Stock in Action Federal Bank 29 October 2024

Why Federal Bank is in the News?

Federal Bank Ltd. recently made headlines with a solid performance in the second quarter of FY2025, delivering an 11% year over year (YoY) growth in net profit, reaching ₹1,057 crore. Key factors contributing to this growth include a robust 15% increase in net interest income (NII) to ₹2,367.3 crore, alongside a substantial 21.9% rise in total income, which soared to ₹7,541.23 crore. The bank's continued positive momentum has led to a stock price rise of approximately 20% over the year. Additionally, Federal Bank's asset quality & capital adequacy have shown improvements, bolstering investor confidence. Let's dive deeper into the bank’s Q2 performance, core banking metrics, & potential future outlook.

Financial Performance Overview

Quarterly Growth & Profit
Federal Bank's Q2 FY2025 results demonstrate a year over year growth in several key areas, indicating a steady financial trajectory. The net profit rose by 10.8% from ₹954 crore in the previous year, crossing the ₹1,000 crore mark for the second consecutive quarter. This achievement surpasses CNBCTV18's profit expectations, which estimated earnings of ₹991.1 crore for the quarter. 

The bank’s NII was a highlight, growing by 15% from ₹2,056.4 crore to ₹2,367.3 crore, though it was slightly below the anticipated ₹2,378 crore. The growth in NII reflects strong lending & deposit management, marking a positive direction in Federal Bank's interest income generation. However, the net interest margin (NIM), a critical profitability measure, dropped slightly from 3.22% to 3.12% over the period, indicating some pressure on profit per unit of loan.

Revenue & Income Metrics
Total income for the quarter jumped by 21.9% YoY, reaching ₹7,541 crore, a significant increase from ₹6,186 crore in Q2 FY2024. Interest income for the quarter was also strong at ₹6,577 crore, up from ₹5,455 crore YoY, signifying a successful income generation strategy amid higher lending rates. 

Core Banking Metrics & Operational Highlights

Asset Quality Improvements
Federal Bank’s asset quality metrics show moderate improvement, with the gross nonperforming asset (GNPA) ratio improving marginally to 2.09% from 2.11% in the previous quarter. The GNPA value slightly increased quarter over quarter to ₹4,884.49 crore but reflects controlled risk levels. On the other hand, net NPAs decreased to ₹1,322.3 crore, representing a 0.57% ratio, a decline from the previous quarter’s 0.6%. These improvements underscore the bank's effective loan recovery measures & conservative risk management approach.

Provision Coverage & Capital Adequacy
The bank maintained a provision coverage ratio (PCR) excluding technical write-offs at 71.82%, highlighting its preparedness to manage potential asset quality risks. However, the capital adequacy ratio (CRAR), calculated under Basel III norms, dropped to 15.20% from 15.50% in the prior year. Despite the slight decline, the CRAR remains comfortably above the regulatory minimum, reflecting sound financial health.

Loan & Deposit Growth
Federal Bank's business expansion continued in Q2 FY2025, with total business reaching ₹4,99,418.83 crore, marking a 17.3% growth. Total deposits increased to ₹2,69,106.59 crore, up from ₹2,32,868.43 crore the previous year. Meanwhile, net advances grew YoY to ₹2,30,312.24 crore, driven by strong demand across retail, business, & corporate lending segments.

Key lending segments also saw strong growth:
Retail Advances grew by 17.24%, reaching ₹72,701.75 crore.
Business Banking showed a 19.26% rise to ₹19,121.18 crore.
Commercial Banking expanded by 24.34% to ₹24,493.35 crore.
Corporate Advances increased by 10.48% to ₹77,953.84 crore.

Notably, the Commercial Vehicles/Equipment segment experienced the most significant growth at 43.83%, reaching ₹3,932.30 crore, which suggests Federal Bank's increasing footprint in assetbacked lending.

Conclusion

Federal Bank's Q2 FY2025 performance highlights its steady operational progress, marked by a rise in both profitability & asset quality. Despite a minor contraction in NIM & a slight dip in CRAR, the bank’s profitability, growth in advances, & robust deposit mobilization provide a strong foundation. Federal Bank’s ongoing improvements in asset quality & a diverse loan portfolio indicate potential for sustained growth. The bank’s positive momentum, driven by disciplined financial strategies, positions it as a resilient player in India's evolving banking landscape.