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Federal Bank: Other income dips

Aug 28, 2002

Federal Bank, south India based old private sector bank, registered a 24% fall in its first quarter profits. The bank's net interest income however, grew by 21% backed by lower borrowing cost and healthy growth in interest income. An over 51% decline in non-interest income however, depressed the bank's bottomline.

(Rs m)1QFY021QFY03Change
Income from operations 2,478 2,752 11.0%
Other Income 629 303 -51.9%
Interest expense 1,824 1,960 7.5%
Net interest income 654 791 21.0%
Other expenses 478 521 9.1%
Operating Profit 176 270 53.3%
Operating Profit Margin (%)7.1%9.8% 
Provisions and contingencies 388 287-26.1%
Profit before Tax 418 287-31.4%
Tax 190 112-40.9%
Profit after Tax/(Loss) 228 174-23.5%
Net profit margin (%)9.2%6.3% 
No. of Shares (m) 21.7 21.7  
Diluted Earnings per share*41.932.1 
P/E Ratio 2.4 

With significant yield volatility during first quarter of FY03, the bank seems to have booked losses in its investment portfolio, which is reflected in lower other income. The contribution of non interest income to total income also declined to 10% in 1QFY03 from 18% in FY02. Apart from lower treasury income, the bank could also be facing stiff pressure on its cash management services business due to its regional nature and comparatively low level of technology integration. Federal Bank has currently integrated 80% of its business.

If we were to include fee based income in operating profits then instead of a 53% growth shown currently, operating profits would decline by over 28% YoY. Nevertheless, to strengthen its fee based income the bank has ventured into third party distribution business. Federal Bank has entered into a tie-up with ICICI Prudential to distribute the latter's insurance products to the bank's 0.2 m customers across 60 bank branches (of the total 413 branches).

The bank's core interest income from advances continued to grow at a slower pace in the first quarter hit by both decline in interest rates over the last one year and a possible slowdown in its loan growth. Its investment income on the other hand, increased at a strong rate of 21%. This could be mainly due to increase in investment portfolio by the bank over the last one year. In FY02, while loans given by the bank were up by a marginal 7%, investment portfolio grew by 24%.

Break up of interest income
(Rs m)1QFY021QFY03Change
Interest on advances 1,539 1,630 5.9%
Income on investments 872 1,053 20.7%
Interest on balance with RBI 30 66 116.8%
Others 37 3 -91.8%
Total 2,478 2,752 11.0%

At the current market price of Rs 78, Federal Bank is trading at a P/E of 2.4x 1QFY03 annualised earnings and price to book value ratio of 0.5x. The bank's higher net NPA ratio of over 8% 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 11%) 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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