Federal Bank Ltd.

| Initiating Coverage Report

Federal Bank Ltd. 17th April 2023

Empowering Progress: Fueling Growth through Digital Partnerships
Established in 1931 as ‘Travancore Federal Bank’, the Bank was renamed ‘Federal BUY
Bank Limited (FBL)’ in 1949 and became a scheduled commercial Bank in 1970. CMP Rs. 131.3
Over the years, the Bank grew steadily and expanded its operations beyond
Kerala to other parts of India. FBL is evolving into a more prolific franchise driven
TARGET Rs. 164 (+24.9%)
by its impressive balance sheet size, quality growth trajectory, extensive pan- Company Data
India presence, unique branch light distribution heavy model, and strategic
digital/fintech partnerships. The Bank's fintech strategy is yielding incremental MCAP (Rs. Mn) 2,81,984

benefits, including higher deposit growth, cost control, and improved fee income. O/S Shares (Mn) 2,115
In 9MFY23, the Bank showcased an all-around performance with strong growth in 52w High/Low 143 / 82
the loan book. In the last four quarters, there has been an improvement in the
Face Value (in Rs.) 2
cost-to-income ratio, which, coupled with the improvement in asset quality,
resulted in the highest-ever profit. This translates into an improvement in return Liquidity (3M) (Rs. 1508
ratios. We believe FBL will maintain its performance going forward. We initiate Mn)

coverage on Federal Bank Ltd. with a BUY rating and a target price of Rs. 164 (1.5x
FY24 Adj. Book Value). Shareholding Pattern %
Dec Sep Jun
Loan growth to drive earnings, leading to improvement in return ratios 22 22 22

In the last decade, FBL grew its loan book at a CAGR of 14% from FY12 to FY22, Promoters 0.0 0.0 00
while the PAT has grown at a slower rate of 9%. The low growth in PAT is due to FIIs 27.72 26.39 26.20
increased cost-to-income ratio and provisions over the years. While in the 9MFY23,
DIIs 42.33 44.22 42.12
there was a significant rise in earnings growing at 56% Y-o-Y. This growth is driven
by strong growth in loan book growing at 19% Y-o-Y in 9MFY23. Going forward, the Non- 29.97 29.39 31.68
Institutional
Bank has guided to increase loan book by 18-20%, maintaining a NIM margin of
3.35-3.40%, improving the cost-to-income ratio, and improving provisions. All these Federal Bank vs. Nifty
factors will lead to better asset quality and higher growth in earnings and return
ratios.

Increasing pan India presence

Mr. Shyam Srinivasan took over as MD & CEO of the Bank in Sep 2010, and his key
focus area was to increase the brand visibility outside Kerala. He spearheaded this
strategy of pan-India presence over FY10-22. The Bank added 610 branches, of
which 66% were opened outside Kerala (as of FY22 1282 branches). FBL aims to add Apr, 20 Apr, 21 Apr, 22 Apr, 23
80-100 branches every year over the next three years. Most of these new branches Federal Bank NIFTY
will be established outside the Kerala region.
Source: Keynote Capitals Ltd.
Digital/ Fintech partnership to drive growth
Key Financial Data
The Bank is continuously leveraging its fintech partnership to enhance its reach and
(Rs Mn) FY22 FY23E FY24E
attract new clients who have traditionally not been the Bank’s clients. FBL has been
aggressive in fintech partnerships, resulting in increased loan growth and an NII 59,620 76,152 85,928

expanded customer base. The Bank has indicated that it will continue to expand its PPOP 37,579 51,916 59,819
partnerships to boost loan growth. The Bank will adopt a hyper-personalized Net Profit 18,898 32,232 37,610
approach to cater to the individual needs of its customers. Advances 14,49,283 17,74,800 20,94,264

ROE (%) 10.1% 15.1% 15.4%

View & Valuation
ROA (%) 0.9% 1.2% 1.2%
We initiate coverage on Federal Bank with a BUY rating and a target price of Rs. 164
Source: Company, Keynote Capitals Ltd.
(1.5x FY24 Adj. Book Value). We believe that FBL is set to grow its loan book at 18-
20% with stable NIM of 3.35%. Improvement in the cost-to-income ratio and
Devin Joshi, Research Analyst
provision will lead to the normalization of asset quality. All these factors will
improve profitability growth, leading to improved return ratios. Devin@keynoteindia.net
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Federal Bank Ltd. | Initiating Coverage Report
Banking Sector
The Reserve Bank of India (RBI) regulates and supervises the banking sector.
Over the years, the banking sector has undergone several reforms to
promote a diversified, efficient, and competitive financial market. Some
reforms are

• Merging public sector banks

• Introducing the Prompt Corrective Action (PCA) framework

• Refining supervisory practices

• Tightening risk weights/provisioning norms (for sectors witnessing high

credit growth)

• Mandating best international practices and norms such as Basel III

• Issuing guidelines to deal with overall asset-liability mismatches

These measures have strengthened the banking system, increased

depositors’ confidence, and aided financial stability.

Over the past decade, financial inclusion has been one of the Government’s
and banks’ key priorities. Pradhan Mantri Jan Dhan Yojana (PMJDY),
launched in August 2014, aims to ensure affordable access to financial
services. As on March 31, 2022, 450 Mn PMJDY accounts had been opened.

In FY21, to deal with the impact of the pandemic, the government and the
RBI took several initiatives to provide relief to borrowers. The crucial
initiatives included the Emergency Credit Line Guarantee Scheme (ECLGS),
the provision of a loan moratorium, and the option to restructure
corporates, MSMEs, and retail loans under the restructuring framework
(One-time restructuring OTR 1.0 and 2.0).

After nine years, the industry is seeing a sign of strength in loan growth,
which grew at 15.5% YoY in Feb’23. The credit growth is expected to remain
strong, led by continued traction in the Retail and SME segment. The
Corporate segment is also reviving due to improved working capital
requirements.

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Federal Bank Ltd. | Initiating Coverage Report
Industry Trends
Private Banks gaining market share
Traditionally, Public Sector Banks (PSUs) have accounted for most of the
banking credit outstanding and deposits. However, in the past few years,
low profitability, weak capital position, low operational efficiency, and
increased stressed loans led to a slowdown in their loan growth. As a result,
private banks gained market share, which were relatively well-capitalized
and had a higher degree of operational efficiency.
Market Share (%) in Credit outstanding Market Share (%) in Deposits

76%
74%
60%
58%

42% 40%

26% 24%

Public Banks Private Banks Public Banks Private Banks

2015 2022 2015 2022
Source: RBI, Keynote Capitals Ltd.

Loan growth to accelerate

In FY22, loan book (all Banks) grew by 11.5% on a YoY basis due to pent-up
demand and normalization in the economy. Due to the COVID impact in
FY21, the Indian economy witnessed the sharpest contraction. However, it
bounced back swiftly, and the loan growth accelerated to ~15.5% YoY in
11MFY23.

Credit growth has generally been trending upward throughout FY23. It is

expected to be in the mid-teens, driven by the retail and agriculture
segments and supported by a recovery in services and industrial credit. The
recovery will be led by private sector banks, which are expected to grow at a 50%
higher rate, 15-17%, leading to further market share gains.

Corporate sector profitability has improved in the last few years, leading to
the companies’ de-leveraged balance sheets. As we advance, we will see a
new leg of the investment cycle.

Loan book growth of Private & Public banks

20% 19% 19%

17%
14% 15%
11%
12%
7% 8%
7%
2% 3% 3%
1%
-1%
2015 2016 2017 2018 2019 2020 2021 2022
Public Banks Private Banks
Source: RBI, Keynote Capitals Ltd.
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Federal Bank Ltd. | Initiating Coverage Report
Asset quality of banks to improve steadily
Post FY18, the Government and the RBI took various measures to restrain
the deterioration in asset quality. As we advance, the overall asset quality of
banks continues to improve steadily.
Asset Quality
All Banks Public Banks Private Banks
Particulars
GNPA NNPA PCR GNPA NNPA PCR GNPA NNPA PCR
FY18 11.6% 6.1% 48.1% 15.6% 8.6% 47.1% 4.0% 2.0% 51.0%
FY19 9.3% 3.8% 60.6% 12.6% 5.2% 60.8% 3.7% 1.6% 57.0%
FY20 8.4% 2.9% 66.2% 10.8% 4.0% 64.2% 5.1% 1.4% 72.6%
FY21 7.4% 2.4% 68.9% 9.5% 3.1% 68.4% 4.8% 1.5% 70.0%
FY22 5.9% 1.7% 70.9% 7.6% 2.3% 69.5% 3.7% 1.0% 74.7%
Note: GNPA – Gross Non-Performing Asset; NNPA – Net Non-Performing Asset; PCR – Provision Coverage Ratio

Source: RBI, Keynote Capitals Ltd.

