The Hindu Business Line : Federal Bank: Buy

AN INVESTMENT can be considered in the stock of Federal Bank. Attractive valuations, healthy business growth, improvement in asset quality, augur well for its growth in the medium term.

At its current price of about Rs 185, the stock trades at a multiple of about 5.5 times its trailing 12-months earnings and a price-to-book value of 1.3 times. This appears attractive compared to most other old private sector banks. Besides, the dividend yield is a healthy 3.3 per cent.

Federal Bank has reported healthy performance in the quarter ended December 2005 on vital business parameters. Its advances rose 26 per cent, slightly below the industry average of 29 per cent. The bank's showing on the net interest income (NII) has been particularly impressive. NII rose 16 per cent, driven primarily by growth in advances. The net interest margin (difference between the rate at which funds are lent and borrowed) at about 3.1 per cent is likely to stabilise at this level as the cost of funds is expected to rise marginally in the near term, which may offset any corresponding increase in lending rates.

Net profit for the first nine months of FY-06 increased by 190 per cent to Rs 175 crore. Net profit for the quarter ending December was at Rs 71 crore, of which Rs 25 crore was treasury gains.

Assuming treasury profits at about Rs 20 crore and interest income of about Rs 340 crore for the quarter ending March 2006, Federal Bank could turn in a net profit of Rs 215 crore this fiscal. This is likely to translate into a more than 100 per cent growth in its per share earnings of about Rs 35. Significant improvement in the asset quality of the bank over the past few years was a strong positive. It has been able to bring down the level of its net NPAs from about three per cent of net advances in March 2004 to 1.4 per cent in December 2005. On the investment front, the bank appears insulated to a large extent from market risk as a substantial part of its securities (about 55 per cent) are under the held-to-maturity category.

Federal Bank's proposed acquisition of Ganesh Bank of Kurundwad can be seen as a move to widen its reach. The merger, however, has hit a roadblock following a petition filed by a group of persons from Ganesh Bank, challenging the scheme.

Ganesh Bank is small-sized with advances of about Rs 200 crore and deposits of Rs 100 crore. With a network of 32 branches and a strong thrust on agriculture lending, it is likely to enable Federal Bank garner a larger share in agricultural and SME lending.

Besides, this exercise is likely to result in greater operational synergies as almost all Ganesh Bank's branches are located in centres where Federal Bank does not have a presence. The addition of Ganesh Bank's NPAs of about Rs 20 crore may not be significant from Federal Bank's point of view .

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