Federal Bank’s Q4 update meets expectations, but second covid wave a risk
- Regional lockdowns are expected to dent credit demand as mobility restrictions may dampen production plans of companies. As such, consumption demand is expected to be hit too
Federal Bank’s fourth quarter balance sheet growth metrics show that the lender has managed to achieve a healthy loan growth for FY21, despite the deep contraction in initial months due to lockdown.
In its advance update on key metrics, the private sector lender reported that its loan book grew by 9% for FY21. This is close to the management’s guidance of 8-10% growth. That said, investors would need to watch for the drivers of growth. For the December quarter, the bank’s loan growth largely came from gold loans. Gold loans had grown at a stellar 67% year-on-year in that quarter and their share has gone up to 11% of the book for the bank. Gold loans come with their own set of issues since the price of the underlying asset tends to swing. To be sure, Federal Bank’s 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.
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The bank’s corporate loan growth has floundered in the wake of the pandemic. The book shrank 5% in the December quarter and investors should watch out for any lingering pain points in the March quarter as well. To be sure, the government’s credit guarantee scheme is expected to give a fillip. That leaves us with the retail loan portfolio. This showed a growth of 16% for the December quarter. The lender has performed well here and expectations are that the bank would continue to show strong growth here.
What’s more is that the bank is keen on increasing its high-margin retail book. According to a Times of India report, dated 19 March, the bank is looking for inorganic growth too. The lender may acquire a micro finance portfolio, managing director Shyam Srinivasan was quoted saying in the report. The goal is to improve return on assets for the lender.
Of course, the biggest risk is the second wave of covid-19 infections that is gaining traction across the country. Regional lockdowns are expected to dent credit demand as mobility restrictions may dampen production plans of companies. As such, consumption demand is expected to be hit too. Today, the bank's shares were down 4%, more than the over 2% drop in broad markets on concerns over recovery.
What works for Federal Bank’s valuations is its reasonable balance sheet growth despite the headwinds of the pandemic. A strong deposit growth, especially in low cost current and savings account too works in its favour. But the pandemic is far from over and early signs of a slowdown in recovery are visible. FY21 may have been challenging, but FY22 would be far from easy.
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