Federal Bank is adjusting its lending strategy by reducing its emphasis on home loans. Managing Director and CEO KVS Manian highlighted that the bank aims to focus on more profitable, higher-yielding segments due to challenging market conditions and low returns in the housing loan sector.
During the bank's Q4 earnings call, Manian stated, "Home loans is a highly competitive segment and at the current pricing, we do not see risk-adjusted returns being favourable. Therefore, we have consciously taken a call to go slower on home loans." This strategic pivot includes prioritizing loans for multi-product customers rather than those seeking a home loan as their primary banking relationship.
Shift in Lending Strategy
The bank plans to concentrate on segments that offer better yields, such as:
- Credit cards
- Gold loans
- Commercial vehicle loans
- Commercial banking
Manian emphasized the importance of profitable growth, stating that the decision to slow down home loan offerings was deliberate.
Financial Performance
Federal Bank reported a net profit of ₹1,259 crore for the quarter, reflecting a 21% increase sequentially and a 22% rise year-on-year. The net interest income reached ₹3,173 crore, up 20% sequentially and 33% year-on-year. A one-time gain from an IT refund contributed ₹456 crore, which was allocated to a floating provision for transitioning to the expected credit loss framework.
Outlook on Corporate Loans
Manian expressed optimism regarding corporate loans, noting their multi-product nature allows for effective cross-selling opportunities. He anticipates a growth rate of approximately 10% in this segment by FY27. The total customer assets of the bank increased by 10% year-over-year and 3% quarter-over-quarter, totaling ₹2.7 trillion as of March 31, 2026.
Yield Management
The bank's strategy is influenced by the need to maintain yield in a low-policy-rate environment. The Reserve Bank of India (RBI) has cut the policy repo rate significantly, which has affected the attractiveness of home loan pricing. Manian noted that about 60% of the bank's loan book is floating and linked to the repo rate, with the yield on advances for the quarter at 8.65%, down from previous periods.
Looking ahead, Manian indicated that the current rate cycle may offer opportunities for yield expansion, with expectations for margins to improve by 5-6 basis points sequentially.
Cost of Funds and Deposits
On the liability side, Federal Bank anticipates that an improving cost of funds will bolster margins. This improvement is attributed to a higher proportion of low-cost current account and savings account (CASA) deposits, alongside a decrease in expensive wholesale deposits. The cost of funds for the quarter was reported at 5.46%, with total deposits rising by 5.4% quarter-over-quarter and 11% year-on-year to ₹3.1 trillion. CASA deposits increased by 8.3% sequentially, comprising 32.9% of total deposits.
