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FB saw a decent quarter due to core revenue beat; higher NII/fees were offset by opex drag leading to 2.8% miss in core PPoP. Loan growth adjusted for FCNR was healthy at ~4% QoQ, mainly led by mid/high yielding loans viz. BuB/CoB/gold/LAP/unsecured, which on a combined basis grew by ~7% QoQ. Over past 6 quarters share of mid/high yielding segments has consistently improved from 37% to 41% while avg. CASA share has enhanced by 330bps to 31%. NIM may surprise positively in upcoming quarters led by (1) credit flow shifting towards higher yielding loans (2) increasing CASA share (3) normalization of FCNR impact and (4) repo hike of 25bps. We keep multiple at 1.8x on Sep’28 ABV and maintain TP at INR400. Retain ‘BUY’.

Slight miss on core PPoP; NII/ fees beat offset by higher opex: NII was 3% higher at INR31.5bn (PLe INR30.7bn) due to better loan growth and NIM (calc.) that was 3.38% (PLe 3.34%); reported NIM was stable QoQ at 3.32%. Loan/deposit growth at 22%/18.6% YoY were higher (PLe 18.5%/16%). Other income was more at INR14.9bn (PLe INR12.1bn) due to higher fees and treasury gains. Opex at INR24bn was 12.6% above PLe led by higher staff cost and other opex. Core PPoP at INR19.9bn was 2.8% below PLe; PPoP was INR22.3bn. Asset quality was steady; GNPA was lower at 1.32% (PLe 1.44%) due to lesser slippage and higher write-offs. Provisions as expected were INR3.4bn. Core PAT was 4.6% below PLe at INR12.1bn; PAT was INR13.9bn.

Incremental loan mix changing favorably: Credit growth was higher at 7.5% QoQ (PLe 4.5%) due to retail (10.4%), commercial (7%) & corporate (4.9%). Within retail, BuB, LAP and gold saw healthy traction (+7.5/11.0/6.7% QoQ). FB aims to maintain gold loan pricing better than NBFCs. Agri/MFI growth was softer as the bank remains cautious of EL-Nino risk and West-Asia crisis. FCNR(B) deposit accretion was INR149.2bn with leveraged portion at INR94.4bn. Share of focused mid/high yielding segments in credit (adjusted for FCNR) has consistently risen from 37.4% in Q1FY26 to 41.4% in Q2FY27 while avg. CASA share increased from 27.7% to 31% over the same period. Credit growth guidance of mid-teens remains intact. We factor loan growth of 22/16% for FY27/28E.

NIM expected to improve further; fee growth was organic: Excluding the FCNR impact NIM increased QoQ with further likely improvement in Q3FY27 due to normalization in liability/asset base, while interest rate cycle may provide additional cushion. Fees growth of 22% QoQ to INR11.7bn was organic. Opex grew 15.3% QoQ led by (i) ESOP impact of INR327mn, (ii) changes in actuarial assumptions and (iii) branch & staff additions.

Q2FY27 Conference Call Highlights

Balance sheet

• Advances grew by 7.5% QoQ (+21.9% YoY) to INR 3trn; growth was calibrated with healthy momentum across chosen mid yielding segments. Credit growth guidance of mid-teens remains intact, as focus remains on the high yielding granular assets that improve the risk-adjusted return profile of the book.

• Commercial banking segment continued strong growth trajectory with 7% QoQ growth. BuB witnessed healthy growth of 7.5% QoQ as FB started pursuing growth due to justified risk adjusted returns.

• Gold loans grew by 6.7% QoQ to INR442bn. FB aims to maintaining its gold loan pricing better than NBFCs with repo rate hike might drive increase in gold loan rates. Bank has launched new gold loan product provided for income generating business which yields higher rates than other gold loans.

• LAP witnessed strong growth of 11.1% QoQ with good traction in the segment since last 3 quarters. 45% of the loan book is priced to repo rate while 22% against MCLR and 33% being fixed. Management avoided pursuing higher growth in Agri and MFI book considering the impact of EL Nino and geopolitical stress.

• FCNR(B) deposits of INR149.2bn were mobilised. Leverage against these deposits were cautiously kept lower at INR94.4bn considering pricing economics, granularity, ALM, tenor and deployment opportunities. Management remains focused on building the wealth business.

• CASA grew by 6.4% QoQ to INR1.1trn with CASA ratio at 32%. CASA growth was faster than overall deposit growth indicating an improving deposit mix and a higher share of low-cost deposits.

• CA balances grew by 15.2% QoQ as traction in accounts resumed with march seasonality washed off. FB’s average CASA crossed INR1trn in Q2FY27.

• Bank expects competition for deposits to intensify once the liquidity situation normalizes. Average LCR stood at 119.8% during the quarter, within the bank's targeted operating range of 110-120%

Profit & loss

• NIM (reported) declined by 1bp QoQ to 3.2% which was primarily led by FCNR led leveraging. Management indicated that yields have been bottomed out in Q1FY27 with 5-6bps improvement expected per quarter due to liability & asset mix actions, while evolving interest rate cycle may provide additional support, as repo-linked book will get repriced ahead of deposits.

• CoF declined from 5.25% in Q1FY27 to 5.21% in Q2FY27 with management highlighting that pace of decline in CoF has moderated.

• Fee income rose to INR11.2bn, with fees/assets reaching a record 1.11%, driven mainly by the organic granular high-yielding portfolio, while contribution from FCNR book was minimal.

• FB saw healthy treasury gains of INR23.8bn during Q2FY27 which was led by (i) gains from IPO activities and sale of specific investments (ii) encashment of SRs and (iii) recovery of previous quarter losses.

• Opex during the quarter amounted to INR24.2bn (+15.3% QoQ) driven by (i) one-time ESOP impact of INR327mn due to change in methodology (from intrinsic value method to fair value method) for stock options granted to non-material risk takers (ii) impact due to changes in actuarial assumptions (iii) addition of new staff channel (iv) transaction cost on FCNR loans and (v) branch additions and tech investments.

Asset quality

• GNPA improved to 1.32%, down 20bps QoQ/ 51 bps YoY. NNPA continues to be the best in class in the industry at 0.17%.

• Management highlighted that no impact on asset quality was witnessed due to EL Nino as well as west-asia crisis. However, it remains watchful and hence growth in agri/SME was softened during Q2FY27.

• Guidance on the one-time ECL impact remains unchanged at ~1.5-2% of net worth, though HTM hardening may lead to incremental impact on the investment book.

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