Federal Bank on Saturday reported a 15% year-on-year (y-o-y) decline in net profit for the June quarter to Rs 861.75 crore, impacted by a sharp rise in operating expenses and a three-fold jump in provisions for bad loans.
The Kerala-based private sector lender posted a 6% increase in interest income to Rs 6,686.63 crore in Q1FY26, while interest expenses rose at a faster pace of 8% to Rs 4,349.8 crore. The bank reported its highest-ever other income at Rs 1,113 crore, a 22% y-o-y increase, supported by growth in fee-based products and treasury income. However, provisions and contingencies surged to Rs 400.16 crore, up three times from a year earlier, dragging down profitability.
Agri MFI stress drives provisions and slippages
KVS Manian, MD & CEO of Federal Bank, attributed the higher provisions to stress in the agri microfinance loan book. “If we isolate the agri MFI-related provisioning, there has been no deterioration in the slippage characteristics in the rest of our portfolio,” Manian said at the earnings press conference.
Slippages rose to Rs 658 crore during the quarter, compared with Rs 417 crore in Q1FY25, primarily led by the MFI segment. This pushed the slippage ratio up to 1.11% from 0.78% a year earlier.
“The good part is we have also seen the peak of the slippages of MFI,” Manian said, adding that slippages declined in June and July after peaking in May.
Gross non-performing asset (GNPA) of the lender rose to 1.91% from 1.81% in Q4FY25. Net NPA also inched up to 0.48% from 0.44%.
Retail and commercial banking drive growth
The bank’s total business rose 9% year-on-year to Rs 5.29 lakh crore, making it the sixth-largest private sector bank by business volume. Net advances grew 9% to Rs 2.41 lakh crore, while deposits rose 8.03% to Rs 2.87 lakh crore.
Retail advances—its largest loan portfolio—grew 15.64% year-on-year to Rs 81,046 crore. Commercial banking advances posted a strong 30.28% growth to Rs 25,028 crore. However, growth in the corporate loan book remained tepid at 4.47%, reaching Rs 83,680.44 crore.
Harsh Dugar, executive director, said corporate credit demand across the industry remains weak due to multiple factors including subdued demand and global uncertainties. “Corporate credit growth across the industry remains muted for a variety of reasons including muteness in general demand, US tariff announcements adding uncertainties in the market,” he said.
Dugar noted that many corporates are tapping alternate funding routes such as debt markets, ECBs, commercial paper, and bonds amid easing interest rates, reducing reliance on bank credit. “We do anticipate corporate demand for credit this year to be a little muted,” he said. The bank expects overall credit growth of 12-13% this fiscal and 8-10% growth in corporate advances.
Net interest margin (NIM) compressed to 2.94% from 3.12% in the previous quarter. Venkatraman Venkateswaran, executive director & CFO, said the impact of the June repo rate cut will start reflecting in the current quarter. “If there are no further rate cuts, we expect the NIM to be around 5-10 bps around these levels and we would be back to 3% levels in H2,” he said.
Manian said the bank would continue to grow its fee and treasury income to offset pressure on net interest income and margins.