Brokerage house Jefferies has initiated coverage on Federal Bank Ltd. with a ‘Buy' rating on the stock. It has kept a target price of Rs 140, a potential upside of 27 percent from Friday's closing price, it said in a research report.
Jefferies' valuation was based on an equal-weighted price-to-book ratio, price-to-earnings ratio and residual income model.
As always, turnarounds are great stories but risky. A few gaps need to be addressed, but we like the new energy in the bank.Jefferies Research Report
Commenting on the asset and revenue profile, the brokerage said that the lender suffers from few obvious gaps such as the net interest margins (NIMs) which lag despite a strong funding cost support and fee income profile, which is weak while running costs are high and sticky.
“The new strategy addresses these through balance sheet growth, loan mix improvement, new fee sources and a sales model with performance-based compensation,” the report added.
On profitability, Jefferies expects the cost-growth dynamics and steady improvement in asset quality to drive the return on assets of the bank to about 1 percent by 2019-20 estimates, adding that the NIM should be stable, while cost reduction could be significant.
With a large ticket issue, which is mostly taken care of, we expect provision costs to be relatively benign.Jefferies Research Report
The brokerage house forecast 28 percent earnings per share and 16 percent compound annual growth rate (CAGR) in book value over FY17-20 estimates.
Weakness in non-resident Indian current account savings account (NRI-CASA) deposits, domestic current account flows, inability to rein in costs, and asset quality deterioration remain key risks for the bank, Jefferies added.
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