India Ratings and Research has affirmed The Federal Bank’s (FBL) debt instruments at ‘IND AA+/Stable’. The rating reflects the bank’s consistent strengthening of its credit profile, evidenced by the scaling up of franchise, a stable liability franchise, improving diversification of its loan portfolio, and enhanced profitability buffers. The bank’s business growth and asset quality metrics remained consistent, indicating strong internal controls and governance depth.
Rating Drivers
The affirmed rating is supported by several key factors:
- Sizeable franchise with reducing concentration in its home state.
- Strengthened management team.
- Stable and adequately provided asset quality.
- Improvement in profitability driven by a focus on growing the medium-yielding book and CASA expansion.
- Adequate capital buffers.
The bank’s developing funding profile is noted as a weakness.
Franchise Expansion
Federal Bank continues to maintain a strong presence in South India. It is actively diversifying beyond Kerala; the share of advances from this state has declined to 30.7% in FY25 (FY15: 42.6%). Concurrently, the shares from Tamil Nadu and Karnataka have increased to 14.4% and 9.7%, respectively. As of FYE25, the bank’s loan portfolio stood at INR2,348 billion.
Asset Quality
The bank’s gross non-performing assets (NPAs) have slightly increased to 1.91% in Q1 FY26, attributed mainly to elevated slippages in the retail segment due to MFI exposure. FBL’s provision coverage ratio stood at 75.2% in Q1 FY26. The absence of large stressed exposure suggests the stabilization of credit costs in the medium term.
Profitability
Federal Bank’s net interest margin decreased by 16bp quarter-over-quarter to 2.94% in Q1 FY26, influenced by asset and term deposit repricing and higher slippages in the unsecured segment. Overall profitability is supported by a strong low-cost retail liability franchise. The bank continues to rebalance its book towards higher-yielding assets. Profit after tax to risk-weighted assets was 1.59% for Q1 FY26.
Capitalization
FBL’s capitalisation (Q1 FY26 Tier 1 ratio: 14.7%) remains adequate, supported by internal accruals and recent capital raising activities. The bank is expected to maintain a CET1 ratio above the regulatory minimum, targeting a floor threshold of 12%.
Rating Sensitivities
A positive rating action could result from improved visibility on asset profile diversification, sustained market share gains, traction in new retail products, and diversification in operating geographies.
Conversely, negative factors include a deterioration in the funding profile, a decline in profitability buffers, a material impact on Tier I capitalization, a significant increase in net non-performing assets, and an erosion of the franchise.
Source: BSE
