Federal Bank is maintaining a cautious approach to lending in agriculture and microfinance amid uncertainties over the monsoon, geopolitics, interest rates and inflation, even as the private sector lender pursues calibrated asset growth and strengthens its deposit franchise.
“We have not pushed the pedal” on agriculture and microfinance, Federal Bank Managing Director and Chief Executive Officer, KVS Manian told analysts during the bank’s earnings call.
The bank is closely monitoring the potential impact of El Niño and other macroeconomic developments on its loan portfolio. However, Manian said it had not seen any impact on the portfolio so far.
The cautious approach reflects the bank’s emphasis on asset quality and risk-adjusted returns as it seeks to sustain growth amid an uncertain economic environment.
Deposit franchise strengthens
Federal Bank’s average cost of deposits crossed ₹1 lakh crore during the quarter, marking progress in strengthening its liability franchise and improving the quality of its deposit mix, Manian said.
The bank also secured a meaningful share of FCNR (Foreign Currency Non-Resident) and NRE (Non-Resident External) deposits under a special deposit window, at volumes and costs it considered appropriate.
A stronger deposit base is helping the lender support its net interest margin (NIM) trajectory while pursuing measured growth in advances.
Manian said the bank had maintained sustained momentum on the liability side while growing its assets in a calibrated manner, with healthy traction in its chosen business segments.
The bank’s focus remains on improving risk-adjusted returns, which, according to Manian, have been strengthening each quarter.
He added that the evolving interest rate cycle could provide additional support to the bank’s NIM performance.
Fee income hits a record
Beyond interest income, Federal Bank has strengthened its fee-generating businesses, with fee income as a proportion of average assets reaching an all-time high.
The performance was broad-based across various fee-generating segments, while operating expenses remained under control, helping the bank maintain discipline in its cost-to-income trajectory.
Manian said the bank had broadly tracked the objectives outlined in its guidance around 18 months earlier, covering NIM, return on equity (ROE) and fee income. Some parameters had outperformed the bank’s expectations.
He attributed the improvement in profitability and profit growth to the underlying strength of the franchise and progress towards its strategic objectives.
However, reported profitability for the quarter also reflected a change in the accounting policy relating to employee stock option (ESOP) expenses. The bank indicated that it would explain the accounting treatment and its implications separately during the earnings call.
CASA initiatives to continue
Federal Bank will continue to pursue initiatives to strengthen its current account and savings account (CASA) deposits, a key source of relatively low-cost funding.
Manian said the bank had improved its CASA performance over the past six to eight quarters through multiple initiatives rather than relying on a single measure.
“There is no one silver bullet on the initiatives on CASA,” he said, adding that new initiatives were continuing.
The bank also remains committed to building a comprehensive wealth management business to serve its non-resident Indian (NRI) customers.
Manian said strengthening the NRI franchise holistically remained a priority, with wealth management identified as one of the areas for development.
Outlook remains constructive
Federal Bank remains constructive about the remaining quarters of the financial year and intends to sustain growth while protecting earnings quality.
The lender’s strategy combines a stronger deposit franchise, disciplined loan expansion, higher fee income and operating cost control.
Manian said the bank would continue to focus on sustainable growth and value creation for stakeholders, while monitoring macroeconomic risks that could affect borrowers and asset quality.
For the bank, the challenge will be to maintain momentum in profitability and lending without compromising underwriting standards as the interest rate cycle and global economic conditions evolve