The Federal Bank Limited (NSE: FEDERALBNK) Q1 2026 Earnings Call dated Aug. 02, 2025
Corporate Participants:
Unidentified Speaker
Souvik Roy — Asstistant Executive Vice President and Head, Investor Relations
KVS Manian — Managing Director and Chief Executive Officer
Venkatraman Venkateswaran — Executive Director
Harsh Dugar — Executive Director
Virat Sunil Diwanji — National Head, Consumer Banking
Analysts:
Unidentified Participant
Mahrukh Adajania — Analyst
Rikin Shah — Analyst
Piran Engineer — Analyst
Anand Dama — Analyst
Madhuchanda Dey — Analyst
Kunal Shah — Analyst
M. B. Mahesh — Analyst
Param Subramanian — Analyst
Sameer Bhise — Analyst
Presentation:
operator
Ladies and gentlemen, good day and welcome to Q1FY26 earnings conference call of the Federal Bank Limited. As a reminder, all participant lines will be in the listen only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing Star then zero on your touchstone phone. Please note that this conference is being recorded.
I now hand the conference over to Mr. Sovik Roy, Head Investor Relations, the Federal Bank Limited. Thank you. And over to you, Mr. Roy.
Souvik Roy — Asstistant Executive Vice President and Head, Investor Relations
Thank you so much and good evening everyone. Thank you for joining us, especially on a weekend. I’ve got quite a few messages over the past couple of days asking if Saturday is going to be the new normal for our earnings call. Well, I can assure you it’s still undecided and we promise you this wasn’t by design. As always, I’m joined by our full leadership team, led by our MD and CEO, along with our Executive Directors and senior business heads. We’ll start with some strategic updates from our md, followed by the CFO walking you through the financials and business performance for the quarter.
After that, we’ll of course, as always, open the floor for discussions and questions. With that, over to you, sir.
KVS Manian — Managing Director and Chief Executive Officer
Thank you, Shavik. Good evening everyone. Thank you for joining us this Saturday evening. Before we dive into the quarterly numbers, let me make some introductory remarks while we will present to you a detailed review of our Strategy Implementation In January 2026, about a year after we first announced it, I thought a quick and a short interim update on the same may be useful. Earlier this February, when we introduced Federal 4.0, it was not just a catchphrase, but was a transformation blueprint to reshape the way we operate, compete and grow. We are focused on execution, as I hope you will realize as we move ahead in this update.
If I had to oversimplify our strategy, and I mean oversimplify, it really comes down to getting three things right. Improving our casa, especially the current account piece to address our cost of funds, driving better yield on advances largely by reshaping the asset mix and increasing granularity and volume of our fee income in the quarter gone by. There is clear evidence that our execution is in sync with all these three objectives and we are making good progress on all three fronts in spite of systemic headwinds on a few aspects. There remains, of course, a lot more to do.
Later on this call, Venkat will take you through these details when he discusses the quarterly results. Coming to the execution elements, we began by refocusing our energies on the most vital part of the bank, our branches, people and profitability model. The Free the Branch initiative is now fully underway. We have already created 70 regional business support centers which are our BUB and agri hubs which are now fully functional helping free up frontline teams from all activities other than relationship and sourcing aspects. The establishment of Regional Loan Service centers which will take care of the retail asset related work at branches is progressing smoothly and should be fully in place in the second quarter.
We continue to focus on what we call codes co D E s, centralize, outsource, digitize, eliminate, simplify and Several initiatives have already been put in place and more are in the pipeline to operationalize each of these. Our goal here is clear remove friction from day to day work and allow branch teams to focus squarely on customer engagement and business development. This process will continue and gain even more momentum in the next two three quarters. We are in the final stages of finalization of standardized branch formats and manning models in them for CASA around opening. Turnaround times have been improved by realigning staffing models and improvement in processes.
However, TAS across products is an important area of focus for the future quarters as well. We are investing in capability building across all levels. Sales management training is underway for identified managers in partnership with a globally renowned sales training firm. A lower cost sales force structure has already been deployed in select branches and we will enhance the scope of this initiative as we get more comfortable with the outcomes. We have kicked off the process of identifying new branch locations based on data backed inputs and we have commissioned an external agency to help us assess our network scientifically.
