We attended Federal Bank Analyst Day, wherein the bank discussed the recent trends and opportunities along with the key levers for RoA expansion. Federal Bank has identified new revenue streams such as microfinance, credit card, CV/CE and business banking for margin expansion. It has set a target of achieving a retail: wholesale loan mix of 55:45 over the medium- to long-term.
The bank reiterated that there is no residual stress in corporate accounts above `100 crore. It thus expects the slippage trend to moderate significantly, which in turn will drive controlled credit cost. Work is happening to improve productivity by adding branches in a calibrated manner and a high focus is placed on leveraging the distribution channel through the RM model. This will drive a further improvement in the C/I ratio. The bank has guided for an exit RoA of 1.25% by FY21.
Overall, the bank is aiming to increase RoA by 25-30 bps over the next 2-3 years. We believe the stock trades at inexpensive valuations (1.1x Sep’21E ABV) and thus offers ample scope of re-rating as the earnings cycle recovers. We thus project earnings CAGR of 25% over FY20-22 with RoA/RoE of 1.2%/15.5% by FY22. Maintain ‘buy’ with a target price of Rs 115 (1.4x for Sep’21E ABV).
The bank has been looking for sustainable loan growth with a strong focus on growing the retail book at 25% y-o-y while consciously slowing down in the wholesale segment. The bank has been gaining market share in chosen segments like housing (~5% of pvt sector), auto (~2%) and personal loans (0.6%) and has also identified new revenue streams such as microfinance, credit card, CV/CE and business banking. The bank has improved its rating profile in the wholesale book over the last few years (~96% of wholesale book is of investment grade v/s 74% in FY15).
