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Federal Bank's Q2FY24 earnings call insights

Oct 17, 2023

By: BlinkX Research Team

In their recent earnings call, Federal Bank shared significant takeaways:

Financial Overview:

Federal Bank anticipates a moderate increase in Net Interest Margins (NIMs) as the cost of deposits continues to rise.

Notably, Net Interest Income (NII) grew by 7% quarter-on-quarter, with a 5% growth in advances and fee income constituting over 1% of assets.

The bank achieved broad-based growth across all segments and businesses, maintaining healthy Return on Assets (RoAs).

NPA management remains effective.

Guidance for FY24:

Federal Bank aims for 18-20% growth in both advances and deposits.

NIMs are expected to reach 3.3% but may stabilize at 3.25%.

Credit cost is projected at 40 basis points (bps) for the full year, with 20bps in the first half and potentially high 20s in the second half.

RoA expansion to 1.4% is trending ahead of guidance, with plans to sustain these levels.

The bank sees an opportunity to increase fee income by 10bps.

On NIMs:

The cost of deposits is beginning to moderate, but further increases are expected in the short term.

NIMs will be supported by higher yield businesses but not expected to see a significant benefit.

The impact of Incremental Cash Reserve Ratio (I-CRR) is offset by the benefit of equity raise.

Asset Quality:

Credit cost is notably low at 13bps.

Medium-term guidance maintains a credit cost of 40bps.

Special Mention Accounts (SMA) are at their lowest in several quarters.

On Growth:

Loan growth stands at 19.5% year-on-year and 5% quarter-on-quarter.

Strong growth is seen across various segments, including retail, business banking, corporate, commercial credit, and more.

Deposits witnessed a robust increase of 23.1% year-on-year and 4.7% quarter-on-quarter.

On Fee Income:

Fee income shows no one-offs, with lower recoveries but improved upgrades.

On Operating Expenses (Opex):

Overhead costs are primarily linked to volume and include increased marketing spending of Rs 150 million.

Expansion of branches is occurring to support high-yielding businesses.

Cost-to-assets ratio is 2.05%, and cost-to-income should trend down to 50% by FY25.

Other Metrics:

The Liquidity Coverage Ratio (LCR) stands at 121%.

Market Risk-Weighted Assets (RWA) increased due to investment growth.

Federal Bank's strategic insights indicate robust performance and ambitious growth targets for the future.