BUY

Federal Bank (FB)

Banks MAY 04, 2019
RESULT
Coverage view: Attractive

The best in 16 quarters. Federal Bank reported a strong performance with a 2.6X yoy Price (`): 98
earnings growth led by 28% yoy operating profit growth. Loan growth was healthy at Fair Value (`): 130
18% yoy, NIM was stable and asset quality improved qoq with negligible slippages.
BSE-30: 38,963
After 16 quarters RoA moved past 1% and we are building further improvement as we
don’t see too many headwinds in business, especially on asset quality. Maintain BUY
rating (fair value revised to `130 from `115 earlier).
Comp any data and valuation summary
Federal Bank
Stock data Forecasts/Valuations 2019 2020E 2021E
52-week range (Rs) (high,low) 105-67 EPS (Rs) 6.3 8.9 10.7
Market Cap. (Rs bn) 194.0 EPS growth (%) 40.6 42.8 19.6 QUICK NUMBERS
Shareholding pattern (%) P/E (X) 15.6 10.9 9.1
Promoters 0.0 NII (Rs bn) 41.8 50.7 60.2  NII increased 17%
FIIs 39.7 Net profits (Rs bn) 12.4 17.8 21.2
MFs 22.5 BVPS 61.5 66.3 73.4
yoy; PAT up 2.6X
Price performance (%) 1M 3M 12M P/B (X) 1.6 1.5 1.3 yoy
Absolute 2.7 13.3 0.2 ROE (%) 9.8 12.7 13.8
Rel. to BSE-30 2.5 6.1 (9.7) Div. Yield (%) 1.4 2.1 2.5  GNPL and NNPL
ratio down 20 bps
Solid performance across the board qoq to 2.9% and
1.5% respectively
Federal Bank reported strong earnings growth at 1.6X yoy driven by robust revenue growth at
21% yoy, modest rise in operating expenses at 14% yoy while provisions declined ~50% yoy.  Maintain BUY rating
Growth in revenues was on the back of a steep increase in non-interest income at ~30% yoy with change in fair
while NII growth was at 17% yoy (NIM flat qoq at 3.2%). Treasury gains led to a rise in non-
value to `130 from
interest income while fee income maintained momentum. Cost-income remained elevated but
`115 earlier
is showing improvement at 50%. Deposit franchise saw strong growth (up 21% yoy) owing to
strong CASA growth (up 21% yoy). CASA ratio was flat qoq at 33%.

Getting past the management change; focusing on getting RoA/RoE closer to normalized levels

There has been progress in performance in FY2019E especially on delivering consistent loan
growth, NIM, fee income, operating leverage and asset quality. Despite a challenging year
which saw one senior exit and impact of floods in Kerala, the bank has come out quite well.

Federal Bank has suffered on account of various factors in the past few years. (1) RoE has been
below normalized levels led by high credit costs or weak cost ratios. (2) Inconsistent momentum
with FY2015/17/19 being strong years while FY2016/18 being moderate to weak due to various
factors. (3) Slippages have been inconsistent making it difficult to forecast credit costs or NPLs
across years for various factors making it difficult to give an opinion on the bank’s underwriting.

With FY2019 having gone quite well we still see there is further scope for improvement in M B Mahesh, CFA
return ratios that could enable the bank to move closer to normalized return ratios by FY2021- mb.mahesh@kotak.com
Mumbai: +91-22-4336-0886
22. However, we are conservative at this point as there is no one single factor that would drive
this improvement. We are building stable NIM though management is forecasting an Nischint Chawathe
nischint.chawathe@kotak.com
improvement and we are marginally higher on loan-loss provisions at 60bps as compared to Mumbai: +91-22-4336-0887
management expectation of ~50-55bps.
Dipanjan Ghosh
dipanjan.ghosh@kotak.com
Retain BUY; few more quarters of consistent performance should aid RoA/RoE recovery Mumbai: +91-22-4336-0888

We maintain our positive view with fair value revised to Rs130 (from Rs115), valuing the bank Shrey Singh
at ~1.6X book and 12X March 2021 EPS for RoEs in the range of ~14% in the medium term shrey.singh@kotak.com
Mumbai: +91-22-4336-0895
and strong earnings growth ~25% CAGR in FY2019-21E.

