Federal Bank Posts Record Rs 1,386 Crore Q2 Profit as Bad Loans Fall to Decade Lows

Federal Bank on Friday reported the most profitable quarter in its history, with standalone net profit for July-September rising 45.10% from a year earlier to Rs 1,386.09 crore. The Kerala-based lender's profit was also up nearly 18% from Rs 1,177 crore in the June quarter, and its bad-loan ratios dropped to their lowest levels in about a decade.

On a consolidated basis, which includes its subsidiaries, net profit came in at Rs 1,498.65 crore.

What drove the jump

The core lending business did most of the work. Net interest income, the gap between what the bank earns on loans and what it pays on deposits, rose 26.38% to Rs 3,153.40 crore. Net interest margin improved by 26 basis points from a year ago to 3.32%, a notable gain at a time when many Indian banks have been complaining about margin pressure as deposit costs stay high.

Fee income was another bright spot, growing 31.86% to Rs 1,167.71 crore, while total other income rose 37.73% to Rs 1,490.44 crore. Operating profit climbed 35.35% to Rs 2,225.37 crore.

Balance-sheet growth was healthy as well. Advances rose 21.66% to about Rs 3.02 lakh crore and deposits increased 18.61% to Rs 3.43 lakh crore, taking total business past Rs 6.4 lakh crore. Low-cost current and savings account balances grew 22.56% to Rs 1.10 lakh crore, which helps explain why margins held up.

Asset quality at its cleanest in years

The most striking number in the release may be the bank's asset quality. Gross non-performing assets fell to 1.32% of loans from 1.83% a year earlier, and net NPAs dropped to just 0.17% from 0.48%. Lower stress in the book means smaller provisions, which flows straight through to profit.

The headline figure would have been slightly higher but for an accounting change. A move to fair-value accounting for employee stock options added Rs 32.72 crore to staff costs and reduced reported net profit by about Rs 24.49 crore for the quarter.

Why the stock reaction was muted

Despite the record result, the share price response was restrained. The stock rose as much as 2.9% to an intraday high of Rs 344.80 on the NSE after the numbers came out, but pared most of the gain to close at around Rs 338, up roughly 0.9% from Thursday's close.

Part of the reason is that expectations were already high after a strong June quarter, and private bank stocks have broadly been weighed down by persistent foreign selling. Investors will also want to see whether the 3.32% margin is sustainable once the Reserve Bank's recent rate increase feeds fully into deposit repricing.

What it means

For Federal Bank, the quarter strengthens the case that its push into higher-yielding retail and business loans is paying off without a deterioration in credit quality. For the wider sector, it sets a demanding benchmark ahead of results from larger private lenders, including HDFC Bank and Axis Bank, which are due to report over the weekend.

This is an original summary based on public reporting. See our editorial policy for how we source, write, and correct our stories.