Federal Bank - A Turnaround banking Story?

The Travancore Federal Bank was founded in 1931 at Travancore (now Kerala) with a Share capital of Rs. 5,000.

Subsequently in 1944 it was taken over by Shri KP Hormis, a 28 year old lawyer, and in 1949, its name was changed to Federal Bank.

By the time Shri KP Hormis retired in 1979 (35 years), he had built the bank from a one branch bank to a 285 branch-bank.

Fast forward to the last decade, the Bank has had a very Interesting Journey.

Let’s look at some key parameters over the last 10 years.

Loan Book Net Interest Income Net Profit
16.08% 14.03% 11.33%

*Percentages are in CAGR.

Over the last 10 years, while Loan book (Total loans given) has grown (CAGR) at 16.08%, NII Growth was lower at 14.03% and Net Profit growth was only 11.33%.

The Investing community sees this gap between the Loan Book growth and the Net Profit CAGR as a chink in Federal Bank’s armour since this implies that the bank is unable to convert loan book growth into proportionally higher Net Interest Income and profits and is therefore, ‘inefficient’.

Along with this mis-match in the loan growth and Net Profit growth, the ROA numbers as well are not very impressive compared to say, City Union Bank, it’s well-reputed (but much smaller) regional peer.

City Union Bank (Top) vs Federal Bank (Bottom)

For these reasons, Federal Bank has always been valued as an average bank but still better than its lesser Prosperous Regional peers : South Indian Bank, Karur Vyasa.

This ‘average valuation’ is evident from the P/B valuation the Bank has received from Investors historically, which has always been under 2X over the last 10 years.

City Union Bank has commanded a higher P/Bx than federal bank’s over the last 10 years.

India’s Top Private Sector banks such as HDFC Bank and Kotak Mahindra have commanded PBx ratios of 4X and 3X respectively during this period, for good reason, one can argue.

However, despite these apparent weaknesses, Federal Bank has a competitive advantage amongst the Smaller Regional banks - Lowest Cost of Funds by virtue of Access to Low cost, Sticky Funds from Non-Residents.

Since the 1960s, remittances from the Gulf have increasingly become the backbone of Kerala’s economy, making up ~ 20% of the state’s GDP.

And the Federal Bank not only has ~30% Market share of Foreign money sent back home to Kerala but also a ~17.5 % share of foreign remittances of the entire country.

As you may know, one of the ways banks can gain an advantage is by accessing low cost funds. These usually come in the form of CASA (Current Account Savings Account) + Deposits, and Federal Bank not only has access to NR Deposits, which are stickier because

  1. Interest is Tax Free on NR Deposits
  2. Interest rate arbitrage - NR’s enjoy higher Interest rates than in their resident countries,
  3. NR keep a portion of their money in Deposits for other than consumption purposes.

Not only this but ~90% of its deposits are granular i.e - less than 2 Cr deposits, which are again cheaper than bulk (2Cr+) and Wholesale deposits.

This gives Federal a 30 bps/120 bps cost advantage over its peers City union bank, Karur Vyasa, South Indian Bank and CSB Bank.

The strength of the liability franchise can also be seen from the fact that the bank was able to slash 1 Year Term deposit rates nearly as much as the major banks and 50% more than ‘other banks’.

Yet, despite the advantage Federal bank enjoys on the cost side, a real change in perception and consequently in re-ratings (P/Bx) will only happen when the following structural improvements are visible within the business :

1. 1-1.2%+ ROA & Higher ROE
2. Higher ‘Other Income’ Growth
3. Higher Proportion of ‘Other Income’ in Net Operating Income.

And in order for the above parameters to improve, certain structural improvements must happen fundamentally at the business level.

For Example, in order to achieve higher ROA & ROE, the bank must earn higher Net Interest Margins. And higher NIMs are a function of :

  1. Recoveries (higher the better)
  2. Slippages & Provisioning (lower the better)
  3. Higher Yielding Product Mix
  4. Low Cost of Funds
  5. Low Operating Costs
  6. Consistent Loan Growth, Net profit & EPS Growth

Fortunately, the Federal Bank’s management has been actively working on improving the above mentioned issues since 2016.

As a result, ROA have been improving consistently since 2016 :

There has been improvement in ROE as well but its still way under any reasonable investors requirement. I mean, nobody is getting excited hearing about a bank that earns ~11% ROE.

Also, NIMs are still under 3%.

Additionally, While Price to Book Value has improved since 2016, it has been negatively impacted by a host of factors shown below.

And the current P/Bx as on 2nd February 2021 is 1.04X, up from 0.5x at the end of March 2020.

