Analyst Report : Federal Bank (Target Price :76.70, CMP :56.54 )

Federal Bank

Federal Bank, the erstwhile Travancore Federal Bank, is medium sized Indian commercial bank in the private sector headquartered at Aluva, Kerala. The Bank was incorporated on April 23, 1931 under the Travancore Companies Regulation, 1916. Late K. P. Hormis took up the reigns in 1945 and built the bank a nationwide institution. Later it scheduled commercial bank under the Second Schedule of Reserve Bank of India Act, 1934 in July 20, 1970.
The bank is recently present in 25 States and 5 Union Territories. It is also listed in Bombay, Cochin, National and London Stock Exchanges. The bank has one subsidiary and one joint venture named as FedBank Financial Service Limited and IDBI Federal Life Insurance Company of India Limited. The bank is one of the nine banks to get approval for integrating with E-treasury program of Government of Kerala that could accelerate the government business portfolio growth. It has won IDBRT Banking Excellency Award for “Digital banking, Analytics & Big Data” among Medium sized banks and also bank’s HR head, Mr. Thampy Kurian figures in the list of 50 most influential HR professionals in Asia.

Shareholding Pattern

Cat Code	Category of Shareholder	Total number of shares	Total shareholding as a percentage of total number of shares
A	SHAREHOLDING OF PROMOTER AND PROMOTER GROUP	0	0
B	Public Shareholding
1.	INSTITUTIONS
a	MUTUAL FUNDS/UTI	21,31,13,860	24.88
b	Financial institutions/Banks	6,87,26,264	8.02
c	Central Government	5	0
d	Foreign institutional investors	30,31,27,092	35.38
e	Any other (Specify) - Foreign Banks	19,08,053	0.22
	Sub Total B(1)	58,68,75,274	68.51
2.	NON- INSTITUTIONS
a	Corporate Bodies (Indian/foreign/Overseas)	5,53,92,129	6.47
b	Individuals(Resident/ NRI/ Foreign National)	0	0
(i)	Individual shareholders holding Nominal share Capital up to Rs.1 lakh	9,82,79,000	11.47
(ii)	Individual shareholders holding Nominal share Capital above Rs.1 lakh	7,11,44,721	8.30
c	Any other-Clearing Members	10,57,686	0.12
	- Trusts	38,29,217	0.45
	-Corporate Body – Foreign Bodies	2,27,03,920	2.65
	-Limited Liability partnership	7,03,662	0.08
	-Overseas Corporate Bodies	3,000	0
	Sub Total B(2)	25,31,13,335	29.55
	Total Public Share Holding   B = B(1)+B(2)	83,99,88,609	98.05
C	Shares held by Custodians for GDRs and ADRs	1,66,66,588	1.95
	TOTAL(A+B+C)	85,66,55,197	100.00

Business Description

The Bank is structured into two verticals: Banking operations and Treasury. Under the Banking operations, the bank has been working in Retail segment, Small and Medium Enterprise (SMEs) segment, Agriculture segment and Corporate/Wholesale banking segment. The total business of the bank is increased by 18.36% to INR 122,109.98 Cr in the FY15. SME and retail lending are the bank's focus areas and constitute 25.7% and 32.2%, respectively, of its loan book. The Bank’s corporate advances forming 32% of total advances in the FY15. The bank has two representative offices in Dubai to increase the scope of the bank among NRIs in the gulf countries which resulted into overall growth of the NRIs business by 26% and acquired more than 130000 new NRIs in the FY15.

Products and Services

Federal Bank provides a range of products and services to cater to the banking needs ranging from Savings Bank, Current Accounts, Deposits, Loans, Debit-Cards, Gift Card, Travel Card - Cash Passport, Funds Transfer, Demat Accounts, Federal Pure Gold, Safe Deposit Lockers, Mutual Fund, Payment Gateway, Mobile Banking- FedMobile, Internet Banking-FedNet, Insurance Products to Priority Banking, Online trading platform. The bank is also started providing online services like Online Healthcare Portal, Online Religious Offering, Scan n Pay, Easy Utility Bill Payments and Tax payment through FedNet. The bank is aimed at adopting technological innovations in the finance sector space and launched innovative SB account opening facility named FedSelfie in which customers have to take the selfie, upload it along with Adhaar and PAN card through mobile app- FedBook.