We have already begun a process of reviewing our branch locations and performance to evaluate, shifting and upgrading branches to improve their catchment and visibility. We are also working with a partner for redesigning our physical branch formats and this may mean slightly lower number of branches this year, but with a better foundational work we can be surer of the way forward and also gather speed later. We have overhauled our performance scorecards for branches as well as individual officers, RMs etc. Sharpening focus on CASA growth and profitability. A department level P and L framework going down to the branch level P and L has been rolled out and is now 20 published frequently based on needs.
Now the teams can see the actual financial impact of their actions. We have also made the branch manager role more aspirational with a higher incentive structure, performance linked metrics and alignment to business priorities and freeing them from lot of routine. We want to ensure that the Branch managers and our regional and zonal heads of all businesses function like mini CEOs and that is the final goal. In some sense we are refueling Mid Air re engineering the business while we are still delivering the business numbers that we have delivered. Fee income and pricing reforms have kicked off with several important changes.
We have revised our fee and charges in line with competition, energized our product partners and improved our revenue structures. Some of the impact of that is already visible in in our fee growth. For the last quarter we also implemented a new loan pricing and delegation structure. Our raw based pricing models and transfer pricing models have been fully revamped giving us sharper insight into segment level profitability, product level pricing decisions across the bank and customer level pricing and profitability decisions in the corporate businesses. With this methodology, a more holistic customer level approach to business with the right balance between wallet share and pricing and also the right mix between fund based revenues and fee revenues is enabled.
The wealth management and Bangka vertical is now well underway with experienced hires. Onboarded Head of Business, Head of Products and Sales head are all in place. Technology enablement is underway. Our partnerships are being renegotiated or restructured to better align outcomes and ensure we build a scalable platform. We also made strong progress in strengthening our trade and forex capabilities. We also now have ahead of global transaction banking who joined us last month. The central teams have been strengthened a team of RMs across the branch network now called PRM Business Priority Relationship Managers business have been identified and trained to give a push to the retail trade and forex business as well as current account business.
Our retail assets team has been restructured to have separate heads for unsecured and secured businesses. Both are now headed by new talent that we acquired last quarter. Also within the secured business, separate verticals have been created for lap and home loan auto as well as brand distribution of secured assets. To bring sharper focus, a retail credit head would be soon joining our team. Under the Chief Credit Officer in the corporate bank business, we have created a separate vertical focusing on BFIC segment which will also help us enhance our focus on capital markets and correspondent banking.
This allows the rest of the corporate bank to focus more sharply on growing the mid market corporate segment. Foundational work has been already done for traction as EMI based business loans and agri based SME loans. These products will be rolled out in the coming quarters. Tech is of course the backbone of Federal 4.0. Our corporate and commercial credit underwriting automation has just gone live. On the customer side, FedOne, our unified interface for corporates has gone live with a new collection and payment solution thereby completing the phase one of rollout and will undergo monthly upgrades with few features.
Future additions from here on Online trade is our next big project within this unified interface, Fed Mobile app has seen over 15 new features rolled out this quarter. Gen AI powered chatbot as an internal copilot for our employees is in alpha testing. It’s being trained on our internal knowledge base and this is just the first step in embedding AI into both customer and employee journeys. At the infrastructure level we we are engaging a partner to undertake a full review of our IT architecture and create a roadmap for the future ensuring our digital and technology backbone is future proof.
We have strengthened the technology team with three key new hires just below the CTO level. We have placed customer experience at the center of all this transformation. Our CRM platform revamp has already delivered over 15 key enhancements. We have kicked off a deep dive study to improve adoption and usage of the platform, ensuring we are not just building tools but driving value through better account management, lead management and organizing our cross sell processes better. There is a lot more work to be done in this area to leverage the investment we have already made in this platform.
This year we have taken a bolder step in brand building. The Savings Ki Vidya campaign featuring Vidya Balan is now live and it is now not just a celebrity endorsement. It’s about repositioning the bank in the minds of retail savers. This is an integrated transformation with over 50 large and 100 small projects under execution designed to make Federal bank faster, simpler, more profitable and more agile. Federal 4.0 is not just a plan anymore. We are transforming where it matters and we remain focused on doing it at speed. But this is surely a multi quarter journey.
This journey will come with some air pockets at times but we remain resilient in our execution. My team fully shares my excitement as we take this journey forward. Thank you for walking this journey with us. Now let me hand it over to Venkat for a more detailed walkthrough of the quarter. In particular that went by. Incidentally, he recently got elevated to the board as Executive Director. Welcome Venkat and all yours.
