Home / Markets / Mark To Market /  Federal Bank’s loan growth shows revival hopes amid festive season
Listen to this article

Federal Bank Ltd’s September quarter update showed encouraging signs of an economic revival after restrictions imposed to contain the pandemic’s second wave were eased.

The private sector bank’s loan book grew by 10% for the September quarter from a year earlier, while deposits also showed a similar expansion, the lender said in its early update filed with the bourses. On a sequential basis, loan growth was 3.4%, a decent rebound from the 1.5% contraction seen in the June quarter. The growth is likely to have come from the retail segment with an improvement in gold loans and unsecured personal loans, according to analysts.

Retail has been a driving force in Federal Bank’s loan growth in the period following the ebbing of the pandemic’s second wave.

Looking up
View Full Image
Looking up

For the June quarter, too, the bank reported a 15% growth in retail loans, though the overall book growth was a modest 7%. In the September quarter, too, much of the growth is likely to have been because of retail.

As such, Federal Bank’s tie-up with Visa for credit card offerings to take advantage of the potential festival spending shows that it is focused on retail.

What works against the bank is its dismal performance on asset quality in the June quarter. The lender reported a spike in provisions as stress increased across loan segments. The increased provisioning resulted in the lender missing Street estimates on net profit.

The bank also increased provisions towards gold loans, the most collateralized loan products. Investors have been wary of asset quality since then.

That said, the bank’s performance during the second wave of the coronavirus pandemic should be appreciated because its operations are concentrated in regions that were worst hit by the lockdowns, analysts said.

Kerala contributes significantly to the bank’s business, and several regions of the state were under severe lockdown during the second wave.

Some benefits are expected on the net interest margin front. The 18% growth in its low-cost current account and savings account deposits will keep the bank’s cost of funds under check. This is expected to boost margins.

“We expect an improvement in margin in 2QFY22, supported by a recovery in credit trends and lower cost of funds," analysts at Motilal Oswal Financial Services Ltd said in a note.

Despite the 3% gains in shares over the past month, the Federal Bank stock has underperformed the sector index over a six-month period because of asset quality concerns. Going ahead, an improvement on bad loan metrics is expected to give investors a reason to warm up.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Recommended For You
Edit Profile
Get alerts on WhatsApp
Set Preferences My ReadsFeedbackRedeem a Gift CardLogout