With better recoveries across the segments, especially in the industrial and
agriculture segment, asset quality in the banking sector started improving.
GNPAs of all Banks have improved from a high of ~12% in FY18 to ~6% in
FY22; PCR has also increased from ~48% to ~71%. While Private Banks are
comparatively doing better than the industry, the GNPAs have remained in
the range of 3-5% between FY18-22, and they have significantly improved
the provision coverage ratio, which reduces the risk of asset quality
deterioration. We expect the improvement in asset quality across lenders to
continue.

The banking sector is well-placed

The Indian banking system is well positioned to support economic growth,
with bank credit growing double-digits after a long hiatus and GNPAs of all
Banks declining to their lowest level in last six years. A new leg of the
investment cycle led by improving trends in capacity utilization and rapid
expansion of credit aided by new loan accounts in the industrial and service
sector will drive growth opportunities.

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Federal Bank Ltd. | Initiating Coverage Report

About Federal Bank Ltd.

Federal Bank Ltd. (FBL) is a private-sector commercial Bank in India. It was
established in 1931 and was initially called the Travancore Federal Bank. In
1944, the Bank was acquired by a group of entrepreneurs led by a young 28-
year-old lawyer, Shri K.P. Hormis. The Bank's initial focus was to cater to the
banking needs of the local business community of Kerala. The Bank grew
steadily over the years and expanded its operations beyond Kerala to other
parts of India. In 1947, the Bank became a scheduled commercial bank and
was granted a banking license under the Banking Companies Act of 1949.
Under the visionary leadership of Shri K.P. Hormis, the Bank rapidly expanded
its operations and grew from a single-branch to a 285-branch Bank by the time
he retired in 1979.

From the 1980s to 2000, the Bank crossed deposits of Rs. 35 Bn, roped in ICICI
group as a shareholder through private placement, and tapped the capital
market with a public issue in March 1994. The size of the balance sheet
exceeded Rs. 110 Bn, and inaugurated the 400th branch in 1999.

From 2000 onwards, the Bank commenced internet banking with software
support from Infosys technologies and started anywhere banking in Bangalore,
connecting all branches; all the branches were fully computerized, introducing
real-time transaction alerts, which are first-of-its-kind services among
traditional banks in India. In 2004, the Bank launched co-branded credit cards
with ICICI Bank. FBL become the first Bank in India to implement a Real-Time
Gross Settlement (RTGS) facility in all its branches.

In 2006 the Bank crossed 500 branches, and in 2007 Bank formed a centralized
processing center for centralizing the account opening process to make it
quick and efficient, leading to cross a loan book size of Rs. 25 Bn in 2009.

Mr. Shyam Srinivasan's appointment as the MD and CEO in 2010 marked the
beginning of a progressive growth phase for the Bank. Over the next five years,
FBL embarked on an ambitious expansion drive, emphasizing broadening its
reach beyond Kerala. The number of branches doubled from 672 to 1,247, and
the employee count increased significantly to support this growth. The
expansion led to an increase in the Bank's cost-to-income ratio. FBL took steps
to tighten its lending norms and realign its business mix to mitigate any
negative impact on profitability.

Over time, the Bank has expanded its footprint in regions such as Gujarat,
Tamil Nadu, Maharashtra, Karnataka, and certain parts of Uttar Pradesh. As
evidenced by its loan mix across different geographies, the Bank is no longer
solely focused on Kerala. The non-Kerala portfolio has experienced rapid
growth due to its small base, with a CAGR of 24% compared to a 15% CAGR in
Kerala between FY10-15.

In the following years, the Bank invested in people and processes and put
many building blocks in place. FBL has invested in building the relationship
manager (RM) team to grow in each segment depending on the opportunity,
be it retail/ SME/ corporate.

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Federal Bank Ltd. | Initiating Coverage Report
FBL – Granular & retail focused liability mix

Rs. In Bn Deposit Mix (%)

2,134

1,817
1,722
1,523
1,349
67%
1,120 63%
977 66%
792 69%
68%
66%
67%
67%

34% 37% 33%

34% 32% 31%
33% 33%

FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

CASA Term Deposit

Source: Company, Keynote Capitals Ltd.

FBL has a retail-focused deposit franchise that ranks among the top quartile
and is characterized by high granularity. As of 9MFY23, ~77% of the total
deposits were granular (deposits < Rs. 10 Mn). CASA and retail term deposits
(TD) represent ~88% of total deposits. In 9MFY23, the retail deposit
constituted 90% of the total deposits, with 62% being from Kerala.

Current Account (CA) and Savings Account (SA) (CASA) – CASA is a function
of the money supply and phases of the economy. CA is the cheapest form of
borrowing, while SA is the second most. CASA has been the preferred form
of deposit for the Bank. It has raised the CASA ratio from ~ 32% in FY19 to
~33% in FY23.

The split between premium (SA balance more than Rs. 1,50,000) and non-
premium used to be 50:50 as of Dec ‘19. With the advent of the Bank’s HNI
relationship growing 1.5 times in the past three years, the ratio has changed
to 62:38, favoring premium customers. The Bank’s debit card spending have
grown at ~13% CAGR in the past three years to reach ~Rs. 13 Bn for 12
months ending Dec ‘22. In the said year, the Bank outperformed the
industry by ~18% and the top 5 private banks by ~16% in terms of debit card
spending and amassed ~5% market share. Customers using debit cards are
favorable for the Bank as they maintain a balance twice the average
monthly balance of an active user.

The savings accounts contributed by fintech partners have grown by ~20

times, and their CASA balance has increased ~17 times over the past two
years.

The management has steered the Bank remarkably towards Digital and new-
age methods of operations. This can be ascertained because Digital, which
contributed ~11% of SA onboarding in FY19, now accounts for ~96% in 9M
FY23.

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Federal Bank Ltd. | Initiating Coverage Report
Over the recent years, the Bank has formed fintech partnerships with more
than 75 fintech companies for several different business operations, one of
which being liability origination. The Bank has guided that the fintech
partnerships with Fi and Jupiter will be responsible for 25% of the
incremental growth in deposits. For 9MFY23, they’ve performed to open
around ~8,000-15,000 accounts per day. These customers are salaried
millennials who are digitally native for their financial activities like savings,
investing, and borrowing. However, they tend to maintain balances lower
than normal. FBL, organically and via its two fintech partnerships, is able to
convert ~18,000 customers daily.

Moreover, the fintech partnership was responsible for 10% of incremental

growth in term deposit and 19% for SA.

Share of Retail Deposit in Total Deposit (%)

97.9%

94.1% 93.7% 94.4%

91.0% 90.2%
90.0% 90.3%

FY16 FY17 FY18 FY19 FY20 FY21 FY22 9M FY23

Source: Company, Keynote Capitals Ltd.

The Bank leads the inward remittances sent by Non-Resident Indians (NRI)
to India with ~21% market share in 9MFY23. In NRI deposits, the Bank has
~7% market share.

Market Share (%)

21.0%

12.6%

0.8% 1.1%

Total Deposit NRI Remittance

FY16 9M FY23
Source: Company, Keynote Capitals Ltd.

Term Deposit (TD) – TD, the most expensive deposit form, accounted for ~
67% in FY23.

The growth drivers for deposit are fintech partnerships, growth in non-
Kerela states, and adding 80-100 branches every year by 2025. The deposit
book is guided to reach a 39% CASA ratio from the current 34% in Q3FY23.

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Federal Bank Ltd. | Initiating Coverage Report
Credit-Deposit (CD) Ratio (%)

83.5%
82.1% 81.7%
80.3% 79.8%

76.4%
75.1%
73.4%

FY16 FY17 FY18 FY19 FY20 FY21 FY22 9MFY23

Source: Company, Keynote Capitals Ltd.

