After successful consolidation, Federal Bank (FBL) is well placed to capitalise on the likely macro-economic recovery. FBL has addressed most of its critical problems. Balance sheet consolidation is now behind and the management is targeting a credit growth of ~20%. Favourable asset liability mix will help in improving net interest margin or NIM. The cautious approach has helped in containing slippage. Improvement in operating efficiency in branches opened recently will also aid in a significant improvement in the cost-to-income ratio. We expect a 23% earnings CAGR over FY14-FY17E. We expect RoA/RoE to improve 32bps/420bps to 1.5%/16.8%, respectively, by FY17E. We have assigned Buy rating to FBL with a target price of Rs183 based on residual income model, implying 1.6x FY17E P/ABV.
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