Kotak Institutional Equities Research

kotak.research@kotak.com
Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Banks Federal Bank

Exhibit 1: Federal Bank quarterly results

March fiscal year-ends, 4QFY18-4QFY19 (` mn)

(% chg.)
4QFY19 4QFY19E 4QFY18 3QFY19 4QFY19E 4QFY18 3QFY19 2019 2018 (% chg.) 2020E
Interest earned 30,323 31,679 25,480 29,544 (4.3) 19.0 2.6 114,190 97,533 17.1 140,141
Interest/discount on advances/bills 24,131 25,210 19,511 23,866 (4.3) 23.7 1.1 90,896 75,388 20.6 111,598
Income on Investments 5,364 5,622 5,170 5,056 (4.6) 3.8 6.1 20,375 19,174 6.3 25,035
Interest on balances / inter bank 118 357 184 156 (67.0) (36.0) (24.3) - 2,966 (100.0) 3,508
Interest expended 19,358 20,410 16,148 18,771 (5.2) 19.9 3.1 72,427 61,701 17.4 89,427
Net interest income 10,965 11,268 9,332 10,773 (2.7) 17.5 1.8 41,764 35,832 16.6 50,714
Other Income 4,117 3,168 3,142 3,456 30.0 31.1 19.1 13,510 11,591 16.6 13,786
Total income 15,083 14,437 12,474 14,228 4.5 20.9 6.0 55,274 47,423 16.6 64,500
Operating Expenses 7,535 7,448 6,588 7,150 1.2 14.4 5.4 27,643 24,509 12.8 29,832
Staff costs 3,702 3,745 3,308 3,537 (1.2) 11.9 4.7 13,778 12,425 10.9 15,011
Other operating expenses 3,834 3,703 3,280 3,614 3.5 16.9 6.1 13,865 12,084 14.7 14,821
Operating profit 7,548 6,988 5,886 7,078 8.0 28.2 6.6 27,631 22,914 20.6 34,669
Other Provisions and Contingencies 1,778 2,175 3,715 1,901 (18.3) (52.2) (6.5) 8,559 9,472 (9.6) 7,924
PBT 5,770 4,814 2,170 5,177 19.9 165.8 11.5 19,073 13,443 41.9 26,744
Provision for Taxes 1,955 1,407 721 1,841 38.9 171.3 6.2 6,634 4,650 42.7 8,984
Net Profit 3,815 3,407 1,450 3,336 12.0 163.1 14.4 12,439 8,792 41.5 17,760
Tax rate (%) 34 29 33 36 465 bps 68 bps -168 bps 35 35 19 bps 34
PBT before provisions 7,548 6,988 5,886 7,078 8.0 28.2 6.6 27,631 22,914 20.6 34,669
Key balance sheet items (Rs bn)
Deposits 1,350 1,310 1,120 1,235 3.0 20.5 9.3 1,350 1,120 20.5 1,577
Reported CASA ratio (%) 32.9 33.3 33.4 (1.1) (1.3)
Advances 1,102 1,122 932 1,056 (1.8) 18.3 4.4 1,102 920 19.9 1,304
Retail including agri 432 348 403 24.0 7.0
SME 211 188 202 12.0 4.7
Others 459 395 450 16.3 2.0
Investments 318 317 308 292 0.3 3.4 9.0 318 308 3.4 392
Asset management details
Gross non-performing loans (Rs mn) 32,607 27,956 33,612 16.6 (3.0) 32,607 27,956 16.6 39,717
Gross NPL ratio (%) 2.9 3.0 3.1 -8 bps -22 bps 2.9 3.0 -9 bps 3.0
Net non-performing loans (Rs mn) 16,262 15,520 18,173 4.8 (10.5) 16,262 15,520 4.8 22,262
Net NPL ratio (%) 1.5 1.7 1.7 -21 bps -24 bps 1.5 1.7 -21 bps 1.7
Restructured loans (Rs bn) 6.0 7.9 6.4 (23.7) (6.2)
Restructured loans (%) 0.5 0.9 0.6 -31 bps -6 bps
Slippages (Rs mn) 2,560 8,720 4,260 (70.6) (39.9) 16,200 22,007 (26.4) 19,814
Slippage ratio (%) 1.0 4.1 1.7 -314 bps -72 bps 1.9 3.0 -110 bps 1.8
Key calculated ratios (%)
Yield on advances 8.9 8.8 9.2 17 bps -30 bps 9.0 9.1 -13 bps 9.3
Yield on investment 7.0 6.8 7.0 20 bps -1 bps 6.6 6.6 0 bps 7.2
Cost of deposit 6.0 6.1 6.2 -9 bps -22 bps - 5.5 -546 bps 5.7
NIM 2.8 2.8 2.9 4 bps -9 bps 3.0 3.0 -4 bps 3.0
CD ratio 81.7 83.2 85.5 -152 bps -382 bps 81.7 82.1 -44 bps 82.6
Credit cost 0.6 1.2 0.9 -62 bps -29 bps 0.7 0.9 -22 bps 0.7
Cost to income 50.0 51.6 52.8 50.3 -163 bps -286 bps -29 bps 50.0 51.7 -167 bps 46.3
Capital adequacy details (%)
Capital adequacy ratio 14.1 14.7 13.0 -56 bps 117 bps 14.1 14.7 -56 bps
Tier I 13.4 14.2 12.4 -80 bps 94 bps 13.4 14.2 -80 bps
Key business parameters (#)
Branches 1,252 1,252 1,251 - 0.1 1,252 1,252 - 1,322
ATMs 1,683 1,696 1,669 (0.8) 0.8 1,796 1,696 5.9 1,896

