Federal Bank lending growth shows hopes of recovery amid the holiday season

The Federal Bank Ltd’s September quarter update showed encouraging signs of an economic recovery following the easing of restrictions imposed to contain the second wave of the pandemic.

The private sector bank’s loan portfolio grew 10% for the September quarter from a year earlier, while deposits also showed a similar expansion, the lender said in its first update filed. from stock exchanges. On a sequential basis, loan growth was 3.4%, a decent rebound from the 1.5% contraction seen in the June quarter. Growth is likely to have come from the retail segment with an improvement in gold loans and unsecured personal loans, analysts said.

Retailing has been a driving force behind Federal Bank lending growth in the period following the ebb of the second wave of the pandemic.

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Also for the June quarter, the bank reported 15% growth in personal loans, although overall account growth was modest 7%. Also in the September quarter, much of the growth is likely to come from retail.

As such, the Federal Bank’s reconciliation with Visa for credit card offerings to leverage potential festival spending shows that it is focused on retail.

What works against the bank is its poor performance on asset quality during the June quarter. The lender reported an increase in provisions as stress increased in the loan segments. The increased funding caused the lender to miss Street’s estimate of net income.

The bank also increased its provisions on gold loans, the most secure loan products. Since then, investors have been wary of the quality of assets.

That said, the bank’s performance during the second wave of the coronavirus pandemic should be appreciated as its operations are concentrated in the regions most affected by the lockdowns, analysts said.

Kerala contributes significantly to the bank’s activities and several areas of the state were severely blocked during the second wave.

Some profits are expected on the net interest margin front. The 18% growth in its low-cost current account and savings account deposits will help control the cost of the bank’s funds. This should increase the margins.

“We expect the margin to improve at 2TFY22, supported by a recovery in credit trends and a decline in the cost of funds,” analysts from Motilal Oswal Financial Services Ltd said in a note.

Despite equities gaining 3% over the past month, the Federal Bank’s stock has underperformed the sector index over a six-month period due to asset quality issues. Going forward, improved bad debt metrics should give investors a reason to warm up.

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