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Home >Markets >Mark To Market >Federal Bank’s Q4 update reflects a tough year, but deposits cheer

Federal Bank’s fourth-quarter metrics show that the lender has ended FY21 well with healthy loan growth, despite the negative impact brought about by the lockdown in the initial quarters.

In its advance update on key metrics, the private sector lender reported that its loan book grew by 9% for FY21. The management had indicated a loan growth of 8-10% for the year. That said, investors would need to watch for the drivers of growth. For the December quarter, the bank’s loan growth had largely come from gold loans. Gold loans grew at a stellar 67% year-on-year that quarter and their share rose to 11% of the bank’s loan book. Gold loans come with their own set of issues since the price of the underlying asset tends to swing.

To be sure, Federal Bank’s loan-to-value ratios are lower than the industry average at 72-73%, which protects the bank against volatile gold prices. Nevertheless, analysts have pointed out in the past that gold loans infuse volatility in earnings and hence should be monitored.

Federal Bank's deposits grew faster as the flow of household savings into banks surged during the pandemic
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Federal Bank's deposits grew faster as the flow of household savings into banks surged during the pandemic

The bank’s corporate loan growth has floundered in the wake of the pandemic. The book had shrunk 5% in the December quarter and investors should watch out for any lingering pain points in the March quarter as well. That leaves us with the retail loan portfolio. This showed a growth of 16% for the December quarter. The lender has performed well here and expectations are that the bank would continue to show strong growth. What’s more is that the bank is keen on increasing its high-margin retail book. The bank is looking to acquire a microfinance portfolio, managing director Shyam Srinivasan was quoted as saying by The Times of India on 19 March. The goal is to improve return on assets for the lender.

Of course, the biggest risk is the second wave of covid-19 infections that is gaining traction across the country. Regional lockdowns are expected to dent credit demand as mobility restrictions may dampen production plans of companies. As such, consumption demand is expected to be hit too.

What works for Federal Bank’s valuations is its reasonable balance sheet growth despite the headwinds of the pandemic. A big positive is its deposit growth, partly the fallout of household savings flowing into deposits during the pandemic. This growth, especially in low-cost current and savings accounts, meant Federal Bank can expect healthy margins. But a second wave may not mean a similar urge to save in deposits among Indians. On the other hand, an enduring pandemic would hit economic recovery. FY21 may have been challenging for loan growth and asset quality, but FY22 would be far from easy.

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