Cost of Deposits (%)

6.4%

5.5%
5.3%
5.1%
5.0%

4.5% 4.6%

4.0%

FY16 FY17 FY18 FY19 FY20 FY21 FY22 9MFY23

Source: Company, Keynote Capitals Ltd.

Federal Bank Ltd. | Initiating Coverage Report
Loan Book – Well-diversified loan mix

Loan Book (Rs. 1,710 Bn as of

9MFY23)

Retail (54%) Wholesale (46%)

Commercial
Business Corporate (79%
Retail (61% of Agri (24% of banking* (21% of
banking* (15% of of wholesale loan
retail loan book) retail loan book) wholesale loan
retail loan book) book)
book)

Source: Company, Keynote Capitals Ltd.

Note: * Business banking & Commercial banking forms the SME segment

Loan Book (Rs. Bn)

1,710
1,476
1,349
1,242
1,118
932
741
588
520
452 442

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 9MFY23

Source: Company, Keynote Capitals Ltd.

Change in loan mix (%)

31% 32% 35% 37% 36% 35% 36%

42% 42% 43% 41%

25% 25% 19% 19% 18%

26% 24% 18%
18% 21% 19%

40% 44% 43% 40% 40% 41% 45% 45% 46%

38% 39%

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 9MFY23

Retail & Agri SME Corporate

Source: Company, Keynote Capitals Ltd.
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Federal Bank Ltd. | Initiating Coverage Report
Shift towards non-corporate segments
Prior to the restructuring in FY12, FBL’s loan book was majorly driven by a
highly volatile corporate book. The higher concentration of the large
corporate segment and the deterioration in asset quality significantly
impacted the Bank's risk profile. Thereafter, the Bank went through a
consolidation phase from FY12 to FY14 and changed its business mix by
increasing the share of retail and SME segments to mitigate the risks arising
from the large corporate segment.

Loan book mix (%)

51% 46% 45% 46%

59% 54% 53%
61%
68% 69%

49% 54% 55% 54%

41% 46% 47%
40%
32% 31%

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 9MFY23
Retail Wholesale
Source: Company, Keynote Capitals Ltd.

Corporate Loan Segment

Any loan above Rs. 250 Mn qualifies as a corporate loan, and this segment
contributes 36% to total credit as of 9MFY23. Since FY17, the Bank has
embarked on a journey of risk-adjusted profitable growth.

The Bank targets high-rated clients, which is visible from the expansion of A
& above-rated portfolio, which used to be 23% of the mix in FY14 and later
increased to 79% in Q3FY23.

Increasing A and above corporate loan mix (%) risk rating

10% 9% 11% 12% 11% 12%

16%
28% 15% 11% 11% 9%
19% 12%
43% 11%
60% 7%

15%
76% 73% 78% 76% 78% 79%
65% 71%
17%
42%
23%

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 Q3FY23

A and above BBB <BBB and Unrated

Source: Company, Keynote Capitals Ltd.
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Federal Bank Ltd. | Initiating Coverage Report
FBL has identified a favourable niche market in the corporate and mid- Granular Ticket Size - Corporate
corporate sectors, where certain geographic areas present challenges for loan book (Rs. Mn)
larger public sector banks to lend.
640 630
The Bank has transitioned from a self-originating approach to a relationship-
based wholesale banking model, strengthening existing relationships and
acquiring new clients. Additionally, FBL has made consistent efforts to 560 550
540
granularize the loan book.

The Bank also anticipates an increase in the share of commercial banking in

its wholesale banking book and plans to capitalize on cross-selling
opportunities in this segment, which remain largely untapped.
FY19 FY20 FY21 FY22 9MFY23
Source: Company, Keynote Capitals Ltd.

Relationship-led Distribution

Corporate Client
RM/Product Team Service Centre Nodal Branch
(CCSC) / Trade Hub

Source: Company, Keynote Capitals Ltd.

SME loan segment

The SME segment for FBL can be defined as loans having a ticket size of Rs.
50 -250 Mn. The Bank portfolio from Kerala contributed 56% in FY16, which
has been coming down Y-o-Y with management’s endeavor to grow the
segment outside Kerala, owing to slow growth in the state and desired
improvement of the portfolio's credit quality. The Non-Kerala SME loan
segment is growing upwards of 20%, which contributed 54% in FY20
compared to 44% in FY16.

The SME segment contributes 18% of the loan book in 9MFY23, which grew
at 15% CAGR from FY13 to FY22. Since Q1FY19, the SME segment has been
bifurcated into commercial and business banking.

The Bank expects a huge opportunity in the business banking space, which > 60% of FBL’s branches are in Semi-
has an untapped market potential of Rs. 36 Trn; out of this, only 15% is urban and Rural areas.
through formal finance. FBL is targeting enhanced access to Tier 2 and 3
cities through digitization.

FBL is committed to doubling its SME portfolio within the next three years by
utilizing calibrated risk models and analytics and enhancing digital lending
capabilities. This growth will be driven by a three-fold increase in the overall
customer base and leveraging partnerships. In the MFI segment, the Bank
holds a 0.5% market share. The Bank expects a significant uptick in market
share and contributions to the Bank's RoA.

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Federal Bank Ltd. | Initiating Coverage Report
Retail loan segment

The retail segment contributed 46% of the loan book in 9MFY23, which grew
at a 16% CAGR from FY13 to FY22. Going forward, the Bank has planned to
embark on the ‘4D mantra’ in retail banking.

4D Mantra

Digitization Depth of
Data Distribution
relationship

Since Feb 2020

Distribution via an
• 96% growth in
increase in Leveraging
disbursement of Since Feb 2020
branches every technology to
credit card & • 100% of
year, doubling cross-channel with
personal loans personal loans
RMs, ramping up personalized
• 60% increase in opened digitally
the direct selling content and
debit card • 90% of retail
agent (DSA), and enhanced
spends transactions are
focusing on Co- customer
• 33% increase in digital
lending and Fintech experience
collection
partnership
capabilities

Source: Company, Keynote Capitals Ltd.

High-margin Retail Loan Segments

The strategy post-Covid pandemic is to increase growth by concentrating on

specific high-margin segments such as credit cards, personal loans, MSME
funding, commercial and construction vehicle financing, gold loans, and
microfinance and additionally, expanding the customer base through a light-
branch heavy distribution network and leveraging digital/ fintech
partnerships.

The Bank has shifted its focus toward a higher-yielding retail loan segment,
and management is expecting to double the loan book over the next 2-3
years.

The share of the unsecured loan portfolio in the total loan book has
increased from 3% in FY19 to 7% in 9MFY23.

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Federal Bank Ltd. | Initiating Coverage Report
Personal Loan: The target customer has been so far towards cross-selling to
existing customers. In 9MFY23, the book size of the personal loan segment is
Rs. 19.6 Bn, which is expected to double in the next two years.
Digital onboarding
Personal loan segment (Rs. Bn) for existing and
new to bank
customers
20
18 Account
18
aggregator Analytics driving
15 from CICs* to pre-approved
expand digital offers
offers
8

Multi-pronged
Partnership led
FY19 FY20 FY21 FY22 9MFY23 approach (tele/field)
approach
to collections
Source: Company, Keynote Capitals Ltd.

Source: Company, Keynote Capitals Ltd.

Note: * CICs – Customer information control system

Credit card: The Bank started a credit card business in May 2021 in
partnership with One card. FBL issued 0.5 Mn CIF (Card-In-Force) as of Jan’23
and holds a 0.6% market share. The Bank intends to be the top 7 credit card
player by 2024.

Commercial and construction vehicle finance (CV/ CE): The CV/ CE financing
sector was adversely affected by COVID-19 as freight and cargo movement
was disrupted worldwide. While the sector has regained its growth
momentum, the industry is expected to grow by 14% in FY23 due to
government spending on infrastructure, construction, and mining and The portfolio is granular, with an
scrappage policy, which offers a significant potential market of over 1 Mn average ticket size of Rs. <2.5 Mn.
vehicles that need replacement. FBL anticipates that CV/CE disbursements
will double in FY23 due to strong on-ground demand. Similarly, the
management predicts that the CV/CE book will double in the next two years.
The Bank plans to adequately support its growth by leveraging its branch
network and activating approximately 85% of its branches with an
experienced team. The Bank has tie-ups with all major OEMs.

