ICICI Securities: Federal Bank - Transitioning Away From Typical Regional Bank Profile

ICICI Securities Report

Federal Bank’s earnings volatility and sub-1% return on asset profile has disconcerted investors – leading to valuation discount and underperformance.

However, through the turbulent journey in the past cycle, its structural transition away from ‘typical old generation regional bank mindset’ is comforting.

Why we say so:

1. Revamped business architecture, state-of-the-art digital initiatives, consistent rise in market share.
2. Similar to new private bank’s approach to build better rated corporate book (78% rated A and above), treading cautiously in small and medium enterprise segment and channelising retail to existing clientele.
3. Strengthened liability muscle – core non-resident base, tapping high networth individual, leveraging digital platform and fin-tech tie-ups.

What gives confidence on improving return profile:

1. Limited exposure to vulnerable sectors – can manage Covid-19 disruption with worst case credit cost estimate of 2.7%.
2. Opportunistically venturing into return on asset accretive segments (commercial vehicle, personal loan/cash credit, micro finance institution, etc)
3. Better margin profile coupled with operating leverage benefit. Undoubtedly, fee income scale up is awaited.

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