Billionaire MA Yusuffali always has a beatific smile on his face. He doesn’t speak much. His actions speak louder. Like the time in January 2014 when he quietly walked up to the South Indian Bank counter and placed an order for 3 crore shares.
Yusuffali was sending us a discreet message that the time was ripe to load up on banking stocks. As usual, he was right. South Indian Bank is itself up 40% since that day, just five months later.
You can get a sense of how wizards like Yusuffali are able to get their timing right. It is only much later that technical analyst Hadrien Mendonca was able to predict that a “multi-year breakout” in banking stocks is happening.
MA Yusuffali’s all-time favourite stock is Federal Bank. He holds a massive chunk of 3,15,76,820 shares (3.69%) worth a mind-boggling Rs. 400+ crore.
Now the important aspect is that Daljeet Kohli and Yogesh Hotwani of IndiaNivesh have issued a detailed research report in which they have recommended a Buy of Federal Bank.
Let’s note the core reasoning:
“We prefer Federal Bank in mid sized banks amongst private sector banking space and would like to highlight it as top pick in midcap space. We are positive on the bank due to increasing penetration outside Kerala which is likely to help growing its assets base in key strength of Retail and SME. Increasing proportion of retail (ex gold) loans and SME along with strong traction in low cost deposits will help margins going forward. Further we are not worried on asset quality front as retail segment continues to do well for overall industry and strong provision coverage ratio of 84% gives us more comfort.
At CMP of Rs 118, the stock is trading at P/ABV of 1.4x and 1.2x for FY15E and FY16E respectively. We initiate coverage with buy rating on Federal Bank with target price of Rs 137, valuing it at 1.5x average of FY15E and FY16E ABV.”
Interestingly, Sharekhan has put Federal Bank in its top picks Model Portfolio for June 2014. Lets see the reasoning:
– Federal Bank undertook structural changes in the balance sheet, viz increasing the proportion of the better rated assets and improving the retail deposit base, and is thus better prepared to ride the recovery cycle. As the economy is gradually showing signs of a revival, the bank is much better capitalised (tier-1 capital adequacy ratio of 15%) compared with its peer banks to expand the balance sheet.
– Asset quality has improved substantially over the past three to four quarters and is likely to improve further in the coming period. Higher provision coverage of 84% and a possibility of recovery from one large-ticket account (likely in the next two to three quarters) would further increase the comfort on asset quality.
– The valuation of 1.2x FY2016 BV is attractive when compared with the regional banks and other old private banks. The expansion in the return on equity (RoE) led by a better than industry growth (FY2014-16) will lead to an expansion in the valuation multiple. We have a Buy rating on the stock with a price target of Rs142.”
Federal Bank has a number of other fans as well. Let’s take a note of them:
“Outlook and valuations:
Stabilising; maintain ‘BUY’
We expect 20% earnings CAGR over FY14-16E considering NIMs of 3.3% and loan growth of 18%. The stock currently trades at 0.9x FY16E ABV. We maintain ‘BUY/SO’.”
“Maintain Buy: Core NIM was below expectation but structural improvement in liability profile (reduction in bulk deposits – 2.7% of deposits v/s 14.7% in FY13), traction in CASA and higher share of SME loans will provide cushion to NIM. Large balance sheet, capabilities and distribution strength are already in place and we expect operating leverage (in terms of productivity) to accrue over FY14/16E. Reported asset quality has improved, however it has been supported by sale of loans to ARCs/write-offs. Risk of slippages from corporate segment persists, which in our view is adequately captured it in our credit cost estimate, and strong PCR limits the downside risk to our estimates.”
“Asset quality is a key catalyst for the bank with slippages expected to improve by 20bps to 1.6% in FY16E. It is adequately capitalized and does not need to raise equity capital for another 3 years. We expect its ROE to augment by 250bps to 15.2% over FY14-16. We initiate coverage on Federal Bank with “BUY” recommendation with a target price Rs.125 per share valuing by residual income model implying valuation of 1.3x P/ABV FY16E.”
So, if you are looking for a banking stock to buy, you have to give Federal Bank serious consideration.