The Federal Bank Q2 FY26 earnings call

Federal Bank delivered a strong Q2 FY26, reflecting structural improvements in its income and balance sheet. The bank's average CASA ratio improved significantly by 120 basis points year-on-year and 100 basis points quarter-on-quarter, contributing to NIM expansion. Fee income also saw robust growth, increasing by 13% quarter-on-quarter, with the fee to average assets ratio crossing 1% for the first time. Credit cost moderated to 50 bps in Q2 FY26, aligning with the full-year guidance of 55 bps.

The Net Interest Margin (NIM) improved by 12 basis points quarter-on-quarter to 3.06%, exceeding earlier guidance. This was primarily driven by a 19 bps reduction in deposit costs and a 3 bps reduction in borrowing costs, partially offset by a 14 bps drop in yield on advances. Additionally, a 1 bps gain from CRR optimization and other asset/liability management actions contributed to the improvement, with management expecting further NIM expansion as deposit repricing continues over the next 6 months.

While overall loan growth was 1.5% quarter-on-quarter, the bank is consciously recalibrating its asset mix away from low-yielding corporate and home loans, which historically constituted nearly half of its loan book. High-yielding segments like cards are growing strongly, commercial banking and commercial vehicle finance are seeing healthy double-digit growth, and retail gold loans (excluding Digi-biz) expanded 7% quarter-on-quarter. LAP and BuB segments are also regaining momentum, with new initiatives like a pilot-launched tractor business.

Credit cost moderated to 50 bps in Q2 FY26, down from an elevated Q1, aligning with the full-year guidance of 55 bps. While MFI stress is easing and slippages have dropped, management is not yet 'comfortable' with the situation, indicating ongoing monitoring is required. The bank also made a proactive management overlay provision of INR 46 crores on standard accounts in the retail segment, where stress in 'connected accounts' was observed, even before reclassification.

The bank's CET1 ratio stands at 15.71% (CRAR including CET1, without profit). An upcoming Board meeting on October 24, 2025, will discuss a potential capital raise. Management indicated that the impact of new ECL guidelines on capital would be minimal, estimated to be less than 0.2% on capital, and should not fundamentally alter credit costs or hinder ROA improvement targets.

The credit card business is strategically shifting towards organic acquisition, with approximately 90% of new customers being existing bank customers, enhancing stickiness. The business is currently in a 'middling mild loss, mild profit' zone, with scale being crucial for future profitability. Digital initiatives like the FedOne platform for corporate cash management are driving higher engagement and improved transaction flows, contributing to strong current account growth.