Federal Bank’s June quarter profit impacted by higher provisioning for microfinance loans

Federal Bank’s (FB) Q1FY26 earnings missed our estimates, owing to elevated provisioning towards the MFI (Micro Finance loans) portfolio, coupled with muted growth on both sides of the balance sheet, offset by stronger traction in fee income. Deposit growth (8% YoY, 1.3% QoQ) was soft, while the CASA ratio (Current & Savings account deposits to total deposits ratio) was largely stable at 30.3% (+12 bps QoQ), driven by pick-up in savings account balances.

Microfinance loans stress has peaked out

The management indicated that the MFI stress has peaked out, with other asset classes remaining stable. FB continues to scale its mid-yielding asset segments, increasing its mix of fixed-rate loans to improve profitability and quality of earnings. We believe FB is well-placed to capitalize on its balance sheet strengths (quality deposit franchise and superior underwriting standards), with clear catalysts for earnings reflation, compared to larger peers that are nearly-fully optimized. We maintain BUY with a TP of INR225 (1.3x Mar-27 ABVPS).

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Source: HDFC Securities Institutional Equities

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