Federal bank’s acquisition of minority stake (26%) in Equirus Capital (unlisted) augurs well with its strategy of building up corporate & institutional banking team. Primary synergies lie in broadening product offerings to corporate & SME clients and additional fee income. Steady loan growth, leverage optimization, improving loan mix and improvement in operating efficiency should result in gradual increase in overall profitability. Retain BUY with TP of Rs 145. Equirus Capital. Equirus Capital clocked a consolidated turnover of R24.72 crore and profit after tax (PAT) of R.31 crore, around 45% coming from securities businesses (capital markets, investment banking and institutional research) and balance being from other advisory businesses (structured finance, PMS, etc.). Founded in 2007, Equirus Capital is present in capital markets, institutional equities (since 2010) and portfolio management (since 2016). Primary synergies for Federal Bank in acquiring minority stake in the company is two fold – (i) Offer more comprehensive product offerings to the wholesale clients – financial solutions like capital markets advisory and structured finances and (ii) Offer add-on products to retail clients – PMS services, etc. Strategically, we believe the tie-up to be in line with company’s strategy of scaling up its corporate & institutional banking. Further, the alliance shall also be an additional fee income source for the bank.
The deal dynamics are not known currently, but the bank is significantly capitalized (CET1 at 14.6%) and can easily pay for this acquisition. Valuation/Risks FB trades at 1.5x P/B (Dec’17) and 12.8x P/E (12m to Dec’18E) versus 5year avg. of 1.5x and 13.4x, respectively. We value FB at 2.2x P/B (Dec’18E) and 15.9x P/E (12m to Dec’19E). Risks: Weak NRI-CASA and domestic CA flows, inability to rein in costs, asset quality deterioration.
The Federal Bank is a major private commercial bank in India, headquartered at Aluva, Kochi, Kerala. The bank was incorporated on April 23, 1931 as the Travancore Federal Bank Limited Nedumpram under the Travancore Companies Regulation, 1916.