However, growth may have come at the cost of profitability or net interest margin (NIM), which fell from 3.15 per cent a year-ago to 3.01 per cent in Q2. Yield on advances, which declined by 22 basis point (bps) year-on-year to 9.33 per cent, indicates the bank’s inability to pass on higher cost to its customers. This is the second takeaway for the banking industry – that in a bid to maintain growth, pricing power in retail loans may be put to test.
The third important takeaway is that, stress from corporate accounts may continue to be on the rise. Elevated slippages (loans turning bad) from corporate accounts was the key concern for IndusInd Bank and so is it for Federal Bank with slippages from this segment increasing by 61 per cent year-on-year to Rs 199 crore for the latter. Analysts at Edelweiss say that given the challenging macro-environment, they will monitor the identified pool of stressed and below-investment grade assets which could lend to volatility in asset quality.
Nonetheless, the Street hasn’t turned pessimistic on Federal Bank just yet. Despite the 13 per cent price correction in six months, majority of analysts polled on Bloomberg remain positive on the stock. Affordable valuations at 1.3x FY21 book also work in its favour.