Shining Star: The Federal Bank Ltd

Shining Star: The Federal Bank Ltd. – BUY

Target Price Rs.192
Upside %28%
Investment Horizon 1 year

Federal BankLtd. (FBL), founded in 1931 in Kerala, is one of India’s oldest and largest private banks, especially big in Kerala with around 1,418 branches nationwide. It’s well-known for getting a lot of its money from Indians living abroad, mainly in the Middle East, which helps the bank grow. The bank cares a lot about its customers, employees, and shareholders, aiming to grow in a balanced way. Recently, they opened about 65 new branches, showing they’re keen on expanding and adapting to changes. Federal Bank offers a bunch of services like savings accounts, home loans, personal loans, auto loans, and even helps with banking for people living outside India. They also help small businesses and farmers with loans. A cool thing about Federal Bank is that almost 90% of their banking tasks are done online, thanks to their partnership with over 75 tech companies, making banking super easy for everyone. All this shows Federal Bank is aiming to keep growing and staying relevant in today’s digital world.

Why do we need to invest in The Federal Bank Ltd.?

Strategic Approach to Enhance Return Ratios

Federal Bank (FBL) is working hard to make more money and become more efficient in a banking world where it’s tough to increase profits. They’re aiming to achieve a Return on Assets (RoA) of over 1.5% and a Return on Equity (RoE) of 18-19% in the future. Thanks to sticking to strict lending rules, the bank’s financial health looks good with no major loan problems, which means they might not have to spend much on unexpected loan losses soon. They’re trying to boost their earnings by focusing on making more from interest on loans and saving money by getting more people to use current accounts, which are cheaper for the bank. They also plan to lend more to businesses that bring in higher interest rates while keeping their loan quality high. The bank’s efforts are paying off, as shown by their increasing RoA and RoE from 2019 to 2024. Even though running the bank is costing more, they believe that investing in technology and better managing their resources will help them make more money and stay competitive.

Focus on High-Yielding Loan Segment to Improve Profitability

Federal Bank (FBL) is working smart in the current environment where people and businesses are borrowing more. They’re focusing on loans that earn them more money, like retail loans and gold loans, even though their profit from interest has dropped a bit recently. In the third quarter of the financial year 2024, they made their highest profit ever at Rs. 1,007 crores and also had their highest income from interest at Rs. 2,123 crores, despite the interest they earn on loans (net interest margin) going down because more people are choosing term deposits over current and savings accounts. They’re getting better at giving out loans that make more money, like credit cards, personal loans, loans to small businesses, and loans for commercial vehicles, which now make up a bigger part of their loan book. The bank is also trying to keep its costs down and make more money from fees, like from selling insurance, which they think will keep growing and help boost their income even more.

Robust Asset Quality Showcases Effective Underwriting Practices

FBL saw a slight increase in bad loans this quarter, going up to Rs. 479 crores from Rs. 365 crores last quarter, mainly because of one corporate account that didn’t do so well. Despite this, the bank’s overall health didn’t really suffer—bad loan rates are stable, and they’ve kept a good chunk of money aside just in case (72.3% to be precise). Even though the cost of handling these bad loans went up a bit, the bank’s bosses think things will stay under control and are sticking to their plan for the year. They’re especially hopeful about fixing the issue with the troubled corporate account soon, possibly even next quarter. This situation shows that Federal Bank is pretty good at handling risks and keeping things steady, even when there are a few bumps along the way.

Business Growth Through Traditional and Modern Partnerships

FBL has teamed up with various Fintech companies to boost its business, using these modern tech firms to bring in more customers while still keeping a tight check on loan quality. The bank has really benefited from offering unsecured loans, thanks to efficient tech-driven processes. These collaborations have also made things smoother for customers, speeding up sales and strengthening relationships. A big win from going digital is getting around 381 schools to use its fee payment system and handling a huge Rs. 22,000 crores in mobile banking transactions every month, with an impressive 94% of all transactions done online. FBL hasn’t just gone all-in on digital; it’s also been opening 100 new branches every year outside its main area, Kerala, which has helped grow its deposits from other places. This blend of new tech partnerships and traditional branch growth shows FBL’s smart strategy to grow in today’s changing financial world, keeping it on track for ongoing success.

Valuation & Outlook

FBL has been focusing on making more money by lending to businesses and financing vehicles, while also keeping up its deposits from Indians living abroad. Even though the profit they make from interest dropped a bit this quarter, they still made a good profit thanks to lending money at higher interest rates. They saw a huge jump in lending money to small businesses and for buying vehicles. This helped the bank spend less compared to how much it earned. There was a small dip in how well the bank’s loans were doing, with a few more loans not being paid back on time, which they’ll need to keep an eye on. Despite this, the bank has been doing well overall and continues to grow, especially in providing banking services to non-residents and opening new branches, particularly in Tamil Nadu. They’ve gone beyond their goal by opening 140 branches instead of 100 this year. The bank is aiming to do even better by focusing on a mix of loans that earn more money and expanding its services, hoping to attract more customers, especially from among Indians living outside the country. This strategy is expected to help the bank grow its profits and its presence in India’s banking sector. On the valuation front, the bank is valued at 1.3 times the estimated book value for the FY26E. This valuation methodology suggests a target price of Rs. 192, representing a potential upside of 28% from the current market price and a 12-month investment horizon.

115 thoughts on “Shining Star: The Federal Bank Ltd. – BUY

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