Kerala-based Federal Bank (FBL), with 606 branches and 559 ATMs all over India, is looking to expand to Gujarat, Uttar Pradesh, Maharashtra, West Bengal and other parts of north India in this financial year, in line with its organic growth plans. Three hundred branches are in Kerala and the rest across the country. The bank plans to open more branches in the Gulf region, where is has got good customer base.
Interest earned grew a healthy 34% to Rs 745.12 crore in the first quarter ended June 2008. Interest expended increased 27% to Rs 278.19 crore. Net interest income (NII), thus, advanced 47% to Rs 278.19 crore.
Other income declined 8% to Rs 96.21 crore, restricting net total income to 28% at Rs 374.40 crore. Although the aggregate non-interest income registered a negative growth, fee income rose 75%, supported by fee and commission income, and remittance distribution, cash management and depository businesses.
Operating expense including staff cost and other expense was up 15% to Rs 120.88 crore, leading to operating profit rising 35% to Rs 253.52 crore. Though there was a significant jump in other operating expenses due to branch expansion and migration of the operating system to the central banking solution, FBL could contain the cost-to-income ratio at 32% as against 36% in the previous fiscal, which is one of the lowest in the industry.
However, provisions & contingencies including provision for non-performing assets (NPAs) spurted 157% to Rs 172.40 crore, in the June 2008 quarter. Investment provision amounted to Rs 131.79 crore on account of depreciation of investments held in trading book. This higher provisioning affected the growth in net profit, with profit before tax falling 33% to Rs 81.12 crore. However, tax provision slipped 76% to Rs 12.97 crore, lifting net profit 2% to Rs 68.15 crore.
Boosted by capital, Federal Bank’s net interest margin (NIMs) was up a strong 60 basis points (bps) to 380 bps over the June 2007 quarter. NIM was the highest among old private sector banks. Moreover, core fees (ex recoveries and treasury) increased 75% over the June 2007 quarter.
Capital adequacy ratio (CRR) was 20.74% end June 2008 as against the regulatory minimum of 9%. Tier-1 (core CRR) was 17.84 %. FBL holds Rs 189.72 crore in investment fluctuation reserve to take care of the depreciation in the held-to-maturity (HTM) category, though this is not required as per the Reserve Bank of India (RBI) guidelines. The bank is fully prepared to move to Basel II.
Gross and net non-performing advances as percentage to advances were 2.64% and 0.46%, respectively, end June 2008 as against 2.93% and 0.37% end June 2007.
The business per employee and profit per employee moved up to Rs 669 lakh and Rs 3.88 lakh, respectively, end June 2008 from Rs 533 lakh and Rs 4.05 lakh end June 2007. The cost-to-income ratio improved to 32.28% from 35.74% end June 2007.
FBL continues to be the favourite choice of NRIs. As an old generation private bank with roots in Kerala, with a fairly large population residing outside the country, the bank has got good NRI deposit and savings composition in its deposit base. NRI deposits constituted 26% of its total deposits. These low cost deposits are considered to be much more stickier than other term deposits. Its current-and-savings-account (CASA) ratio is also a healthy 25%.
Total business increased 32.7% to Rs 47178 crore end June 2008 over end June 2007. Total deposits spurted 28.7% to Rs 26893 crore and rose 38.3 % to Rs 20285 crore. FBL has a target of Rs 100000 crore of total business and to open 1,000 branches by 2012.
We expect FBL to register EPS of Rs 25.5 in the fiscal ended March 2009 (FY 2009). The share price trades at Rs 213. P/E works out to just 8.4. The bank’s book value (BV) stood at Rs 229.16 in FY 2008. BV is expected to go up to Rs 250. Thus, price/BV on FY 2008 numbers works out to just 1 and falls to 0.9 on our FY 2009 estimated BV. With the Left parties losing their hold on the Indian political scene, chances of liberalisation in banking regulations and allowing foreign banks to acquire Indian banks have increased. FBL offers one of the best acquisition opportunities among the private sector banks.
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