Federal Bank, one of the South based old private sector banks reported a single digit growth in both profits and interest income for the fourth quarter ended March 2002. The bank' operating profits however soared by 22% as it managed to control operating cost significantly.
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During the year, the bank's business witnessed subdued growth. Loans given by the bank increased by 7% while deposits growth was slightly on a better side at 16%. Consequently, the bank's interest income from advances was higher by 13% and investment income grew by 15%. These growth rates are much lower than its other private sector peers in the industry. The bank is integrating the technology and expanding its network to increase the business. It has automated 412 branches and has set up 39 ATMs across the country. The bank is planning to increase the number of ATMs to 150 by March 2003.
Federal Bank's fee based income grew by 76% and accounted for 18% of total income earned in FY02. The bank's tie up with Prudential ICICI for distribution of insurance products and LIC mutual fund for distribution of mutual fund products would further improve this revenue stream.
Federal Bank's treasury operations account for over 80% of its pre tax profits with 12% of total capital employed. Treasury revenues are mainly from investments and trading in securities (shares and debentures). With interest rates stabilizing at current levels, the bank might have to book losses on its investment portfolio in the current year, as bond prices have declined in the last one month. Also, since the bank derives major portion of its earnings from treasury, it could be impacted severely unless it has short duration investment portfolio.
At the current market price of Rs 97, Federal Bank is trading at a P/E of 2.6x FY02 earnings and price to book value ratio of 0.5. The bank's net NPA ratio of 8.6% is curtailing the rise in its valuations. Its net non-performing assets are equal to its networth which implies a substantial erosion in book value. Although, its adequate capital (CAR of 10.6%) would allow it to expand its business, unless it improves quality of its loans, valuations are unlikely to get a re-rating.
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