Source: Company, Kotak Institutional Equities estimates

Loan growth healthy at 18%

Federal Bank reported 18% yoy loan growth in 4QFY19, driven by robust growth in retail
lending (up ~25% yoy) and strong performance in agricultural portfolio (up 25% yoy).
Corporate loan growth that had been in the range of 30-40% over the last few quarters
moderated to 16% in 4QFY19. The share of “A and above-rated” loans increased 100 bps
qoq to 73%. Business banking grew 17% yoy while commercial banking saw a modest
increase of 8% yoy. There hasn’t been significant change in the loan growth strategy by the
management despite the recent NBFC crisis. Within the retail segment, housing loans
witnessed strong growth at 32% yoy; LAP growth was ~25% yoy while gold loan book
increased by 16% yoy. Federal bank has maintained healthy credit growth over the last 10
quarters which is quite impressive in our view. The spike in retail loans has been a result of
the wider distribution franchise through relationship managers, a larger feet-on-street
presence and activation of the in-house NBFC channel (Fedfina). Additionally there has been
a significant increase in focus on brand recognition.

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

 Federal Bank Banks

We forecast retail and corporate segment to deliver robust growth going ahead. We
forecast ~17% loan CAGR in FY2019-22E. The company is gradually increasing focus on
retail loans. There is however increase in competition from other private players and small
finance banks within the home state. With gradual revival in lending by NBFCs post the
recent crisis, growth will moderate a bit from current levels.

Exhibit 2: Contribution of retail loans increased in 2019 by 120 bps yoy

Break-up of loans, March fiscal year-ends, 2013-2019 (%)
2011 2012 2013 2014 2015 2016 2017 2018 2019
Retail 29.5 23.3 29.5 32.0 31.1 29.6 29.5 27.6 28.8
Housing 17.4 14.9 11.3 13.4 13.2 13.4 12.3 12.5 14.0
Gold loans 3.2 6.9 9.4 8.1 6.6 4.0 2.8 2.1 2.1
LAP 1.0 0.8 2.2 3.7 4.6 5.4 5.3 5.1 5.4
Others 7.9 0.6 6.5 6.7 6.7 6.8 9.0 7.8 7.3
SME 18.9 27.0 18.0 25.0 24.9 25.6 22.1 20.2 19.1
Agriculture 12.8 4.9 10.4 11.6 12.1 11.3 10.1 9.8 10.4
Corporate and others 38.8 44.9 42.1 31.4 31.9 33.5 38.4 42.4 41.7

Source: Company, Kotak Institutional Equities

Asset quality showing improving trends

Asset quality showed signs of improvement after deteriorating in 3QFY19 due to impact of
Kerala floods. GNPL decreased by 3% qoq to `32.6 bn (2.9% of loans; down 20 bps qoq)
while net NPL decreased by ~10.5% qoq to `16 bn (1.5% of loans; down 20 bps qoq). Total
stressed book declined by 25 bps qoq and 60 bps yoy to 1.7% of average total assets
Calculated provision coverage ratio increased 420 bps qoq to 50%.

Slippages dropped to 1%; lowest in the last six quarters. Out of the total slippages of
`2.5bn, ~`1.9 bn was on account of the agricultural and SME portfolio whereas slippages in
the retail portfolio were at `0.7 bn. Retail slippages dropped ~50 bps qoq to 0.7% while
SME and agricultural slippages declined to 3.8% after increasing in the last quarter due to
the impact of Kerala floods (down 165 bps qoq). There were no slippages from any
corporate account in this quarter; post the sharp rise till 1HFY19.

The outstanding stock of restructured loans is low at ~55 bps of loans and the outstanding
security receipts where there is a risk of impairment has also declined to ~0.3% of loans.
Security receipts saw a decline of 11% qoq.

We expect GNPL to remain at 3% levels till FY2021E. Slippages are expected to drop to 1.7
from current levels.

