Stock Review: Federal Bank

 

Federal Bank, one of the largest mid-sized private sector banks in terms of capital base, has been reporting robust financial numbers even in a rising interest rate scenario helped by strong distribution network and huge customer base. High low-cost deposit base and well diversified loan portfolio provides an edge to the bank over peers and enables it to maintain better margins consistently.
This has been reflected in its stock market performance as well. In the last six months, the stock has gained 21% compared with a mere 0.1% return from ET Bankex.

Federal Bank has an optimum mix of overseas and low-cost domestic deposits that safeguards the bank's net interest margin in a rising interest rate scenario. Non-resident Indian clients contribute almost 26% to the bank's retail deposits, a segment that was largely unaffected during the financial downturn of 2008-09. Healthy growth in NRI deposit will help facilitate the bank to maintain its current account savings account ratio at a record level of 30%.

 

The bank's net interest margin --which is a measure of spread between the cost of borrowing and yield on loans -- was 4.22% in 2010-11, the highest among small banks. The bank has maintained a NIM of about 3.5% for nine years. In the fourth quarter, the bank's advances and deposits grew by 15.6% and 19.3%, respectively.

The bank has managed to reduce its non-performing assets (NPAs) to 0.6% as on March. However, gross NPA ratio is slightly higher at 3.5% as a result of increase in slippage in the past few quarters against 2.9% in last fiscal. The bank restructured substantial corporate and small medium enterprise loans under the Reserve Bank of India's special dispensation. These loans may further slip into NPA categories, elevating the bank's credit risk in the near term.

The bank has not been able to grow its fee income business, which may hit profitability as fee income is likely to be a differentiating factor for banks given that higher interest rates may affect their core income. The bank's stock is trading at a sixmonth high price-book value of 1.5. However, these valuations can be justified if the bank's management efficiently deals with the concerns of non-income growth and asset quality.