>FEDERAL BANK (LKP SHARES)

• Low cost deposits and CASA: Federal Bank Ltd. (FBL) always had advantage of garnering NRI deposits and remittances, which constitute to a healthy low cost deposit base of the bank. Together with CASA of ~ 25%, low cost deposits constitute ~ 40% of total deposits of the bank. Low cost deposits base has anchored its NIMs to a significant extent, helping Federal Bank report one of the highest NIMs in the industry @ ~4% for FY09.

• Credit Offtake: FBL witnessed a very healthy loan growth in H1FY10E @ 21% and management is confident of maintaining a robust 25-30% loan growth for the year 2010E, which is more than the average industry standards. Slower credit off take in past quarters as well as infusion of capital has led to contracted growth of the balance sheet and has impacted return ratios. However, credit offtake in the corporate segment as well as retail segments, especially home loans shall remain the focus areas for growth.

• Asset Quality: FBL has reported high slippages in H1FY10E, at Rs.4.5bn out of restructured assets. However, FBL's provision coverage ratio, which has historically been in the range of 80-85% is the highest in the industry. Conservative provisioning of FBL is likely to continue going forward, with FBL maintaining ~ 83% as provision coverage, which gives further cushion on the asset quality and profitability. We believe that the incremental slippages should peak out this year, with FBL likely to see Gross NPAs at ~3% in FY11E.

• Pending acquisition of CSB: The acquisition of Catholic Syrian Bank (CSB), if it happens, will be a complementary fit to FBL's regional leadership strategy. CSB has s strong branch network of 363 branches and 140 ATMs as at March'09. This merger would provide FBL the market leadership in South India, thus raising the entry barriers for other banks in Kerala. Further, FBL would be able to productively utilize its excess capitalization for acquisition of CSB.

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