Exhibit 3: Significant decline in slippages in 4QFY19

Sectoral break-up of slippages, March fiscal year-ends, 4QFY16-4QFY19 (%)
4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
Retail 2.0 1.5 1.5 1.7 1.0 1.8 1.9 2.6 1.2 1.7 1.8 1.6 0.9
SME 4.4 3.6 3.8 3.2 3.2 2.8 2.5 2.8 3.2 1.9 3.6 3.9 3.8
Agri 2.8 2.0 1.6 0.9 1.8 2.4 2.6 2.0 2.6 2.4 2.7 2.8 2.7
Corporate 6.1 0.9 0.8 0.9 0.6 2.4 0.3 1.2 7.0 2.1 1.2 0.5 -
Total 4.1 1.9 1.8 1.7 1.4 2.3 1.5 2.0 4.1 2.0 2.0 1.7 1.0

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Banks Federal Bank

Exhibit 4: Net stressed assets continue to follow a downward trajectory

Stressed assets, March fiscal year-ends, 2016-2019 (` bn)
2016 2017 2018 2019
Net stressed assets (Rs bn)
NNPL 10 9 16 16
Standard restructured 16 13 8 6
Net SR 6 7 5 4
Total 22 20 13 10
% of loan book 5.4 4.0 3.1 0.9
Loan book 586.19 740.90 931.73 1102.23
Net NPA 10 9 16 16

Source: Company, Kotak Institutional Equities

Exhibit 5: Calculated coverage ratio up 420 bps qoq to 50% Exhibit 6: Slippages declined to 1% in 4QFY19
March fiscal year-ends, 4QFY13-4QFY19 (%) March fiscal year-ends, 4QFY13-4QFY19 (%)

Gross NPL (LHS) Net NPL (LHS) Slippages LLP

Coverage ratio (RHS) 5.0
4.5
4.0 100
4.1 4.1
4.0 3.6
3.2 80 3.3
3.0 2.8
2.4 60 2.5 2.3
2.2 2.3
2.1 1.9 1.91.8 2.0 2.02.0
1.9
1.6 40 2.0 1.6 1.5 1.7 1.7
1.51.4 1.4 1.5
1.2 1.2
0.8 0.91.0 0.90.80.8 1.0
0.80.7 0.70.70.9
0.8 20 1.0 0.5 0.6 0.6
0.4 0.5 0.3
0.3 0.3
- - 0.0
4QFY13
2QFY14
4QFY14
2QFY15
4QFY15
2QFY16
4QFY16
2QFY17
4QFY17
2QFY18
4QFY18
2QFY19
4QFY19

4QFY13

2QFY14

4QFY14

2QFY15

4QFY15

2QFY16

4QFY16

2QFY17

4QFY17

2QFY18

4QFY18

2QFY19

Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities 4QFY19

Overall strong traction in deposits

Overall deposit growth was strong at 21% yoy in 4QFY19 driven by strong CA growth at
25% yoy and moderate SA growth at 15% yoy. This led to 16% yoy growth in CASA in
4QFY19. CASA ratio declined 45 bps qoq and 110 bps yoy to 32%. The bank’s market
share in deposits crossed 1% in FY2019 increasing by 8 bps yoy. NRE deposits maintained
momentum reporting 18% yoy growth in 4QFY19. The share of NRE deposits to total
deposits declined to 39.6% in 4QFY19 (down 170 bps qoq and 90 bps yoy.)

We expect CASA ratio to remain in the range of ~33% over the medium-term driven by
18% CAGR in CASA over FY2019-22E while deposits will grow at a similar CAGR over the
same period.

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Federal Bank Banks

Exhibit 7: Dominant presence in home state

Bank wise break-up of deposits and loans in Kerala, March fiscal year-ends, 3QFY19 (%)
Deposits Loans
Semi- Semi-
Rural urban Urban Total Rural urban Urban Total
State Bank group 0.6 19.9 11.0 31.5 0.5 12.8 8.9 22.3
State Bank of India 0.6 19.9 11.0 31.5 0.5 12.8 8.9 22.3
Nationalized banks 0.6 14.3 9.6 24.5 0.8 16.4 15.8 33.0
Canara Bank 0.2 4.5 2.4 7.1 0.3 5.7 4.0 9.9
Others 0.4 9.8 7.2 17.4 0.5 10.7 11.9 23.0
Private-sector banks 1.1 24.7 14.2 40.0 0.7 18.6 19.0 38.4
Federal Bank 0.5 13.0 3.3 16.7 0.3 7.3 3.9 11.5
South Indian Bank 0.3 5.7 2.6 8.6 0.3 4.2 3.2 7.7
Axis Bank 0.0 0.9 1.2 2.1 0.0 0.6 2.3 2.9
HDFC Bank 0.1 1.3 2.2 3.6 0.1 2.7 3.0 5.8
ICICI Bank 0.0 1.1 1.3 2.4 0.0 1.5 1.5 3.1
Others 0.2 2.8 3.6 6.5 0.1 2.2 5.1 7.4
Small Finance Banks 0.0 0.3 0.4 0.7 0.1 0.5 0.3 0.8
Others (RRB, foreign banks) 0.2 2.5 0.7 3.3 0.3 4.8 0.5 5.6
Total 2.5 61.7 35.8 100.0 2.4 53.1 44.5 100.0

