Detailed Narrative
Q3 FY25 Financial Performance Overview
Fedbank Financial Services reported an AUM of INR14,922 crores as of December 31, 2024, marking a 5% QoQ and 39% YoY growth. Disbursals for Q3 FY25 stood at INR4,395 crores, up 31.4% YoY. Operating profit grew 30.9% YoY to INR144.6 crores. However, net profit significantly declined by 71.3% YoY to INR18.8 crores, primarily due to a one-time📎 elevated provision of INR75.5 crores. Net Interest Income (NII) increased by 7% QoQ and 31% YoY to INR284 crores.
Asset Quality and Provisioning Actions
The company's asset quality saw mixed trends, with entity-level Gross Stage 3 NPA remaining stable at 1.9% and Net NPA improving to 1% from 1.5% last quarter. However, Mortgage gross Stage 3 increased slightly to 3.3% from 3.2% QoQ. To strengthen the balance sheet, Fedbank undertook a one-time📎 additional provisioning of INR75.5 crores, comprising INR57 crores for the NPA pool and INR18 crores in management overlays for Stage 1 and Stage 2 Small Mortgage loans. This led to a significant increase in PCR on Stage 3 from 21.9% to 45.2%.
Strategic Shift and Business Mix
Management outlined a strategic pivot towards a more secured lending construct, aiming for 90-95% secured loans. The contribution of unsecured business loans is targeted to reduce from 12-15% to 5% within the next year. The company plans to double down on its LAP and Gold Loan businesses, with Gold Loans expected to maintain a 30-40% share of AUM. Small Ticket LAP is identified as a key growth driver, expected to grow at a much faster pace with a focus on quality.
Small Mortgage Business Challenges and Corrective Measures
The Small Mortgage business is experiencing elevated delinquencies, attributed to underinvestment in collection infrastructure and a lack of last-mile reach in certain pockets for its underbanked customer segment. Corrective actions include appointing a new Chief Business Officer (Shardul Kadam), tightening lending norms, migrating to a robust loan origination system, strengthening collection teams from the ground up, and onboarding a dedicated senior collection head. Management expects to see a 'good pull back' in collections by Q1 FY26.
Operational Efficiency and Cost Management
Fedbank aims for a frugal opex structure, leveraging technology and exploring synergies between Gold and Small Ticket LAP branches. Initiatives include implementing Salesforce for LAP business, reevaluating underperforming branches, and exploring an apprentice model for certain functions to achieve cost savings. The company expects to drive down its cost-to-income ratio in FY26, though specific targets were not provided.
Funding and Capital Adequacy
The company's weighted average interest cost decreased by 4 bps QoQ to 8.69%. The debt-equity ratio improved to 3.98% from 4.09% in September 2024, and the CRAR stood at 21.6%, up from 21.4%. Fedbank continued its policy of deleveraging through co-lending (INR302 crores) and securitization (INR486 crores), which helped improve capital adequacy and leverage position.
Regulatory Engagement
Fedbank is in correspondence with the RBI regarding the October 4 guidelines for upper layer NBFCs. While acknowledging the stipulations, management expressed hope for an exception, citing the company's listed status and existing compliance with many regulatory requirements. They emphasized that RBI has given them freedom to choose product constructs and that recent annual RBI inspections had satisfactory outcomes.