Branch Network

The bank opened 73 new branches and 126 ATMs during the FY15. The bank has 1251 Branches, 1523 ATMs and 11696 Employees as on 30^th September 2015. 79% branches of the bank are in five states i.e. Kerala, Tamil Nadu, Maharashtra, Karnataka, and Gujarat. The bank is breaking new ground in inclusive banking by providing financial literacy to the under privileged and through innovations like Branchless banking through Business Correspondents (BCs) and Financial Inclusion Branches – Grama Jeevan branch. The bank is opened 46 new Grama Jeevan branch and one representative office in Dubai in the FY15.

Industry Analysis

Banking sector is the lifeline of the nation, developing the important sectors of the country and ushering in a new dawn of the progress on the Indian horizon. Indian banking industry has a total assets size of INR 81 trillion which is expanding continuously with a cautious note. From 2014-2015, Reserve Bank of India (RBI) issued 21 bank licenses which includes 2 universal banks, 11 Payment banks and 8 small banks such as Janalakshmi, Ujjivan, Suryoday, Equitas, RGVN and Disha. Since new payments banks will cover un-banked areas bringing more households into the financial ecosystem and banks must try and access these customers so the existing banks have pressure to come up with the customised financial products. Indian banks, including the private sector banks are aggressively improving their technology infrastructure to enhance customer satisfaction, gain competitive advantage and reduced costs. Indian banks are expected to spend on technology at an annual rate of 14.2%. Indian banks are already embraced the international banking supervision accord of Base II and according to RBI, majority of the banks already meet the capital requirements of Basel III. Corporate demand for bank loan is expected to increase due to continued infrastructure investments, and due to certain policy decision such as issuing telecom spectrum licenses.

Market Analysis

India’s strong GDP growth i.e. expected at CAGR of 7 % over 2012-17 to ease banking sector for the expansion. Simplification of Know Your Customer (KYC) norms and introduction of Kisan Credit Cards will become crucial growth driver in the Indian banking sector to increase rural banking penetration. India currently spends 6% of GDP on infrastructure and Planning Commission expects this fraction to grow in the nearby future so banking sector is expected to finance part of USD 1 trillion infrastructure investments in the 12^th Five Year Plan which will open great opportunity for the banking sector. The flagship schemes like Pradhan Mantri Suraksha Bima Yojana(PMSBY), Pradhan Mantri Jeevan Jyoti Bima Yojana(PMJJBY), Atal Pension Yojana(APY) and Pradhan Mantri Jan Dhan Yojana(PMJDY) have been helping the Indian banks to tapped the un-banked and capture new business opportunity.

Financial Analysis

The Bank has shown great growth in the last five years. The Bank’s deposits has been growing at CAGR of 13.29% from the last five years. Its deposit increased by 18.57% at INR 70822.69 Cr during FY15. Its borrowing decreased by 58.51% from INR 5767.54 Cr to INR 2392.98 Cr during FY15. On the asset side, the bank’s fixed assets and other assets have almost doubled in the last five years. Its investment comprises of 29.18% of the total assets at INR 24189.81 Cr as compared to 31.94% last year. Its advances comprise of 62.15% of the total assets at INR 51529.20 Cr as compared to 58.55% previous year but advances are growing at CAGR of 12.69% from last five years. The bank’s balance with cash and money at Call and Short Notice comprise of 1.69% at INR 1402.46 Cr as compared to 1.91% last year. This shows that the bank is reaping benefits from the investments done in the previous few years.
       

(INR in Crores)	2010-11	2011-12	2012-13	2013-14	2014-15
EQUITY AND LIABILITIES
Share capital	171.04	171.05	171.06	171.06	171.33
Reserves and surplus	4846.65	5421.25	6092.86	6689.65	7528.95
Deposits	42988.45	48934.73	57611.17	59729.04	70822.69
Borrowings	1888.36	4266.04	5239.04	5767.54	2392.98
Other current liabilities and Provisions	1448.33	1751.17	1878.82	2287.55	1992.35
TOTAL ASSETS	51342.83	60544.24	70992.95	74644.84	82908.3
Cash and Balances with RBI	2936.35	2429.68	2748.86	3108.37	3381.98
Balances with banks and money at Call and Short notices	813.25	1108.7	977.67	1425.81	1402.46
Investments	14407.9	17102.02	20854.49	23838.59	24189.81
Advances	31957.81	37945.85	44327.42	43703.81	51529.2
Fixed assets	292.91	337.03	414.48	436.46	472.68
Other assets	934.61	1620.96	1670.03	2131.8	1932.17
TOTAL	51342.83	60544.24	70992.95	74644.84	82908.3

The bank’s interest earned increased by only 6.88% from INR 7005.7 Cr in the previous year to INR 7488.77 Cr in 2014-15 whereas its other income increased by 28.22% from INR 685.18 Cr to INR 878.54 Cr during 2014-15. The bank’s interest expended increased by only 6.95% from INR 4727.76 Cr in the last year to INR 5056.33 Cr in 2014-15 but its operating expenses increased by 12.17% from INR 1493.5 Cr to INR 1675.21 Cr during FY15. Here, The Bank’s Net profit crossed the INR 1000 Cr landmark for the first time in history. Its net profit increased by 22.10% from INR 828.92 Cr to INR 1012.09 Cr during FY15. This shows that the bank is trying to increase its non-fee incomes while cutting down its expenses.

