Federal Bank conducted an analysts' meeting on February 21, 2025, during which KVS Manian, the newly appointed MD & CEO, shared his insights into the bank’s financial performance, strategic initiatives, and future outlook. In this note, we look how the bank has performed over last few years, and in this backdrop, the priorities highlighted in the meeting.  

Financial summary of last 5 years:

• The company's overall advances have grown at a CAGR of 14% from FY19 to 9MFY25. Within this, the retail advances grew at a CAGR of 18%, accounting for 57% of total advances, while wholesale advances segment expanded at a CAGR of 10%, representing 43% of total advances. The retail advances segment comprises several sub-segments, including housing, business banking, consumer vehicles, agri-business, and microfinance.

  

• In the retail segment housing segment grew at 12% CAGR; typically housing loans are low risk and provide stability to the overall loan book.
• In the wholesale advances segment, the company has two sub-segments: corporate banking advances, which contribute 33% of the overall advances, and commercial banking advances, which contribute 11%. Commercial banking advances have grown at a faster rate aided by low base, with a CAGR of 15% from FY19 to 9MFY25, whereas corporate advances grew at a CAGR of 9% over the same period.  
• Year to date performance:
  • For 9MFY25, the overall retail advances grew by 18% compared to 9MFY24, in which Commercial Vehicle/Construction Equipment (CV/CE) segment, which expanded by 39%, followed by business banking which expanded by 13%. Management commentary is to be more cautious in MFI segment and target medium yield assets like Loan against property to continue its growth trajectory.
  •  Wholesale advances grew by 11% compared to 9MFY24, with corporate advances increasing by 8%, while commercial advances surged by 25%.

• The company's GNPA have declined from 2.9% in FY19 to 1.95% in 9MFY25, indicating an improvement in asset quality. Here is the snapshot of banks segmental NPA-

Over the past five years, Federal Bank has delivered a fairly consistent performance, growing its total business to over Rs. 4.6 lakh crore (advances + deposits) and expanding its balance sheet beyond Rs. 3.4 lakh crore by 9MFY25. Profitability improved during this period, supported by a retail-focused approach, tighter cost controls, and increased digital adoption. Return ratios like ROA and ROE saw gradual improvement, though still moderate in comparison to top peers. While not without challenges, Federal Bank’s steady execution in its core areas—retail banking, deposit mobilisation, and selective fintech tie-ups—has contributed to its gradual strengthening within the private banking space.

Project breakthrough- Chapter 4.0

• NIM Improvement: The bank aims to enhance its NIM by expanding current account (CA) mobilization through strategic product innovation and targeted market penetration. Additionally, Federal Bank plans to diversify its customer base by tapping into high CASA potential markets beyond the Gulf and Kerala corridor.

• On assets Side Company will be focusing on medium secured retail assets (like LAP) to improve NIMS. And also expanding unsecured, high-yield credit (MFI, credit card) to optimize portfolio returns as market conditions improve.

• Expanding Product Portfolio: The Company plans to broaden its product offerings by scaling up its used vehicle finance, including Commercial Vehicle/Construction Equipment (CV/CE) loans, tractor finance, affordable housing loans, as well as syndication and investment banking services, etc. 
• Fee Enhancement: To enhance fee income (bank earnings from sources other than its interest income), the company has identified key growth opportunities in areas such as trade and forex income, wealth management, bancassurance, credit cards and acquiring businesses, and cash management services. This will be achieved through product co-origination and cross-selling initiatives. Through this measures bank will achieve other income to average assets ratio upwards of 1.5% from current 1.1%.
• Branch Strategy for Scalable Growth: Federal Bank plans to grow its branch network by adding 400 to 450 branches, increasing the total from the current 1,550 to ~2,000 by FY28. This expansion will be executed with a targeted approach, focusing on the top 10 high GSDP (Gross State Domestic Product) states and prioritizing growth in tier 2 cities.

• Branch Transformation: To improve operational efficiency, the bank plans to automate processes by leveraging digital tools to streamline workflows and reduce costs. Additionally, the bank will accelerate its digitization efforts to further optimize processes, minimize manual efforts, and enhance overall efficiency.
• Renewed Digital Distribution Strategy: In the credit card segment, the company will focus on accelerating the growth of organic credit cards through its own digital channels. For savings accounts, the bank will target Gen Z by scaling up its own digital acquisition efforts and forming strategic partnerships. This approach aims to drive higher Average Monthly Balance (AMB), enhance cross-selling opportunities, and optimize commercial arrangements.
• Cost Optimization: The bank will focus on improving productivity and reducing operational costs through the adoption of AI and automation. Bank’s current cost to income ratio is 53.12% which they will reduce it to 50%.
• Evolution Towards a Universal Bank: The bank plans to diversify its financial services, both organically and inorganically, with the goal of providing more comprehensive services. A universal bank is a financial institution that offers a wide range of financial services, essentially acting as a "one-stop shop" for its customers. This distinguishes them from banks that specialize in only one area, such as commercial banking or investment banking.

