>FEDERAL BANK LIMITED (GEPL)

COMPANY OVERVIEW
Incorporated in 1931, Federal Bank is an old private-sector bank with a dominant presence in the southern state of Kerala. It operates 617 branches and over 630 ATMs spread across 24 states. It has a customer base of over 5 mn, concentrated in Kerala and is a key player in servicing Kerala based middle-east NRI community. At present it is the fifth largest private sector bank in terms of assets (asset size of Rs 388.5 bn as on March 31, 09).

INVESTMENT RATIONALE

■ Highest CRAR to Enable Sustainable and Quality Asset Growth
Federal bank had the highest Capital to Risk Weighted Assets (CRAR) ratio in the industry at 20.14%, with tier I capital ratio at 17.5% as on March 31, 09. As a result of a high tier I capital ratio we do not see equity dilution in immediate future. Apart from this, in case of a faster than expected economic recovery the excess cash on the bank’s balance sheet can be
deployed to ramp up its business activities. As per our conservative estimates, the bank’s business is expected to grow at a CAGR of 22.6% over FY09-FY11 with advances and deposits estimated to grow at a CAGR of 22.2% and 22.9% respectively during the same period.

■ Asset Mix Tilted Towards High Yielding Retail and SME Advances
The advances mix of Federal Bank has traditionally been tilted towards high yielding retail and SME advances (constitute around 63% of its loan book) as a result of which it has had higher than industry average Net Interest Margins (NIM) of 3.4-4.3% over FY03-FY09. It had second
highest NIMs in the industry at 4.3% in FY 09.

■ Good Low Cost Deposit Base at 34% Another Key Driver of NIMs
The bank’s low cost deposit base including its CASA deposits and low cost NRI term deposits stood at 33.5% as on March 31, 09. In our view the bank’s expanding distribution network (bank expected to add over 170 branches and 220 ATMs during FY09-FY11) and a growing retail liability and low cost NRI deposit base will help the bank maintain a lower cost of funds at 5.8-5.9% and Net Interest margin (NIM) at 3.75- 8% during FY09-FY11.

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