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Federal Bank: Difficult times

May 17, 2001

Federal Bank, one of the largest old private sector bank has reported a 32% jump in profits backed by a sharp rise in operating margins. The bank's profits in the fourth quarter however dipped by 46%.

(Rs m)FY00FY01Change4QFY004QFY01Change
Interest Income 8,818 9,192 4.2% 2,332 2,425 4.0%
Other Income 1,323 1,251 -5.4% 534 511 -4.2%
Interest Expenditure 7,015 6,822 -2.7% 1,738 1,854 6.7%
Operating Profit (EBDIT) 1,803 2,370 31.4% 595 571 -4.0%
Operating Profit Margin (%)20.5%25.8% 25.5%23.6% 
Other Expenditure 1,772 1,750 -1.2% 531 499 -6.1%
Profit before Tax1,3551,87038.0%597584-2.3%
Provisions & Contingencies 811 1,033 27.4% 254 348 37.2%
Tax 80 227 183.3% 30 67 122.0%
Profit after Tax/(Loss) 464 610 31.6% 313 169 -46.2%
Net profit margin (%)5.3%6.6% 13.4%7.0% 
No. of Shares (eoy) 22 22   22 22  
Diluted Earnings per share*21.428.1 57.731.0 
P/E (at current price) 1.8  1.6 

The sharp drop in profits in fourth quarter is attributed to higher tax and provisions apart from fall in operating margins. Other income too registered a negative growth of 4%.

The bank's topline growth of 4% was disappointing. This was due to comparatively slow growth rate in advances and deposits which rose by 20% and 19% respectively. Priority sector advances contributed 62% of the net bank credit against the RBI stipulated mark of 40%. Also, its credit to deposit ratio of 64%, was much above its peers in the banking sector. These factors had contributed in increasing the provisioning requirement for non-performing assets. The amount of provision in the fourth quarter rose by 37% to Rs 348 m. The bank's ratio of net NPA to advances was over 8% as on March '00.

During the year Federal Bank has successfully reduced the cost of deposits by 85 basis points to 9%. This has resulted in the sharp rise in operating profits margins. Its interest spread of 4.5% is comparable amongst the best in the industry.

At the current market price of Rs 50 Federal Bank is trading at a P/E of 2 times and Price/Book value ratio of just 0.3 times. The reason for bank's lower valuations are its comparatively high NPA ratio and regional nature. Provisions for non-performing assets was more than 25% of networth in the current year. Also, it is a regional bank with most branches located in Kerala, out of the total 400 branches.

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