CV/ CE loan Book (Rs. Bn) has grown 4.4x over FY19 to FY22
18

13

FY19 FY20 FY21 FY22 9MFY23

Source: Company, Keynote Capitals Ltd.
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Federal Bank Ltd. | Initiating Coverage Report
Gold loan: Over the last three years, the gold loan portfolio has more than Gold loan (Rs. Bn) portfolio up
doubled from De'19 to Dec'22, significantly contributing to the Bank's fee 2.2x
income. The Bank aims to become the largest private bank engaged in gold
195
financing and double its loan book over the next three years. To achieve this
goal, FBL has devised a six-touchpoint distribution model, including
expanding the number of branches offering gold loans by 25%, collaborating
89
with fintech companies to access new customers and markets, increasing
reach through co-lending, generating leads through contact centers,
converting leads into sales through the sales team, and utilizing online
channels.
Q3FY20 Q3FY23
Housing loan: A housing loan is considered a low-yielding asset for the Bank Source: Company, Keynote Capitals Ltd.

and forms 33% of the retail loan book as of 9MFY23, growing at 16% CAGR
from FY13 to FY22. FBL’s overall market share in home loans stands at 0.92%
and 5.5% among private banks as of Q3FY23.

The Bank is gaining market share in chosen geographics outside of Kerala

and focusing on Metros such as:

• Mumbai – 3% incremental share in the home loan and 9% among Private

banks

• Chennai – 1.5% incremental share in the home loan and 8.5% among
Private banks

• Bangalore - 1.5% incremental share in the home loan and 9% among

Private banks

Retail loan book mix (%) as of 9MFY23

Personal
3% Others
9%
Gold
6% Housing
Auto 33%
7%

LAP
13%

Agri
29%

Source: Company, Keynote Capitals Ltd.

FBL – Diversified loan book

The Bank has a well-diversified advances portfolio across segments,

comprising corporates (9MFY23: 36.4%; FY22: 35.3%), retail (31.5%; 32.4%),
small and medium-sized enterprises (SMEs; 18.1%; 18.4%) and agriculture
(12.3%; 13%). FBL expects the loan growth to be higher than the industry
growth and maintain a momentum of high double-digit growth going
forward. In the future, management indicates strong growth in high-yielding
products, the share of which has increased from 17.4% in Q3FY20 to 20.5%
in Q3FY23 and aims to double the loan book over the next three years.
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Federal Bank Ltd. | Initiating Coverage Report
Asset quality
The Bank’s asset quality has remained stable over the years, with GNPA
ranging close to ~3% from FY12 to FY22. While NNPA has remained elevated
since FY16 due to a lower PCR and increase in slippages during FY16 & FY17
mainly due to delinquencies in a corporate account, in FY18, slippages
remain elevated due to the revised framework by RBI. Since FY18, the Bank
PCR started improving, and in FY22 NNPA ratio improved from 1.7% in FY16
to 1.0% in FY22.

The stress test of asset quality of the Bank has seen during the period of the
Covid-19 pandemic, where the Bank reported almost flattish slippages, while
the GNPA ratio has increased by ~60 bps from FY21 to FY20, the NNPA ratio
has improved by 13 bps due to improving in PCR ratio.

In Q3FY23, the asset quality improved further; GNPA stands at 2.4% lowest
in the last 21 quarters, and PCR increased from 64% in FY22 to 69% in
Q3FY23, resulting in a sharp improvement in the NNPA ratio from 1.0% in
FY22 to 0.7% in Q3FY23.

Asset quality over years

81.1%
70.6% 69.2%
66.3% 65.1% 63.9%
63.0%
53.4%
49.3%
42.0% 43.7% 43.5%

3.4% 3.5% 3.5%

2.9% 3.0% 3.0% 2.9% 2.9%
2.5% 2.4% 2.4%
2.1%
1.7% 1.7% 1.5%
1.3% 1.3% 1.2%
1.0% 0.8% 1.0%
0.7% 0.8% 0.7%

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 Q3FY23

GNPA Ratio (%) NNPA Ratio (%) PCR (%)

Source: Company, Keynote Capitals Ltd.

Slippages and Credit Ratio

3.3%

2.4%

1.8% 1.8%
1.6% 1.6% 1.5% 1.6%
1.5% 1.5%
1.3%
0.9%
1.3%
1.1%
0.9% 0.9% 0.9% 0.9% 0.9%
0.7% 0.7%
0.4% 0.4% 0.4%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 Q3FY23

Slippage Ratio (%) Credit Cost (%)

Source: Company, Keynote Capitals Ltd.

15
Federal Bank Ltd. | Initiating Coverage Report
State-specific to pan India presence
Mr. Shyam Srinivasan took over as MD & CEO of the Bank in Sep 2010, and
his key focus area was to increase the brand visibility outside Kerala. The
Bank already has a sizeable presence in Kerala, and expanding the footprint
outside Kerala will reduce concentration risk and could provide better brand
visibility. He spearheaded this strategy of pan-India presence over FY10-15.
The Bank added 575 branches, of which 64% were opened outside Kerala.

The Bank consciously scaled up and decided to focus on geographics like

Tamilnadu, Karnataka, Maharashtra, Gujarat, Delhi, and Punjab & Haryana.

Branches increasing outside Kerala

672 743 950 1103 1174 1247

18% 17% 18% 18% 19% 21%

1% 1% 3% 3%
7% 7% 3% 4%
7% 7% 8%
9% 9% 8%
9% 8% 9%
7% 7% 9%
9% 11% 11% 11%

57% 60% 55% 52% 50% 48%

FY10 FY11 FY12 FY13 FY14 FY15

Kerala Tamilnadu Maharashtra Karnatka Gujarat Others

Source: Company, Keynote Capitals Ltd.

After FY15, the Bank’s focus has been shifted to get value from the
expansion before they decide to expand further, and hence we can see that
from FY15-22, FBL has just opened 35 new branches. At the same time, the
Bank has increased its bandwidth to focus more on digital and relationship-
led business structures.

Shift in focus from branch expansion to digital/ fintech and RM

1252 1252 1252 1251 1263 1272 1282

20% 20% 21% 21% 21% 21% 21%

4% 4% 4% 4% 4% 4% 4%
8% 8% 8% 8% 8% 8% 8%
9% 9% 9% 9% 9% 8% 8%
11% 11% 11% 11% 11% 12% 13%

48% 48% 48% 48% 47% 47% 46%

FY16 FY17 FY18 FY19 FY20 FY21 FY22

Kerala Tamilnadu Maharashtra Karnatka Gujarat Others

Source: Company, Keynote Capitals Ltd. 16
Federal Bank Ltd. | Initiating Coverage Report
FBL aims to add around 80-100 branches per year over the next three years.
Most of these new branches will be established outside the Kerala region,
and the Bank will select new branch locations based on the potential of high-
yielding products in those areas.

During 9MFY23, the Bank opened 58 branches, and the Bank is targeting to
add 75 branches in FY23. FBL plans to add another 15-17 branches in
Q4FY23.

The Bank intends to have a ‘Lite branch heavy distribution model’ in the
future, focusing on breaking even faster. It currently takes about 18 months
for a new branch to become profitable.

Hired new talent to improve the underwriting process

Over the past 5-6 years, the top management has undergone a dramatic
makeover with talented people from across the banking system on-boarded.

