Federal Bank Ltd (FEDERALBNK) Q2FY27 Concall Transcript - Sep-2026 Qtr
Moderator: Ladies and gentlemen, good day, and welcome to the Q2 FY '25 earnings conference call hosted by Federal Bank. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touch-tone phone. I now hand the conference over to Mr. Souvik Roy, Head, Investor Relations, The Federal Bank Limited. Thank you, and over to you, sir.
Souvik Roy (The Federal Bank Limited): Thanks, Ryan. Good afternoon, everyone, and welcome to our earnings call. We have announced the results. I'm hoping all of you have gone through it already, and we are pleased to share that the bank has delivered a strong performance this quarter. We have with us today our MD and CEO, Mr. K.V.S. Manian, along with the entire senior leadership team, who will take you through the performance and the key developments that happened in the quarter that went by. With that, I'll hand it over to Mr. Manian for his opening remarks. Over to you, sir.
K.V.S. Manian (Federal Bank): Thank you, Souvik. Good afternoon, everyone, and welcome to Federal Bank's quarterly results call. Let me begin by briefing you on some changes to our board. Virat Diwanji, who has been our National Head of Consumer Banking, joins our board, and we look forward to his continued leadership. I am also pleased to welcome Rajesh Warrior to the board as an independent director. His strong technology background and experience will be valuable as we continue to strengthen our capabilities in the technology and AI areas. I would also like to place on record our sincere appreciation for Ramanand Mundkur for his valuable contribution and service to the bank over the past 5 years. We thank him for his guidance
K.V.S. Manian (Federal Bank): his association with the Federal Bank and wish him the very best. Coming to the quarter, we have delivered a strong performance, underpinned by sustained momentum on the liability side, disciplined growth on the asset side, and continued focus on fees and operating efficiency. A significant milestone this quarter has been our our average CASA deposits crossing 1 lakh crores. This reflects the progress we have made in strengthening our liability franchise and improving the quality of our deposit mix. We have also garnered our meaningful share of FCNRB deposits under the special window, participating at a quantum and economics that we believe are appropriate for us. On the asset side, we have continued to grow in a calibrated and disciplined manner with healthy momentum across our chosen segments. Our focus remains on pursuing quality growth while maintaining discipline while maintaining the discipline on risk-adjusted returns, which continues to improve each quarter. As we have articulated in our annual report, sustained momentum and discipline remain central to our approach. The progress we are making on both sides of the balance sheet reflects this commitment. A stronger liability franchise combined with disciplined asset growth is helping sustain our NIM trajectory. And we remain confident in its underlying resilience. The evolving interest rate cycle should provide an additional supportive factor as we move forward. Beyond margins, we have delivered a strong performance on fee income. Fee income as a proportion of average assets have reached an all-time high with performance broad-based across various fee-generating businesses. At the same time, we have maintained discipline on operating expenses and have kept our cost-to-income trajectory under control. If we look at the guidance we provided about a year and a half ago, we have, by and large, tracked well against or against our stated objectives on NIM, ROA, and fee income, with certain parameters actually outperforming the anticipated metrics. Our profitability trajectory and PAT growth reflect the underlying strength of the franchise and progress we are making towards our strategic objectives. Our reported profitability for the quarter also incorporates the impact of the change in accounting policy related to ESOP expenses. Venkat will later explain on this call the accounting treatment and its implications in more detail. Looking ahead, we remain constructive about the balan- balance quarters of the financial year. We will continue to pursue growth with discipline, strengthen the quality of our earnings, and remain focused on delivering sustainable value for all our stakeholders. With that, I will hand it over to Venkat to take you through the financial performance and the key numbers in greater detail. Venkat.
