Federal Bank: Turnaround in first half - Views on News from Equitymaster

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Federal Bank: Turnaround in first half

Dec 26, 2001

Federal Bank, one of the largest old private sector banks, reported a sharp improvement in overall financial performance during the first half of the current fiscal. The bank's profits before tax doubled due to a rise in interest margins and a triple digit growth in other income.

(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Interest Income 2,205 2,639 19.7% 4,402 5,118 16.3%
Other Income 266 447 68.3% 537 1,076 100.6%
Interest Expenditure 1,673 1,906 13.9% 3,313 3,730 12.6%
Operating Profit (EBDIT) 532 734 37.8% 1,089 1,388 27.5%
Operating Profit Margin (%) 24.1% 27.8%   24.7% 27.1%  
Other Expenditure 435 454 4.5% 859 932 8.5%
Profit before Tax 364 727 99.9% 766 1,532 100.0%
Provisions & contingencies 210 423 101.7% 412 811 96.8%
Tax - 110 - 60 300 400.5%
Profit after Tax/(Loss) 154 194 25.7% 294 421 43.2%
Net profit margin (%) 7.0% 7.3%   6.7% 8.2%  
No. of Shares (eoy) 21.7 21.7   21.7 21.7  
Diluted Earnings per share* 28.3 35.6   27.1 38.8  
P/E (at current price)   1.2     0.5  
*(annualised)            

The bank's revenues from core business of lending increased by 18% in the first half of the year. Federal Bank's efforts to focus on the retail market led by IT initiatives helped it fuel interest income. Interest income on advances accounted for 63% of total operating income. During the fourth quarter of the last fiscal, the bank's interest income was up by marginal 4%. The bank is adequately geared in terms of capital (CAR of 10.8%). This would help it in future business expansions.

Break-up of interest income
(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Interest on advances 1,321 1,637 24.0% 2,696 3,185 18.1%
Income from investments 865 975 12.7% 1,665 1,873 12.5%
Interest on balance with RBI 20 27 37.4% 33 58 73.7%
Others - 0 - 7 2 -77.0%
Total 2,205 2,639 19.7% 4,402 5,118 16.3%

Lower cost of borrowings resulted in about 240 basis points rise in interest margins in 1HFY02. A sharp reduction in cost to income ratio to 38% in 1HFY02 from 53% in the comparable previous period was another achievement. This helped the bank to double its profits before tax. However, a similar rise in provisions and contingencies figure and higher provision for tax (deferred tax provision according to Accounting Standard 22) trimmed bottomline growth of the bank.

At the current market price of Rs 42 Federal Bank is trading at a P/E of 1x its 1HFY02 annualised earnings and Price/Book value ratio of 0.2x. The bank's lower valuations are due to its higher net NPA to advances ratio, which stood at 10.1% as on March 2001. Also, its a regional bank with most branches located in Kerala.

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