The banking system is currently enjoying regulatory & legal cushions which may be hiding some of the pain our banks are enduring because of Covid-19 induced slowdown.

Federal Bank is no different, however, the assessment so far is that the quantum of bad loans is a lot lower than initially anticipated.

Even if we consider NPAs that would’ve been declared had the Supreme Court order against declaring NPAs not been in place, the GNPA & NNPA numbers would have been 3.38% & 1.14% (Q3FY21 - Con-call) respectively.

All this aside, the most interesting parts of the Federal Bank story are the kind of developments that are happening on the fundamental business level - Product mix change, mining existing data for cross-selling etc.

These developments are responsible for a 3X increase in EPS over the last 4 years.

If you would like to learn more about the Federal Bank Story, let me know I’ve done more extensive research on the bank and would be happy to share the research.

(Disclaimer : Not Invested. Also, because I’m a new member, I am not allowed to embed more than 1 media item which means at least 7-8 graphs were left out of this article. My apologies if you feel that the article could have been better illustrated with graphs.)


It will be good if you can share about the lending culture of the bank, what is the management philosophy , culture they are building and whats their focus area ?


Great analysis. Would love if more can be shared. Personally interested in banks like this and SIB as I feel they will be corporatized, merged or “privatized”

1 Like

Excellent analysis . One of the other drawback is half of the branches are their in Kerala and in last 2 years Kerala witnessed 2 floods which i guess had an impact on loan book and recoveries. Another problem is inconsistentency and not able to maintain same growth all quarters . Recently their is a greater focus on increasing other income like card business and I guess they are focusing more on digital capabilities.

I invested in 2018 and my entry price is still higher than current price

1 Like

On admins Request, I’m posting a Risk Analysis as well. hope you find this somewhat useful

Risk Analysis - Federal Bank

Risk is inherent in the banking business after all it agrees to lend money to a borrower with the hope (and reasonable assurance) of getting it back.

In that sense, the primary risk comes from the fact that the money might not make its way back to the bank. This is Credit Risk.

For Example, when the bank decides to enter the Credit Card business (which it recently has in order to increase it’s fee income - remember we talked about this in the article above), it’s taking on a type of credit risk.

Then there is the fact that Interest Rates determine to a large extent what rates a bank can lend at - This is Market Risk and it includes Interest Rate Risk and Liquidity Risk.

And then there are operational risks - Snags in IT systems, Cyber security etc.

For Example, In 2018 there was a breach in the ATM IT Network and as a result FB lost 31 Cr, luckily it has insurance and the bank recently reported that it has received 17 Cr back.

So, that’s operational risk.

For a more comprehensive look at the various types of risk Federal Bank takes on, please checkout this graphic

For this article, it would be appropriate to go deeper into concentration risk and Interest Rate Risk for Federal Bank.

Concentration Risk :

Concentration risk can show up as concentration of deposit base, concentration of segment exposure (NBFC, Micro-Finance, Infrastructure) amongst others.

In the Federal Bank’s case, ~64% of its deposits come from Kerala. Although that very fact is a strategic advantage for FB, it might also be a source of risk.

Kerala accounts for nearly 20% of the total remittances in India, so it has a significantly higher percentage of Non Residents sending money back home compared to most states.

More than 70% of these expats work in the middle eastern countries - Kuwait for Example. Middle Eastern countries rely on Oil economy and any adverse impact on the oil business is going to impact employment and therefore remittances, and maybe deposits.

Due to covid-19, there has been a significant migration back to kerala - 8.84 Lac migrants reportedly had to return home.

Such adverse events can impact the deposits of the bank which might lead to increase in cost of deposits and consequently lower NIMs.

Interestingly, the immediate impact of Covid-19 on the Bank’s deposit base was actually positive. People couldn’t really spend money for a couple months so things turned out to be better than not. As of March 2020, the CASA Ratio stood at 30.50% whereas by December 2020 it had increased to 34.48%.

However, Geographic concentration to certain segments might cause issues as well. Out of the ~1250 Federal Bank branches, 600 are in Kerala. And as we discussed 64% of the deposits are kerala based and 22% of the loan book exposure is within Kerala.

To that extent the management has tried to mitigate geography based risk on the loan portfolio but considering Kerala still has a significant share of the total loan book, adverse geography specific events can impact its loan quality.

Events such as Kerala Floods (August 2018) followed by Droughts (March 2019) might impact parts of the total loan book such as Agri loans, Retail loans etc.

The Education loan crisis (2017) also caused issues. The Bank had a total loan book of 700 Cr out of which 500 Cr was from Kerala. Eventually, the State Government agreed to cover 40% of the loans for families with an yearly Income of less than 6 lakhs per Year so the impact was mitigated.

