Deterioration in asset quality affects Federal Bank's performance

Federal Bank reported lower than expected results for the quarter ended March. This was on account of higher slippages and restructuring which impacted its profitability. However with no significant stressed assets in the pipeline and a pick-up in its loans and deposits, the bank might show an improved performance going ahead.

The most challenging aspect of this quarter was the deterioration in asset quality. The slippages were higher compared to other quarters mostly due to corporate segments. However, due to sell down of assets to Asset Reconstruction Company (ARC) and higher recoveries, the gross non-performing assets was stable. Even restructured assets were higher due to Tamil Nadu (TN) State Electricity Board (SEB) restructuring. These factors combined resulted in higher provisioning costs.

Even the net interest income declined quarter-on-quarter due to interest reversal of TN SEB and higher slippages. However, adjusted for this one-off, it was modest helped by strong growth in advances. Interest reversal and base rate reduction also affected its margins which reduced 40 basis points sequentially.

On the positive side, advances growth was strong led by corporate segment. Even the deposit growth was strong non CASA sources.

Federal Bank is currently trading at a discount compared to its peers like ING Vysya and Karur Vysya Bank. With no significant pipeline of stressed assets together with a pick-up in loan and deposits growth helped by branch expansion, the stock might be re-rated over the next few quarters.