Venkatraman Venkateswaran — Executive Director
Thank you. Thank you Manian and good evening to all of you. Thank you for joining us to discuss our Q1 FY26 financial results. I hope you have had a chance to go through our investor presentation and detailed disclosures. As always, we will use this forum to walk you through the key developments and then take questions. Let me begin by Providing some macro context, the first quarter of the year is typically soft for the banking industry. The seasonal factors, particularly around collections dispersals, affect segments like mfi, Agri and Seaweed. This year was no different and as you know, Reserve bank of India cut the repo rate by a cumulative 100 basis points since February including a 50bps cut in June.
This was done with the intent to spur growth and improve liquidity. Inflation is under control and rural consumption is showing signs of revival. Credit growth in Q1 has seasonally muted across the banking systems. Corporate loan demand continues to remain selective with many large borrowers opting for bond market and other alternate source of funding. At the same time, unsecured retail portfolios, especially micro finance and cards remain under scrutiny and the industry has seen a calibrated pullback in new originations in certain sub segments. On the liability side, deposit repricing has commenced in a small way and we will see a lagged impact of the rate cut on deposits.
From our perspective, we believe the medium term environment remains conducive for banks with disciplined credit filters and a diversified lending engine. Now coming to the metrics of the bank’s performance, we delivered a strong operational performance in Q1 and by the way we are now the sixth largest private sector bank by total business. Gross advances grew by 9.15% year on year and 3% sequentially. On the back of our strategy to grow medium yield businesses, the growth was led by commercial banking which grew by 5.5% QoQ and 30.28% YoY. Credit cards which grew 8% QoQ CVCE which grew 5% QoQ.
With the recent circular on gold, the gold loan business grew quite strongly in June and we’ll see the full impact of that playing through from this quarter onwards. As mentioned by Manyam, the retail restructuring is almost complete and this will aid in stronger retail growth in H2. Also, with the festive season around the corner, we expect growth to gain further momentum. We are in line to grow at 1.2x nominal GDP. On the deposit side growth was 8.03% YoY and 1.34% QoQ with retail TD seeing strong traction and steady CASA growth. In fact our Average KASA growth was 3% this quarter.
Our CASA ratio stands at 30.35 which is an improvement of 108bps year on year and 12 days quarter on quarter. An average deposit growth was 6% QoQ. Our net interest income for the quarter stood at 2,337 crore growing at 2% NIM for the quarter. Now this 2% growth you must note that FIO y last year the rates were 100 bits higher whereas real got 100bps rate cut impact. In this Q1 the NIM for the quarter was 2.94%. As you are aware we follow a T1 repricing for the stock and a large part of the 100bps rate cut is already reflected.
We had some offsets including lower savings rate which full impact will be seen in Q2. We did quite well to manage the impact of the NIM drop and end at 2.94%. We expect NIMS to bottom out in Q2 subject to no further rate cuts and improve into H2 as cost of funds falls. Total non interest income which was mentioned earlier was the highest ever for the bank at 1,113 crore. Core fee income grew by a healthy 20% year on year and other income by 22% year on year. Operating expenses were flat sequentially and our cost to income ratio is 54.89%.
We will continue to focus on operating leverage especially through digital origination and process optimization on asset quality. Gross slippages for the quarter stood at 658.19 crore with MFI Agri being a large part of it. GROSS NPA was 1.91% and net NPA 0.48%. Broadly stable CCR stands at a healthy 74.41% and credit cost for the quarter was 65bps excluding the MFI AGRI impact. Our credit costs are well in line with historical trend and in fact flat as compared to the last few quarters including last year’s same period. Having seen the trend of the slippages in the month of May, June, July and the downward trajectory, we are confident that we maintain our full year credit cost guidance around 55bps.
It is important to reiterate that outside of MFI agree and slight uptick in business banking slippages were either stable OR improved. Our CET1 stands at 14.69% and overall capital adequacy is at 16.03. ROA for the quarter was at 1% and ROE at 10.3%. Disbursement momentum should improve post monsoon especially in retail and msme. Combination of a better macro drum backdrop, declining cost of funds and recovery in unsecured lending should support margin and bottom line normalization. The external environment is improving, albeit there are some geopolitical and tariff related uncertainties. Inflation is moderating and early signs of consumption revival are visible.
