Untamable NPA, rise in cost-to-income ratio take shine off Federal Bank performance

KOCHI: Despite raking in the highest ever quarterly operating profit at Rs708 crore, highest ever net profit at Rs334 crore after growing at 28 per cent compared with the same period last year, and having made good scores on most attributes including earnings per share (EPS), return on assets (ROA), book value (BV), etc. during the third quarter ending December 31, 2018, the market didn’t seem to be pleased with the performance of Federal Bank, the largest Kerala-based bank by far.

The Federal Bank shares dropped 3.12 per cent – from Rs91.20 to Rs88.35 on Thursday, after the results were announced.  The share though has pared some loss on Friday, is still down at Rs89.95 from the closing of Wednesday.

Though some analysts chose to attribute the resignation of the bank’s executive director Ganesh Sankaran a few days ago to the bank’s share price movement that has been in disregard to the good Q3 topline and bottom-line performance, many others businessbenchmark.news spoke to trained their disenchantment at the untamable NPA book with unrelenting fresh slippages and the reversal in the cost to income ratio (CI ratio) during the quarter.

NPA picture

The gross NPA ratio of the bank increased from 3.11 per cent to 3.14 per cent sequentially as of December end, 2018, but the year on year (YOY) growth was from 2.52 per cent to 3.14 per cent.

Likewise, though sequentially the net NPA saw a drop from 1.78 per cent to 1.72 per cent during the quarter ending December 31, 2018, the net NPA has actually grown from 1.36 per cent to 1.72 per cent.

In fact, the percentage expression of NPA essentially masks the severity of NPA growth in absolute terms as the growth in bank’s advances dilutes the magnitude of bad loans expressed in percentage.

For Federal Bank, which is considered to be the most aggressive among the Kerala banks, and a very ambitious lender that keeps growing its market share at country level, the advances have grown from Rs84,953 crore to Rs105,550 crore during the past one year – almost by one-fourth, whereas the asset base expanded by over 17 per cent to about Rs150,000 crore during the said period.

Though the cost to income ratio – a well-accepted gauge that represents efficiency, has fallen from 51.80 per cent to 48.15 per cent during the second quarter ending September 30, 2018, it did a reversal, during the third quarter and  increased by 210 basis points to 50.25 per cent.

Souring of assets would give sleepless nights to any bank managements. And so would obviously to Federal Bank too. While the fresh slippages have slightly fallen to Rs426 crore sequentially from Rs477 crore, they have grown year on year marginally from Rs411 crore. The SME sector continues to be the pain point with Rs192 crore worth contribution to the fresh slippages this time.

The total stressed book of the bank stands at Rs2875 crore as of December end falling from 2.01 per cent to 1.96 per cent, but in absolute terms, it has marginally increased by Rs20 crore from Rs2855 crore.


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