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Federal Bank: Margins squeeze

Apr 10, 2002

Private banking stocks witnessed a sharp spurt in prices over the last three months. Federal Bank was the star performer in this stunning rally. The bank's stock price, which was hovering near Rs 44, jumped by 130% during the period. Expectations that the bank could be a potential takeover target infused the buying interest.

(Rs m) 3QFY01 3QFY02 Change
Income from operations 2,365 2,649 12.0%
Other Income 203 607 198.8%
Interest expense 1,655 1,886 14.0%
Net interest income 710 762 7.4%
Other expenses 353 457 29.3%
Operating Profit 357 306 -14.3%
Operating Profit Margin (%) 15.1% 11.5%  
Provisions and contingencies 288 493 71.1%
Profit before Tax 272 419 54.3%
Tax 85 200 135.3%
Profit after Tax/(Loss) 187 219 17.4%
Net profit margin (%) 7.9% 8.3%  
No. of Shares (m) 21.7 21.7  
Diluted Earnings per share* 34.4 40.4  
P/E Ratio   2.5  
*(annualised)      

Meanwhile, Federal Bank's financial performance witnessed a marginal pressure during the third quarter. The bank maintained a double digit growth in topline. However, net interest income growth slowed down (7.4%) due to lower credit demand and pressure on yield on advances. (In the first half of FY02, its net interest income grew by 28%.)

Nevertheless, the bank has trimmed the decline in operating profit margins by controlling costs. Its cost to income ratio reduced to 33% in the third quarter from 39% in 3QFY01. Also, a three fold rise in fee based income fueled its pre tax profit growth by 71%. The contribution of other income to total income increased to 19% from 8% in 3QFY01. This was mainly from higher gains recorded by the bank on trading portfolio of investments in government securities.

At the current market price of Rs 100, the stock gets a P/E of 3x and Price/Book value ratio of 0.5x. Even though, the bank is adequately geared in terms of capital (CAR of 10.8%), high level of non-performing assets is impacting its financial performance and valuations. Its net NPA to advances ratio stood at 10.1% as on March 2001. The bank's valuations are likely to get discount, considering its regional nature (most of the branches located in Kerala) and quality of loans.

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