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Federal Bank Ltd.

BSE: 500469 Sector: Financials
NSE: FEDERALBNK ISIN Code: INE171A01029
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VOLUME 303334
52-Week high 110.35
52-Week low 67.05
P/E 12.18
Mkt Cap.(Rs cr) 16,640
Buy Price 83.70
Buy Qty 13.00
Sell Price 83.70
Sell Qty 87.00
OPEN 86.00
CLOSE 85.50
VOLUME 303334
52-Week high 110.35
52-Week low 67.05
P/E 12.18
Mkt Cap.(Rs cr) 16,640
Buy Price 83.70
Buy Qty 13.00
Sell Price 83.70
Sell Qty 87.00

Federal Bank Ltd. (FEDERALBNK) - Auditors Report

Company auditors report

TO THE MEMBERS OF THE FEDERAL BANK LIMITED

Report on the Audit of the Standalone Financial Statements Opinion

We have audited the accompanying Standalone Financial Statements of THE FEDERAL BANKLIMITED ("the Bank") which comprise the standalone balance sheet as at 31March 2019 and the standalone profit and loss account the standalone cash flow statementfor the year then ended and notes to the Standalone Financial Statements including asummary of the significant accounting policies and other explanatory information in whichare included the Returns for the year ended on that date audited by the branch auditors ofthe Bank's branches.

In our opinion and to the best of our information and according to the explanationsgiven to us the aforesaid Standalone Financial Statements give the information requiredby the Banking Regulation Act 1949 (र BR Act') as well as the Companies Act 2013("Act") in the manner so required for banking companies and give a true and fairview in conformity with the accounting principles generally accepted in India of thestate of affairs of the Bank as at 31 March 2019 and profit and its cash flows for theyear ended on that date.

Basis for Opinion

We conducted our audit in accordance with the Standards on Auditing (SAs) specifiedunder section 143(10) of the Act. Our responsibilities under those SAs are furtherdescribed in the Auditor's Responsibilities for the Audit of the Standalone FinancialStatements section of our report. We are independent of the Bank in accordance withthe Code of Ethics issued by the Institute of Chartered Accountants of India together withthe ethical requirements that are relevant to our audit of the Standalone FinancialStatements under the provisions of the Act and the Rules thereunder and we have fulfilledour other ethical responsibilities in accordance with these requirements and the Code ofEthics. We believe that the audit evidence we have obtained is sufficient and appropriateto provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that in our professional judgment were of mostsignificance in our audit of the Standalone Financial Statements of the current period.These matters were addressed in the context of our audit of the Standalone FinancialStatements as a whole and in forming our opinion thereon and we do not provide aseparate opinion on these matters.

Description of Key Audit Matters

Identification of Non-Performing Assets (र NPAs') and Provision on Advances GrossNPA: INR 3260.68 crore for year ended 31 March 2019 Charge (including write-off): INR630.55 crore for year ended 31 March 2019 NPA Provision: INR 1606.32 crore as at 31 March2019

Refer to the accounting policies in "Schedule 17 to the Standalone FinancialStatements: Significant Accounting Policies- Use of estimates and Advances and Note 1.4and Note 3.1 of Schedule 18 to the Standalone Financial Statements: Advances"

The key audit matter How the matter was addressed in our audit
Significant estimate and judgment involved

Identification of NPAs is made based on the assessment of various criteria stipulated in the Reserve Bank of India (र RBI') guidelines with regard to the 'Prudential Norms on Income Recognition Asset Classification and Provisioning'. NPA classification is made borrower wise whereby if one facility to the borrower becomes an NPA then all facilities to such a borrower will be treated as an NPA.

Provisions in respect of such NPAs and restructured advances are made based on management's assessment of the degree of impairment of the advances subject to and guided by the minimum provisioning levels prescribed under RBI guidelines prescribed from time to time. The provision on NPAs are also based on the valuation of the security available. In case of restructured accounts provision is made for erosion/diminution in fair value of restructured loans in accordance with the RBI guidelines.

Our key audit procedures included:

Design / controls

• Assessing the design implementation and operating effectiveness of key internal controls over approval recording and monitoring of loans monitoring process of overdue loans (including those which became overdue subsequent to the reporting date) measurement of NPA provision identification of NPA accounts and assessing the reliability of management information which included overdue reports. In addition for corporate loans we tested controls over the internal ratings process monitoring of stressed accounts including credit file review processes and review controls over the approval of significant individual impairment provisions.

• Evaluated the design implementation and operating effectiveness of key internal controls over the valuation of the securities for NPAs and the Special Mention Accounts (र SMA').