However, competition remains intense especially on pricing and they will be guided by risk adjusted profitability. We see strong opportunity in secured MSME Business, Banking, Gold Backed Lending and the other medium yielding segments like Lab, cvc as highlighted by manual on the progress made on the 12 teams. We continue to invest in distribution, digital and data to scale the franchise efficiently. Our focus will remain on sustainable growth, risk discipline and improving productivity across the board.
Thank you and I’ll now open the floor for questions.
Souvik Roy — Asstistant Executive Vice President and Head, Investor Relations
Operator, we start with the questions.
Questions and Answers:
operator
We’ll now begin with the question and answer session. Anyone who wishes to ask a question may press Star and one on their Touchstone telephone. If you wish to remove yourself from the question queue, you may press star N2 participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles participants, you may press Star and one to ask a question. The first question is from the line of Maruka Jania from Luamaval. Please go ahead.
Mahrukh Adajania
So one question on MFI that quite a few lenders recognized MFI stress in third and fourth quarters and of course it continues to some extent even in the first quarter. So for us it bunched up only in the first quarter. Is it? Is it? And there would be accelerated or aging provisions on the slippages this quarter in the next few quarters as well. Right? Because the write offs are not materially different from fourth quarter overall in general. So that’s my first question. And then in general there appears to be stress in the very retail segments like unsecured business banking. And of course the MFI stress may peak in one or two quarters in cvs. In business banking we hear a lot of lenders talking about new stress buildups. So how do you view the environment and do you see credit costs remaining high in the second quarter and then moderating or how do we view it? So that’s my first question and then my next question is on margins.
Of course you have repriced faster so that explains the margin decline. But you know you also got benefit on cost of funds, but how much do they fall in the second quarter before stabilizing? The quantum should be much lower or how do we view that?
KVS Manian
So Maruk multiple questions. So yes it’s correct that our. MFI. Stress had begun to show up a little bit on the fourth quarter. But yes, signal significantly showed up in this quarter. And as I mentioned May we saw the peak of our slippages in May and in June and July we have seen drop in slippages in mfi. And of course you know that we now since last year December quarter we take an accelerated provision on our unsecured loans so that policy continues. So therefore this at best lingers for a quarter more. This slippage effect lingers for a quarter more at best, not more than that because we take 100% provision by that time.
So that is point number one. And second, I will ask Harsh to add something on the business part of that. The second question you asked was a NIM impact like you rightly pointed out because we reprice faster because of our T1 policy we have repriced faster but interestingly as you said our cost of funds have also dropped significantly over this period of time and we have been able to defend some of our NIM pressures. And since we have priced faster we don’t expect our further NIM pressure to be more than 5 to 10 basis point range in the next quarter.
I hope that answers your question. And on MFI Harsh wants to add some color.
Harsh Dugar
Yes, on MFI you’re right we did. Peak in May as Vanyan mentioned and. We have seen June to be better. Than May and July to be better than June. So we do see slippages kind of. Coming off also other indicators such as. The SMA book and collection efficiency seems to be improving from what it was. So we do feel that we should. See improvements going forward from here.
KVS Manian
Maruk, I would add one more thing just to clarify but for the MFI agree piece, our slippages have remained in the same range that they have been all through the last year. In fact in some products they are better or equal or very marginally higher, but nothing alarming, nothing out of the way, nothing significant, no significant change in asset quality other than mfi. Agri segment
Mahrukh Adajania
and business ranking is also. Good,
KVS Manian
is also in the same range as it was in the first. See, business banking of course had a very good quarter last Q4, but if you look at seasonality in that and Q1 of last year, it is not ballpark in the same range. Very marginal. Very very marginal uptick. Yes.
Mahrukh Adajania
Okay, thank you,
KVS Manian
thank you,
operator
thank you. Next question is from the line of Riven Shah from IISL Capital Service. Please go ahead.
Rikin Shah
Hi, good evening and thank you for the opportunity. Just three quick questions. The first one, you know we spoke briefly about business banking and mfi, but would you be able to supplement it with some more color and data? So specifically on business banking, wanted to understand what proportion of the book is secured versus unsecured, how much of that is backed by any government guarantee schemes and how the slippages have kind of moved y4q you did mention it was very strong and even on mfi if you could talk about a bit more about X bucket collection efficiency in April, May, June and how that has moved in July that will help us to understand how the forward flows are and how much of improvement we can expect in the second quarter.
