Gold loans power up Federal Bank’s Q3, but stress seems under control

Operating profit for the quarter grew at a healthy 29% to ₹963 crore as core interest income increased by 24%. Retail loans and loans to small businesses showed strong pick up, growing 16% and 13% respectively. In a call with the media, the management said that it is seeing growth across categories and loan growth for the full year could reach 8-10%.

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Two highlights of Federal Bank’s operating performance were the sharp rise in gold loans and the drop in cost of funds. Low-cost current and savings account deposits grew 6% to form 34.48% of total deposits. Low interest outgo on deposits not only beefed up net interest margin but also its core interest income.

With a 67% year-on-year surge, gold loans powered up the loan book growth. Share of gold loans in the total portfolio is a little over 11% as of December. Managing director Shyam Srinivasan said that the bank is comfortable with the growth and won’t have trouble with up to 15% of its loan book being gold loans. Loan-to-value ratios are lower than industry average at 72-73%, which protects the bank against volatile gold prices. Nevertheless, analysts have pointed out in the past that gold loans infuse volatility in earnings and hence should be monitored. The pain point was the corporate loan book, which shrank around 5% for the December quarter. “We have seen good growth in retail banking, business banking, gold loans and even agri loans and we expect these to contribute to loan growth… the corporate loan book may not give us material growth,” he said.

Federal Bank’s growth metrics are showing recovery from the pandemic’s impact, but asset quality is yet to be comfortable. To be sure, the judicial standstill on bad loan recognition has meant that both gross and net bad loans have slipped as a percentage of the book for the bank. But adjusting for this forbearance, Federal Bank’s gross bad loans formed 3.38% of assets, a jump from 2.84% in the previous quarter. Even so, the lender has a formidable provision coverage ratio of 77% which should comfort investors. Also, the potential restructuring loan pile may not exceed 1.5% of the loan book, the management said.

Given that the outlook on asset quality hasn’t worsened, analysts believe current valuations are modest compared with peers. Shares of the bank have surged 37.5% in the last three months including the 2.6% rise on Wednesday. Despite the gains, shares are trading at a discount to the estimated book value for FY22.