Federal Bank is a private sector bank headquartered in Aluva, Kerala. The bank operates in four segments: treasury operations, wholesale banking, retail banking, and other banking operations.
The bank has 1,250+ branches and 1,900+ ATMs/Recyclers and has its representative offices at Abu Dhabi and Dubai and an IFSC Banking Unit (IBU) in Gujarat International Finance Tec-City.
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Federal Bank is well ahead of its peers in terms of digitisation. The bank is transforming and establishing itself as a next-generation bank among the private mid-segment.
The bank has been spearheading digital initiatives with tie-ups with various payments platforms, neo banks, and fintech companies across its assets and liabilities.
This enables the bank to lower its costs and enhance revenue. Further, the bank has a well-diversified loan book with a continued focus on increasing the retail mix. Retail loans constitute 54% of total advances and are less risky, which carry higher margins.
Federal Bank has been able to maintain a consistent and stable deposit franchise (helped by overseas remittance flow to Kerala) with a high proportion of retail deposits with lower branch spread.
This idiosyncrasy allows it access to cost-effective, low-cost funds, crucial to not only maintain its loan growth but also sustain its margins.
On the assets side, with a focused approach, the bank has been building incremental addition in better-rated corporate borrowers, which has helped bring down the stressed pool.
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Constantly adapting to digitisation: Federal Bank has been strengthening its digital footprint.
The bank was among the first five banks to launch UPI payments; and since 2016, it focused on digital migration from branch channels to digital channels.
Currently, 87.5% of the transactions are being conducted through the digital platform and digital transactions have witnessed 34% y-o-y growth in Q2FY2022.
The bank has partnered with PineLabs, Bill Desk, and PayU to offer EMI loans. The bank has also tied up with Jupiter, DGV, and epiFi to offer savings account.
Better product mix.
The bank stands better in terms of product mix, with retail constituting 54% of total advances.
There has been a continuous shift in the focus from wholesale to increasing the retail mix in the overall portfolio.
The retail segment, which contributed 46% in FY2019, has increased to 54.3% in Q2FY2022. This equips the bank with less risky assets in its loan portfolio and, at the same time, these assets also carry higher margins.
The bank’s gold loan portfolio has also been gaining strength.
Asset quality and funding profile: The bank’s asset quality has remained stable. In Q2FY2022, its asset quality improved because of lower slippages and higher recoveries.
The bank’s GNPA declined by 26 bps q-o-q to 3.24%. Slippages moderated significantly to Rs. 320 crore in Q2FY2022 (1% of loans) and its restructured book increased to 2.6% of loans (1.9% in Q1FY2022), which demonstrates that the bank has the best underwriting practices given the environment and Reserve Bank of India’s (RBI) dispensation.
Federal Bank Ltd Stock recommendation.
We find Federal Bank to be an attractive franchise with a strong balance sheet and well-managed asset quality, which will help it tide over medium-term challenges
At the CMP, the stock currently trades at 0.8x its FY2023E P/BV, which we believe is at attractively lower valuations and a value buy at current levels.
Factors such as its digital initiatives and changing itself to a next-generation private bank and continued focus to increase its retail mix with higher-yielding businesses such as commercial vehicles, credit cards, and microcredit, are expected to augur well for the bank’s growth going ahead.
The bank’s asset quality is also holding up well with better underwriting practices.
Additionally, the well-experienced management team has brought in management stability to drive the long-term strategy of the bank.
Federal Bank Ltd Stock Target Price.
We have a buy recommendation on the Stock Federal bank with a Target Price of Rs 140. The Current Market Price of the Stocks is Rs 82.
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- Stock Recommendation
- Stock buy recommendation for federal Bank.
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