Company Name – Federal Bank Limited (Federal Bank) Current Share Price – INR 147 (Jan 31, 2024) Market Cap – INR 35,853 cr |
1. What is interesting about the stock?
Money lending is one of the oldest professions in the world. Banking has a long and rich history in India, dating back to ancient times:
Ancient times: Banking and money lending in India can be traced back to ancient times, with references to money lending and banking practices in early Sanskrit texts. Money lending was often done by wealthy individuals and merchants, who would lend money at high-interest rates to those in need.
Medieval times: During the medieval period, banking and money lending continued to thrive, with the emergence of various types of moneylenders, such as shroffs, sarrafs, and hundis. These moneylenders facilitated trade and commerce by providing loans, exchanging currencies, and managing accounts.
Colonial era: The arrival of Europeans in India during the colonial era led to the establishment of modern banking in India. The Bank of Hindostan, which was established in 1770, was one of the first modern banks in India. The Bank of Bengal, Bank of Bombay, and Bank of Madras were established by the British East India Company in the early 19th century.
Post-Independence: After India gained independence in 1947, the government nationalized many of the private banks to promote economic growth and ensure financial stability. The Reserve Bank of India (RBI) was established in 1935 and became the central bank of India after independence. The RBI regulates the banking sector and manages the country's monetary policy.
Modern era: In the past few decades, the banking sector in India has undergone a significant transformation, with the entry of private and foreign banks. The government has also taken various initiatives to promote financial inclusion, such as the establishment of regional rural banks, microfinance institutions, and mobile banking services.
FinTech's are disrupting the traditional banking industry with the digitization of banking services (like UPI), lower costs (no physical branch and related overheads), innovative products especially targeting the younger tech-savvy population, and data analytics (insights into customer behavior and preferences for customized products).
One traditional bank is using FinTech's to its advantage – Federal Bank. Not to be confused with the US Federal Bank which has been in the news.
Federal Bank Limited is an Indian private-sector bank that offers personal, business, and online banking services to its customers. It has a customer base of over 17 million, including 1.5 million NRI customers, and handles ~20% of India’s total inward remittances. It has ~1,400 branches and ~2,000 ATMs or recyclers spread across different states in India, as well as representative offices abroad in Abu Dhabi, Qatar, Kuwait, Oman, and Dubai. It was founded as Travancore Federal Bank in 1931 at Nedumpuram, a place near Thiruvalla in Central Travancore, and renamed as Federal Bank in 1949 after completing the formalities of the Banking Regulation Act.
While Federal Bank operates across the country, business continues to have a sizeable presence in southern India, with Kerala, Tamil Nadu, Karnataka, Andhra Pradesh, and Telangana accounting for ~75% of deposits and ~60% of advances. Its home state, Kerala, alone accounted for ~65% and 30-35% of deposits and advances, respectively. The concentration risk is mitigated by the relatively better economic performance of this region. NRI deposits (majorly part of deposits in Kerala) are diversified by the location of the NRI customers.
Federal Bank has a strong focus on technology and innovation and has been recognized for its digital initiatives. It has also established partnerships with various fintech companies to provide cutting-edge services to its customers. Fintech partnerships help in customer acquisition, especially outside Kerala.
Bank is looking to improve its ROA to 1.39% in Q3FY24 (vs more than 2% for large private sector banks) to 1.5% in next 12-24 months. Cost to income ratio has increased from 49% in Q3FY23 to 52% in Q3FY24 and is higher than large private sector banks (~40%).
Bank is headed by Shyam Srinivasan, Managing Director and Chief Executive Officer (MD & CEO), who is associated with FBL for over a decade and has over three decades of banking experience, previously being associated with Standard Chartered Bank. His tenure has been extended till September 2024 and is further supported by a strong senior and second-level management team built over the past few years providing stability and succession.
Why invest in Federal Bank?
Strong market position in South India especially with NRIs based in the Middle East from Kerela
Partnership with Fintechs
Best-in-class retail deposit franchise with deposits less than INR 2 cr at around 90%
Experienced Management team
Improving profitability and return ratios
2. Key Historical Financials
Bank revenue and profit have been growing 12% and 28% on a CAGR basis respectively in the last 5 years
Revenue grew 24% in FY23 and 30% in Q3FY24
Profit growth was 61% in FY23 and 25% in Q3FY24 (increase in cost-to-income ratio)
3. What is my view on company valuation?
Federal Bank trade at a P/BV of 1.4x vs large private sector banks (HDFC Bank – 2.8x, ICICI Bank – 3.4x, Kotak – 3.2x) and mid-tier private sector banks (AU Small Finance – 3.9x, IDFC First – 2.2x, Bandhan – 1.9x).
On the P/E (TTM) basis, Federal Bank is at 9.3x vs large private sector banks (HDFC Bank – 16.3x, ICICI Bank – 17.0x, Kotak – 20.8x) and mid-tier private sector banks (AU Small Finance – 26.8x, IDFC First – 19.7x, Bandhan – 14.5x).
So, the valuation is reasonable compared to the other private sector banks but the historical growth at 10% is not great. Management has guided towards high teen growth for next few years. Valuation could be re-rated if the bank can grow consistently between 15-20% for the next 5-10 years.
On an overall basis, the Bank looks interesting and should be evaluated by long-term investors.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Business generated by Fintech could be risky and would need monitoring
High concentration risk – geography (both borrower and retail deposit base) and type of retail customer (NRI)
Very competitive industry with a large number of private and public sector banks and not many differentiators
About the Author
Stock market enthusiast.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.
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