Name & Designation Joining date Profile

Mr. Sankaran has over 20 years of work experience in relationship and risk
Mr. Ganesh Sankaran function and was associated with HDFC Bank before joining FBL. Mr.
Sep-15
(Executive Director) Sankaran has now left the bank to join Axis Bank in March 2019 as the
group executive of Wholesale Banking.
Ms. Warrier has around 26 years of work experience and was associated
with Standard Charted Bank before joining the FBL. Her responsibility is
Ms. Shalini Warrier
Nov-15 operational excellence and digital innovation. In May 2019, she took on
(Executive Director)
additional responsibility as the business head of Retail Banking Products.
She is currently the Executive Director of the Bank.
Mr. Harsh Dugar (Group Mr. Dugar has around two decades of work experience and was associated
President & Country with HDFC Bank before joining FBL. He currently heads the wholesale
2016
Head - Corporate Banking of the bank and is a nominee director on the board of Equirus
Banking) Capital Pvt. Ltd.
Mr. Kakkar has over 20 years of work experience in credit underwriting of
Mr. Sumit Kakkar (Chief commercial and institutional lending and was associated with Yes Bank &
Aug-16
Credit Officer) HDFC Bank before joining FBL. Mr. Kakkar left the Bank in March 2020 to
pursue other opportunities.
Mr. Dixit has over 20 years of work experience in credit risk and relationship
Mr. Divakar Dixit (EVP &
management and was associated with HDFC Bank before joining FBL. He is
Head Credit – CB, BuB, May-17
currently EVP and head of credit risk in commercial banking & business
Retail and Agri)
banking and retail segments.
Mr. Mahalingam has work experience in Transaction banking and was
Mr. Pitchai Mahalingam
May-17 associated with Intellect Design and DBS before joining FBL. He is currently
(SVP & Internal Auditor)
the SVP & Internal Auditor of the Bank.
Mr. Bhatia has over 18 years of work experience in commercial banking and
Mr. Kapil Bhatia (EVP &
was associated with HDFC Bank and BNP Paribas before joining FBL. He join
Head – Commercial Jun-17
as a VP for Commercial and Institutional Banking of North & East geography
Banking)
and currently holds EVP & Head of Commercial Banking segment.
Mr. Kumar has over a decade of work experience in the corporate credit risk
Mr. Sanjesh Kumar (EVP
Jan-18 division and was associated with HDFC Bank before joining FBL. He currently
& Head Credit – CIB)
heads Credit risk in mid and large corporate segments.

17
Federal Bank Ltd. | Initiating Coverage Report

Mr. Lakshmanan has over 17 years of work experience in selling treasury

Mr. V Lakshmanan (SVP
Apr-18 products and was associated with BNP Paribas before joining FBL. He
& Head – Treasury)
currently heads the treasury department of the Bank.
Source: Company, Keynote Capitals Ltd

The bank has made significant changes to enhance its capabilities and
improve risk management by hiring highly qualified and experienced
personnel. In the past 5-6 years, the Bank has achieved growth by focusing
on the quality of its assets. A key part of this strategy involves separating the
loan origination and underwriting processes and conducting underwriting
through various credit hubs.

FBL mantra – ‘Digital at the fore: Human at the core’

Over the years, the Bank has been at the forefront of technology and digital
banking with the rise in product innovation and customer adoption of digital
technology.

FBL has launched many innovative digital products in the market, be it the
online passbook, account opening on the smartphone, pre-approved online
personal loan, UPI-based app, digital-first credit card in 3 clicks, easy access
to credit for farmers through digital kisan credit card, online account opening
for current account, etc.

The continuous focus on enhancing digital innovation has improved the total
transaction from a digital share from 73.5% in FY19 to 90.3% in 9MFY23.

The share of digital transaction is increasing Y-o-Y

88% 90%
83% 85%
74%

FY19 FY20 FY21 FY22 9MFY23

Source: Company, Keynote Capitals Ltd

Significant rise in digital onboarding of savings account

FY19 9MFY23
4%
11%

89% 96%

Branch Digital Branch Digital

Source: Company, Keynote Capitals Ltd
18
Federal Bank Ltd. | Initiating Coverage Report
Lending through a digital medium is increasing
FY19 9MFY23

37%
During FY19 to 9MFY23, the loan
44% book per branch increased from Rs.
894 Mn to Rs. 1283 Mn leading to
56%
63% branch productivity through a
digital medium.

Branch Digital Branch Digital

Source: Company, Keynote Capitals Ltd

Increase in mobile banking active users (Mn) Y-o-Y

1.7
1.6
1.4
1.2

0.9

FY19 FY20 FY21 FY22 9MFY23

Source: Company, Keynote Capitals Ltd

The Bank offers several digital platforms for retail (FedNet, Lotza, and
FedMobile), corporate, and SME (FedCorp, Corporate FedNet, Paylite, and
Fed EBiz) customers to enhance their banking experience.

Further, FBL plans to increase the share of digital lending across retail
products by FY26. The aim is to increase the percentage of digital lending in
MFI to 100% vs. 90% in 9MFY23, 25% in Gold loans vs. 10% in 9MFY23, and
20% in Agri loans vs. 3% in 9MFY23.

Fintech Partnership
Since 2017, FBL has been actively investing in open banking and has now To strengthen the fintech
established itself as a prominent API banking provider with over 400 APIs, 13 distribution network, the Bank will
API bundles, and over 75 fintech partnerships. FBL's open banking platform add ten fintech on the asset side and
operates on a plug-and-play model, allowing partners to access APIs, utilize four fintech partnerships on the
the Sandbox, and refer to the documentation to develop their desired deposit side.
products.

The Bank is continuously leveraging its fintech partnership to enhance its

reach and attract new clients who have traditionally not been the Bank’s
clients. The Bank’s fintech strategy is incrementally benefitting through
higher deposit growth, controlled cost, and improving fee income.

FBL has been aggressive in fintech partnerships, resulting in increased loan

growth and an expanded customer base. The Bank has indicated that it will
continue to expand its partnerships to boost loan growth. The Bank will
adopt a hyper-personalized approach to cater to the individual needs of its
customers.
19
Federal Bank Ltd. | Initiating Coverage Report
Unleashing unique fintech partnership

Source: Company, Keynote Capitals Ltd

Through partnerships with fintech firms, the Bank is significantly expanding

its reach to new geographical locations to tap the diverse customer
segments.

Customer geographical Customer geographical

distribution - Organic distribution – Organic + Fintech

Source: Company, Keynote Capitals Ltd

20
Federal Bank Ltd. | Initiating Coverage Report
Profit & loss statement
Over the FY11-22 period, the Bank’s net interest margin (NIM) has remained
in the 3-3.3% range, except for the initial two years, where NIM was ~4%.
The decrease in NIM can be attributed to the rising cost of deposits, as the
low-cost CASA shares experienced minimal growth, indicating that term
deposits drove most deposit growth at a higher cost.

During Q3FY23, the Bank's NIM experienced an improvement attributed to

increased high-margin business in areas such as credit cards, personal loans,
MSME, CV/CE, Gold, and MFI. The management has indicated its intention to
maintain NIM within the range of 3.35% to 3.40%. This target considers
factors such as the mix of business, credit quality, pricing on assets and
deposits, incremental credit flow, and the quality of the loan book, as well as
factors that could positively or negatively impact NIM, such as higher or
lower slippages.

Guided NIM (%) to be in the range of 3.35% to 3.40% going forward

4.2%
3.8%
3.4% 3.3% 3.3% 3.3% 3.2% 3.5%
3.1% 3.2% 3.1% 3.0% 3.2%

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 Q3FY23
Source: Company, Keynote Capitals Ltd

Fee and other income

The fee and other income of the Bank have grown at the same CAGR of
~14%, with loan book growth from FY12 to FY22. The fee and other income
ratios to total income have improved from 8.7% in FY12 to 13.3% in FY22. At
the same time, the core fee income ratio to total income doubled from 4.1%
in FY12 to 8.1% in FY22. The core fee income for the Bank is a loan
processing fee and exchange, commission, brokerage & other income.

Over the last five years, the Bank is continuously expanding product basket
to cross-sell the customers. The Bank has introduced different services and
partnerships on the demat account opening, insurance space, wealth
management, mutual fund, credit card, etc.

The fee income to average advances stands at ~90 bps in FY22, and Bank
plans to improve the ratio by 10 bps every year. Going forward, the Bank
expects the fee income growth to be higher than the loan growth by 2%.

21
Federal Bank Ltd. | Initiating Coverage Report
Cost-to-income ratio
The Bank cost-to-income ratio has increased from FY12 due to a significant In the last three years, from Dec-22
increase in branches over FY10 to FY15. After that, the cost-to-income ratio to Dec-20, RM has significantly
has remained elevated due to a rise in relationship managers (RM), an increased by 8.3x from 113 to 937.
increase in employee stock option schemes, and a focus on expanding
digital/ fintech partnerships.