So that’s my first question. Maybe I’ll ask the other two questions after this.
KVS Manian
So Ricken on business banking almost very large part of that book is secured book. It is not unsecured book. Almost entirely. Almost entirely it is a secured book and there is very little of cgt SME and those kind of products we have done largely it is pure lending, secured lending. That’s the nature of that business that I hope clarifies your doubt on that. On MFI of course we don’t disclose the roll forward and those kind of like Let me but let me clarify you again that we saw the peak of this in May and both in the month of June and in July we have seen secular fall in slippages even in our MFI book and we are hoping that the trend is there to stay.
And also our SMA book which is a precursor to slippage is also lower than as we exit the quarter is lower than previous quarter. So. I would say that clearly on this part as things stand now we. Think the worst is behind us. Of course provisioning comes with a lag as with some lag so it may moderate down but with a lag of a quarter. But slippages have at least shown a trend downwards.
Rikin Shah
Got it. The second one was more like a clarificatory. The credit cost guidance has actually been up to 55 basis point right. I think we used to earlier guide below 50 basis points. So is that the correct understanding?
Venkatraman Venkateswaran
Not really Ricken. Last time we guided 50 to 60 bips. So right now the guidance is around the midway on that.
KVS Manian
We used to guide that lower figure last year Ricken. This year we are in the last time itself we had set 50 to 60 as the guidance
Rikin Shah
got it. And so last question is for many an sir, you know historically the one. Comforting factor for the bank has always. Been a very stellar and stable kind of outcomes on asset quality for a much lower share of unsecured loans we have started seeing stress 3Q we took accelerated provisions again this quarter. This is happening and margins given the starting point for federal bank itself was low and then you have the cyclical downturn. How do we really Think about the roas, right? Because you know we had you had guided in the analyst day earlier that we aspire to improve our roas meaningfully. Is this now pushed back given the macro environment is or would you want to kind of revisit your ROA growth trajectory or guidance? Those are all my questions.
KVS Manian
So Ricken, if you see even this quarter performance and if you were to take the NI net interest on average assets and fee on average assets, our fee on average assets has also grown. In fact, if you technically look at it, we have been able to defend the roi, but for the MFI provision that we have taken, we would have defended our ROA at the same level as last quarter but for the MFI provision. So. I remain optimistic. The structure change as you can also see in our presentation of the mid yielding assets is consistently happening, right? You have even this quarter seen improvement in mid yielding asset proportion compared to last quarter. And Venkat mentioned that we are more optimistic about some of the products like gold for example. The real change in regulation happened in June. So the growth you see in this quarter is effectively a month growth which will give us more growth in the coming quarters. And retail assets, like Venkat mentioned, we have restructured the business. We are more hopeful that things are now in place to push for growth.
So mediating assets part of the strategy. So I continue to say that our ROA is defined by improvement in CASA which you can see evidence of in the quarter one results, improvement in fees, which again you can see the evidence in the first quarter results and change in mix on assets which again you can see the evidence of that in the results. So all those three that we guided improvement in ROA based on all those three parameters are playing out clearly. Yes, the asset quality like we again clarified. But for the mfi, the asset quality on rest of the book has remained absolutely at the same levels that it. Was till last year.
Rikin Shah
Got it sir. Thank you very much.
KVS Manian
Thanks Rukin.
operator
Thank you. Next question is from the line of Piranha engineer from CLSA India. Please go ahead.
Piran Engineer
Yeah. Hi team, thanks for taking my question and comments on the quarter. Just a couple of questions. Firstly on fee income. Now we’ve done a good job on fee income over the last 34 quarters since you joined. Is this more a case of low hanging fruit being plucked and now fees will grow in line with balance sheet or can fees continue to sustainably grow for a long period faster than the balance sheet? And if so, then what are the drivers?
KVS Manian
Of course Piran, we would like to Believe that of course this is there to stay and not just because we hope for it. You know I just mentioned that our wealth vertical is just about falling in place. We will have to grow our wealth business which will add to fees. I also mentioned that we now have a team in place on the transaction banking side and therefore we are expecting our trade and forex fees to grow from here. Our current bank assurance growth has been very good even in this quarter. If you see the parabanking fees have grown very, very handsomely.