Profit & Loss Statement for Last Five Years

(INR in Crores)	2010-11	2011-12	2012-13	2013-14	2014-15
INCOME
Interest earned	4052.03	5581.72	6246.32	7005.7	7487.77
Other Income	518.33	532.2	664.64	685.18	878.54
TOTAL INCOME	4570.36	6113.92	6910.96	7690.88	8366.31
EXPENDITURE
Interest expended	2304.49	3606.67	4208.94	4727.76	5056.33
Operating Expense	836.54	1008.06	1223.59	1493.5	1675.21
Provisions and Contingencies	840.86	727.68	628.22	640.7	622.68
TOTAL EXPENSES	3981.89	5342.41	6060.75	6861.96	7354.22
Net Profit For the Year	588.47	771.51	850.21	828.92	1012.09
Share of (profit)/loss of Associate	-32	-17.78	2.45	20.83	45.72
Consolidated Net Profit Attributable to Group	556.47	753.73	852.66	849.75	1057.81
Profit brought forward	-37.92	-66.17	181.66	411.83	693.67
TOTAL ASSETS	518.55	687.56	1034.32	1261.58	1751.48

Projected Balance Sheet for Next 5 Years

(INR in Crores)	2016	2017	2018	2019	2020
EQUITY AND LIABILITIES
Share capital	171.33	171.33	171.33	171.33	171.33
Reserves and surplus	8624.30	9835.90	11209.14	12765.52	14529.39
Deposits	80237.53	90903.95	102988.30	116679.09	132189.88
Borrowings	2713.28	3075.26	3485.38	3950.03	4476.48
Other current liabilities and Provisions	2259.02	2560.40	2901.86	3288.72	3727.03
TOTAL	94005.46	106546.83	120756.01	136854.70	155094.11
ASSETS
Cash and Balances with RBI	3834.65	4346.24	4925.86	5582.55	6326.57
Balances with banks and money at Call and Short notices	1590.18	1802.32	2042.68	2315.01	2623.54
Investments	27427.58	31086.73	35232.48	39929.53	45251.16
Advances	58426.31	66221.03	75052.32	85057.99	96394.15
Fixed assets	535.95	607.45	688.46	780.24	884.23
Other assets	2190.79	2483.06	2814.21	3189.39	3614.45
TOTAL	94005.46	106546.83	120756.01	136854.70	155094.11

Projected Income Statement for Next 5 Years

(INR in Crores)	2016	2017	2018	2019	2020
INCOME
Interest earned	8103.73	8963.83	10159.70	11514.60	13049.69
Other Income	950.81	1051.73	1192.04	1351.01	1531.12
TOTAL INCOME	9054.54	10015.55	11351.74	12865.61	14580.80
EXPENDITURE
Interest expended	5472.27	6053.08	6860.63	7775.56	8812.17
Operating Expense	1813.02	2005.44	2272.99	2576.12	2919.56
Provisions and Contingencies	673.90	745.43	844.88	957.55	1085.21
TOTAL EXPENSES	7959.19	8803.95	9978.49	11309.23	12816.93
Net Profit For the Year	1095.35	1211.60	1373.24	1556.38	1763.87

It is our assumption that the bank’s initiative of improving customer critical processes is going to good down the line. We have used Discounted Cash Flow method to arrive at valuation for Federal bank. Our estimated price is coming out to be around INR 76.70. The Current Market Price of federal bank is INR 56.55 as on December 23, 2015.

Price Performance

References:

Annual Report 2015-2010, Retrieved from http://www.federalbank.co.in/financial-result

RBI grants “in-principle” approval to 11 Applicants for Payments Banks, Retrieve from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=34754

S&P BSE SENSEX View, Retrieved from http://www.bseindia.com/sensexview/indexview_new.aspx?index_Code=16&iname=BSE30#

About the Author

This report has been authored by Jaymin Shah. He is pursuing MBA in Finance from Institute of Management, Nirma University located in Ahmedabad, India.

Disclaimer

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The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only.

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