Trading at 1.1 times FY17E P/ABV, with RoA touching 1.4% plus and RoEs rising to 16%, the stock of Federal Bank has potential to trend towards 1.5x, implying >35% return potential. With tier-1 of 14.4%, the stock has the requisite fuel for growth as well.
We recently met Federal Bank’s management to gauge the performance on critical parameters. Key highlights were: (1) Credit growth: Confident of 15% plus surge in FY16 driven by SME and retail, corporate growth will be more opportunistic; (2) Margin: NIMs will largely be stable as funding cost benefit flows in; (3) Though the elevated cost-income ratio does strike a sour note as past investments are yet to bear fruits, rising productivity riding improved revenue traction and controlled opex is bound to lower the ratio, which in turn will boost return ratios; and (4) Asset quality: confident that stress will be contained with no further addition to the watchlist, moreover >80% provision coverage lends comfort.
The stock has corrected and now trades at 1.1x FY17E ABV, which for a bank with tier-1 of 14.4% and estimated RoA/RoE of 1.4%/16% by FY17E lends comfort.
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