MoneyWorks4me Opinion:

The company has demonstrated significant improvements over the past five years. Its gross NPA has reduced from 2.9% in FY19 to 1.95% in 9MFY25, reflecting better asset quality. Additionally, the company’s NIM has improved from 2.83% to 3.11%. 

Post IndusInd Bank recent discrepancies, we are looking at other banks in our portfolio for any stress/concerns. Federal bank under new leadership of experienced banker KVS Manian and clear strategic plan stands out as a worthy booster investment (~20% CAGR from our entry levels). Management focus is towards strategic reorientation of the bank without disruption, focusing on scaling while maintaining quality. We will monitor this execution and make any changes to the portfolio if necessary. 

In terms of valuation, the stock is currently trading at its 10-year median Price-to-Book Value (PBV) of 1.4. Based on these factors, we recommend holding the stock with an unchanged MRP of Rs 191.

Federal Bank (FBL) is a mid-sized private sector bank headquartered in Kerala. As of Q2 FY25, the bank had a network of 1,533 banking outlets and 2,052 ATMs/recyclers.  The bank has a strong retail funding franchise, including a stable base of NRI deposits, largely contributed by remittances from the expatriate Indian community in the Middle East. Retail deposits form more than 90% of total deposits which gives it a very strong liability franchise. CASA i.e. Current and Savings Account, forms 30% of total liabilities. 

Below is the result summary for Q2 FY25: 

• FBL’s total business stood at Rs. 4.99 lakh Cr with advances of Rs. 2.30 lakh Cr (up 16% YoY) and deposits of Rs. 2.69 lakh Cr (up 19% YoY) 
• Net interest income was at a highest-ever level of Rs. 2,367 Cr while the bank registered it highest ever Quarterly Net Profit of Rs. 1,057 Cr
• Portfolio yield was flat at 9.35% while the cost of funds increased by 30 bps YoY to 5.93%
• NIMs contracted 10 bps YoY to 3.12% (partially affected by the change in reporting of penal interest. Like for like NIMs are 3.19%)
• Cost to income saw a slight increase to 53%
• NNPA dropped further to 0.57%

Management Commentary:

Unsecured Lending: Federal Bank's credit card and personal loan portfolios are relatively small and were historically secured. The recent pivot to unsecured lending has seen a slight increase in slippage rates for both credit cards and personal loans, including those originated through partners. However, the impact is immaterial due to the small size of these portfolios within the bank’s overall lending. The bank has experienced better-than-expected performance in secured products like home loans, car loans, and vehicle loans, which offsets these slippages. Consistent with its cautious approach, the bank has calibrated its strategy in the unsecured lending segment.

Microfinance Institution (MFI) Lending:

The bank has maintained a cautious stance on high-margin products, including MFI lending. While there has been a noticeable increase in slippages in the MFI portfolio, the impact is mitigated by the bank's focus on favorable southern states, which account for over two-thirds of its MFI exposure. Additionally, proactive measures, including early adoption of best practices recommended by the Microfinance Institutions Network (MFIN), have kept slippage levels significantly below industry averages. This strategic approach underscores the bank's emphasis on managing risk effectively in MFI lending.

Quality of Underwriting:

Federal Bank's conservative underwriting practices have significantly contributed to maintaining asset quality. The bank's approval rate for loans is 33%, compared to the industry average of 45%, reflecting its stringent evaluation criteria. The bank ensures that loans are not extended to delinquent customers and avoids granting multiple loans or top-up loans to the same customer. This disciplined approach, considering factors like multiple lenders and overall indebtedness, has been instrumental in preserving the quality of its loan book.

Management Transition: 

FBL is undergoing a management shift as KVS Manian became the new Managing Director and CEO on September 23, 2024. He succeeded Shyam Srinivasan, who served as MD and CEO for 14 years. Manian has over 25 years of experience in the banking industry, including a stint at Kotak Mahindra Bank. At Kotak, he played a key role in the bank's transformation from an NBFC to a leading private-sector bank. He also led the Corporate, Institutional, and Investment Banking, and Wealth Management divisions. 

