Federal Bank Q1 Profit Drops 15% Amid Margin Pressure, MFI Stress

The private sector lender reported a credit growth of 9 per cent, but the narrowing of NIM to 2.94 per cent from the year-ago period's 3.16 per cent impacted the core income growth the most

The overall provisions shot up to Rs 437 crore in April-June period, from Rs 173 crore which impacted the profits

Source : Unsplash

Federal Bank reported a 15 per cent decline in net profit for the June quarter of FY26, with earnings falling to ₹862 crore. The decline was primarily driven by compressed net interest margins (NIMs) and increased provisioning due to a rise in non-performing assets (NPAs), particularly in the microfinance segment.

The bank’s core net interest income (NII) registered modest growth of just 2 per cent year-on-year to Rs 2,337 crore. However, other income surged 22 per cent to a record Rs 1,113 crore, supported by stronger core fees and treasury income.

The lender witnessed a narrowing of its NIM to 2.94 per cent from 3.16 per cent in the same quarter last year. This weighed heavily on overall income, even as the bank saw a 9 per cent credit growth.

Federal Bank’s MD & CEO, K V S Manian, expressed confidence in a turnaround in the second half of the fiscal. “NIMs will hit the bottom in the September quarter before starting a northward journey into over 3 per cent levels as deposits reprice,” he said. He also projected credit growth to rise to 12–13 per cent with stronger momentum in H2.

Rising Slippages Led By Microfinance And Agri Segments

Fresh slippages rose to Rs 658 crore, attributed largely to the MFI portfolio and seasonal stress in agricultural loans. However, officials indicated that the worst may be over, citing a peak in MFI stress during May and some relief seen in June and July.

As a result, total provisions for the quarter jumped to Rs 437 crore from Rs 173 crore a year ago, weighing on bottom-line performance. The gross NPA ratio ticked up slightly to 1.91 per cent from 1.84 per cent in the previous quarter.

Loan Growth Outlook Positive

Segment-wise, the MFI book grew 4 per cent, commercial loans rose 30 per cent, credit card lending increased 16 per cent, and corporate loans grew 4 per cent—reflecting the preference of top-rated borrowers to tap bond markets. For FY26, the bank expects its gold loan portfolio to expand 25–30 per cent, and corporate loan growth to reach up to 10 per cent during the busy season.

As of June 30, 2025, the bank reported a healthy capital adequacy ratio of 16.03 per cent, with a core Tier-1 ratio of 14.69 per cent, providing sufficient headroom for future growth.

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