HDFC Securities Institutional Research's Darpin Shah and Shivraj Gupta released a note on Federal Bank today with a Buy rating and a Rs 174 price target. The analysts gave three driving reasons for the rating:
1. Our recent interaction with Federal Bank's management reinforces our view that growth is now sustainable. This is important because FB enjoys significant operating leverage. We believe the bank is on a strong footing to gain market share in South India on the back of its strong brand image and a well-capitalised, cushioned balance sheet. The capital structure and asset quality strain in some PSBs may well work to Federal Bank's advantage.
2. Recent relative underperformance (-11% in 6M vs. Nifty and 18% vs. Bank Nifty) makes Federal Bank a compelling value BUY at just 1.2x FY17E ABV with improving RoE. FB remains our top pick within mid-tier PVT Banks as we see a case for an expansion in both earnings & valuation multiples.
3. Our interactions indicate; loan growth of 17-18% for FY15 driven by SME and Retail, Federal Bank's forte segments. With the corporate book also picking up a bit, FB targets a growth of 20+% in FY16; CASA ratio is expected to remain stable led by continued traction in SA deposits; management targets 3.2-3.3% NIMs for FY16, despite scope to improve C-D (73%) & CASA ratio; while asset quality in retail and SME remains healthy, four a/cs worth Rs 3.7 billion in the corporate book are currently under watch.
Shares of the bank gained Rs 0.5, or 0.38%, to trade at Rs 131. The total volume of shares traded was 45,092 at the BSE (11.50 a.m., Thursday).
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