Federal Bank Q2: Retail loans take centre stage

The Federal Bank stock recovered on Thursday, after falling over 5 per cent a day earlier in what was a hasty reaction to the results.

It bounced back by 3 per cent, after the dust settled on its September quarter (Q2) numbers. However, beyond the headline numbers and being the second after Indusind Bank to publish its results, Federal Bank’s Q2 numbers highlight some important lessons.

First, with a 24 per cent year-on-year (YOY) increase in retail loans, this segment will remain the cash cow for Federal Bank, and possibly for the banking system as a whole. Growth was led by newer sub-segments such as personal and auto loans, which rose 131 per cent and 60 per cent YOY, respectively, backed by housing loans that grew 24 per cent.

Despite turning cautious on unsecured personal loans, Federal Bank may have placed its bets on this segment, given its competitors have, of late, had to go slow on this space on account of the scale they have gathered in recent years.

Federal Bank’s inroads into the auto loans space also indicates there is space for late entrants, notwithstanding the slowdown.

However, growth may have come at the cost of profitability or net interest margin (NIM), which fell from 3.15 per cent a year-ago to 3.01 per cent in Q2FY20.

Yield on advances, which declined by 22 basis point (bps) YOY to 9.33 per cent, shows the bank’s inability to pass on the higher cost to its customers.

This is the second lesson for the banking industry — pricing power in retail loans may be put to test in the bid to maintain growth.

Third, stress from corporate accounts may continue to rise. Elevated slippages (loans turning bad) from corporate accounts was the Achilles heel for Indusind Bank, and it is no different with Federal Bank, with slippages from this segment increasing by 61 per cent YOY to ₹ 199 crore.

Analysts at Edelweiss say that in light of the challenging macro-environment, they will monitor the identified pool of stressed and below-investment grade assets, which could add to volatility in asset quality.

Nonetheless, the Street hasn’t turned pessimistic on Federal Bank. Despite the 13 per cent price correction over the past six months, majority of analysts polled on Bloomberg remain positive on the stock. Affordable valuations at 1.3x its FY21 book work in its favour.