Source: SLBC, Company

Exhibit 8: Federal Bank has 16.7% market share of deposits within its home state as of 3QFY19
Bank wise break-up of deposits and loans in Kerala, March fiscal year-ends, 2015-3QFY19 (%)

Deposit share in Kerala (%) Loans share in Kerala (%)

2015 2016 2017 2018 3QFY19 2015 2016 2017 2018 3QFY19
State Bank group 33.1 33.5 33.2 32.1 31.5 28.9 27.5 26.7 23.1 22.3
Nationalized banks 27.4 26.4 26.1 25.1 24.5 34.2 32.9 32.8 32.9 33.0
Canara Bank 7.4 6.8 7.2 7.0 7.1 0.0 9.2 8.7 9.4 9.9
Others 20.0 19.6 18.9 18.1 17.4 25.2 23.7 24.0 23.5 23.0
Private-sector banks 36.1 37.2 37.7 39.0 40.0 32.2 34.5 35.2 38.3 38.4
Federal Bank 14.1 14.7 15.5 16.3 16.7 10.5 11.1 10.8 11.5 11.5
South Indian Bank 8.3 8.3 8.4 8.2 8.6 6.3 6.9 7.1 7.8 7.7
Axis Bank 1.6 1.8 1.9 2.0 2.1 2.5 2.7 2.7 2.9 2.9
HDFC Bank 2.8 3.0 3.1 3.5 3.6 4.3 4.8 5.2 5.4 5.8
ICICI Bank 1.8 1.8 2.1 2.2 2.4 2.0 2.3 2.7 3.0 3.1
Others 7.6 7.5 6.8 6.8 6.5 6.6 6.6 6.6 7.8 7.4
Others (RRB, foreign banks) 3.3 2.9 3.0 3.4 3.3 4.8 5.1 5.4 5.7 5.6
Small Finance Banks NA NA NA 0.4 0.7 NA NA NA 0.0 0.8

Source: SLBC, Company

Exhibit 9: High share of NR deposits in overall deposit mix

NRE deposits, March fiscal year-ends, 2013-2019 (%)

2013 2014 2015 2016 2017 2018 2019

Total deposits 576 597 708 792 977 1,120 1,350
NRE deposits 132 206 242 307 364 426 501
(% of total deposits) 22.8 34.6 34.2 38.8 37.3 38.0 37.1

Source: SLBC, Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

Banks Federal Bank

Exhibit 10: Strong deposit traction from branches inside Kerala Exhibit 11: Deposit growth/branch outside Kerala is improving
Total branches and deposits per branch inside Kerala, March fiscal Total branches and deposits per branch outside Kerala, March fiscal
year-ends, 2011-3QFY19 year-ends, 2011-3QFY19
Branches (LHS) Non-NR deposit/branch (#) Branches (LHS) Deposits/branch (Rs mn)
Deposits/branch 700 900
(#) (Rs mn)
814
610 1,213 1,350
1,336 580 780
1,023
488 1,080 665
886
756 460 602 660
366 645 810 565 557
527 531 569 517
340 540
244 432 475 441 540
366 396
316 335 321 328
396 399
220 373 420
122 270
457 525 581 586 595 601 599 599 600 286 425 522 588 652 651 653 653 651
- - 100 300

2011

2012

2014

2015

2017

2018
2013

2016
2011

2012

2014

2015

2017

2018
2013

2016

3QFY19
3QFY19

Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

Exhibit 12: Dominance in NR deposits within Kerala

Market share in NRI deposits, March fiscal year-ends, 3QFY19 (%)

Rural Semi-urban Urban Total

State Bank group 0.6 21.5 8.5 30.6
State Bank of India 0.6 21.5 8.5 30.6
Nationalized banks 0.4 14.0 5.9 20.3
Canara Bank 0.1 5.3 1.4 6.9
Others 0.3 8.7 4.5 13.5
Private-sector banks 1.4 33.6 13.3 48.3
Federal Bank 0.7 20.0 4.0 24.7
South Indian Bank 0.4 7.2 2.6 10.2
Axis Bank 0.0 1.3 1.5 2.9
HDFC Bank 0.1 1.4 2.4 3.9
ICICI Bank 0.0 1.3 1.2 2.5
Others 0.1 2.4 1.5 4.1
Small Finance Banks 0.0 0.1 0.1 0.2
Others (RRB and foreign banks) 0.0 0.5 0.0 0.6
Total 2.4 69.8 27.8 100.0

Source: SLBC, Company

NIM stable qoq; rise in cost of deposits offset by rise in lending yields
NIM (reported) was flat qoq at 3.2% on the back of a rise in cost of deposits offset by a rise
in lending yields. Yield on loans continues to inch up gradually for the third quarter in a row.
There is lower pricing pressure from what we see on the ground. The other tailwind is likely
to emerge from the mix in the loan book towards retail and SMEs where the yields are
higher by 100-200 bps. The broad outlook on NIM is broadly stable to positive in the
medium term. We expect calculated NIM to range between 3% over FY2019-22E.

