Federal Bank's Q2 reiterates the importance of retail, small-ticket loans

Retail and small-ticket business loans have been a key source of loan book growth, but pricing power is being put to test

After a hurried reaction to results and Federal Bank stock falling over five per cent on Wednesday, some recovery was visible a day later. On Thursday, as the Street got a better handle of numbers, the bank's stock recovered almost 3 per cent.

But beyond the headline numbers, Federal Bank’s September quarter (Q2) numbers have some important takeaways.

Firstly, with 24 per cent year-on-year increase in retail loans, this segment will remain the growth anchor for Federal Bank and possibly for the banking system. Growth was led by newer sub-segments such as personal and auto loans where the book grew by 131 per cent and 60 per cent respectively year-on-year, backed by housing loans which grew by 24 per cent. Despite turning cautious on unsecured personal loans, Federal Bank may have looked at this segment as an opportunity as its competitors have had to slow down growth in this space given the scale they have gathered in recent years. Federal Bank’s inroads into auto loans also indicates that despite the slowdown there is space for late entrants.

However, growth may have come at the cost of profitability or net interest margin (NIM), which fell from 3.15 per cent a year-ago to 3.01 per cent in Q2. Yield on advances, which declined by 22 basis point (bps) year-on-year to 9.33 per cent, indicates the bank’s inability to pass on higher cost to its customers. This is the second takeaway for the banking industry – that in a bid to maintain growth, pricing power in retail loans may be put to test.

The third important takeaway is that, stress from corporate accounts may continue to be on the rise. Elevated slippages (loans turning bad) from corporate accounts was the key concern for IndusInd Bank and so is it for Federal Bank with slippages from this segment increasing by 61 per cent year-on-year to Rs 199 crore for the latter. Analysts at Edelweiss say that given the challenging macro-environment, they will monitor the identified pool of stressed and below-investment grade assets which could lend to volatility in asset quality.

Nonetheless, the Street hasn’t turned pessimistic on Federal Bank just yet. Despite the 13 per cent price correction in six months, majority of analysts polled on Bloomberg remain positive on the stock. Affordable valuations at 1.3x FY21 book also work in its favour.