We identified NPA identification and provision on loans and advances as a key audit matter because of the significant efforts involved by the management in identifying NPAs based on the RBI guidelines the level of management judgement involved in determining the provision the valuation of security of the NPAs and on account of the significance of these estimates to the financial statements of the Bank. • Testing of management review controls over identification of NPAs measurement of provisions and disclosures in financial statements including auditing management controls on Early Warning System of identifying credit impairment indicators.

• Involved our information systems specialist in the audit of this area to obtain evidence and get assurance over data integrity and calculations including system reconciliations.

Substantive tests

• Test of details for a selection of exposures over calculation of NPA provisions including valuation of collaterals for NPAs as at 31 March 2019; the borrower-wise NPA identification and provisioning determined by the Bank and also testing related disclosures by assessing the completeness accuracy and relevance of data and to ensure that the same is in compliance with the RBI guidelines with regard to the Prudential Norms on Income Recognition Asset Classification and Provisioning.

• We also selected a number of loans to test potential cases of loans repaid by a customer during the period by fresh disbursement(s) to these higher risk loans.

• We selected samples (based on quantitative and qualitative thresholds) of corporate clients where impairment indicators had been identified by management. We obtained management's assessment of the recoverability of these exposures (including individual provisions calculations) and challenged whether individual provisions or lack of were appropriate.

• This included the following procedures:

- Reviewing the statement of accounts approval process board and credit committees minutes credit review of customer review of Special Mention Accounts (र SMA') reports and other related documents to assess recoverability and the classification of the facility;

- Assessed external collateral valuer's credentials and comparing external valuations to values used in management's assessments; and

- For a risk based sample of corporate loans not identified as displaying indicators of deterioration by management challenged this assessment by reviewing the historical performance of the customer and assessed whether any impairment indicators were present.

The key audit matter How the matter was addressed in our audit
Valuation of Financial Instruments (Investments)

Gross value of investments: INR 32224.29 crore as at 31 March 2019

Mark to market: INR 399.82 crore as at 31 March 2019

Net value of investments: INR 31824.47 crore as at 31 March 2019

Refer to the accounting policies in "Schedule 17 to the Standalone Financial Statements: Significant Accounting Policies- Investments" and "Schedule 8 to the Financial Statements: Investments"
Significant estimate and judgment involved Investments

Investments are classified into 'Held for Trading' (र HFT') 'Available for Sale' (AFS') and 'Held to Maturity' (र HTM') categories at the time of purchase. Investments which the Bank intends to hold till maturity are classified as HTM investments.

Investments classified as HTM are carried at amortised cost. Where in the opinion of management a diminution other than temporary in the value of investments has taken place appropriate provisions are made.

Investments classified as AFS and HFT are marked- to-market on a periodic basis as per the relevant RBI guidelines.

We identified valuation of investments as a key audit matter because of the management judgement involved in determining the value of certain investments (Bonds and Debentures Pass through certificates) based on the policy and model developed by the Bank impairment assessment for HTM book and the overall significance to the financial results of the Bank.

Our key audit procedures included:

Design / controls

We tested the design implementation and operating effectiveness of management's key internal controls over the valuation process and independent price verification including the Bank's review and approval of the estimates and assumptions used for the valuation including key authorization and data input controls;

We assessed appropriateness of the valuation methodologies with reference to RBI guidelines and Bank's own valuation policy;

Read investment agreements / term sheets entered into during the current year on a sample basis to understand the relevant investment terms and identify any conditions that were relevant to the valuation of financial instruments.

We tested the controls operated at the Bank for ensuring completeness of the investments.

Substantive tests

We verified the list of investments from eKuber for SLR securities and DP statements for Non-SLR securities.

We independently verified the fair valuation of investments on a sample basis with direct observable inputs and external input data such as market value from FBIL spreads from FIMMDA etc. after considering the requirements of RBI guidelines.

We assessed that the financial statement disclosures appropriately reflected the Bank's exposure to investments valuation risks with reference to the requirements of the prevailing accounting standards and the RBI guidelines.

Information technology (र IT') systems
IT systems and automated controls

The Bank's key financial accounting and reporting processes are highly dependent on information systems including automated controls in systems such that there exists a risk that gaps in the IT control environment could result in the financial accounting and reporting records being materially misstated. Amongst its multiple IT systems seven systems are key for its overall financial reporting.

In addition large transaction volumes and the increasing challenges to protect the integrity of the Bank's systems and data cyber security has become a more significant risk in recent periods.

We have identified 'IT systems and automated controls' as key audit matter because of the high level automation significant number of systems being used by the management and the complexity of the IT architecture.

