Federal Bank Q2 FY26 Net Profit Declines Despite Record NII

Federal Bank Ltd on Saturday announced its financial results for the quarter ended September 30, 2025 (Q2 FY26), reporting a 9.6 percent year-on-year decline in standalone net profit to Rs 955.3 crore. The dip in profitability came despite strong revenue traction, reflecting higher provisioning and a marginal uptick in operating expenses.

However, the bank’s core operations remained solid, with net interest income (NII) rising 5.4 percent YoY to a record Rs 2,495 crore, supported by stable margins, consistent loan growth, and healthy yields across segments. The total income stood at Rs 7,824.3 crore, up 3.8 percent YoY, underlining resilience amid a volatile interest-rate environment.

Asset Quality Improvement Reflects Prudent Risk Management

Federal Bank continued to display strong asset quality metrics, with gross non-performing assets (GNPA) improving to 1.83 percent from 2.09 percent in the same quarter last year. Similarly, net NPA declined to 0.48 percent from 0.57 percent a year ago.

The provision coverage ratio (PCR) stood firm at 73.45 percent, demonstrating the lender’s conservative approach to managing potential stress. The improvement in NPAs was aided by better recoveries, proactive monitoring of accounts, and disciplined underwriting standards.

Banking analysts noted that the sharp improvement in asset quality highlights the bank’s diversified credit portfolio and careful expansion into retail and SME lending, which helped cushion the impact of any sector-specific headwinds.

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Fee Income and Non-Interest Revenue Hit Record High

Non-interest income continued to strengthen during the quarter. Fee income surged 13 percent YoY to an all-time high of Rs 886 crore, driven by increased traction in trade finance, wealth management, and retail transaction banking.

Operating profit rose 5 percent YoY to Rs 1,644 crore, aided by strong treasury income and stable cost ratios. The return on assets (ROA) came in at 1.09 percent, while return on equity (ROE) stood at 11.01 percent, indicating steady profitability despite the net profit moderation.

CASA Ratio Strengthens, Deposits See Broad-Based Growth

Federal Bank’s total deposits grew 7.4 percent YoY to Rs 2.89 lakh crore, underpinned by a robust rise in low-cost CASA deposits, which climbed 10.7 percent to Rs 89,591 crore. The CASA ratio improved 94 basis points to 31.01 percent, reflecting the lender’s strong retail franchise and customer engagement strategy.

Net advances increased 6.2 percent YoY to Rs 2.45 lakh crore, with retail loans contributing a larger share, particularly in home loans, vehicle finance, and small business credit. The bank’s balanced loan book continues to drive sustainable growth while limiting concentration risk.

Capital Adequacy and Balance Sheet Strength Remain Robust

Federal Bank maintained a healthy capital buffer, with the capital adequacy ratio (CRAR) at 15.71 percent, up from 15.20 percent in the previous year. Net worth rose nearly 12 percent YoY to Rs 34,820 crore, showcasing the bank’s strong internal capital generation and prudent dividend policy.

The bank also reported a liquidity coverage ratio (LCR) comfortably above regulatory requirements, ensuring resilience amid changing market conditions.

Management Commentary: Building a Strong, Customer-Centric Future

Commenting on the results, K.V.S. Manian, Managing Director and CEO, emphasized that the bank’s strategic reorientation is now delivering visible results:

“Our CASA franchise continues to demonstrate sustained and meaningful growth, reflecting customer trust and consistent execution. We’re broadening our asset mix thoughtfully and strengthening our foundation for the future. The focus remains on profitable growth and long-term value creation.”

Manian also underlined that digital innovation and customer-centric initiatives are central to Federal Bank’s next growth phase. The lender has accelerated its digital transformation strategy, expanding self-service platforms, and improving turnaround times across retail and SME lending.

Analysts’ Take: Stable Outlook with Upside from Retail and Digital Push

Market experts maintain a positive outlook on Federal Bank, citing its stable core metrics, improving asset quality, and robust balance sheet.

“Despite a modest decline in profit, the bank’s strong NII and fee-income growth suggest resilient core performance. The asset quality trajectory remains encouraging, and we expect earnings momentum to pick up in the second half of FY26,” said Vinod Nair, Head of Research at Geojit Investments.

Analysts at Religare Broking added that Federal Bank’s focus on retail loan expansion, technology adoption, and cost optimization should help offset the impact of higher provisions and maintain steady margins.

Sector Context: Private Banks Focus on Margin Stability

The latest quarterly results reaffirm a broader trend in India’s private banking space — margin compression amid rising competition for deposits, even as credit growth remains healthy.

Federal Bank’s ability to sustain NIMs while improving asset quality puts it in a favorable position compared to some peers. Analysts believe that a stable interest-rate environment in early 2026 could support margin expansion and lower credit costs for the sector.

Focus on Sustainable Growth and Capital Efficiency

Looking ahead, Federal Bank aims to strike a balance between growth and prudence. Its continued investment in digital infrastructure, cross-selling initiatives, and rural banking expansion will remain key catalysts for future growth.

The management expects steady loan growth in the high single digits for the rest of FY26, backed by strong demand in the retail and SME segments. The bank is also enhancing its ESG (Environmental, Social, and Governance) initiatives, focusing on sustainable financing and green lending to align with evolving regulatory and investor expectations.

Conclusion: Core Strengths Cushion Profit Dip

While Federal Bank’s Q2 FY26 net profit declined nearly 10 percent YoY, the quarter’s highlights — record NII, rising fee income, strong CASA growth, and improved asset quality — underscore the bank’s operational resilience.

With a solid capital base, disciplined cost control, and growing digital presence, Federal Bank remains well-positioned to navigate macroeconomic uncertainties and maintain steady growth momentum through FY26.

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