| The Federal Bank Limited | ||||
| Rating Reaffirmed | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the short-term debt programmes of The Federal Bank Limited (Federal Bank).
The rating continues to reflect the bank's comfortable capitalisation, healthy resource profile, and strong brand among non-resident Indians (NRIs). These strengths are partially offset by average asset quality and profitability, and relatively small scale of operations with geographic concentration in business.
In-line with the Covid-19 relief measures announced by the Reserve Bank of India (RBI), Federal Bank had provided moratorium to its borrowers. Though collections declined during the initial months of the first wave, they improved subsequently. However, intermittent lockdowns and localised restrictions amid the second wave of the pandemic impacted collections once again. Although the impact was moderate during this phase, any adverse change in the payment discipline of borrowers may lead to higher delinquencies.
Under the schemes announced by the RBI dated January 1, 2019; February 11 and August 6, 2020; and May 5, 2021, the bank had restructured 2.9% of gross advances as on September 30, 2021, of which 2.5% was covid related. Retail (including CV/CE[1] financing) accounted for 62% of the covid-related restructuring, small and medium enterprise (SME) 29%, agriculture 5% and corporate 4%. While majority of the restructured book is well collateralised, its performance as well as overall asset quality will remain monitorables.
1CV: commercial vehicle, CE: construction equipment. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Federal Bank and its subsidiaries and associate concerns on a proportionate basis.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: * Comfortable capitalisation Capitalisation is comfortable and should remain stable over the medium term. The overall capital adequacy ratio (under Basel III) and networth were adequate at 15.6% and Rs 18,121 crore, respectively, as on September 30, 2021. Networth coverage for net non-performing assets (NPAs) was ~11.4 times. The bank raised Rs 916 crore from World Bank’s arm International Finance Corporation in the first six months of the fiscal 2022.
* Healthy resource profile with strong brand equity in Kerala Resource profile is healthy with a strong position among NRIs, especially in Kerala. Deposits from NRIs, accounted for 38.0% of the total deposits as on September 30, 2021, and the bank’s market share in India’s inward remittances improved to 20.5% for the three months ended June 30, 2021, from 18.2% in fiscal 2021. These factors lend stability to the bank's resource base and fee income. Moreover, current account and savings account (CASA) deposits accounted for 36.2% of total deposits as on September 30, 2021. Resource profile is granular with retail deposits contributing 94% to total deposits. Cost of deposit declined to 4.3% in the quarter ended September 30, 2021, from 5.0% in fiscal 2021, in-line with the industry trend.
Weakness: *Average asset quality Asset quality is average with gross NPA ratio of 3.2% as on September 30, 2021, compared with 3.4% as on March 31, 2021. The bank had restructured 2.9% of gross advances (2.5% is Covid-specific) as on September 30, 2021. Of the Covid-specific restructured book, 73% has security cover of over-100%.
The bank focuses on growing its retail and SME book, and has strengthened its credit appraisal and risk management systems to improve its underwriting practices. It has adopted a conservative approach to grow its corporate book and has been lending to better rated corporates, over the past few years. Ability to manage asset quality in SME and agriculture loan portfolios will remain a key rating sensitivity factor.
*Average profitability Return on assets was 0.80% (annualised) for the half year ended September 30, 2021, and 0.86% in fiscal 2021 (0.92% in fiscal 2020). The provision cover for NPAs was 65% (excluding technical write-offs) as on September 30, 2021. Earnings should remain average over the medium term. Nevertheless, ability to manage credit cost and maintain net interest margin will be closely monitored.
* Modest, albeit growing, scale of operations with regional concentration Although advances and deposits rose at a five-year compound annual growth rate of 18.3% and 16.8% till fiscal 2021, respectively, the bank’s scale remains modest. Advances grew 10.1% on-year in the half year ended September 30, 2021, driven by growth in gold loans, retail loans, and business banking loans, while deposits grew 9.9%. The bank had a market share of 1.21% and 1.07% in advances and deposits, respectively, as on September 30, 2021.
The bank’s business continues to be concentrated in southern India, with Kerala, Tamil Nadu, Karnataka, Andhra Pradesh, and Telangana accounting for 75% of its deposits and 59% of advances as on September 30, 2021. Kerala alone accounted for 63% and 33% of deposits and advances, respectively. The concentration risk is mitigated by the relatively better economic performance of this region. The deposits in Kerala include NRI deposits which are diverse based on the location of the customers. Nonetheless, asset quality in the retail and SME portfolios in Kerala will continue to be monitored. |
Liquidity: Strong Liquidity is supported by a healthy retail deposit base. Average liquidity coverage ratio was 234.8% for the three months ended September 30, 2021, against the statutory minimum of 100%. Liquidity also benefits from access to systemic sources of funds, such as the liquidity adjustment facility from the RBI and access to the call money market. |
Rating Sensitivity Factors Downward Factors * Deterioration in asset quality, with rising gross NPAs and credit cost crossing 1.0% on a continuous basis * Significant reduction in profitability |
About the Bank Federal Bank is a mid-sized, private sector bank with net advances of Rs 1,38,583 crore and deposits of Rs 1,71,925 crore as on September 30, 2021. Its head office is in Aluva, Kerala. It has a strong NRI customer base in the Middle East. The bank had 1,272 branches and 1,874 automated teller machines/cash recyclers as on September 30, 2021.
The bank is focused on increasing the retail book share and improving granularity in wholesale book. The wholesale (including corporate and commercial banking) and retail segments (including retail, agriculture, and business banking) constituted a mix of 46:54 as on September 30, 2021, compared with 51:49 as on March 31, 2020.
In fiscal 2021, profit after tax (PAT) was Rs 1,664 crore and total income (net of interest expenses) was Rs 7,745 crore, against Rs 1,580 crore and Rs 6,794 crore, respectively, the previous fiscal.
For the half year ended September 30, 2021, PAT was Rs 842 crore and total income (net of interest expenses) was Rs 4,103 crore, against Rs 725 crore and Rs 3,774 crore in the corresponding period of the previous fiscal. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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