Why Ambit Research has a sell on Federal Bank ?
Positive reversals in loan growth and asset quality trends have stirred long-held expectations of a sustained turnaround. But we find underlying operating profitability structurally compromised due to a weak assets franchise (NIM 3.3%, fee income 0.7%) given low employee productivity (high salaries, low income). The bank has attempted to address this, but current account penetration and POS expansion hint at low income traction so far. We expect EPS CAGR (FY18-20) of 19% and average RoE of 11%, vs consensus estimates of 26% EPS CAGR and 13% RoE respectively.
We increase Target Price by 7% (in-line with earnings upgrade) to Rs 71 (10x 1-year fwd EPS and 1.0x 1-year fwd BV).
