Fedbank Financial Services Limited — Q2 FY25 earnings call

Call held 23 Oct 2024

Management summary

Fedbank Financial Services reported a busy Q2 FY25 with robust AUM growth driven by both mortgage and gold loans. Despite an 8% QoQ PAT degrowth, YoY growth remained strong at 12%. The company made significant investments in branch expansion and technology, leading to a higher cost-to-income ratio. Management acknowledged a challenging credit environment, particularly in small-ticket mortgages, and increased provisioning while maintaining strong asset quality metrics.

Highlights

  • AUM grew to ₹14,218 crores, a 7.8% QoQ growth.

  • PAT for Q2 FY25 was ₹64.55 crores, an 8% QoQ degrowth but 12% YoY growth.

  • Disbursements elevated at ₹38 billion, representing a 30% YoY growth.

  • Gold loan tonnage reached 10.7 tons, a 2.4 tons YoY increase.

  • Net Interest Income grew 6% QoQ and 28% YoY.

  • Cost-to-Income ratio increased from 55.4% in Q1 to 58.6% in Q2 due to growth investments.

  • Gross Stage 3 improved to 1.9%, but an additional ECL provision of ₹22 crores was taken.

  • Average blended interest cost reduced by 5 bps QoQ to 8.73%.

Concerns

  • Changing credit environment and stress in small-ticket mortgages

Key financials

  1. AUM ₹14,218 Cr +7.8%QoQ
  2. PAT ₹64.55 Cr +12%YoY
  3. Interest Income ₹479 Cr +28%YoY
  4. Net Interest Income — +28%YoY
  5. Cost-to-Income Ratio 58.6%
  6. Gross Stage 3 1.9%

What they filed

Q1 FY27: revenue up 29.6%, net profit up 52.0% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue513 530 536 517 535 +4%555 +5%616 +15%670 +30%
Net profit65 19 72 75 80 +23%88 +363%101 +40%114 +52%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

  • Mortgage Business
    9% Growth
  • Gold Loans
    8.2% Growth10.7 tons Tonnage
  • MSME Originations
    ₹1,200 Cr Originations
  • Gold Loan Originations
    ₹2,610 Cr Originations

Guidance & targets

Profitability

  • Credit Cost (ROA basis) Profitability · FY25 · Medium confidence 90-100 bps

    Previously 80 bps → 90-100 bps

    At this point in time, it looks like we may -- it may be a little higher than 80 basis points, okay, given what we are seeing. Now as a step towards that, we've done a discretionary provisioning this quarter and maybe we could see 90 basis points or even 100 basis points in the -- for the year entirely.

    — Anil Kothuri, MD and CEO

  • Credit Cost (ROA basis) Profitability · Q3, Q4 FY25 · Medium confidence 100-110 bps
    So see basically, I think at least for Q3, there is visibility. You know, we, as Anil articulated, we do this annual PD, LGD refresh exercise. And as of now, I think we should go with a three-digit bps number, maybe 100, 110 bps number for Q3, Q4.

    — C.V. Ganesh, CFO

  • ROE Profitability · FY25 · Medium confidence 2.4%

    Previously 2.7-2.75% → 2.4%

    So we are saying we will try to maintain it at the FY '24 level. FY '24 it was 2.4.

    — C.V. Ganesh, CFO

Capital

  • PCR coverage Capital · gradually · Medium confidence at least 100 bps or a little more
    So I'll just add there, Renish, also our stated intent is to take up our PCR gradually. And from that extent to that extent, I think conservatively you should read it as being at least 100 basis points or a little more.

    — C.V. Ganesh, CFO

Efficiency

  • Cost as a percentage of AUM Efficiency · FY25 · Medium confidence 30 bps improvement
    In terms of cost as a percentage of AUM, it is reasonable that we may get to a 30 basis points kind of improvement across the year.

    — Anil Kothuri, MD and CEO

Branch Expansion

  • Branch opening agenda Branch Expansion · by the end of Q3 FY25 · High confidence done
    And the intent is to get done with the branch opening agenda by the end of Q3.

    — Anil Kothuri, MD and CEO

Growth

  • AUM Growth Growth · medium-term · Medium confidence 25%
    Our guidance always has been that we will strive to do 25% and anything over and above that will be opportunistic.

    — Anil Kothuri, MD and CEO

Risks & concerns

  • Changing credit environment and stress in small-ticket mortgages

    high

    Management noted that the credit environment seems to have materially changed, especially for smaller-ticket mortgages, leading to increased provisioning.

    Management acknowledged

  • Elevated interest rates and funding squeeze

    medium

    Interest rates haven't declined as expected, and a funding squeeze from banks is making liabilities costly, impacting NIM.

    Management acknowledged

  • Inflation impacting customer repayment capacity

    medium

    Inflation is hitting the informal business segment, reducing real incomes and making it difficult for customers to meet EMI payments.

    Management acknowledged

  • Regulatory changes (RBI circulars)

    medium

    Several regulatory vicissitudes over the past six months require constant analysis and adherence, impacting business operations and potentially co-lending.

    Management acknowledged

Q&A highlights

2 direct
Rationale for increased ECL provisioning despite improving DPD metrics Direct
So, I will tell you how we see it. You look at our provisioning. One of our core tenets is to take up the provisioning on the portfolio... The second is that we did achieve good outcomes in the quarter gone by. But that's the result of intensive activity on the field and the signals that we get is that people are finding it a little difficult to come up with their monthly EMIs as opposed to before.

Reveals management's proactive stance on asset quality and their forward-looking view of potential stress, even if current reported metrics appear stable.

Asked by Renish, ICICI

Revision of full-year credit cost guidance Direct
So it's a fair point. Last quarter I did say that our cost of credit through the year will be about 80 basis points, up from 60 basis points in the year gone by. At this point in time, it looks like we may -- it may be a little higher than 80 basis points, okay, given what we are seeing.

Indicates a more cautious outlook on credit quality for the remainder of the fiscal year, impacting profitability expectations.

Asked by Renish, ICICI

Gold loan co-lending volume and regulatory impact Partial
So the hiatus that we have seen over the past quarter is because people are trying to come to grips with the -- with the altered reality, if any, for them. And otherwise, structurally, I don't see a slowing down of co-lending for gold loan because the banks are hungry to get as much gold loan as possible because it's a zero-risk weight product for them.

Explains the temporary slowdown in co-lending due to regulatory adjustments, highlighting a potential future growth driver once partners adapt.

Asked by Pranav Gupta, Aionios Alpha Investor Advisor

2 min read 6 chapters

Detailed narrative

Q2 FY25 Performance Overview

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.

Asset Quality and Provisioning Strategy

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.

Investment in Growth and Operational Efficiency

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.

Funding and Interest Rate Dynamics

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.

Segment Performance and Strategic Focus

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.

Regulatory Environment and Rating Upgrade

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.

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