During Q3FY23, the cost-to-income ratio demonstrated a significant 597 bps

improvement on a Y-o-Y basis. The management anticipates further
enhancement in the cost-to-income ratio, targeting a range of 47.5%-48% for
FY24. The Bank's partnerships with fintech firms are expected to play a
crucial role in increasing overall business volume, as they enable the Bank to
deepen relationships with existing customers and attract New-to-Bank
customers. By leveraging these partnerships, the Bank aims to build a
scalable franchise while driving cost efficiencies.
Rise in employee cost (%) as a % of total income due to increased in employee stock
options
14.7%
12.3% 12.9%
11.9% 11.4% 11.7%
10.5% 10.1% 10.7% 10.8%
8.9% 9.2%

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: Company, Keynote Capitals Ltd.

Increased in the cost-to-income ratio (%) and targeting a range of 47.5%-48%

57%
53% 52% 51% 53%
49% 50% 50% 49% 49%
45%
37% 39%

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 Q3FY23
Source: Company, Keynote Capitals Ltd.

Due to the increase in the cost-to-income ratio, Pre-Provisioning Operation

Profit (PPOP) has seen a CAGR of 9% from FY11 to FY22.
Slower growth in PPOP (Rs. Bn)
38 38
32
28
23
19
15 15 15 16 14
14

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: Company, Keynote Capitals Ltd. 22
Federal Bank Ltd. | Initiating Coverage Report
The provision has increased at a CAGR of 14% from FY12 to FY22, leading to
lower growth in PAT.

PAT (Rs. Bn)

19

15 16
Increased branches, high provision, and investment in digital and
employee hiring led to stagnant PAT from FY11 to FY18
12

10
8 8 8 9
8
6
5

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: Company, Keynote Capitals Ltd.

The Bank has faced the turbulent times reasonably well and is now on the
path to sustained growth momentum with various enablers in place. In
Q3FY23, the Bank posted the highest-ever net profit supported by strong
loan growth, an increase in NIM, an improvement in the cost-to-income
ratio, and a high provision created, leading to improved asset quality.

Going forward, the Bank has guided to grow loan book by 17-18%,
maintaining a NIM margin of 3.35-3.40% and improving the cost-to-income
ratio. All these factors will lead to better asset quality and higher growth in
earnings.

23
 Federal Bank Ltd. | Initiating Coverage Report
Peer Comparison
We reviewed FBL against its closest peers, IDFCFB, AU Small, Bandhan Bank,
and City Union.
Loan book (Rs. Bn) and CAGR for last three years

10% 1710 6% 25% 30% 8%

1476 1522
1319 1320
1223 1171
1102 11041070
993 978
870
718
563
478 448
377 412 430
309 331 346 370
242

FBL IDFCFB AU Small Bandhan Bank City Union

FY19 FY20 FY21 FY22 9MFY23 CAGR FY19-FY22

Source: Company, Keynote Capitals Ltd.,

NII (Rs. Bn) and CAGR for last three years

13% 45% 40% 42% 6%

97
90 87
74
68
61 63
55 60 53
46 45
42
32 32 32 30
24
12
19 16 17 18 19 16

FBL IDFCFB AU Small Bandhan Bank City Union

FY19 FY20 FY21 FY22 9MFY23 CAGR FY19-FY22
Source: Company, Keynote Capitals Ltd.

PPOP (Rs. Bn) and CAGR for last three years

11% 62% 36% 29% 80 9%

68

54 53

38 38 37
32 35 33 34
28 25
19 21 18
16 14
12 14 12 13 15
8 7

FBL IDFCFB * AU Small Bandhan Bank City Union

FY19 FY20 FY21 FY22 9MFY23 CAGR FY19-FY22
Source: Company, Keynote Capitals Ltd.
24
 Federal Bank Ltd. | Initiating Coverage Report

Stable NIM (%) for FBL as compared to peers

10.4%

7.0% 6.6% 6.5%

6.0% 6.4% 6.1%
5.2% 4.8% 6.7%
4.7% 4.3%
3.9% 3.5% 4.0%
3.1% 3.0% 3.2% 3.5% 5.0% 4.7% 3.2%

3.2% 1.7% 3.6%

FBL IDFCFB AU Small Bandhan Bank City Union

FY19 FY20 FY21 FY22 Q3FY23

Source: Company, Keynote Capitals Ltd.

FBL GNPA ratio (%) improved over the years compared to peers

7.1%6.8%7.2%

5.2%
4.8%4.6%
4.3% 4.3% 4.2%
3.8%
3.5%
3.0%2.9% 2.9% 3.0% 3.0%
2.4% 2.4%2.7%
2.0% 2.0%1.8% 2.0%
1.7% 1.5%

FBL IDFCFB AU Small Bandhan Bank City Union

FY19 FY20 FY21 FY22 Q3FY23
Source: Company, Keynote Capitals Ltd.

Improvement in PCR (%) across bank’s

88%
77% 75%
69% 70% 71% 72% 72%
65% 64% 65% 64%
61% 63% 64% 64% 67%
53% 56% 53% 50%
49% 50%
45%
37%

FBL IDFCFB AU Small Bandhan Bank City Union

FY19 FY20 FY21 FY22 Q3FY23
Source: Company, Keynote Capitals Ltd.

25
 Federal Bank Ltd. | Initiating Coverage Report
Stable cost-to-income ratio (%) for FBL and City Union

79% 77% 79% 76%

72%
60% 62%
54% 57%
50% 51% 49% 53% 49%
44% 42% 43% 42% 40%
38% 38%
33% 31% 29% 31%

FBL IDFCFB AU Small Bandhan Bank City Union

FY19 FY20 FY21 FY22 Q3FY23
Source: Company, Keynote Capitals Ltd.

Stable and lowest cost-to-assets ratio (%) for FBL

7.5%

5.1%
4.3% 4.2% 4.4%
3.9%
3.4%3.2%3.5% 3.6% 3.4%
2.6%2.4%2.5% 2.6%
1.7%1.9%1.8%1.9%1.9% 2.0% 2.0%2.0%2.0%1.8%

FBL IDFCFB AU Small Bandhan Bank City Union

FY19 FY20 FY21 FY22 Q3FY23

Source: Company, Keynote Capitals Ltd.

FBL has a lowest credit cost (%) compared to peers

9.0%

6.4%
5.2%
3.8%
3.1%3.2%
2.2% 2.3%2.6% 2.4%2.2%
1.3% 1.4% 1.6%
1.1% 1.1%
0.7%0.9% 0.9%
0.4%
0.9% 0.5% 0.7%
0.3% 0.2%

FBL IDFCFB AU Small Bandhan Bank City Union

FY19 FY20 FY21 FY22 Q3FY23

Source: Company, Keynote Capitals Ltd.

26
Federal Bank Ltd. | Initiating Coverage Report
ROE (%)

19% 19% 20%

16%
14% 15% 15% 15%
13%
15%
11% 12% 12%
9% 11% 10% 10% 9% 10%
6%
3%
1% 1%

-11%

-19%
FBL IDFCFB AU Small Bandhan Bank City Union
FY19 FY20 FY21 FY22 Q3FY23

Source: Company, Keynote Capitals Ltd.

ROA (%)

4.2%
3.3%
2.3%
1.9%
1.5%1.6% 1.6%1.8% 1.6%
1.3% 1.2%1.5%
0.8%0.9%0.8%0.9%
1.1%
0.8% 1.0%1.1%
0.3%0.1% 0.1%

-1.2%
-1.9%
FBL IDFCFB AU Small Bandhan Bank City Union
FY19 FY20 FY21 FY22 Q3FY23
Source: Company, Keynote Capitals Ltd.

FBL has a highest total operating revenue per employee in FY22 (Rs. Mn) compared to peers

1.3

0.8 0.8

0.2 0.2

FBL IDFCFB AU Small Bandhan Bank City Union

Source: Company, Keynote Capitals Ltd.

27
Federal Bank Ltd. | Initiating Coverage Report

Valuation Metrics (P/B) vs. Peers

5.6

1.9
1.6
1.4 1.4

FBL IDFCFB AU Small Bandhan Bank City Union

Source: Company, Keynote Capitals Ltd., CMP as of 13th April 2023

28
Federal Bank Ltd. | Initiating Coverage Report

Opportunities
Loan growth to drive earnings leading to improvement in return
ratios
In the last decade, FBL grew its loan book at a CAGR of 14% from FY12 to
FY22, while the PAT has grown at a slower rate of 9%. The low growth in PAT
is due to increased cost-to-income ratio and provisions over the years. While
in the 9MFY23, there was a significant rise in earnings growing at 56% Y-o-Y.
This growth is driven by strong growth in loan book growing at 19% Y-o-Y in
9MFY23. In 9MFY23, there is a Q-o-Q improvement in NIM, cost-to-income
ratio compared to last year, leading to rising in PPOP. The provision has
increased Q-o-Q leading to improvement in asset quality.