So I think we are still scratching the surface and our cards business continues to grow which will add to fees. So I think there are enough levers for us to sustain the fee growth at a good momentum much faster than the growth in balance sheet. For some many more quarters to come. I am hoping. Yes.
Piran Engineer
Okay. Okay, fair enough. Secondly, just on growth, two questions are both related to growth. One is I think I heard as mentioned that growth will be 1.2x of nominal GDP. Did I hear that? Is that only for FY26 or. This is a. Because we used to usually grow at 18 20% then we did this recalibration.
KVS Manian
We have been always saying 1.2 to 1.55, 1.4, 1.5 times. But depends on that. Also depends on the environment. If the environment is of a low growth environment then the faster growth becomes tougher and that’s why we guide towards the lower end of that band. But
Piran Engineer
this is only for FY26. Right.
Venkatraman Venkateswaran
And see 18 20%, you should know the context that the economy let’s say was growing at 7 and inflation was 7. And then you apply the 1.2 to 1.4x you’ll still get to that 18 20%. So it’s a context to that growth and that’s why we stick to nominal GDP and a multiplier.
Piran Engineer
Understood. And also on growth and business banking, you know we’ve slowed down quite a bit. Is this more of pricing related tweak that you know, it’s just very competitive?
KVS Manian
Yeah. No, no. So Piran, what we are doing in business banking is of course we are. You know there is generally the environment is. I mean you have heard many calls where people are warning against SME credit. While I mentioned that our book is not seeing particularly higher stress than in the past. But it is important for us to be cautious. So we have made some internal rejigs on our credit buying decisions and we have been slightly more cautious while growing that while on the commercial bank side we have continued to grow faster and because we have felt more confident of the market as well as our book on that and is the upper end of the SME.
So we are pushing the upper end of SME growth faster than the lower end. But we have also created a new team there, there is a new leader there, there is a set of new RMs that we have created dedicated to that business. So some of that is playing out. But I am sure that in quarters to come we will pick up some growth in that segment as well.
Piran Engineer
Got it. Okay. That was all that I had. Just one thing since Shavik mentioned it about this Saturday thing. I hope this is just a one off. You’ll get much more clients on the call when you do it on weekdays. And literally every bank has started doing it on Saturday which is just very surprising. And when it clashes, imagine if you all clash with an ICICR or a quota. People will obviously give more important stuff. I’m just being very honest here.
Souvik Roy
Not follow the path. Let’s see.
Piran Engineer
Yeah, it’s better on a week.
KVS Manian
Noted your feedback. We will.
Piran Engineer
Yeah. Thank you and wish you all the best.
Venkatraman Venkateswaran
Thank you. Thank you so much.
operator
Thank you. Next question is from the line of Anand Dharma from MK Global. Please go ahead.
Anand Dama
Yes sir. Thank you for the opportunity and operation. Strong operating performance. My question is on the stress again. Like you said that microfinance, we have seen a stress in this quarter. If you can quantify what the trick is in microfinance, I believe our portfolio is towards Kerala rather than Karnataka or state of, you know, wherever ordinance related impact. So what basically led to this kind of fire preparation? Microfinance. That’s my first question. Second is that CBC book that also seems to be, you know, now seasoning out. And so business banking, can there be some surprises over there in terms of asset quality that you see going forward?
KVS Manian
So Anand, right? Yeah. Anand on mfi. Our portfolio is not Kerala. Our portfolio is actually across the country over multiple states. But 20 odd is in Karnataka. So that is where the big pain is coming. And our slipping numbers are there in our deck in MFI Agri. Agri, we call it Agri mfi. So it is there in the deck for you to get on CVC and business banking as I mentioned, yes, we have seen marginally higher stress than in the past. But I would say it is not yet something that is alarming on the cvnc. We are largely not on the very retail end of that business.
We are in the medium to large size customers, strategic customers and retail premium customers. If you might want to call them so we are not at the lowest end in the LCV and the lower end of the business. So while we have seen marginal deterioration it is not yet alarming us. Of course if the data tells us something else we will change our mind. But right now it does not give us any reason to change our mind on wanting to continue to grow the CVCE business Banking. I mentioned to you again very marginal change broadly in line with what we have seen in Q1 of last year and Q1 of this year is similar that of course in BB we have more Kerala focused book.
