Care Ratings has upgraded the credit rating of Federal Bank’s bonds from AA to AA+ on continued improvement in the bank’s overall business, diversification of loan portfolio, better profitability and stable asset quality.
Federal Bank is one of the oldest private sector banks in India with over 80 years of operating history and is a prominent bank especially in South India with strong presence in Kerala. As on June 30, 2023, the bank had over 1,300 branches including nearly 600 in Kerala.
The upgrade in rating considers Federal Bank’s steady growth in total advances and deposits over the years, Care Ratings said.
The bank has its origins in Travancore Federal Bank Ltd, founded in 1931 in Nedumparambu, Kerala. The bank was renamed Federal Bank in 1946 and is headquartered in Aluva, Kochi.
CARE last reaffirmed the bank’s rating at AA with a ‘Stable’ outlook in September 2021 which meant high degree of safety for timely servicing debt obligations. In September 2022, the rating outlook was revised to ‘Positive’ signifying possibility of an upgrade.
Now, it has upgraded the long term rating to CARE AA+ while retaining the outlook at ‘Stable’. The AA+ rating implies instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.
AA+ rating signifies second highest credit quality just below the highest rating of AAA. The ‘+’ sign indicates relatively better standing within the category. The higher credit rating will make it easier for the bank to raise money through bonds and potentially lower its cost of funds.
Improving Operating Metrics
Federal Bank has reported consistent improvement in profitability over the past few years on the back of robust balance sheet growth, better margins and lower credit costs, noted Care Ratings.
In FY23, the bank’s net interest income grew 23% year-on-year to Rs 12,669 crore as advances rose 20% and NIMs (Net Interest Margins) improved to 3.01% from 2.82% last year due to interest rate hikes. NIMs indicate the difference between interest earned and interest expended by the bank.
Non-interest income, such as fees and commissions, grew 12% to Rs 6,465 crore.
Operating expenses were controlled leading to lower cost-to-income ratio of 50% against 53% last year. Cost-to-income ratio shows operating efficiency – the lower the better. With moderation in credit costs to 0.31%, the bank achieved highest ever return on total assets of 1.25% in FY23. Return on assets measures profit generated from total assets deployed.
A similar improvement was visible on the bank’s asset quality also. Gross NPAs (Non-Performing Assets) declined to 2.36% from 2.8% last year due to recoveries, upgrades and lower fresh slippages. Gross NPAs indicate total bad loans as a percentage of all loans.
Net NPAs — after accounting for write-downs and recoveries — also reduced to 0.69% from 0.96%. PCR (Provision Coverage Ratio) strengthened to 70%. PCR shows provisioning done against bad loans. With slippages also coming down to 1.2%, the overall asset quality stress reduced considerably. Going forward, the bank’s ability to maintain asset quality will be monitored while growing and diversifying the loan book.
The bank has diversified its loan book by expanding product offerings particularly in retail segment. As on March 31, 2023, the retail-wholesale loan mix improved to 54:46 compared to 52:48 last year. Within retail, housing loans and loans against property remained the largest constituting over 60% of total retail book.
The bank is gradually increasing focus on other retail loans like personal loans, commercial vehicles, microfinance, gold loans etc. to reduce concentration in just housing and LAP, the agency pointed out. High exposure to corporate clients is considered a risk factor, while retail exposure is considered a mitigating factor.
The rating agency pointed out that the bank’s deposits have grown at healthy pace of 17% year-on-year in FY23.
Although CASA deposits (current account and savings account deposits) are lower than peers at 33% currently, they are granular as retail plus term deposits comprise 82% of total, it noted.
CASA deposits are considered low cost funds for the bank.
The bank also gets sizeable NRE (Non-Resident External) deposits forming nearly 32% of total deposits. NRE deposits are funds from NRIs in foreign currencies. The bank’s ability to generate low cost deposits and deploy them in high yielding advances will be crucial for maintaining growth and profitability, said the agency.
Robust Capital Position
The ratings also factor in the strong capital position of Federal Bank. Capital refers to the funds invested by the bank’s shareholders and accumulated profits and serves as a cushion against potential losses and reversals from the operations.
As on June 2023, the bank’s total capital adequacy ratio – which indicates capital as a percentage of risk-weighted assets – stood at 14.28% with Tier I capital of 12.54%. Tier I capital primarily includes shareholder equity.
During the last year, the bank raised around Rs 995 crore of Tier II capital to bolster the capital base. Tier II includes reserves and bonds. It also raised Rs 3,040 crore through QIP (Qualified Institutional Placement) in July 2023 by issuing shares to large investors. Further capital infusion of Rs 1,000 crore is planned through international institutions this year. This will provide adequate growth capital for expanding operations, the agency said.
Federal Bank reported total income of Rs 19,134 crore in FY23, up 21% over previous year. Net profit grew by 59% to Rs 3,011 crore. On a quarterly basis, the bank recorded income of Rs 5,757 crore and profit of Rs 854 crore in Q1FY24.
As on June 30, 2023, the bank had total assets of Rs 2.74 lakh crore, net NPAs of 0.69% and capital adequacy ratio of 14.28% with Tier I of 12.54%. Federal Bank is considered one of the most stable mid-sized private sector banks in the country.