FBL is posting robust performance for the last six quarters leading to
improvement in return ratios Q-o-Q.

Q-o-Q improvement in ROA (%) Q-o-Q improvement in ROE (%)

1.3%
1.2% 15.9%
1.1% 14.4%
1.0% 1.0%
0.9% 11.9% 12.7%
11.6%
0.8% 10.7%
9.0%

Q1FY22 Q2FY22 Q3FY22 Q4FY22 Q1FY23 Q2FY23 Q3FY23 Q1FY22 Q2FY22 Q3FY22 Q4FY22 Q1FY23 Q2FY23 Q3FY23
Source: Company, Keynote Capitals Ltd.

All these factors will lead to better asset quality and higher growth in
earnings and return ratios.

Increasing pan India presence

Mr. Shyam Srinivasan took over as MD & CEO of the Bank in Sep 2010, and
his key focus area was to increase the brand visibility outside Kerala. The
Bank already has a sizeable presence in Kerala, and expanding the footprint
outside Kerala will reduce concentration risk and could provide better brand
visibility. He spearheaded this strategy of pan-India presence over FY10-15.
The Bank added 575 branches, of which 64% were opened outside Kerala.
The Bank is diversifying away
The Bank consciously scaled up and decided to focus on geographics like from Kerala, where its share in
Tamilnadu, Karnataka, Maharashtra, Gujarat, Delhi, and Punjab & Haryana. the overall advances has
moderated to 31.8% in
FBL aims to add around 80-100 branches per year over the next three years. Q3FY23 from 42% in FY16.
Most of these new branches will be established outside the Kerala region,
and the Bank will select new branch locations based on the potential of
high-yielding products in those areas.

During 9MFY23, the Bank opened 58 branches, and the Bank is targeting to
add 75 branches in FY23. FBL plans to add another 15-17 branches in
Q4FY23.

29
Federal Bank Ltd. | Initiating Coverage Report
Digital/ Fintech partnership to drive growth
Over the years, the Bank has been at the forefront of technology and digital
banking with the rise in product innovation and customer adoption of digital
technology.

FBL has been actively investing in open banking and has now established
itself as a prominent API banking provider with over 400 APIs, 13 API
bundles, and over 75 fintech partnerships.

The Bank is continuously leveraging its fintech partnership to enhance its

reach and attract new clients who have traditionally not been the Bank’s
clients. The Bank’s fintech strategy is incrementally benefitting through
higher deposit growth, controlled cost, and improving fee income.

FBL has been aggressive in fintech partnerships, resulting in increased loan

growth and an expanded customer base. The Bank has indicated that it will
continue to expand its partnerships to boost loan growth. The Bank will
adopt a hyper-personalized approach to cater to the individual needs of its
customers.

High-margin Retail Loan Segments

The strategy posts the Covid pandemic is to increase growth by

concentrating on specific high-margin segments such as credit cards,
personal loans, MSME funding, commercial and construction vehicle
financing, gold loans, and microfinance and additionally, expanding the
customer base through a light-branch heavy distribution network and
leveraging digital/ fintech partnerships.

The Bank has shifted its focus toward a higher-yielding retail loan segment,
and management is expecting to double the loan book over the next 2-3
years.

The share of the unsecured loan portfolio in the total loan book has
increased from 3% in FY19 to 7% in 9MFY23.

30
Federal Bank Ltd. | Initiating Coverage Report

Challenges
An increase in operating cost can impact the profitability
FBL’s cost-to-income ratio has increased from 50% in FY19 to 53% in FY22.
while in Q3FY23, the cost-to-income ratio improved to 49%. However, the
consistent rise in branches and employees through RM-led distribution can
increase the cost, which can impact the profitability of the Bank.

Asset quality deterioration

FBL’s corporate loan book contributes 46% of the loan book, and in the past
corporate loan book has remained volatile, which impacted the Bank’s asset
quality. FBL is moving towards a high-yielding asset class and unsecured loan
book, further providing risk to the asset quality.

31
 Federal Bank Ltd. | Initiating Coverage Report

Financial Statement Analysis

Profit & Loss Ratios

Y/E Mar, Rs. Mn FY21 FY22 FY23E FY24E FY25E FY21 FY22 FY23E FY24E FY25E

Net Interest Income 55,337 59,620 76,152 85,928 99,677 Growth YoY (%)
Other Income 19,587 20,891 26,653 31,364 37,379 Advance Growth (%) 7.9% 9.9% 22.5% 18.0% 18.0%
Net Income 74,924 80,510 1,02,805 1,17,291 1,37,056 Deposit Growth (%) 13.4% 5.2% 17.4% 15.5% 9.0%
Operating Expenses 36,917 42,932 50,888 57,473 66,472 NII Growth (%) 19.0% 7.7% 27.7% 12.8% 16.0%
Pre-Provision Operating Profit 38,007 37,579 51,916 59,819 70,584 PPOP Growth (%) 18.6% -1.1% 38.2% 15.2% 18.0%
Provisions 16,634 12,218 8,941 9,673 11,414 Ratios
Profit Before Tax 21,373 25,361 42,976 50,146 59,170 NIM (%) 3.1% 3.0% 3.4% 3.3% 3.3%
Tax 5,470 6,463 10,744 12,537 14,792 Cost to Income Ratio 49.3% 53.3% 49.5% 49.0% 48.5%

Profit After Tax 15,903 18,898 32,232 37,610 44,377 C/D Ratio 76.4% 79.8% 83.2% 85.0% 92.0%

CASA Ratio (%) 34.0% 37.1% 32.7% 34.2% 35.5%

Balance Sheet
ROE (%) 9.9% 10.1% 15.1% 15.4% 15.9%
Y/E Mar, Rs. Mn FY21 FY22 FY23E FY24E FY25E
ROA (%) 0.8% 0.9% 1.2% 1.2% 1.3%
Share Capital 3,992 4,205 4,205 4,205 4,205 Asset Quality
Reserves & Surplus 1,57,244 1,83,720 2,09,569 2,39,656 2,75,158 GNPA 3.4% 2.9% 2.5% 2.2% 2.0%
Networth 1,61,236 1,87,925 2,13,774 2,43,861 2,79,363 NNPA 1.2% 1.0% 0.8% 0.6% 0.5%
Deposits 17,26,445 18,17,006 21,33,840 24,63,840 26,86,121 PCR (%) 65.1% 63.9% 67.3% 72.7% 75.0%
Borrowings 90,685 1,53,931 2,17,672 2,18,636 3,86,876 Credit Cost (%) 3.1% 3.2% 1.5% 1.2% 1.0%
Other Liabilities & Provisions 35,299 50,588 89,500 93,500 99,800 Valuation
Total Liabilities 20,13,674 22,09,463 26,54,786 30,19,837 34,52,170 Book Value Per Share 88.6 100.8 115.0 131.8
ASSETS
Adjusted Book Value Per Share 82.2 94.4 109.4 126.3
Cash and Balance 1,95,914 2,10,103 1,79,443 1,76,372 1,75,340 P/BV (x) 1.5 1.3 1.1 1.0
Investments 3,71,862 3,91,795 5,10,721 5,29,117 5,55,243 Price-ABV (x) 1.6 1.4 1.2 1.0
Advances 13,18,786 14,49,283 17,74,800 20,94,264 24,71,232
Fixed Assets & Others 1,27,112 1,58,282 1,89,812 2,20,074 2,50,346
Total Assets 20,13,674 22,09,463 26,54,786 30,19,827 34,52,170
Source: Company, Keynote Capitals Ltd.

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Federal Bank Ltd. | Initiating Coverage Report
Valuation based on Adj. P/B

Valuation FY22 FY24E

Networth (Rs. Mn) – A 1,87,925 2,43,861

NNPA (Rs. Mn) – B 14,173 12,565

Adjusted Book Value

1,73,752 2,31,296
(C = A - B)

No. of Shares (Mn) - D 2,115 2,115

Adj. Book Value Per Share

82.2 109.4
(Rs.) – (E = C/D)

Adj. P/B – (CMP/E) 1.5

Target Price (Rs.) 164

CMP (Rs.) 131.3

% Upside/Downside 24.9%

Source: Company, Keynote Capitals Ltd.