About 30% of the book is Kerala but like I said that is not showing any abnormal signs to us just now. Again we have been cautious. We have not grown that book very fast and we have taken some protective measures over the last two three quarters on that book and we have done some tinkering with our underwriting as well there to make sure that we have because there are too many people calling out stress in that sector and we don’t want to wade into the storm. So we have been cautious though our portfolio per se has not exhibited any alarming tendencies I hope.
Anand Dama
Do you plan to build some buffer on provisions front? Because I mean you may never load. The stress mark. Incrementally. Obviously you can
KVS Manian
Anand. It is a secured book, it is not an unsecured book. So we are not yet thinking in terms of that.
Anand Dama
The secondly cost implications of your transformation process how that would look like in FY26 in terms of overall opex because you talked about branch transformation, you talked about people changes that you are doing and stuff. So if you can just talk about that in terms of what kind of OPEX that we should build in for FY26 and FY27.
KVS Manian
So you know Anand, we have always guided that. Don’t assume any benefits out of cost to income and they will remain in the same range that they have been. As you can see even this quarter while we have taken all those initiatives we have created the 70 RBSCs. We are also trying to optimize. We have not. The fact that we have created 70 retail business centers does not mean we have added people from outside. We have also optimized internally transferred people from one role to other and created. When I said we have created 70 business PRMs, it is not an addition to our manpower, it is more realignment of our manpower.
So we are trying to optimize whatever we can and we are trying to get efficiencies that we can get. However, as per our past guidance I Continue to say that since we will be in the investment mode and we will, you know all these talent that we have added will of course add cost to us and therefore we have to continue to optimize this. So we don’t want to guide for any benefits arising out of. So we will remain in the mid-50s range that we have always guided.
Anand Dama
Awesome. Thank you.
Venkatraman Venkateswaran
Thanks Anand.
operator
Thank you. Next question is from the line of Madhu Chandra Day from Money Control. Please go ahead.
Madhuchanda Dey
Yeah hi, good evening. I have a couple of questions. The first is you sounded quite confident on the MFI asset quality not deteriorating from the and you also said that there is a marginal downtick in earning. That is expected in Q2. So is it correct to assume that 1% is kind of the bottom of ROA for us?
KVS Manian
Yeah, yeah. I think we are close to the bottom of the ROA side. Like I mentioned to you, had it not been for the extra MFI provision that we took this quarter, we would have defended our ROA at 1.24 itself almost. So
Venkatraman Venkateswaran
assuming no red.
KVS Manian
So of course who knows we are assuming no red curve happen from here. Yes, we would say NIM 5 to 10 basis points downside possible but hopefully we will defend that through fees and other means and roas will sustain from here and upwards.
Madhuchanda Dey
Yeah. My second question is on the asset quality. You sounded quite confident on broad array of asset classes. So is there any pocket of worry incrementally from here on?
KVS Manian
So Madhu, as we mentioned, if we go back to the data and strip it off the MFI situation, our MFI agree if I take that out, that segment out and look at the rest of the book, we have currently no reason to assume that there is any stress building up in our book. Our current SMS position even as of July, not only June but July as well is not indicative of any stress that is building up in our book as of now. So is there a marginal deterioration in bub cvce? Yes there is. But like I said there is a marginal deterioration but that it’s not yet I would say alarming or anything like that to us unless this data changes, yes, we remain confident of our asset quality.
Madhuchanda Dey
And a last small question. Will it. Be possible to quantify what percentage of our loan book or borrowers have exposure. To the US market?
KVS Manian
That’s a tough one. Difficult to say that. Madhu. I know, I know where you are getting there. But you know the way I look at the tariff situation is first, it may not be the last word yet there will be more developments on this I’m sure government will get into some negotiation, do something to defend the situation. So we may not have yet have the last word on it, but once it is there, then I would say this is some monitorable for us. But. Difficult to say what the impact of this will be. Difficult to say. Frankly, we have never looked at our portfolio from this lens and analyzed it in that manner.
Madhuchanda Dey
Thanks a lot and all the best.
Venkatraman Venkateswaran
Thank you.
operator
Thank you. Next question is from the line of Kunal Shah from Citigroup. Please go ahead.
