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Home >Markets >Mark To Market >Federal Bank’s capital looks good, but investors must watch for stress

Federal Bank Ltd is beefing up its capital, and how the lender deftly handles stress in the wake of the second covid wave will determine whether this fresh capital will go towards provisioning or balance sheet growth.

The private lender has raised 916 crore by allotting preferential shares to World Bank subsidiary International Finance Corporation (IFC), it said in an exchange filing on Wednesday. IFC will hold 1.5% in the bank, while its two funds will get 1.75% shareholding.

Further, Federal Bank has received the approval of its board to raise a cumulative 4,000 crore capital through various routes. The bank’s capital adequacy ratio stood at 14.62% as of March, well above the regulatory minimum. The fresh capital will boost the tier-1 ratio by roughly 150 basis points, according to analysts. One basis point is one-hundredth of a percentage point.

Keeping it safe
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Keeping it safe

Most lenders have been readying plans to raise capital despite having healthy adequacy ratios. Much of this has been in anticipation of more provisioning because of increasing stress in the wake of the second wave of the covid-19 pandemic.

Federal Bank is not an outlier in the capital-raising exercise. However, what may set it apart is the extent of fresh capital used for growth. In other words, the lender’s asset quality outlook determines how much capital it can use for improving its book instead of providing for defaults.

Here, the indications are good. For the March quarter, gross bad loans were just 3.4% of the total book. The management believes that the stress from the second wave would be manageable. That said, the bank’s provision coverage ratio is a little more than 65%. This comes up short against some larger peers such as ICICI Bank and HDFC Bank, where the coverage ratio is above 70%.

The management, however, has assured that these provisions are enough to manage the upcoming stress.

Federal Bank has guided for a challenging first and second quarter of FY22 in terms of growth and asset quality. The lender would need to boost its provisions, though collection efficiencies indicate that potential stress from the second wave of the covid-19 pandemic may be less than anticipated, analysts said. With a 13% increase since April, shares of the lender reflect most of its strengths, according to analysts.

The preferential share issue was done at 87.39 per share, which valued the bank at roughly 17,000 crore. Federal Bank will, however, need to keep up its asset quality in the coming quarters for further upside in valuations.

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