Consistent Performer - Federal Bank

Strong business growth, improved net interest margins and better asset quality – that would be the right way to describe Federal Bank (FBL). But in addition to these factors there are certain other compelling factors like continuous dividend payment, strong growth in other income, lower exposure to risky assets, lower slippages to bad assets, higher exposure to the infrastructure sector and good financial performance that make FBL a good buy at current levels. The scrip looks good on the valuation front too where its CMP of Rs 250 discounts its FY09 earnings by 8.50x and its price-to-book value (Rs 218.50) ratio stands just at 1.20x. Our recommendation is that investors should buy the scrip at its current level with a target price of Rs 315 in the next one year.

FBL currently has 612 branches out of which 379 are based in semi-urban and rural areas. This comes as an advantage as rural and semi-urban areas witnessed strong growth last year. This can be also seen from the fact that the per branch business in FY09 has increased to Rs 89.20 crore as compared to Rs 74.32 crore in FY08.

As regards the business growth, in FY09 its advances stood at Rs 22,391.88 crore (up 18.15 per cent over FY08). During the same period, deposits increased by 24.25 per cent to Rs 32,198.19 crore. Regarding the [PAGE BREAK]advances, out of the total advances, 31 per cent are retail advances and risky personal loans form only 1 per cent of that amount. Further, while many banks are reeling under the pressure of toxic housing assets, FBL has very low exposure to such risk-laden sectors as commercial real estate (3.90 per cent) and capital markets (1.87 per cent).

On the deposits front, the low cost CASA deposits stand at 24.51 per cent of its total deposits. This is a bit on the lower side but the management expects it to improve going ahead. This will also improve its net interest margins (NIM), which at current levels is at 4.28 per cent (3.49 per cent in FY08). With improved NIM the net interest income (NII) has also improved. Further, the bank has also showed a consistent growth pattern of more than 30 per cent in the other income since the last five years, thus resulting in a better bottomline.

As regards asset quality, the net NPAs stand at Rs 68.10 crore or 0.30 per cent. Although it is higher than 0.23 per cent of FY08, it has showed a declining trend from Q2FY09. Further, the slippages have also reduced in Q4FY09. Even in restructured advances, out of Rs 631 crore around Rs 593 crore are standard assets. Regarding its capital adequacy ratio, it stands strong at 20.14 per cent, way ahead of the norms. FBL has consistently paid dividend during the past 18 years and the current dividend yield stands at 2 per cent (Rs 5 per share).

The financial performance for FY09 has been good on account of improved NIM and better other income. For FY09, the total income stood at Rs 3,831.41 crore and the bottomline stood at Rs 500.49 crore as compared to Rs 2,910.43 crore and Rs 368.05 crore respectively for FY08. Hence we recommend that investors should buy this scrip at its current level with a target price of Rs 315 in the next one year.