Federal Bank credit growth shows revival hopes amid festive season

The private sector bank’s loan book grew 10% in the September quarter compared to a year ago, while deposits also saw a similar expansion, the lender said in its initial update. On a sequential basis, loan growth was at 3.4%, a nice rebound from the 1.5% contraction seen in the June quarter. According to analysts, growth is likely to come from the retail segment with recovery in gold loans and unsecured personal loans.

Retail has been a driving force in Federal Bank’s credit growth in the period following the ups and downs of the second wave of the pandemic.

For the June quarter also, the bank reported a 15% growth in retail loans, though the overall book growth was a modest 7%. Most of the growth in the September quarter is likely to be on the back of retail.

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

The bank’s dismal performance on asset quality in the June quarter works against the bank. The lender reported a spike in provisions as tensions mounted in loan segments. The increased provisioning resulted in the lender missing Street estimates on net profit.

The bank also increased the provisions for gold loans, the most collateralized loan products. Since then, investors have been cautious about asset quality.

Analysts said the bank’s performance during the second wave of the coronavirus pandemic should be applauded as its operations are concentrated in sectors that were hardest hit by the lockdown.

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

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

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

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