Federal Bank on right track with more focus on high-margin biz

This includes segments such as commercial vehicle and construction equipment finance, credit cards, and personal loans. The bank’s management told analysts that it plans to double new businesses over the next three years while continuing to scale rest of the large businesses. Federal Bank intends to grow the share of high yielding loans from 20.5% currently to 25%. Faster growth in these segments is expected to aid the bank’s net interest margin.

To drive loan and deposit growth, Federal Bank had been working on improving its customer base over the years, particularly in the digital space and scaling up fintech partnerships. As of December-end, the share of fintech partnerships stood at 75% in credit cards and 36% in personal loans, 19% in incremental savings balances and 10% in incremental term deposits. These partnerships contributed to about 4.5 times rise in personal loan disbursements between October and December 2022.

Additionally, levers to improve return on asset (RoA) expansion include consistent growth in advances and deposits; increase fee income and cross-selling by leveraging data; maintain good asset quality; and improve efficiency with calibrated branch expansion. For FY23, it expects its RoA at around 1.25%.

Needless to say, an improvement in RoA could boost sentiment for the stock. The company has maintained its loan growth target for FY23 at 18-20%. It has seen robust loan growth for the nine months ended December.

“If Federal Bank achieves its revenue related targets, core earnings for FY24/25E could see a 10-15% upgrade leading to FY25E RoA of 1.4% (vs 1.2% now),” said analysts at Prabhudas Lilladher.

The broking firm has kept its FY24 and FY25 earnings estimates unchanged.

Meanwhile, Federal Bank shares are just about 6% lower than their 52-week highs seen in January. In general, analysts remain upbeat on the prospects of Federal Bank.

“With a de-risked book, fintech partnerships gaining traction and market share acquisition in loans, we expect Federal to deliver a strong earnings per share CAGR of 28% over FY22–25E,” said analysts at Nuvama Research in a report on 28 February. CAGR is compound annual growth rate.