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Federal Bank Banks

Cost pressure to moderate going ahead

Cost-to-income ratio was at 50% in 4QFY19 (down 30 bps qoq and down 280 bps yoy)
driven by increase in operating expenses at 14% yoy in 4QFY19 despite slowdown in branch
expansion. Rise in employee expenses was modest at 12% yoy while other operating
expenses increased by 17% yoy.

We expect cost-to-income ratio to gradually moderate to 45% by FY2021E on the back of

~10% CAGR in operating expenses over FY2019-2021E (employee expense CAGR of 10%
over the same period). Investment in digital channels would slow down the pace of branch
expansion in the medium term.

Other operational highlights for the quarter

 Non-interest income increased 31% yoy in 4QFY19 led by an increase in fee income (up
30% yoy) and sharp uptick in sale of investments at 2.4X yoy. Recovery from written-off
assets declined by ~10% yoy while forex income declined by 4% yoy.

Tier-1 increased by 100 bps qoq to 13.4% as per Basel-III norms, with overall capital
adequacy at 14% observing a 110 bps qoq increase. Growth in RWA at 13% yoy was lower
than loan growth at 18% yoy in 4QFY19.

Exhibit 13: Bank has slowed fresh expansion in branches Exhibit 14: Cost-income ratio elevated at 50%
Total branches, March fiscal year-ends, 2008-2019 (#) Cost-income ratio, March fiscal year-ends, 4QFY12-4QFY19 (%)
1,300 Cost-income ratio (LHS) Cost growth (RHS)
60 30

1,040 54 24
1,252
1,252
780 1,252 48 18
1,247
1,252 42 12
1,174
520 1,103
950
743 36 6
603 612 672
260
30 -
4QFY12
2QFY13
4QFY13
2QFY14
4QFY14
2QFY15
4QFY15
2QFY16
4QFY16
2QFY17
4QFY17
2QFY18
4QFY18
2QFY19
4QFY19
-
2008

2009

2012

2013

2014

2015

2018

2019
2010

2011

2016

2017

Source: Company, Kotak Institutional Equities

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

 Banks Federal Bank

Exhibit 15: Change in estimates- Federal Bank

Old and new estimates, March fiscal year-ends, 2019-2022E (` mn)
New estimates Old estimates % change
2019 2020E 2021E 2022E 2019E 2020E 2021E 2019 2020E 2021E
Net interest income 41,764 50,714 60,248 70,037 42,064 50,052 58,229 (0.7) 1.3 3.5
NIM (%) 3.0 3.0 3.0 3.0 3.0 3.0 2.9 -1 bps 3 bps 12 bps
Loan growth (%) 19.9 18.3 17.9 17.6 22.0 18.3 17.9 -214 bps 0 bps 0 bps
Loan loss provisions 7,232 7,217 9,943 11,709 7,451 7,958 10,120 (2.9) (9.3) (1.8)
Other income 13,510 13,786 16,660 19,329 12,115 13,156 15,903 11.5 4.8 4.8
Treasury income 2,290 1,700 1,800 1,800 1,700 1,700 1,800 34.7 - -
Operating expenses 27,643 29,832 34,279 38,008 27,148 29,805 33,087 1.8 0.1 3.6
Employee expenses 13,778 15,011 16,601 18,350 13,633 14,947 16,530 1.1 0.4 0.4
Net profit 12,439 17,760 21,236 25,860 11,940 16,333 19,972 4.2 8.7 6.3
PBT-treasury+provisions 25,341 32,969 40,829 49,558 25,332 31,703 39,245 0.0 4.0 4.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 16: Federal Bank trading at 1.5X one-year forward book Exhibit 17: Federal Bank is trading at discount to peers
Rolling PER and PBR, May 2013-May 2019 (X) Trading premium to peers, May 2013-May 2019 (X)

Rolling PER (X) (LHS) Rolling PBR (X) (RHS) 1.0

25 2.5

0.8
20 2.0

0.6
15 1.5

10 1.0 0.4

5 0.5 0.2

0 0.0 0.0
May-13

May-14

May-17

May-18

May-19
May-15

May-16

May-15

May-16

May-17

May-19
May-13

May-14

May-18

Source: Company, Bloomberg, Kotak Institutional Equities estimates Source: Company, Bloomberg, Kotak Institutional Equities estimates

