Federal Bank Forging Ahead
Vidrum / 07 Mar 2012
Shyam Srinivasan, MD and CEO of Federal Bank said, “This expansion of branches will propel the business growth of the bank in the coming years.” The shares of Federal Bank closed down by 0.11 per cent yesterday and today it closed lower by 0.31 per cent at Rs 403.90. However, the shares on a YTD basis are up by 20 per cent.
This addition of 100 branches will further aggregate the bank’s total network of 938 branches. Further, by the end of June 30, 2012, it plans to take this number to 1,000. The approximate average cost for setting up a branch is around Rs 50 lakhs. As per the management, the bank would be reaching break-even in 18 to 24 months which is the usual period for a branch to generate value addition. The management also claimed that they are in control of the expenditure and would maintain the cost to income ratio below 40 per cent, which is a decent level. As on December 31, 2011 the cost to income ratio of the bank stood at 37.13 per cent.
The Federal Bank has seen decent financial performance in the past. In the December quarter of 2011 its net profit surged by 41 per cent to Rs 202 crore. The net interest margin (NIM) of the bank has decreased by 37 basis points on a YoY basis but has increased by 17 basis points to 3.94 per cent on a sequential basis. It has a strong capital adequacy ratio (CAR) of 15.91 per cent with Tier 1 CAR at 14.97 per cent and therefore has no plans of raising funds in the near term. As on December 31, 2011 the total deposits of the bank grew by 26.63 per cent while its advances grew by 17.59 per cent on a YoY basis.
However, the asset quality of the bank deteriorated further, which is not a very good sign. On a sequential basis it increased by 16 basis points to 0.74 per cent. The bank may face some concerns going ahead. However, one should not forget that it has maintained a high provision coverage ratio which stands at 80.54 per cent. Also, it has lesser exposure to power, aviation and telecom sectors which are in turbulence.
Going ahead, with the interest rate soon expected to reverse, the banking space will be benefiting as their NIM will improve. The strong branch expansion initiative will benefit the bank in the medium to long term perspective. On the valuation front it is available at a price to book value of 1.35x which also should be considered at decent levels when compared to its peers like IndusInd Bank available at 3.81x, Yes Bank at 3.14x, Jammu and Kashmir Bank at 1.15x, etc.
The management aims to maintain its return on assets (ROA) at 1.4 per cent and expects the return on equity (ROE) at 18 per cent (current 14.56 per cent) going ahead. We believe the bank is in a decent shape and hence one should remain invested in the scrip or could invest in a staggering manner, keeping a long-term horizon.
Key Financial Performance
| Particulars (Rs / Cr) | Q3FY12 | Q3FY11 |
|---|---|---|
| Net Profit | 201.87 | 143.1 |
| CASA (%) | 29.63 | 28.65 |
| NIM (%) | 3.94 | 4.31 |
| CAR (%) | 15.91 | 16.42 |
| Provisions | 115.25 | 142.38 |
| Gross NPA (%) | 3.97 | 3.95 |
| Net NPA (%) | 0.74 | 0.81 |
| Return On Assets (%) | 1.41 | 1.3 |
| Book Value Per Share | 330.19 | 298.53 |
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