Our key IT audit procedures included:

• We focused on user access management change management segregation of duties system reconciliation controls and system application controls over key financial accounting and reporting systems.

• We tested a sample of key controls operating over the information technology in relation to financial accounting and reporting systems including system access and system change management program development and computer operations.

• We tested the design and operating effectiveness of key controls over user access management which includes granting access right new user creation removal of user rights and preventative controls designed to enforce segregation of duties.

The key audit matter How the matter was addressed in our audit
• For a selected group of key controls over financial and reporting system we have performed procedures to determine that these controls remained unchanged during the year or were changed following the standard change management process.

• We have also assessed other areas which includes password policies security configurations system interface controls controls over changes to applications and databases and that business users developers and production support did not have access to change applications the operating system or databases in the production environment.

• Security configuration review and related tests on certain critical aspects of cyber security on network security management mechanism operational security of key information infrastructure data and client information management monitoring and emergency management.

Information Other than the Standalone Financial Statements and Auditors' Report Thereon

The Bank's management and Board of Directors are responsible for the other information.The other information comprises the information included in the Bank's Annual Report butdoes not include the Standalone Financial Statements and our auditors' report thereon. TheBank's Annual report is expected to be made available to us after the date of thisauditor's report.

Our opinion on the Standalone Financial Statements does not cover the other informationand we do not express any form of assurance conclusion thereon.

In connection with our audit of the Standalone Financial Statements our responsibilityis to read the other information identified above when it becomes available and in doingso consider whether the other information is materially inconsistent with the StandaloneFinancial Statements or our knowledge obtained in the audit or otherwise appears to bematerially misstated.

When we read the Bank's Annual report if we conclude that there is a materialmisstatement therein we are required to communicate the matter to those charged withgovernance.

Management's Responsibility for the Standalone Financial Statements

The Bank's management and Board of Directors are responsible for the matters stated insection 134(5) of the Act with respect to the preparation of these Standalone FinancialStatements that give a true and fair view of the state of affairs profit and cash flowsof the Bank in accordance with the accounting principles generally accepted in Indiaincluding the Accounting Standards specified under Section 133 of the Act provisions ofSection 29 of the Banking Regulation Act 1949 ("BR Act") and the circularsguidelines and directions issued by the Reserve Bank of India ("RBI") from timeto time. This responsibility also includes maintenance of adequate accounting records inaccordance with the provisions of the Act for safeguarding of the assets of the Bank andfor preventing and detecting frauds and other irregularities; selection and application ofappropriate accounting policies; making judgments and estimates that are reasonable andprudent; and design implementation and maintenance of adequate internal financialcontrols that were operating effectively for ensuring the accuracy and completeness ofthe accounting records relevant to the preparation and presentation of the standalonefinancial statements that give a true and fair view and are free from materialmisstatement whether due to fraud or error.

In preparing the standalone financial statements management and Board of Directors areresponsible for assessing the Bank's ability to continue as a going concern disclosingas applicable matters related to going concern and using the going concern basis ofaccounting unless management either intends to liquidate the Bank or to cease operationsor has no realistic alternative but to do so. The Board of Directors are also responsiblefor overseeing the Bank's financial reporting process.

Auditor's Responsibilities for the Audit of the Standalone Financial Statements

Our objectives are to obtain reasonable assurance about whether the standalonefinancial statements as a whole are free from material misstatement whether due to fraudor error and to issue an auditor's

report that includes our opinion. Reasonable assurance is a high level of assurancebut is not a guarantee that an audit conducted in accordance with SAs will always detect amaterial misstatement when it exists. Misstatements can arise from fraud or error and areconsidered material if individually or in the aggregate they could reasonably beexpected to influence the economic decisions of users taken on the basis of thesestandalone financial statements.

As part of an audit in accordance with SAs we exercise professional judgment andmaintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the standalonefinancial statements whether due to fraud or error design and perform audit proceduresresponsive to those risks and obtain audit evidence that is sufficient and appropriate toprovide a basis for our opinion. The risk of not detecting a material misstatementresulting from fraud is higher than for one resulting from error as fraud may involvecollusion forgery intentional omissions misrepresentations or the override of internalcontrols.

• Obtain an understanding of internal control relevant to the audit in order todesign audit procedures that are appropriate in the circumstances. Under section 143(3)(i)of the Act we are also responsible for expressing our opinion on whether the Bank hasadequate internal financial controls with reference to financial statements in place andthe operating effectiveness of such controls.