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

 Federal Bank Banks

Exhibit 18: Federal Bank - key growth rates and financial ratios
March fiscal year-ends, 2017-2022E (%)
2017 2018 2019 2020E 2021E 2022E
Growth rates (%)
Net loan 26.2 25.4 19.9 18.3 17.9 17.6
Customer assets 25.0 24.5 19.5 18.0 17.7 17.5
Investments excluding CPs and debentures 26.3 13.0 4.6 28.5 24.0 22.8
Net fixed and leased assets (5.9) (6.6) 3.2 (17.1) 6.7 5.2
Cash and bank balance 37.5 23.5 9.4 42.5 7.9 8.4
Total assets 25.8 20.3 15.2 19.9 17.0 16.9
Deposits 23.4 14.7 20.5 16.9 17.9 17.6
Current 22.1 19.7 2.5 28.6 18.8 17.6
Savings 23.2 17.1 21.2 16.9 17.9 17.6
Fixed 23.5 13.3 21.8 16.0 17.9 17.6
Net interest income 21.9 17.4 16.6 21.4 18.8 16.2
Loan loss provisions (5.6) 31.5 (6.6) (0.2) 37.8 17.8
Total other income 37.6 7.1 16.6 2.0 20.8 16.0
Net fee income 38.7 10.5 22.0 17.0 18.0 18.0
Net exchange gains (2.2) 32.7 40.0 15.0 15.0 15.0
Operating expenses 18.4 10.9 12.8 7.9 14.9 10.9
Employee expenses 10.5 6.8 10.9 9.0 10.6 10.5
Key ratios (%)
Yield on average earning assets 9.0 8.1 8.1 8.4 8.4 8.5
Yield on average loans 10.0 9.1 9.0 9.3 9.4 9.6
Yield on average investments 7.3 6.6 6.6 7.2 7.0 6.9
Average cost of funds 6.1 5.4 - 5.7 5.7 5.8
Difference 2.9 2.7 8.1 2.7 2.7 2.7
Net interest income/earning assets 3.2 3.0 3.0 3.0 3.0 3.0
New provisions/average net loans 0.9 0.9 0.8 0.6 0.7 0.7
Interest income/total income 73.8 75.6 75.6 78.6 78.3 78.4
Fee income to total income 13.9 13.4 14.5 14.5 14.4 14.6
Fees income to PBT 44.1 47.4 42.0 35.0 34.6 33.5
Net trading income to PBT 21.4 4.9 5.5 4.0 3.7 3.0
Exchange income to PBT 9.8 12.6 12.4 10.1 9.8 9.2
Operating expenses/total income 53.4 51.7 50.0 46.3 44.6 42.5
Operating expenses/assets 2.1 1.9 1.9 1.7 1.7 1.6
Operating profit /AWF 1.0 0.9 1.2 1.5 1.5 1.6
Tax rate 36.4 34.6 33.6 33.6 33.6 33.6
Dividend payout ratio 18.7 22.4 22.4 22.4 22.4 22.4
Share of deposits
Current 5.8 6.0 5.1 5.7 5.7 5.7
Fixed 67.2 66.3 67.1 66.6 66.5 66.5
Savings 27.0 27.6 27.8 27.8 27.8 27.8
Loans-to-deposit ratio 75.1 82.1 81.7 82.6 82.6 82.6
Equity/assets (EoY) 7.8 8.8 8.3 7.6 7.2 6.9
Asset quality trends (%)
Gross NPL 2.3 3.0 2.9 3.0 3.1 3.1
Net NPL 1.3 1.7 1.5 1.7 1.6 1.5
Slippages 1.8 3.0 1.9 1.8 1.7 1.6
Provision coverage 45.5 44.5 50.1 43.9 48.1 51.9
Dupont analysis (%)
Net interest income 3.0 2.8 2.8 2.9 2.9 2.9
Loan loss provisions 0.6 0.6 0.5 0.4 0.5 0.5
Net other income 1.0 0.9 0.9 0.8 0.8 0.8
Operating expenses 2.1 1.9 1.9 1.7 1.7 1.6
Invt. depreciation 0.0 0.1 0.1 0.0 0.0 0.0
(1- tax rate) 63.6 65.4 65.2 66.4 66.4 66.4
RoA 0.8 0.7 0.8 1.0 1.0 1.1
Average assets/average equity 12.1 12.0 11.7 12.6 13.5 14.1
RoE 9.8 8.3 9.8 12.7 13.8 15.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

