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Federal Bank Ltd. (FBL), is an Indian private commercial bank, headquartered in Kerala. FBL owns 1,418 branches with a loan book size of Rs.2,06,930cr. FBL is the second-largest bank and the largest private sector bank in Kerala, with nearly 42% of its 1,418 branches located in the state. The bank has a strong retail funding franchise, including a stable base of NRI deposits, largely contributed by remittances from the expatriate Indian community in the Middle East.

FBL has a large presence in the southern states of the country with a huge asset and a liability franchise, however the bank is diversifying away from Kerala. With a reducing concentration in the home state and increased geographical diversification, the bank is strengthening its position in the market.

FBL has a well-diversified granular deposit profile with a low reliance on bulk deposits. Its granular deposits (deposits lower than INR20 million) constituted 81% of the total deposits as of 3QFY24 with the overall current accounts and savings accounts constituting 30.6% of the total deposits. Non-resident external deposits stood at 30.3% of the total deposits in 3QFY24 (FY23: 33.1%; FY22: 37.1%) and have been largely stable over the years. Further, the bank has maintained its NRI deposits share/total deposits and its share in NRI remittances was 19.3% as of 3QFY24 (FY23: 19.3%, FY22: 21.06%, FY21: 18.20%). This large granular funding is helping FBL to maintain lower funding costs than that of its large peers.

The bank’s gross non-performing assets moderated to 2.29% in 3QFY24 (FY23: 2.36%; FY22: 2.8%), with improved recoveries and upgradation. FBL’s provision coverage ratio improved to 72.3% in 3QFY24 (71.2%; 66.3%).

FBL’s net interest margin declined 36bp yoy to 3.19% in 3QFY24 (FY23: 3.31%, FY22: 3.20%), largely because of higher flows towards term deposits and lower CASA ratio. However, the overall deposits profile was supported by its strong low-cost retail liability franchise, a shift in loan mix towards highyielding retail loans and the increase in gold loan proportion in the overall book.

FBL’s improved visibility on the diversification of asset profile outside its core geographies, sustained market share gains on both asset and liabilities, traction in the new retail products with adequate seasoning, build-up of other noninterest revenue streams, along with a sustained diversification in operating geographies comparable to peers will trigger a re-rating in the stock.

The Federal Bank has been showcasing solid performance, with advance growth of 21% and PAT growth of 25.3%YoY. The performance is expected to continue in the foreseeable future, which could lead to a re-rating in the stock and hence we recommend a Buy.

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