margin declined from 4.28 per cent to 3.82 per cent in the last one year and its net NPAs increased from 0.3 per cent to 0.48 per cent during the same period. The share of the bank is currently trading at 1.16 times price to its adjusted book value. This does not look very expensive and is par with peer banks. However, our suggestion to investors is to book profits and exit from the counter because of the possibility of underperformance in the coming months