Federal Bank Expects Possible RBI Rate Cut To Affect Margins

Federal Bank Ltd. may experience pressure on margins in the short and medium term in case of a possible rate cut by the Reserve Bank of India in the monetary policy review scheduled in December, according to Executive Director Harsh Dugar.

Talking to NDTV Profit, Dugar highlighted that the lender was taking measures to minimise the impact of a possible rate cut on its net interest margins.

“Going forward, we are quite mindful that once the RBI cuts its rates, we see that in the short to medium term, we will see a pressure on margins because assets get affected faster than deposits,” he said.

Federal Bank was working to improve its CASA (current and savings account) ratio in order to keep its margins intact, Dugar said.

“We are focussing on improving our CASA and therefore, bringing down our cost of funds. Our CASA has improved QoQ by 80 basis points,” he said.

In the second quarter, Federal Bank reported a CASA ratio of 30.07%, up by 80 bps from 29.27% on a sequential basis. The cost-to-income ratio of the bank decreased 19 bps on a quarter-on-quarter basis from 53.2% to 53.01% in the July-September period.

“Secondly, we are improving our yields as much as we can. Our focus on high-yielding assets remains without compromise. Cost should be another place we should be focussing on. Our cost-to-income ratio has come down by roughly 20bps this quarter sequentially,” the top executive noted.

“So, we are looking at these things to improve our ROA (return on assets) and ROE (return on equity),” he said.

The pressure created on margins by the possible RBI rate cuts will take a few quarters to stabilise, he added.

“In the medium term there will be an impact on margins when the RBI starts cutting rates and it will take a couple of quarters to stabilise,” Dugar said.

The net interest margin of Federal Bank in the quarter ended Sept. 30, 2024 came down to 3.12% from 3.16% on a sequential basis.

However, the lender’s executive director noted that this was due to the RBI’s decision to ban banks from charging penal interest and instead take penal charges only.

“The penal that was a part of the NIM earlier has moved below the line and is now a free item. Hence, if I do a like-to-like comparison, 3.16% will be technically comparable to 3.19%. Our NIM has expanded and not contracted,” he said.

“That’s where you can see a higher than usual growth on the fee line because the penal charges now get covered in the fee line. So the NIM on a net-to-net basis is higher,” Dugar added.

The fee income of Federal Bank in Q2 increased to its highest-ever levels at Rs 784, up over 18% sequentially from Rs 652 crore in the preceding three months.

Shares of Federal Bank Ltd. on Tuesday gained 7.9% in intraday trade to touch a high of Rs 199.47 apiece. The stock was trading 7.47% higher at Rs 198.81 at 12:10 p.m., while benchmark Nifty 50 fell 0.27% to 24,272.40.