A Covid-induced deterioration in asset quality pulled down the net profit of Federal Bank in the fiscal first quarter ended June, evident from the stress running through the gold loans and small businesses.

A major portion of Federal Bank’s fresh stress emanated from its retail book as borrowers lost jobs or faced salary cuts. A slowdown in business for the self-employed in the second wave of the coronavirus pandemic also impacted the Kerala-based bank.

Despite recording its highest operating profit in a quarter, Federal Bank’s net profit in the three-month period ending June 2021 dipped 8.4% to Rs 367.29 crore amid higher provisioning as bad loans rose. Even on a sequential basis, net profit fell 23.1% fr477.81 crore in the quarter ended March 2021.

Federal Bank’s operating profit rose 22% year-on-year to a new high of Rs 1,135 crore, but the loan loss provision of Rs 459 crore and a provision of Rs 180 crore for standard restructuring ate into the bank’s profits. Total income was higher at Rs 4,005.86 crore versus Rs 3,932.52 crore a year ago.

Fresh slippages during the quarter stood at Rs 640 crore, up from Rs 598 crore in the preceding quarter. Gold loan slippages were at Rs 50 crore while another Rs 35 crore of other retail loans linked to gold loan borrowers were also recognised. In business banking, which includes loans to small enterprises, new bad loans increased to Rs 169 crore in the June quarter versus Rs 73 crore a quarter ago.

Federal Banks’s provisioning policy remained conservative. Provisions were even made against gold as stressed borrowers could not repay instalments. “We chose to give customers more time rather than go down the road of auctioning gold and recovering,” said Srinivasan.

“All banks have been reporting Covid-related stress and we are no exception. Provisioning policy continues to be very conservative so that the balance sheet remains strong. For the Rs 640 crore of fresh slippages during the quarter, we have provisioned Rs 460 crore as a choice. Even in gold loans which is 100% secure, we have provisioned 65%. There are no lumpy slippages,” said Federal Bank managing director and CEO Shyam Srinivasan in a press conference.

The other operating parameters of the bank, however, remained robust. Net interest income (NII) grew 9.41% to Rs 1,418.43 crore at the end of the quarter. Other income grew by 33.13% to reach Rs 650.15 crore. The net interest margin (NIM), a key operating parameter of banks, was steady at 3.15%. NIM is the difference between the interest earned and interest paid by the bank.

“We had a strong quarter in treasury and we had a one-off recovery in a large account which was written off in the past,” Srinivasan said.

The bank has standard restructuring outstanding of Rs 2,574 crore. Of this, the Covid-related restructuring amounts to Rs 2,414 which is 1.82% of its advances. This included Rs 1,422 crore from the retail book. Among the retail loans, the most impacted were the home loans at Rs 736 crore and Rs 570 crore from loans against property.

The bank’s asset quality deteriorated in the quarter as the gross non-performing assets (NPAs) rose to 3.50 % of the gross advances versus 2.96% a year ago. The bank also wrote off Rs 439 crore of bad assets during the quarter. Net NPAs, however, stood put at 1.23% versus 1.22% in the year-ago quarter.

The provisions and contingencies improved to Rs 641.83 core, higher than Rs 394.62 that the bank had provisioned in the year-ago period. The provision coverage ratio including technical write-offs was strengthened to 78.6%.

The net advances of the bank grew by 6.98% to Rs 1,29,765.06 crore, while the deposits grew by 9.33% to1,69,393.30 crore. But sequentially both credit and deposits have de-grown.

”We reduced our certificate of deposits by Rs 2,000 crore in Q1, while customer deposits went up. The credit growth is dependent on the environment and we believe that it will pick up from September onwards and we will have a higher share,” Srinivasan said.

The board of Federal Bank also approved a stake sale of 4.9% to International Finance Corporation (IFC).

“The process is complete as our board has approved the allotment of shares to IFC. They have taken up 4.9% shares of the bank. As far as incremental equity issuance, we are very prudent about capital allocation and use, and in the last 10-12 years, we have done only one QIP and IFC is the only other transaction. Our capital adequacy is strong and we are not looking at anything right now. However, we have an enabling resolution passed,” Srinivasan said in his interaction with the press.