In India’s banking landscape, Federal Bank has consistently demonstrated a stable trajectory marked by growth, innovation, and unwavering resilience. Originated in Kerala, the bank’s ambitious expansion strategies spans across the nation, as it strives to solidify its dominance within the banking industry. The bank’s distinctive approach lies in its strategic integration of fintech partnerships and a pronounced focus on secure lending avenues, particularly in the realm of gold loans. Guided by the leadership of CEO Mr. Shyam Srinivasan, Federal Bank has not only achieved commendable financial results, but has also paved the way for sustainable future growth. With its remarkable trajectory and strategic initiatives, the bank emerges as a promising investment prospect in India’s ever-evolving banking landscape.
Branch distribution:
Shareholding Pattern: (June 2023)
Key Ratios:
Capital Adequacy Ratio – 15.77%
Net Interest Margin – 3.16%
Gross NPA – 2.8%
Net NPA – 0.96%
CASA Ratio ~37%
Growth Drivers for the bank:
Aggressive Branch Expansion:
- With a mission to expand its branch network, Federal Bank plans to open 80-100 branches annually over the next three years, focusing on Gujarat, Maharashtra, Tamil Nadu, and Karnataka.
- This strategy aims to tap into vibrant states, attracting a wealthier customer base and diversifying its regional presence. New branches achieve rapid profitability, indicating effective management and operational efficiency.
Dominance in Remittances:
- Federal Bank holds a 21% share in India’s ₹1,00,000 crore remittance business.
- It’s shifting from small-ticket transactions to larger sizes, particularly targeting eastern and northern India.
Fintech Partnerships:
- Embracing the fintech boom, the bank collaborates with major players, investing in 300-400 APIs.
- This positions Federal Bank as a vital fintech banking platform, with a head start in renewables, infrastructure, and digital ecosystems.
NIM Improvement:
- The bank’s Net Interest Margin (NIM) of 3.16% is projected to reach 3.30% by year-end.
- This growth is driven by credit adjustments, book balance strategies, retail CASA growth, fintech partnerships, and an expanding gold loan portfolio.
Healthy Credit Growth:
- Year-on-year net advances growth is 21%.
- The bank anticipates sustaining ~18-20% credit growth for FY24, reflecting an expanding customer base and strong lending practices.
Raising New Capital:
- Federal Bank aims to secure ₹4,000 crore through preference shares and QIP.
- This capital will aid in its expansion, branch establishment, and potential microfinance acquisitions
Potential Subsidiary Listing:
- FedFina, the bank’s subsidiary, actively considers listing, which can unlock value for the parent company.
Attractive Valuation:
- Federal Bank’s appealing P/B valuation ratio of 1.35 stands out compared to peers (IDFC First – 2.33, AU Small Finance bank-4.53, IndusInd – 2.27).
Financial Performance and key ratios:
10 Year view:
For Federal bank, we see a 13-15% CAGR growth in book value in the next 10 years.
Reasons include the aggressive branch expansion, remittance dominance, fintech partnerships, healthy credit growth etc.
The FII stake in the bank is currently at 26% . More FII inflows are expected due to the solid performance of the bank.
Also India economy is bound to grow rapidly in the next few decades and banking is the backbone of our economy. Federal bank can will capitalize on this growth which will reflect in the books of the bank.
We estimate the stock to grow by at least 5.1 times or grow by a CAGR of at least 17.7 % in the next 10 years.
Disclaimer: This research is for informational purposes only and does not constitute investment advice. Please do your own due diligence and consult your financial advisor before making any investments.
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