• Aditya Battu

#3 Federal Bank - Mid cap, private bank

Updated: Sep 28, 2020

Why is this stock important?

  1. Undervalued stock with healthy growth in revenues and net profits YoY, with margins intact

  2. Available at attractive prices as the stock witnessed a huge correction post Yes Bank debacle and during lockdown, down 35% from its pre-lockdown levels of Feb 2020

  3. Loan quality is well maintained with gradual decrease of NNPA% (bad loans) YoY

  4. With economic activity slowly opening up in pockets, banks are likely to benefit in the medium-long term


Overview: One of the major banks in private sector, headquartered at Aluva, Kerala. The history of Federal bank dates back to pre-Independence era, incorporated on April 23, 1931 as Travancore Federal Bank Limited

Shareholders : Major shareholders include Non-institutional investors (32%), Foreign institutional investors (31%) & Mutual Funds (26%)

Presence: Serving customers pan India and also from the Middle East through NRI accounts (~37% of the total deposits comprises of NRI deposits) with more than 1000 branches spread across different states

Products/Services: The bank offers its customers a variety of services that a normal private bank provides :

  1. Regular banking services : Both retail and corporate

  2. Cash management services, insurance, mutual fund products etc.

Customer Mix : The loan book comprises of a healthy mix of Retail, Agri, MSME's & large corporates

Market Value: Federal bank with a market value of ~11,000 Cr is one of the fastest growing private banks in India


a ) Valuation parameters (As on Aug 21, 2020)

  • Lower P/E ratio (6.9) as compared to Industry P/E ratio (25.7) & lower P/B ratio (0.74) indicates that the stock might be undervalued

b ) Historical returns ( Past 2 years )

  • Past two year returns show that Federal Bank has fared better compared to overall Nifty Bank index, especially in 2019, but has fallen recently due to the covid pandemic, indicating a potential opportunity in the medium - long term

c) Financial Performance

  • Revenue: Growing at a CAGR of 15.8% from FY'16 - FY'20

  • Net Profit: Growing at a CAGR of 33.6% from FY'16 - FY'20 with healthy margin growth

  • NPA's : Both Gross & Net NPA ratios ( Non-performing assets ) have been stable over the past few years, indicating that the bad loans are kept in check

  • CASA Ratio & CAR (Captial Adequacy Ratio) : Both the ratios have been stable over the years

CASA Ratio : ( Current & Savings deposits)  / ( Total deposits )  A higher CASA ratio implies lower cost of funds and higher profitability for the bank  CAR : Ratio of bank's core capital to its risk assets Regulators track bank's CAR to ensure it can absorb unexpected losses in case of high defaults. The higher the ratio the better, as it is in a better shape to absorb the losses

  • RoE & EPS : The stock has been increasing shareholder value over the years with increasing EPS and RoE ( Return on Equity ) YoY

  • Debt to Equity ratio : Healthy debt position with ratio consistently maintained below 1

  • Advances & deposits : Advances (loans) and deposits are growing over the years, however the growth rate has been declining, which is a red flag for the company

d) Loans under moratorium due to Covid

  • As per the latest company investor presentation, 24% of the loans were under moratorium at the end of Jun'20, so essentially 76% of the loans cleared their monthly dues on time during the moratorium period indicating that the effect of rise in bad loans post moratorium might be limited

e) Peer-Peer comparison

  • Federal bank has delivered consistent growth in revenues and also at healthy growth rates comparable to its other high valued peers such as HDFC, ICICI & Kotak Mahindra Bank

  • The stock since March 2020 has performed poorly due to the covid pandemic and increasing concerns around bad loans and loan de-growth during the covid phase, but with stable asset quality and comparable revenue growth the stock looks to be grossly undervalued, indicating a potential upside in the medium-long term


We summarize the performance of Federal bank and the outlook for the coming months below:

To conclude, it looks like the stock price has already absorbed the impact of Covid and with the moratorium period ending and some pockets of the economy slowly opening up, this might be one of those stocks to have in your portfolio for good returns in the medium-long term, especially with the loan book likely to increase rapidly once the economic activity resumes across all the sectors

Link to company's latest investor presentation : Link

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