Federal Bank -Q3FY24 results update

Highest-ever net profit aided by healthy operating performance
In the third quarter of the 2024 fiscal year (Q3FY24), Federal Bank reported its highest-ever net profit, thanks to a strong operational performance that exceeded market expectations.
Net Interest Income (NII): The bank’s NII was Rs. 2,123 crores, growing by 3.3% from the previous quarter and 8.5% compared to the same quarter last year. This was higher than the market prediction of Rs. 2,000 crores.
Pre-Provision Operating Profit (PPOP): PPOP reached Rs. 1,437 crores, up by 8.5% from the last quarter and 12.8% year-over-year.
Provisions: The bank set aside Rs. 431 crores for potential losses, higher than Rs. 371 crores in the previous quarter but lower than Rs. 471 crores from the same period last year.
Net Profit: The bank’s net profit increased to Rs. 1,007 crores, a 5.5% increase from the last quarter and 25.2% higher than last year, surpassing the expected Rs. 933 crores.
Net Interest Margin (NIM): NIM slightly dropped to 3.19%, mainly due to higher costs of funds.
Non-Performing Assets (NPAs): The Gross NPA was 2.29%, slightly up from the previous quarter but down from last year. Net NPA was 0.64%, similar to the last quarter and lower than last year.
Credit Cost: There was a significant increase in credit cost to 0.31%, indicating higher defaults in the retail and corporate loan sectors.
Cost to Income Ratio: This ratio stood at 51.9%, indicating the bank’s efficiency in managing its expenses.
Capital Adequacy Ratio: This declined to 15.02%, showing a slight decrease in the bank’s financial strength.

Deposits and Loans:
Gross Deposits: Showed healthy growth at Rs. 2,39,591 crores, a sign that the bank is attracting more customers.
Gross Advances: Also improved to Rs. 2,02,475 crores, indicating stable and diverse loan growth.
CASA Ratio: Reached a 15-quarter low at 30.63%, as time deposits (TDs) grew at the expense of low-interest CASA deposits.

Key Concall Highlights

• During the last quarter (Q3FY24), the bank faced an issue with one client’s account, leading to a higher provision for potential losses. This account, worth Rs. 70 crores, had problems because of a fire at the client’s factory. However, the bank expects to resolve this issue in the next quarter (Q4FY24).
• Even with tough competition in the banking sector, the bank’s management believes it will achieve a Return on Assets (RoA) of 1.4% in the future. This optimism is based on an improved mix of different banking products.
• Interest rates on deposits might go up, but the bank doesn’t expect this to significantly affect its Net Interest Margin (NIM). This is because the overall rates for different time periods might start to balance out.
• The bank anticipates higher operating expenses for the next few quarters due to some pending pension costs, although the exact financial impact is still being worked out by the management.
• The bank is also adjusting its mix of fixed and floating rate products, which is likely to influence its NIMs starting from the 2025 fiscal year (FY25).
• Recent changes in the rules for calculating risk didn’t have much effect on the bank’s CET-1 ratio, a key measure of its financial strength.
• Looking ahead, the bank’s management is positive about the growth in lending and remains confident in achieving an 18-19% increase in loans for the 2024 fiscal year (FY24).

Valuation and Outlook
Federal Bank had a strong performance in the third quarter of the 2024 fiscal year (Q3FY24), doing better than what many people expected, especially in terms of net profit. The bank’s strategy of focusing on business loans and vehicle loans, along with deposits from non-resident Indians (NRIs), helped increase its loan activities.
Despite a slight decrease in Net Interest Margin (NIM) this quarter, the bank’s profits weren’t much affected thanks to its emphasis on lending products that bring in higher profits. A notable area of growth was in microfinance lending, which saw a huge 161% increase compared to last year. Vehicle financing also grew impressively by 67% year-over-year.
Another positive point was the bank’s lower cost-to-income ratio, which improved due to better revenue. However, there was a slight concern with the bank’s asset quality, as there were more loans that turned bad (slippages) this quarter. This will be something to watch in the coming months.
Federal Bank has been consistently showing strong return ratios and is expanding its branches as planned. This should help improve its profitability in the future. However, it’s important that this growth isn’t overshadowed by worsening loan quality. Unexpected bad loans in the corporate sector could increase the bank’s credit costs and make it harder to improve its Return on Assets (RoA).
The bank’s involvement in para-banking activities like insurance, investment, and wealth management is also expected to contribute to its growth. With ambitions to achieve higher returns through a mix of different types of loans and better pricing strategies, Federal Bank is well-positioned to be a leader in the regional private banking sector.