In Short, concentration risks might pop up because of geographic concentration as we just discussed.

Interest Rate Risk

Interest Rate Risk arises from changing Interest rates on a system wide basis and the bank’s ability to respond to such changes. The response in all cases must be such that the NIM’s are maintained, Costs are as low as possible, and profitability is least impacted by changes in Interest rates.

A Bank that can do that, gets to earn a higher ROA compared to a bank that can’t.

This ‘response’ to changing Interest rates depends on how well a Bank can manage the following :

  1. Loan Book - Types of loans, higher yield or not, Floating rate or fixed etc.
  2. Cost of Funds - How quickly can you re-price deposits without seeing a meaningful flight to other assets.
  3. Cost to Income Ratio.
  4. Maintaining Asset Quality

The combined impact of the above factors leads to stable (& respectually higher ROA).

To check whether A & B are well taken care of we can look at NIMs.

To Check Whether A,B,C & D as a combination are managed well, we can check ROA.

NIM Analysis

In a Decreasing Interest Rates environment (2014 onwards), FB NIMs have been under pressure. Whereas, over the same period, City Union Bank’s NIMs have gone up from about 3.2% to 3.75%.

Over the same period HDFC Bank’s NIMs have been most stable, fluctuating mildly around 4% over the years.


An ROA of 1.2%+ is considered respectable, however, Federal Bank has not touched that mark since 2016 but has been steadily improving. On the other hand HDFC, Kotak, CUB have consistently ranked distinctly higher than FB (not surprisingly).

Looking at ROA (the graph is probably not visible since I’m not allowed more than 1 Graphic embeds), it’s obvious that while FB ranks distinctly lower than HDFC, Kotak, City Union Bank, it ranks better than other private banks and public banks such as Karur Vyasya Bank and SBI.

There are other ways in which the Bank is exposed to risk but in my view, these are the primary risk factors I thought were worth sharing as of now.


Hi, I’ve got a much more detailed analysis from my end which I’m happy to share soon. Thank you

Well noted Rahul. Would love it if you could share it with me. I am not sure if personal emails are allowed by moderators but it is rajiv@malhotrafamily.com

1 Like

I am wondering about the numbers - Market cap 17Cr & contingent Liability 38 Cr - any say there?

1 Like

These are the potential liabilities that can occur in future; well, its called contingent because the outflow is unlikely to happen.

Per FY 20 annual report contingent liabilities of Federal bank are as below -

Forward contracts in Forex - 24K Cr
Claims against the bank and other legal cases 6K Cr
Guarantees given to customers to enhance the customers credit - 6K Cr
Other obligations -1.6K Cr

hope this helps.

1 Like

FY 15

and then they did it again :slightly_smiling_face:

FY 21

Conference Call highlights

 Bank appointed Mr. Venkatraman Venkateswaran as new CFO, he was financial controller
in his earlier role. Mr. Ashutosh Khajuria, Executive Director was earlier in charge of CFO
role, post this transition, will be responsible for Treasury, Credit & Collections, Strategic
initiatives and establish the ESG journey of the Bank.
 NBFC + HFC book forms 13% of loans, 85% of book is highly rated.
 Gold loans is around INR160bn, forming ~12% of loans - of this >1/3rd is in retail, 2/
3rd in Agricultural and SME book. Bank will be targeting growth of 30-40%YoY in FY22
after growing by 70%YoY in FY21.
 CV book is INR10bn and MFI book is INR3bn.
 Credit Card - ~10% of bank’s customer is eligible for pre-approved cards
 Cost of term deposit is around 5.4%.
 Bank expects to improve CI ratio by 100-150bps in FY22
 ECLGS disbursement was INR30bn
 Yield break up - retail book is on 9%+, business banking is ~10%, BB book is 9%,
corporate book is 7%, and Agricultural book is on ~10%.
 In terms of pricing, book is divided into fixed rate - 32% and floating rate - 68% in which
MCR is 28% and EBLR is 32%.
Asset Quality
 SMA book stands at 4.6%
 Collection efficiency has come down to 89-90% in April from 95% in March quarter.
 Restructuring book was well within guidance loans at 1.1%, this consists of 68-70% book
backed by mortgages; unsecured portion is 6% of total restructured book.
 PCR including TWO stood at 78%. Bank is likely to keep PCR between 60-65% in coming
years given secured book and low historical LGDs. Bank typically holds 10% more coverage
than existing LGDs.
 Bank has made PCR of 25% on large infra account.


The company ìs planning to raise INR 916 crore by way of preferential allotment to IFC.

Price is being fixed at 87.39 per share, subject to shareholders" approval.