Federal Bank Ltd
Market Cap 29,818Cr
CMP 141
P/B  1.3xFY23

Check Federal Bank 10 year X-ray here

Key Highlights –

·        Retail advances (54% of loan book) grew by 18%; Wholesale Advances (46% of book) grew by 19%.

·        Deposits increased by 15% to 201,408 Cr, CASA Ratio at 34.24%.

·        50.4% of the book is floating- linked to ELBR (External Benchmarks Lending Rate).

·        GNPA at 2.43% decreasing by 0.63%, while NNPA at 0.73% decreasing by 0.32% on yearly basis. Cost of Credit rose to 0.38% vs. 0.22% in Q3FY22.

Management Outlook –

·        Management guided on NIM pressure as rates increase following quarter, with 3.35-3.4% guidance for FY23

·        Management guided on high-teens growth in advances in FY24 across segments.

·        Management expects to open 15 additional branches this year, with 80-90 new ones in FY24 & 25.

·        Cost of funds may move up by 0.2%, while advances by 0.25-0.3% per quarter in future, based on rate hikes by RBI.

Federal Bank Ltd
Market Cap 27,660 Cr
CMP 131
P/B 1.2xFY23E

Click here for 10 year X-ray

• The growth has been broad based and traction is visible across the segments. Corporate loan book grew fastest at 21% year on year. Pricing in the corporate segment has improved, and thus, the bank is witnessing some good opportunities to grow in this segment
• Core fee income grew 38% year on year, led by a healthy business activity. Treasury income grew to Rs. 70 Cr. The bank used to improve its PCR (67.41%).
• Slippages (including an increase in the balance of existing NPAs) reduced to Rs. 390 Cr (~1.1% of loans), due to decline in the Retail segment. GNPA and NNPA ratio moderated to 2.5% and 0.8% respectively. Restructured loans improved 20bps sequentially to ~2%.
• 65% of the book is floating and the bank passes the increase in Repo rate instantly. Thus, the margins remained on a positive trajectory, supported by increase in yields and lower interest reversals.
• Credit cost is expected to remain in the range of ~50-55bps. RoA expansion is ahead of the bank’s expectation. Thus, the bank expects FY23 RoA to be ~1.2% (vs earlier 1.15%) and expects FY23 RoA at ~1.25%.
• Overall, the growth in gold loans remains strong and the environment remains fairly conducive. 10-12% of incremental deposits came from the Fintech partnerships.
• The bank might look for a capital raise in early FY24

Click here for 10 year X-ray

Federal Bank | Market Cap 19,084 Cr

CMP 91 | P/B 0.95x FY23

Results: Federal Bank reported 7% growth in Net interest income and Loan book growth of 9.5% year on year. Fee Income grew 25% during the same period. Operating profit before provisioning declined 8% year on year.

For full year FY22, operating profit before provisioning declined 3%.

Click here to see the 10 year X-ray of Federal Bank

 Key Highlights

• Retail loans for the year grew at 6%, Agri loans grew 20% and Business banking grew 15%. Non-retail loan growth majorly came from Institutional Banking (7%) and Corporate banking (12%).
• NIM deteriorated to 3.16% (vs 3.23% in Q4FY21), Cost of deposits increased to 4.28% (from 4.27% in previous quarter) and Cost to income ratio went up to 59.89% (vs 52.72% in Q4FY21).
• On a positive note, as of end of FY22, asset quality improved as the GNPA^ & NNPA^^ grew to 2.78% & 0.98% (from 3.35% & 1.18% in Q4FY21) respectively.
• The company recognized family pension cost and loss on revaluation of Security Receipts during the Q4. Without this expense, operating Profit would have been 35% and 5% respectively and RoA would have been at 1.24%.
• Overall deposits grew by 5.25% year on year and CASA** improved to 36.94%.
• As of end of Q3FY21, bank had 1,282 branches and 1,885 ATMs all over India.
• The bank declared a dividend of Rs. 1.80 per share.

Management Outlook: Management expects RoA (return on assets) possibility of 1.2% over next 4-6 quarters. As per the management, the bank despite of the absorption of a large one-off expense, the ROA and ROE have met the guided levels of 1.03% and 11.93% respectively. The Bank also registered its highest ever Net Profit for a quarter and asset quality has been resilient. Credit cost for FY22 was at a new low at 45 bps.