• Evaluate the appropriateness of accounting policies used and the reasonablenessof accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management's use of the going concern basisof accounting and based on the audit evidence obtained whether a material uncertaintyexists related to events or conditions that may cast significant doubt on the Bank'sability to continue as a going concern. If we conclude that a material uncertainty existswe are required to draw attention in our auditor's report to the related disclosures inthe standalone financial statements or if such disclosures are inadequate to modify ouropinion. Our conclusions are based on the audit evidence obtained up to the date of ourauditor's report. However future events or conditions may cause the Bank to cease tocontinue as a going concern.

• Evaluate the overall presentation structure and content of the standalonefinancial statements including the disclosures and whether the standalone financialstatements represent the underlying transactions and events in a manner that achieves fairpresentation.

We communicate with those charged with governance regarding among other matters theplanned scope and timing of the audit and significant audit findings including anysignificant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have compliedwith relevant ethical requirements regarding independence and to communicate with themall relationships and other matters that may reasonably be thought to bear on ourindependence and where applicable related safeguards.

From the matters communicated with those charged with governance we determine thosematters that were of most significance in the audit of the standalone financial statementsof the current period and are therefore the key audit matters. We describe these mattersin our auditors' report unless law or regulation precludes public disclosure about thematter or when in extremely rare circumstances we determine that a matter should not becommunicated in our report because the adverse consequences of doing so would reasonablybe expected to outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

The balance sheet and the profit and loss account have been drawn up in accordance withthe provisions of Section 29 of the BR Act Section 133 of the Act.

(A) As required by sub section (3) of Section 30 of the BR Act we report that:

(a) we have sought and obtained all the information and explanations which to the bestof our knowledge and belief were necessary for the purpose of our audit ;

(b) the transactions of the Bank which have come to our notice have been within thepowers of the Bank; and

(c) since the key operations of the Bank are automated with the key applicationsintegrated to the core banking systems the audit is carried out centrally as all thenecessary records and data required for the purposes of our audit are available therein.However during the course of our audit we have visited 40 branches. Returns from 1234branches were received duly audited by other auditors and were found adequate for thepurpose of our audit.

(B) Further as required by Section 143(3) of the Act we report that:

(a) we have sought and obtained all the information and explanations which to the bestof our knowledge and belief were necessary for the purposes of our audit and have foundthem to be satisfactory;

(b) in our opinion proper books of account as required by law

(C) have been kept by the Bank so far as it appears from our examination of thosebooks;

(c) the reports on the accounts of the 1234 branches of the Bank audited by branchauditors under Section 143(8) of the Act have been forwarded to us and have been properlydealt with by us in preparing this report;

(d) the standalone balance sheet the standalone profit and loss account and thestandalone cash flow statement dealt with by this Report are in agreement with the booksof accounts.

(e) in our opinion the aforesaid standalone financial statements comply with theAccounting Standards specified under Section 133 of the Act to the extent they are notinconsistent with the accounting policies prescribed by the RBI;

(f) on the basis of the written representations received from the directors as on 31March 2019 taken on record by the Board of Directors none of the directors isdisqualified as on 31 March 2019 from being appointed as a director in terms of Section164(2) of the Act;

(g) with respect to the adequacy of the internal financial controls with reference tofinancial statements of the Bank and the operating effectiveness of such controls referto our separate Report in "Annexure A"; and

With respect to the other matters to be included in the Auditors' Report in accordancewith Rule 11 of the Companies (Audit and Auditors) Rules 2014 in our opinion and to thebest of our information and according to the explanations given to us:

G.S.R. 308(E) dated 30 March 2017 issued by the Ministry of Corporate Affairs is notapplicable to the Bank (D) With respect to the matter to be included in the Auditors'Report under section 197(16):

i. The Bank is a banking company as defined under Banking Regulation Act 1949.Accordingly the requirements prescribed under Section 197 of the Companies Act 2013 donot apply.

For B S R & Co. LLP

Chartered Accountants Firm's Registration No: 101248W / W-100022

Akeel Master

Partner

Membership No: 046768

For M.M. Nissim & Co.

Chartered Accountants

Firm's Registration No: 107122W

Sanjay Khemani

Partner

Membership No: 044577

Mumbai May 4 2019

i. The Bank has disclosed the impact of pending litigations on its financial positionin its Standalone Financial Statements - Refer Schedule 12 and No.4.7 of Schedule 18 tothe Standalone Financial Statements;

ii. The Bank has made provision as required under the applicable law or accountingstandards for material foreseeable losses if any on long-term contracts includingderivative contracts- Refer Note 4.12 of Schedule 18 to the Standalone FinancialStatements ;

iii. There has been no delay in transferring amounts required to be transferred tothe Investor Education and Protection Fund by the Bank

iv. The disclosures required on holdings as well as dealing in specified bank notesduring the period from 8 November 2016 to 30 December 2016 as envisaged in notification

ANNEXURE A TO THE INDEPENDENT AUDITORS' REPORT ON THE STANDALONE FINANCIAL STATEMENTSOF THE FEDERAL BANK FOR THE YEAR ENDED 31 MARCH 2019.

