Fedbank Financi.

Fedbank Financial Services reported a robust Q2 FY25 with AUM reaching ₹14,218 crores, marking a 7.8% QoQ growth. Both mortgage and gold loan businesses contributed significantly, growing 9% and 8.2% respectively. Disbursements were strong at ₹38 billion, a 30% YoY increase. PAT for the quarter was ₹64.55 crores, an 8% QoQ decline from ₹70.2 crores in Q1, but a 12% YoY growth from ₹57.8 crores in Q2 FY24.

Despite improving 1+ DPD and 30+ DPD numbers, management took an additional ECL provision of ₹22 crores, increasing total ECL from ₹122 crores to ₹151 crores. This proactive measure reflects a cautious view of the changing credit environment, particularly stress observed in small-ticket mortgages. The gross stage 3 improved to 1.9%, and PCR coverage was increased by 250 basis points QoQ. Full-year credit cost guidance was revised upwards from ~80 bps to 90-100 bps, with Q3 and Q4 expected to be 100-110 bps on an ROA basis.

The company invested significantly in its future by adding 46 new branches in Q2, bringing the total to 665 across 18 states. This expansion, along with hiring 400 new employees, led to an increase in expenses by ₹18 crores QoQ and a rise in the cost-to-income ratio from 55.4% in Q1 to 58.6% in Q2. Management expects these investments to yield revenue benefits in coming quarters, eventually bringing the cost-to-income ratio back to Q1 levels.

Fedbank successfully reduced its average blended interest cost by 5 bps QoQ to 8.73%, with incremental borrowing costs under 8.60%. Approximately 85% of borrowings are on floating rate benchmarks, with 40% linked to external benchmarks, positioning the company well for potential future interest rate declines. However, management noted that interest rates have remained elevated, and a funding squeeze in the NBFC sector is making liabilities costly, impacting margins.

The twin-engine strategy is working well, with gold loans performing handsomely and medium-ticket LAP originations increasing 50% QoQ, showing 130% YoY growth in that book. While small-ticket mortgage growth will be measured due to observed stress, the company aims for overall AUM growth of 25% (annualized 40% currently) for FY25, leveraging its diversified product suite. Co-lending volumes for gold loans were static due to regulatory adjustments, but new partnerships are in the pipeline.

The company highlighted several regulatory changes over the past six months, emphasizing its full compliance with all regulations and informal feedback. Fedbank received a rating upgrade from CRISIL to AA+, aligning with its India Ratings and CARE ratings. This improved rating is expected to position the company favorably for long-term borrowings and bond offerings.