 Banks Federal Bank

Exhibit 19: Federal Bank - income statement and balance sheet

March fiscal year-ends, 2017-2022E (` mn)
2017 2018 2019 2020E 2021E 2022E
Income statement
Total interest income 86,774 97,533 114,190 140,141 167,654 199,425
Loans 65,457 75,388 90,896 111,598 134,059 160,545
Investments 18,014 19,174 20,375 25,035 30,020 35,562
Cash and deposits 3,303 2,966 - 3,508 3,575 3,318
Total interest expense 56,247 61,701 72,427 89,427 107,406 129,388
Deposits from customers 54,036 57,219 - 84,130 100,773 122,690
Net interest income 30,526 35,832 41,764 50,714 60,248 70,037
Loan loss provisions 5,889 7,742 7,232 7,217 9,943 11,709
Net interest income (after prov.) 24,638 28,090 34,532 43,497 50,305 58,328
Other income 10,818 11,591 13,510 13,786 16,660 19,329
Net fee income 5,761 6,368 8,010 9,372 11,059 13,049
Net capital gains 3,087 2,389 2,290 1,700 1,800 1,800
Net exchange gains 1,277 1,695 2,360 2,714 3,121 3,589
Operating expenses 22,095 24,509 27,643 29,832 34,279 38,008
Employee expenses 11,638 12,425 13,778 15,011 16,601 18,350
Depreciation on investments 296 1,729 1,240 620 620 620
Other Provisions — - 87 87 87 87
Pretax income 13,065 13,443 19,073 26,744 31,979 38,941
Tax provisions 4,757 4,650 6,634 8,984 10,742 13,081
Net Profit 8,308 8,792 12,439 17,760 21,236 25,860
% growth 74.5 5.8 41.5 42.8 19.6 21.8
PBT - Treasury + Provisions 16,163 20,525 25,341 32,969 40,829 49,558
% growth 24.6 27.0 23.5 30.1 23.8 21.4
Balance sheet
Assets
Cash and bank balance 74,522 92,034 100,668 143,477 154,760 167,800
Net value of investments 281,961 307,811 318,245 391,967 471,906 566,405
Govt. and other securities 215,654 244,662 256,167 330,836 411,634 506,907
Shares 2,176 2,086 2,086 2,086 2,086 2,086
Debentures and bonds 14,076 10,617 9,555 8,600 7,740 6,966
Net loans and advances 733,363 919,575 1,102,230 1,303,518 1,537,245 1,808,294
Fixed assets 4,895 4,574 4,720 3,913 4,177 4,393
Other assets 55,029 59,146 67,537 67,537 67,537 67,537
Total assets 1,149,769 1,383,140 1,593,400 1,910,413 2,235,624 2,614,430
Liabilities
Deposits 976,646 1,119,925 1,349,543 1,577,272 1,860,084 2,188,057
Borrowings and bills payable 61,722 118,717 81,195 154,207 177,437 205,313
Other liabilities 21,977 22,396 29,931 32,924 36,217 39,838
Total liabilities 1,060,346 1,261,037 1,460,670 1,764,404 2,073,737 2,433,208
Paid-up capital 3,448 3,944 3,970 3,970 3,970 3,970
Reserves & surplus 85,976 118,158 128,760 142,039 157,917 177,251
Total shareholders' equity 89,424 122,102 132,730 146,009 161,887 181,221

Source: Company, Kotak Institutional Equities estimates

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Disclosures

"Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which
the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views
about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or views expressed in this report: M B Mahesh, Nischint Chawathe,
Dipanjan Ghosh and Shrey Singh."

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
70%
Equities, within the specified category.

60%
Percentage of companies within each category for
which Kotak Institutional Equities and or its affiliates has
50%
provided investment banking services within the
previous 12 months.
40% * The above categories are defined as follows: Buy = We
expect this stock to deliver more than 15% returns over
27.9% 28.9% the next 12 months; Add = We expect this stock to
30%
22.5% deliver 5-15% returns over the next 12 months; Reduce
20.6% = We expect this stock to deliver -5-+5% returns over
20% the next 12 months; Sell = We expect this stock to deliver
less than -5% returns over the next 12 months. O ur
10% target prices are also on a 12-month horizon basis.
4.4% 3.4% These ratings are used illustratively to comply with
0.5% 0.0% applicable regulations. As of 31/03/2019 Kotak
0%
Institutional Equities Investment Research had
BUY ADD REDUCE SELL
investment ratings on 204 equity securities.

Source: Kotak Institutional Equities As of March 31, 2019

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our Fair Value estimates are also on a 12-month horizon basis.

Our Ratings System does not take into account short-term volatility in stock prices related to movements in the market. Hence, a particular Rating may not
strictly be in accordance with the Rating System at all times.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and fair value, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)
and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction
involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and fair value, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or fair value. The previous investment rating and fair value, if any, are no longer in effect for this stock
and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

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