I read the Annual Report and found it very refreshing. The focus on shedding the old generation bank tag is palpable in the tone and texture of the report. Federal Bank is emerging as one of the pioneers among the legacy banks to participate in the fintech revolution with extensive partnerships with neo-banks. The share of digital transactions increased to 86% and nearly 90% of incremental savings accounts were opened digitally. FB is the largest banking partner for BharatPe (3.8mn merchants on-boarded on the Business Banking vertical; 48mn transactions during the year).

On performance metrics, the book has become more granular - share of retail assets is up to 54% and retail make up more than 90% of all deposits. Cost of deposits has reduced to 4.7%. Share of top 20 deposits is down from 6% in FY 20 to 4.8%. Top 20 exposures share is 10.4% which is also quite conservative. Credit / deopsit market shares are up from 0.9% / 0.94% to 1.1% / 1.2% respectively. Total customer base as at Mar’21 crossed the 10mn mark, offering huge cross-selling opportunity. They are also initiating various measures to improve margins on a sustainable basis. One of the strategies is to focus on scaling up high yield products like credit card, CV, business banking, MFI, etc. During FY21, it launched its own credit card and registered strong growth in CV/CE business.

At one time price to book, IMO they have exciting opportunities as they enter blue sky territories. Execution will remain key ofcourse and will ahve to be monitored closely.

Disclosure: Invested with average buy price of 71. Looking for the right opportunity to average up.

1 Like

Q1 results

1 Like

The company has announced investment by IFC of 5% which will help further bolster the capital adequacy ratio.

Net profit of 360 crore, down 8% yoy due to higher provisioning. Asset quality showed a marginal deterioration. Digital continues to be a major focus.

The IFC news had come sometime back. It’s both good and bad. Good because it gives the bank ammunition capital for growth. Bad because it has been raised at near book value at these suppressed valuations.

Federal Bank has been rather inconsistent for years. I’m drawn mainly to their digital push. I am of the view that digital lending will grow exponentially in India, and before we know it , neo-banks and fintechs will be a lot more mainstream. When that happens, Federal Bank will be poised for rapid growth and retrating

1 Like

They caught up in low crar. Unless they boost it to somewhere near 20, rapid growth not at all possible

Incase of other Pvt banks, they have other business, where they can earn some money. But federal pure play bank(insurance business is very early).

Update on the Original post :

Federal Bank is a Tier 2 Bank, or Tier 3, Whatever you want to call it. It’s definitely not a Top Tier Bank.

Amongst the smaller Regional Banks, Federal is one of the better performers on most major parameters that matter i.e - ROA, ROE, Cost of Funds, Capital Adequacy, Asset Quality etc.

Since 2016, there has been a consistent improvement in its performance which ran into a speed bump with the whole Covid episode.

It appears that Federal Bank is emerging out of the crisis surprisingly better than expected.

Check Asset Quality, Restructured loan book, Covid provisioning for a better idea.

Now with the IFC loan, it has bolstered its Capital, although it was raised at about 1x P/B, which means higher dilution for Equity holders compared to say if capital was raised at 2X P/B.

Higher P/B is obviously a reflection of the market’s confidence in a Bank and P/BX of 1 clearly reflects what the market believes about Federal Bank.

Anyway, despite Federal Bank’s improving yet below average performance over the last 5 years, there are a few key triggers that might turn this Frog into a prince, albiet temporarily maybe.

When I was initially covering the Bank in the beginning of they year It did not have anything especially favorable happening for itself in terms of positive triggers but over the last 6 months, things have improved for the better.

These triggers are :

  1. Higher Capital on account of IFC’s buying of Rs. 916 odd cr.

  2. Staff salary rationalisations are going to kick in over the next 12 months. Federal has had higher Salary Expense compared with its peers and over the last few years it has been slowly reducing the percentage of Staff that was on a relatively higher pay scale (they’re older employees who are retiring or being offered VRS etc). New Employees since 2010 have had a more rationalised Salary structures in line with industry standards. So Cost benefits are going to come in hopefully soon.

  3. CEO’s tenure has been extended until September 2024.

  4. South Indian Bank, a competitor in Kerela is in trouble. Federal Bank stands to benefit from SIB’s problems, although, I should make it clear that the extent to which this might help Federal Bank will need more research.

  5. Relatively better Asset Quality versus peers.

Looking at the above positive triggers, combined with the fact that it is trading at 1.04X (P/B) makes it an “Okay Bank, Available at a decent price”.

So depending on how you want to play the game, this might be a short term Investment opportunity.

There is nothing in my humble (and possibly limited view) that Federal Bank is now a structurally "reformed’ bank worthy as a long term investment opportunity.

Disclaimer : Not Invested.