The Bank has a well-diversified advances portfolio across segments,

comprising corporates (9MFY23: 36%), retail (32%), SMEs (18%), and
agriculture (12%). The Bank has a strong liability franchise with amongst
highest share of retail deposits. The Bank is set to grow its loan book at 18-
20%, with a stable NIM of 3.35-3.40%. The constant decrease in the Cost-
to-Income ratio will lead to growth in PPOP at a CAGR (FY22-24) of 26%,
and given the management’s guidance, a fall in Credit Cost will decrease
provisioning by 11% from FY22 to FY24. The above assumptions will lead to
a substantial 41% Net Profit CAGR over the same period. This will lead to a
~14% CAGR growth in Networth from FY22 to FY24.

We believe that the asset quality will further normalize. Therefore, we

assume a 2.2% Gross NPA in FY24 from 2.9% in FY22.

Given Bank’s overall improvement, we ascribe an adjusted P/B multiple of

1.5x (average Adj. P/B for FY10 to FY19) for FY24E Adj. Book Value,
implying an upside of ~24.9% from the CMP.

DEVIN Digitally signed

by DEVIN
PRAMOD PRAMOD JOSHI
Date: 2023.04.17
JOSHI 16:53:05 +05'30'

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Federal Bank Ltd. | Initiating Coverage Report
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Rating Methodology
Rating Criteria

BUY Expected positive return of > 10% over 1-year horizon

NEUTRAL Expected positive return of > 0% to < 10% over 1-year horizon

REDUCE Expected return of < 0% to -10% over 1-year horizon

SELL Expected to fall by >10% over 1-year horizon

NOT RATED (NR)/UNDER REVIEW (UR)/COVERAGE SUSPENDED (CS) Not covered by Keynote Capitals Ltd/Rating & Fair value under
Review/Keynote Capitals Ltd has suspended coverage

Disclosures and Disclaimers

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the
Regulations).

Keynote Capitals Ltd. (KCL) is a SEBI Registered Research Analyst having registration no. INH000007997. KCL, the Research Entity (RE) as defined in
the Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of various financial
products. Details of associate entities of Keynote Capitals Limited are available on the website at https://www.keynotecapitals.com/associate-
entities/

KCL and its associate company(ies), their directors and Research Analyst and their relatives may; (a) from time to time, have a long or short position
in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction
involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies)
discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to
any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the specific
recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the
associates of KCL even though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report.

KCL and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, the
recipients of this report should be aware that KCL may have a potential conflict of interest that may affect the objectivity of this report.
Compensation of Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

Details of pending Enquiry Proceedings of KCL are available on the website at https://www.keynotecapitals.com/pending-enquiry-proceedings/

A graph of daily closing prices of securities is available at www.nseindia.com, www.bseindia.com. Research Analyst views on Subject Company may
vary based on Fundamental research and Technical Research. Proprietary trading desk of KCL or its associates maintains arm’s length distance with
Research Team as all the activities are segregated from KCL research activity and therefore it can have an independent view with regards to Subject
Company for which Research Team have expressed their views.

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Federal Bank Ltd. | Initiating Coverage Report
Regional Disclosures (outside India)
This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such
distribution, publication, availability or use would be contrary to law, regulation or which would subject KCL & its group companies to registration or
licensing requirements within such jurisdictions. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain
category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

Specific Disclosure of Interest statement for subjected Scrip in this document:

Financial Interest of Research Entity [KCL] and its associates; Research Analyst and its Relatives NO
Any other material conflict of interest at the time of publishing the research report by Research Entity [KCL] and its associates; NO
Research Analyst and its Relatives
Receipt of compensation by KCL or its Associate Companies from the subject company covered for in the last twelve months; NO
Managing/co-managing public offering of securities in the last twelve months; Receipt of compensation towards Investment
banking/merchant banking/brokerage services in the last twelve months; Products or services other than those above in connection
with research report in the last twelve months; Compensation or other benefits from the subject company or third party in
connection with the research report in the last twelve months.
Whether covering analyst has served as an officer, director or employee of the subject company covered NO
Whether the KCL and its associates has been engaged in market making activity of the Subject Company NO
Whether the Research Entity [KCL] and its associates; Research Analyst and its Relatives, have actual/beneficial ownership of 1% or NO
more securities of the subject company, at the end of the month immediately preceding the date of publication of the research
report or date of the public appearance.

The associates of KCL may have:

-Financial interest in the subject company
-Actual/beneficial ownership of 1% or more securities in the subject company
-Received compensation/other benefits from the subject company in the past 12 months
-Other potential conflicts of interests with respect to any recommendation and other related information and opinions.; however, the same shall
have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are
completely independent of the views of the associates of KCL even though there might exist an inherent conflict of interest in some of the stocks
mentioned in the research report.
-Acted as a manager or co-manager of public offering of securities of the subject company in past 12 months
-Be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial
instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies)
-Received compensation from the subject company in the past 12 months for investment banking / merchant banking / brokerage services or from
other than said services.

The associates of KCL has not received any compensation or other benefits from third party in connection with the research report.

Above disclosures includes beneficial holdings lying in demat account of KCL which are opened for proprietary investments only. While calculating
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collaterals, error trades etc.). KCL also earns DP income from clients which are not considered in above disclosures.

Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part
of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed
by research analyst(s) in this report.

Terms & Conditions:

This report has been prepared by KCL and is meant for sole use by the recipient and not for circulation. The report and information contained herein
is strictly confidential and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the
media or reproduced in any form, without prior written consent of KCL. The report is based on the facts, figures and information that are believed to
be true, correct, reliable and accurate. The intent of this report is not recommendatory in nature. The information is obtained from publicly
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sell or subscribe for securities or other financial instruments for the clients. Though disseminated to all the customers simultaneously, not all
customers may receive this report at the same time. KCL will not treat recipients as customers by virtue of their receiving this report

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Federal Bank Ltd. | Initiating Coverage Report
Disclaimer:
The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way,
transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written
consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or
solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal,
accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The
securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions,
based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise
of independent judgment by any recipient. Each recipient of this document should make such investigations as it deems necessary to arrive at an
independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and
should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be
suitable for all investors. Certain transactions -including those involving futures, options, another derivative product as well as non-investment
grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the
accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement
incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed
in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and
alternations to this statement as may be required from time to time without any prior approval. KCL, its associates, their directors and the
employees may from time to time, effect or have affected an own account transaction in, or deal as principal or agent in or for the securities
mentioned in this document. KCL, its associates, their directors and the employees may from time to time invest in any discretionary PMS/AIF
Fund and those respective PMS/AIF Funds may affect or have effected any transaction in for the securities mentioned in this document. They may
perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred
to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account
before interpreting the document. This report has been prepared on the basis of information that is already available in publicly accessible media
or developed through analysis of KCL. The views expressed are those of the analyst, and the Company may or may not subscribe to all the views
expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on,
directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for
distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where
such distribution, publication, availability or use would be contrary to law, regulation or which would subject KCL to any registration or licensing
requirement within such jurisdiction.

The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose
possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors,
employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost
revenue or lost profits that may arise from or in connection with the use of the information. The person accessing this information specifically
agrees to exempt KCL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold
KCL or any of its affiliates or employees responsible for any such misuse and further agrees to hold KCL or any of its affiliates or employees free
and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and
delays.

Keynote Capitals Limited (CIN: U67120MH1995PLC088172)

Compliance Officer: Mr. Jairaj Nair; Tel: 022-68266000; email id: jairaj@keynoteindia.net

Registered Office: 9th Floor, The Ruby, Senapati Bapat Marg, Dadar West, Mumbai – 400028, Maharashtra. Tel: 022 – 68266000.

SEBI Regn. Nos.: BSE / NSE (CASH / F&O / CD): INZ000241530; DP: CDSL- IN-DP-238-2016; Research Analyst: INH000007997

For any complaints email at kcl@keynoteindia.net

General Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and the T&C on
www.keynotecapitals.com; Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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