Report on the internal financial controls with reference to the aforesaid standalonefinancial statements under Clause (i) of Sub-section 3 of Section 143 of the CompaniesAct 2013

(Referred to in paragraph (B)(g) under 'Report on Other Legal and RegulatoryRequirements' section of our report of even date)

Opinion

We have audited the internal financial controls with reference to financial statementsof The Federal Bank Limited ("the Bank") as of 31 March 2019 in conjunction withour audit of the standalone financial statements of the Bank for the year ended on thatdate.

In our opinion the Bank has in all material respects adequate internal financialcontrols with reference to financial statements and such internal financial controls wereoperating effectively as at 31 March 2019 based on the internal financial controls withreference to financial statements criteria established by the Bank considering theessential components of internal control stated in the Guidance Note on Audit of InternalFinancial Controls Over Financial Reporting issued by the Institute of CharteredAccountants of India (the "Guidance Note").

Management's Responsibility for Internal Financial Controls

The Bank's management and the Board of Directors are responsible for establishing andmaintaining internal financial controls based on the internal financial controls withreference to financial statements criteria established by the Bank considering theessential components of internal control stated in the Guidance Note. Theseresponsibilities include the design implementation and maintenance of adequate internalfinancial controls that were operating effectively for ensuring the orderly and efficientconduct of its business including adherence to Bank's policies the safeguarding of itsassets the prevention and detection of frauds and errors the accuracy and completenessof the accounting records and the timely preparation of reliable financial informationas required under the Companies Act 2013 (hereinafter referred to as "theAct").

Auditors' Responsibility

Our responsibility is to express an opinion on the Bank's internal financial controlswith reference to financial statements based on our

audit. We conducted our audit in accordance with the Guidance Note and the Standards onAuditing prescribed under section 143(10) of the Act to the extent applicable to anaudit of internal financial controls with reference to financial statements. ThoseStandards and the Guidance Note require that we comply with ethical requirements and planand perform the audit to obtain reasonable assurance about whether adequate internalfinancial controls with reference to financial statements were established and maintainedand whether such controls operated effectively in all material respects.

Our audit involves performing procedures to obtain audit evidence about the adequacy ofthe internal financial controls with reference to financial statements and their operatingeffectiveness. Our audit of internal financial controls with reference to financialstatements included obtaining an understanding of such internal financial controlsassessing the risk that a material weakness exists and testing and evaluating the designand operating effectiveness of internal control based on the assessed risk. The proceduresselected depend on the auditor's judgement including the assessment of the risks ofmaterial misstatement of the standalone financial statements whether due to fraud orerror.

We believe that the audit evidence we have obtained is sufficient and appropriate toprovide a basis for our audit opinion on the Bank's internal financial controls withreference to financial statements.

Meaning of Internal Financial controls with Reference to Financial Statements

A Bank's internal financial controls with reference to financial statements is aprocess designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A Bank's internal financial controls withreference to financial statements include those policies and procedures that (1) pertainto the maintenance of records that in reasonable detail accurately and fairly reflectthe transactions and dispositions of the assets of the Bank; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles and that receiptsand expenditures of the Bank are being made only in accordance with authorisations ofmanagement and directors of the Bank; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorised acquisition use or disposition of theBank's assets that could have a material effect on the financial statements.

Inherent Limitations of Internal Financial controls with Reference to FinancialStatements

Because of the inherent limitations of internal financial controls with reference tofinancial statements including the possibility of collusion or improper managementoverride of controls material misstatements due to error or fraud may occur and not bedetected. Also projections of any evaluation of the internal financial controls withreference to financial statements to future periods are subject to the risk that theinternal financial controls with reference to financial statements may become inadequatebecause of changes in conditions or that the degree of compliance with the policies orprocedures may deteriorate.

For B S R & Co. LLP

Chartered Accountants Firm's Registration No: 101248W / W-100022

Akeel Master

Partner

Membership No: 046768

For M.M. Nissim & Co.

Chartered Accountants Firm's Registration No: 107122W

Sanjay Khemani

Partner

Membership No: 044577

Mumbai May 4 2019