| The Federal Bank Limited | ||||
| Rating reaffirmed at 'CRISIL A1+'; rated amount enhanced for Certificate of Deposits | ||||
| 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 comfortable capitalisation of the bank, healthy resource profile, and strong brand among non-resident Indians (NRIs). These strengths are partially offset by average, albeit improving, profitability, a relatively modest scale of operations, and geographical concentration.
Asset quality has been improving steadily after the inch up witnessed during the pandemic. Gross non-performing assets (GNPAs) improved to 2.78% as on March 31, 2022, from 3.35% as on March 31, 2021, and a further to 2.67% as on June 30, 2022. This was supported by lower slippages and higher recoveries, apart from sale of Rs 275 crore to an asset reconstruction company, which positively impacted GNPAs by 18 basis points. The asset quality of the corporate segment (35% of the loan book) improved the most, with segment GNPA declining to 0.9% as on March 31, 2022, from 2.1% a year ago.
The bank had 2.2% (Rs 3,366 crore) of its loan book as standard restructured book as on June 30, 2022, of which majority was retail and secured. While majority of the restructured book is well collateralised, its performance as well as overall asset quality will remain monitorable. |
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:
Overall capital adequacy ratio (CAR, under Basel III) was 15.12% as on June 30, 2022 (16.33% as on March 31, 2022) against 15.19% as on March 31, 2021. Networth increased to Rs 19,256 crore as on March 31, 2022, from Rs 16,502 as on March 31, 2021, supported by higher internal accrual and infusion of Rs 916 crore from the World Bank arm, International Finance Corporation, in fiscal 2022. Additionally, the bank raised Rs 700 crore through Tier 2 bond in fiscal 2022. Networth coverage of net non-performing assets improved to 12.9 times as on June 30, 2022 (13.0 times as on March 31, 2022), from 10.3 times as on March 31, 2021. Capitalisation is expected to remain comfortable for the proposed scale-up in business over the medium term.
Resource profile is backed by the strong market position of the bank among NRIs, especially in Kerala. Deposits increased 5.2% on-year to Rs 1,81,678 crore as on March 31, 2022, out of which NRIs accounted for 40.0%; standalone deposits were Rs 1,83,355 crore as on June 30, 2022. The bank had a market share of 7% among NRI deposits; and 21.1% in India’s inward remittances in fiscal 2022, up from 18.2% in the previous fiscal. These factors lend stability to resource base and fee income.
Deposit base is granular with retail deposits accounting 94% of total deposits. Furthermore, CASA (current account and savings account) deposits accounted for 36.8% of total deposits (standalone) as on June 30, 2022 (36.9% as on March 31, 2022), up from 33.8% as on March 31, 2021. Cost of deposit improved to 4.3% in fiscal 2022 (4.2% for the three months ended June 30, 2022) from 5.0% in the previous fiscal. While the current deposit rates have inched up in-line with rising interest rate environment, the impact on cost of deposit is expected to be gradual.
Weaknesses:
Profit after tax (PAT) improved to Rs 1,970 crore in fiscal 2022 from Rs 1,664 crore previous fiscal due to lower credits cost, which reduced to Rs 1,305 crore from Rs 1,638 crore. In fiscal 2022, bank absorbed upfront cost of pension obligation of Rs 177 crore, and after adjusting for it, PAT was Rs 2,040 crore. Return on assets (RoA) improved to 0.91% in fiscal 2022 from 0.86% in fiscal 2021. Adjusting for the excess pension costs, RoA was 0.99%. The PAT was Rs 634 crore and RoA was 1.12% (annualised) for the three months ended June 30, 2022. Credit costs to average total assets declined to 0.61% in fiscal 2022 (0.31% in the three months ended June 30, 2022) from 0.84% in fiscal 2021, in line with steady improvement in asset quality. Gross non-performing assets (GNPAs) improved to 2.78% as on March 31, 2022, from 3.35% as on March 31, 2021, and a further to 2.67% as on June 30, 2022. This was supported by lower slippages and higher recoveries, apart from sale of Rs 275 crore to an asset reconstruction company, which positively impacted GNPAs by 18 basis points. The bank had 2.2% of its loan book as standard restructured book as on June 30, 2022, of which majority was retail and secured. Nevertheless, provision cover for GNPAs was healthy at 65% (excluding technical write-offs) as on June 30, 2022.
Going ahead, the bank plans to grow its credit card and personal loan portfolio. Improved mix of loan book should support better net interest margin (NIM). However, ability to sustainably improve NIM and manage credit cost will be closely monitored.
Although advances and deposits increased at a compound annual growth rate of 16.6% and 14.8%, respectively, during fiscals 2016 and 2022, scale remains relatively small. Advances grew 10.7% on-year in fiscal 2022, driven by growth in gold loans[1] (12% of the book), retail loans (33% of the book), and business banking loans (8% of the book), while deposits grew 5.5%. Market share was 1.21% and 1.08% in advances and deposits, respectively, as on June 30, 2022.
While Federal Bank operates across the country, business continues to have sizeable presence in southern India, with Kerala, Tamil Nadu, Karnataka, Andhra Pradesh, and Telangana accounting for 75% of deposits and 59% of advances, respectively, as on March 31, 2022. Its home state, Kerala, alone accounted for 65% and 33% of deposits and advances, respectively. The concentration risk is mitigated by the relatively better economic performance of this region. NRI deposits (majorly part of deposits in Kerala) are diversified by the location of the NRI customers. [1] Gold loan book is spread over the retail and agriculture segments |
Liquidity: Strong Liquidity is supported by a healthy retail deposit base. Average liquidity coverage ratio was 139% as on June 30, 2022, 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
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About the Bank Federal Bank is a mid-sized, private sector bank with net advances of Rs 1,51,689 crore and deposits of Rs 1,83,355 crore as on June 30, 2022. It has a strong NRI customer base in the Middle East. The bank had 1,291 branches and 1,860 automated teller machines/cash recyclers as on June 30, 2022.
In fiscal 2022, PAT was Rs 1,970 crore and total income (net of interest expenses) was Rs 8,543 crore, against Rs 1,664 crore and Rs 7,851 crore, respectively, the previous fiscal.
For the three months ended June 30, 2022, PAT was Rs 634 crore and total income (net of interest expenses) was Rs 2,214 crore, against Rs 357 crore and Rs 2,146 crore, respectively, in the corresponding period 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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