Detailed Narrative
Q2 FY26 Financial Performance Overview
Fedbank Financial Services reported a robust Q2 FY26, with AUM growing 13.5% year-on-year to INR16,136 crores, or 28% excluding business loans. Disbursals surged by 36.5% year-on-year to INR5,205 crores. Net Profit for the quarter stood at INR80.2 crores, marking a 24.2% year-on-year increase, while Net Interest Income grew 10.9% and Operating Profit grew 10.1% year-on-year.
Strategic De-risking and Portfolio Mix Shift
The company continued its de-risking strategy, successfully selling a deep delinquent pool of ST LAP and HL NPAs amounting to INR79.5 crores, including INR41 crores of technically written-off principal, for an upfront cash payment of INR32.6 crores. Additionally, INR115.6 crores of business loan portfolio was assigned and derecognized from AUM, reducing unsecured lending exposure to less than 1%. This has shifted the loan book mix, with gold loans now comprising 46% (up from 40% at fiscal start) and secured mortgage at 53%.
Asset Quality and Provisioning Adequacy
Asset quality showed improvement with Gross Stage 3 at 1.9% after the ARC sale, down from 2% quarter-on-quarter. The credit cost for Q2 FY26 was 0.9%, which included a 0.2% impact from an annual ECL refresh exercise. The revised Provision Coverage Ratio (PCR) stands at 32% post-ARC transaction and ECL refresh, with management aiming to maintain credit costs at '1% plus or minus 10 bps' for FY26.
Gold Loan Business: Growth, Expansion, and Seasonality
The gold loan business demonstrated strong performance, with AUM growing 36.4% year-on-year to INR6,731 crores, and DSGL growing 71% year-on-year. The company opened 57 new gold loan branches in Q2, contributing to a total target of approximately 150 new gold branches for FY26. Management noted that gold loan tonnage growth, which was flat in Q1 and Q2, typically picks up in Q3 and Q4 due to seasonal factors, and they are maintaining a conservative LTV policy.
LAP Business: Small Ticket Challenges and Medium Ticket Growth
The Medium Ticket LAP (MT LAP) segment disbursed INR554 crores, achieving a 23% quarter-on-quarter growth while maintaining yields. However, the Small Ticket LAP (ST LAP) business disbursed INR206 crores, with management acknowledging it as a 'rebuild year' for this segment due to past challenges in collection infrastructure and credit policies. They anticipate the ST LAP business will take another '6 months away from it becoming predictable' as they strengthen teams and refine processes.
Branch Network Expansion and Operational Efficiency
The company expanded its branch network by commissioning 57 new gold loan branches in Q2, bringing the total to 699. Concurrently, 49 ST LAP branches were successfully merged and co-located within gold loan branches, with a target to consolidate 75-80 branches for the year. These initiatives, coupled with cost rationalization measures, helped contain opex growth at 2.6% year-on-year and improved the cost-to-income ratio to 56.9%, a sequential improvement of 136 bps.
Capital Adequacy and Funding Strategy
Capital adequacy stood at 21.64% as of September 30, with the debt-equity ratio decreasing from 3.89% to 3.78%. The company secured ECBs totaling $150 million to date and diversified its resource mix, leading to a 37 bps quarter-on-quarter decline in weighted average interest cost to 8.19%. Management indicated sufficient headroom for loan book expansion without immediate equity raising, and incremental borrowing cost for Q2 remained comfortably below 8%.