Federal Bank's Q3 profit up 9% on strong loan growth, better asset quality

Mumbai: Strong loan growth, better asset quality, higher core income, and improved profitability helped Federal Bank report stellar performance for the quarter ended December.

The private sector bank’s net profit rose 9% year-on-year and quarter-on-quarter to ₹1,041 crore in Q3FY26.

Following the news, shares of the bank rose 8.6% to ₹268.20 on the National Stock Exchange.

While advances rose 9% year-on-year to ₹2.65 trillion, led by strong momentum in the commercial and corporate banking segment, deposit growth outpaced at 15% to ₹2.50 trillion.

Going forward, the bank expects to maintain this momentum on both the asset and liability sides, and expects it to be around the high teens, the management said on a post-earnings call.

Retail loans, which constitute 55% of the bank’s customer assets, rose 9% year-on-year to ₹94,886 crore. Commercial loan book rose 25% on year to ₹28,177 crore and corporate rose 5% on year to ₹1.42 trillion.

Apart from the commercial book, which is growing at a higher rate, the bank’s gold loan business grew 9% quarter-on-quarter, credit cards and commercial vehicles rose 6% each, loan against property rose over 4% and microfinance institutions declined 1%.

While the bank said it wants to grow its personal loan and MFI books from here on, it remains cautious about doing so.

Asset quality of the bank also continued to improve with gross non-performing assets ratio improving to 1.72% as against 1.83% a quarter ago. Net NPA also fell to 0.42% from 0.48% in the previous quarter. This was led by lower slippages of ₹435 crore as of December end, compared with ₹579 crore in the prior quarter.

Net interest income of the bank rose over 9% on year and 6% on quarter to ₹2,653 crore. Consequently, the net interest margin of the bank was up by 12 basis points sequentially to 3.18% led by improvement in the bank’s liability mix and asset repricing. One basis point is equal to one-hundredth of a per cent.

“Our CASA ratios have improved over a period of time. That improves NIM on the liability side. Our deposit costs have dropped. The drop in yield actually is lesser than what the repo rate cut would have indicated, and therefore, there is improvement in the yield in that sense, net of repo cuts. So there are multiple factors that play a role in the NIM improvement,” managing director and chief executive officer K.V.S. Manian said.

However, Manian expects the pressure from the Reserve Bank of India's 25 bps repo rate cut last month to fully play out in the next quarter.

“...we have seen the impact of that for a month in Q3. That will fully play out in Q4. We have to see how to mitigate the impact of that through the next quarter,” he said.

Current account and savings account or CASA ratio improved to 32.07% as of December end, up 106 basis points (bps) on quarter and 191 bps on year.

During the quarter, the bank’s cost-to-income ratio improved to 53.92%, reflecting continued operating leverage, which in turn aided its bottom line.

Following the news, shares of the bank rose 8.6% to ₹268.20 on the National Stock Exchange.

Blackstone infusion

Executive director Venkatraman Venkateswaran said Blackstone’s capital infusion in the bank will boost the lender's capital to risk-weighted assets ratio by approximately 50 bps if the first tranche comes in Q4.

“That's the impact on CRAR. But as you know, the structure is such that we get 25% first, and then the balance after 18 months. So the remaining will come only in FY28,” Venkateswaran said. As of December end, the bank’s CRAR was 15.20%.

In late October, Federal Bank announced that Blackstone is investing ₹6,200 crore into the bank through a preferential warrant allotment, acquiring up to a 9.99% stake to become a major shareholder.

“...our strategy requires an investor with long-term conviction on our strategy and we found Blackstone willing to make that long-term bet on the bank's strategy. It is a very good name to get on your cap table and we do believe that the presence of a large investor and a reputed investor like that boosts confidence and will help re-rate the bank and the stock,” Manian said.