Venkat (Federal Bank): Yeah. Thank you, Manian. And good afternoon, everyone, for joining this call. I'll focus on the key financial developments for the second quarter. As usual, before that, a quick overview of the macro environment. In the last call, we flagged on the inflation trajectory, and you would have noticed that the headline CPI rose in each of the months, July, August, and September, from 4.45 in July to 4.83 in August and 5.54 in September. It averages approximately 4.94% for the quarter. The September reading was the highest so far in 2026 under the revised series and the fourth consecutive month above RBI's 4% target. Food inflation remained the main driver. It was 5.52% in July, 5.97% in August, and 7.74% in September. Whilst in August, the MPC held the repo rate at 5.25% and retained its neutral stance, on October 7th, they unanimously raised the repo rate by 25 basis points to 5.5%, and it also changed the stance to calibrated tightening. RBI raised the FY '27 growth projection to 7.1% from 6.7%. It also raised the FY '27 inflation projection to 5.2% from 5%.
Venkat (Federal Bank): much of the benefit from the easing cycle has now passed through to our liability book. From here, the margin mix will depend on improvement in assets and strength of our liability franchise. Now coming to the performance overview for the for Q2, our net profit for the quarter was 1,382 crore, the highest in the bank's history. It's 45.1% up YoY and 17.77% QoQ. Earnings per share stood at Rs. 22.26, up 44.34% and 16.25% QoQ. Operating profit was 2,225.37 crore, up 35.35% YoY and 17.29% QoQ. In fact, if you look at our OP, if not for the one-time impact of the income tax refund, which we had in Q4 of last year, if we exclude that, OP also has been the highest ever for the bank at 2,225 crores. Total business crossed 6 lakh crore and gross advances crossed 3 lakh crore. Net interest income was 3,153.4 crore, up 7% QoQ and 26.38% YoY. NIM was 3.32%, down only 1 basis point QoQ and up 26 basis points YoY. Our cost of deposits declined 3 basis points during the quarter and 39 basis points YoY. Last quarter, we said that the pace of decline in deposit cost would moderate. And it has. The cost of deposits fell 3 basis points QoQ against 22 basis points in Q1. With the October rate increase, the externally benchmarked part of our loan book will reprice ahead of deposits, which will reprice as they mature. We also expect competition for deposits to intensify once the liquidity situation normalizes. On the deposit and liability franchise, our total deposits closed at 3,42,693 crore, up 7% QoQ and 18.6% YoY. Our CASA balances stood at 1,09,803, up a very impressive 6.44% QoQ and 22.56% YoY. That is approximately 395 basis points faster than the deposit book. Our CASA ratio improved 103 basis points YoY. Another important milestone was the average CASA crossed 1 lakh crore during the quarter. NRE and ONR deposits together reached 1,19,055 crore, up 13.25% QoQ and 26.6% YoY. Savings balances grew close to 4% QoQ and 19.6% YoY. Last quarter, we addressed the sequential dip in current accounts, and we did say the traction would resume as the March quarter seasonality washed out. It has. Demand deposit deposits grew 14.4% 14.04% QoQ and 33% YoY. CASA itself grew by 6.4% QoQ. And there is no change to our guidance on CASA. The 103 basis point improvement in the ratio YoY reflects the trend in the growth. On advances, our gross advances closed at 3,01,687 crore, up 7% 7.27% QoQ and 21% YoY. We have grown on the chosen segments, and our stated focus remains on the higher-yielding, granular assets that improve the risk-adjusted return profile of the book. And this granularity also feeds into our fee core fee line. Gold loans grew 37.13% YoY and 6.67% QoQ. LAP grew 32.21% YoY, and credit cards grew an impressive 28.27% YoY. Commercial banking continues with the strong growth trajectory over the year and in this quarter also grew 6.99%, almost 7% QoQ and 25.46% YoY. CV/CE grew 21.74%. Corporate and institutional banking grew 17.19% YoY. We continue to engage where pricing and counterparty quality meets our threshold. Business banking grew 12.39% YoY and QoQ 7.48%.
