Introduction:

 

Federal Bank is a Private Sector Scheduled Commercial Bank in India headquartered in Kochi, Kerela. With a customer base of eight million and a large network of remittance partners across the world, Federal Bank claims to handle more than 15% of inward remittances.


 Investment Rationale:

 

1.   Bank has both segments retail as well as wholesale with focus on wholesale. The bank management has said that the focus will shift to retail as that is where the growth is coming from.

 

2.    Recently, Federal Bank has been in news for its high NPA ratios which is not healthy for any bank. NPAs lead to higher provisions, lower revenues, higher costs and finally decrease in net profit affecting the EPS growth. The bank has been gripped with the sectoral challenge of increasing NPAs, especially corporate facing banks. It had Stressed book to total average assets ratio of 4.30% in Q1 16 which the bank has brought down to 1.96% in Q3 19 which is a major decrease in stressed assets. Along with this, the restructured loans have been brought down from Rs 2583 cr to Rs 644 cr over the same period. This is accompanied with rise in net NPA amounts from Rs 484 cr to Rs 1817 cr. Coupled with increase of “A” and above rated loan book from 65% to 72%, increase in asset quality, it all signals towards peaking of NPA cycle and healthy growth in future can be expected. 

 

3.   Sectoral challenges in NBFCs and PSBs to also aid to higher growth in private sector banks.

 

4.   Bank has taken digital initiatives to increase its market share. Active digital users are growing 45% YoY with mobile transaction volume clocking 92% YoY. Digital share of the bank has been improving. 

 

5.   The value in the bank lies in its digital initiatives, peaking of NPA cycle, improvement in asset quality, healthy CASA deposits and growth. Third-party products still form a very small portion of total income and therefore, immense value lies in this segment of Federal Bank. 

 

Technical Analysis:

 

Federal Bank on the weekly charts has made a double bottom at levels close to 95-99, after making a high of 127 in 2017. It has been consolidating at these levels for the past 12-14 months, and any move above 99 would make a fresh case for a retest of its previous highs of 127.

 

The longer term charts suggest a good move on the upside. In terms of price action, the stock has made a classic reversal on the Fibonacci retracement indicator, which reinforces the fact that the move from 127 to 75 odd levels was just a routine correction (remember the stock moved from 42 to 127 in a span of one year) and now the stock appears to be making a base at 95, and if this time correction holds on for a few more days, fresh entry can be taken. Alternatively, any slight dip to 93 or 88 levels presents an attractive entry point.

 

Share-price Chart:

 


Source: Federal Bank stock price chart | The Stellar Investor

 

Financials:

Federal Bank Balance Sheet, Federal Bank Financial Statements & Accounts | Moneycontrol


Other articles from this analyst:

IDFC First Bank: More valuable after merger?

Yes Bank poised for recovery?

Comments (3)
chirag - 01 May 19, 01:40 AM

Very insightful article!

amritbrar1805 - 01 May 19, 06:51 AM

Thanks. Suggestions, improvements are welcome.

Rmasand - 04 May 19, 02:07 PM

There was a report posted by motilal oswal with Buy recommendation. Good read and the results this Quarter align to their research. https://www.motilaloswal.com/site/rreports/HTML/636516898903440401/index.htm

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