Federal Bank – A Turnaround banking Story?

Federal bank might be a low PBV/PE banking stock but not a rerating candidate till the below issues get addressed:

1. Low NIM’s at 3.30% due to higher proportion of Corporate lending alongwith Lower exposure to Unsecured retail and high dependency on Secured Retail such as Gold loan/Home loan/Vehicle loans which are low yielding products and highly competitive. Further, they have Low CASA, Normal fee income and no strategy to grow unsecured retail agressively such as personal loans, credit cards, microfinance.
   Even top pvt banks such as ICICI,HDFC,Kotak are focussing on these segments and have a good high yielding retail book which compensates for lower yield from Corporate lending.
2. Low ROA at 1.30% and ROE at 15%. Banking is a highly competitive business where ROA, NIM, ROE are very critical. At this ROE, if you raise growth capital, market doesnt appreciate.
3. Regional exposure in South India. I have seen the low pricing strategy of the bank in Corporate lending to onboard accounts and beat competitors such as HDFC bank.
4. Lending as a business has risks and Mgmt doesnt seem to grow unsecured retail so how will the NIM’s go up. Banks have to take a calibrated risk adjusted approach. It is not that the NPA for the bank was invisible in covid crisis as the GNPA went upto 3%. Same was 4% for IDFC first bank. Today Net NPA is 0.74% for Federal and 0.86% for IDFC considering Infra & corporate book as well. IDFC first has NIM of 6% for march quarter even after having some old legacy bonds in liabilities. Premium is paid for a reason.
5. IN BFSI sector, there are many stock options for investors and it makes more sense to invest in established models which have long growth visibility, niche scalable business model. There is a reason that PSU banks/regional pvt banks with low PE/PBV are not considered good long term compounders. All the best.