Venkat (Federal Bank): we did mention in the last quarter that we would grow this book as the risk adjusted returns justified. We are seeing directional change coming through now. Retail banking grew by 17.92% YoY. The average CD ratio for the quarter was 86.22, and we continue to operate within the band which we have set for ourselves. On fee income, our fee income was again 1,167 crore, up 22% plus QoQ and 31.86% YoY. Total other income at 1490 crore is the highest in the bank's history. Our fee income to assets is at an all-time high of 1.11%. Last quarter, fee income was seasonally lower against strong March base, and this quarter has been a very strong growth, and it is well distributed as Maniyan mentioned. Our cost to income ratio improved to 52%, down 196 basis points YoY and 42 basis points QoQ. We'll continue to operate in the range of 52% on the CI ratio. As explained in the past as well, the focus will be on ensuring that the revenue growth is faster than cost growth. We will be investing in technology, in new branch openings, and other initiatives which will position us well for the future. Maniyan also mentioned that I'll explain about the ESOP employee cost-related change. Until last year, we followed the intrinsic value method for ESOPs granted to non-material risk takers. For the material risk takers, it was at fair value. From 1st April '26, we have standardized this, and this is in line with best practices, and we have moved we're moving to fair value accounting for ESOPs across all employees. This change has resulted in an incremental employee cost of 32.7 crore and a consequent PAT impact of 24.5 crore. So, when you are comparing year-on-year movement in employee cost and profitability, please keep this accounting change in mind. On asset quality, our GNPA improved to 1.32%, down 20 basis points QoQ and 51 basis points YoY. Our NNPA continues to be the best-in-class in the industry at 0.17%. Both GNPA and NNPA are at decadal lows. Our PCR excluding technical write-off is at 86.78%, and including technical write-off, the coverage is at 94.4%. Credit cost is at 0.31%, down sequentially by 10 basis points and 19 basis points YoY. Our RoA improved to 1.32, up 10 basis points in this quarter and 23 basis points YoY. You will recollect that we had given a guidance of RoA of 3 to 4 bps per quarter, and we did mention that it will not be it will not be on a quarterly basis, but it won't be in every sequential quarter, but for the year, we have given the guidance. And our RoE improved to 13.57%, up 156 basis points QoQ. Last quarter, we did explain the sequential dip in RoE reflected the share warrant subscription money received ahead of deployment, and we said that it is expected to reverse as the capital was deployed. Our book value has grown to 166.32 rupees, and CRAR stands at a very healthy 16.84%. In closing, the bank has delivered its highest ever profit and highest ever other income. Total business crossed 6 lakh crore and advances crossed 3 lakh crore. Over the year, profit has grown 45%, margin expanded 25 bps, cost to income improved by 196 basis points, and credit cost declined by 20 basis points, and our provision coverage ratio has improved by 1,300 basis points. GNPA and NNPA are at decadal lows. The macro picture ahead carries higher inflation and tighter policy, and also the overhang of geopolitical tensions. Competition for deposits will intensify in due course. Our priorities are unchanged: deepen the liability franchise, grow in our chosen segment at the right risk-adjusted return, and hold the line on cost and credit quality. The granular and secured character of this balance sheet is what allows us to be consistent. Thank you all, and we'll now open up for questions.
Moderator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use their handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles.
Souvik Roy (Federal Bank): Ryan, one quick thing before we begin. A quick request to everybody. Please limit yourself to one question per participant, so that we can allow, you know, more people to participate in the discussion. So please bear that in mind. Yes, please go ahead Ryan and open the line.
Moderator: Thank you. We take the first question from the line of Mahukh Arjania from Tara Capital Partners. Please go ahead.
Mahukh Arjania (Tara Capital Partners): Yeah, hi. Congratulations. I had a actually I had a few questions. My first question is on general asset quality, right? Given inflation, drought, does that affect any of your segments, especially the high-yield segments? Have you seen any stress in any of these segments so far? That's my first question. And my second question is on your levered FCNR deposits. The leverage seems to be lower than other banks, right? So any thought process behind it? And my third question is on talks about M&A. You've already clarified on exchanges. But what I want to understand is that I mean why would the bank be keen on acquiring an MFI, given that the cycles may be too short, they are very volatile, and they're very steep and deep bad cycles? So just your thought process around it.
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