Kunal Shah
Hi. Thanks for taking the question. So firstly, if you can highlight in terms of have you aligned the kras of the employees? You indicated that now you are seeing the capacity at the branch and focusing on more business development, customer engagement with parabanking plus casa. So how have the kras of the employees changed? And eventually in terms of the priorities, fair to assume that maybe car and fee income are the initial priorities? And would we be picking KRAs six months, 12 months down the line? Because now maybe, you know, you are well aware of the how it’s working and what are the lower hanging fruits here?
KVS Manian
Yes, Kunal, all branch scorecards have been changed. All, all employees and sales profiles have a scorecard which reflect our bank’s priority and that has been rolled out across. The bank for all profiles. So that has been implemented and is in place and scores are declared every month for every profile. So that’s all in place. Yes, Car and fee, but asset mix too. I mean if you look at Kunal, our data that we have shown you, asset mix is showing steadily improvement towards the medium yield. Even in this quarter we have made 50, 60 basis points improvement in the mid yield. And as I told you, the retail products, as we get Traction, gold, as we get traction will all add to this bucket and therefore all three, as I said, oversimplified strategy of casa.
Getting car right, getting fee right and getting asset mix right. All three are absolutely built into the scorecards of people. And the way we are evaluating them, it is very much.
Kunal Shah
Okay, okay, got it. So the weightages would have gone up for this three in particular.
KVS Manian
Yes, absolutely. Branches. For example, the CASA weightage for branches has gone up dramatically more than it used to be.
Kunal Shah
If you can quantify.
KVS Manian
Let me put it this way, more than half the weightage is for liability products.
Kunal Shah
Yeah. Oh great. Okay. Okay. And earlier it would have been more tilted towards assets.
Souvik Roy
Well, that’s in the past, but now. It’S more than 50. Let’s stick to that.
Kunal Shah
Yes, yes. Yeah. Okay. Okay, got it, got it. And Two more questions. Firstly, fair to say the increase in agree is purely on MFI or MFI is there in retail as well?
KVS Manian
There is no, no MFI anywhere other than what we classify as agree mfi.
Kunal Shah
So then what is leading to the. Increase in the retail slippage is when. We look at it, maybe there also. It’S gone up a bit in the first quarter. Is it more of seasonality or maybe some
KVS Manian
seasonality? Kunal, even if you compare it with last year, we have seen the trend in the first quarter. It is generally slightly higher. But in fact we are already seeing July itself. SMA is, SMA is lower, July itself, the slippages are lower. So it is more. I won’t say there is a trend of any big deterioration there yet.
Kunal Shah
Okay, got it. And lastly on eblr. So EBLR is now coming off. You indicated in terms of how you are transitioning maybe from floating to fixed trading few of the portfolios. Are we largely done or still there is a scope to get the EBLR further down from here on?
KVS Manian
Yes, yes, there is scope to get it further down. As you would have noticed, we were 51 odd percent close to 52% sometime.
Kunal Shah
That’S down to 48. Yeah.
KVS Manian
Now and there is scope to further reduce this. And as we build for example car loan business, the gold loan business are all fixed. So card is fixed, a commercial vehicle is fixed. So some of the areas which are growing faster fixed. So there is definitely more scope to get it down from 48.
Venkatraman Venkateswaran
Also more nicely from around 25, 26% levels to now 33%.
KVS Manian
Yeah. The fixed book has moved up from 26 to 33. Right? Yeah. So there is clear see some of these priorities we said clearly our execution is keeping pace with some of those priorities that we have fixed on all these parameters. So I think 48 is still there is upside on that.
Kunal Shah
Okay, got it. Thanks. Thanks a lot. And all the best.
Venkatraman Venkateswaran
Yeah. Yeah. Thanks. Thank you.
operator
Thank you. Next question is from the line of MB Mahesh from Quoted securities. Please go ahead.
M. B. Mahesh
Hey. Hi. Three questions from my. Three questions from my side. One is can you walk us through. As to why would NIM only decline by 5 basis points the next quarter? And within this, if you could spell out in this quarter what was the contribution of interest derecognition on account of. Some of the high reading segments slipping. In the current quarter.
KVS Manian
Impact of high interest derecognition. Okay, first let me take the NIM part first. We have a residual see 50 bips that came in June has had a one month impact. Right. So we need to yet get two months impact on 50 basis which is roughly 33 basis points. If 48% of our book is there, say 33 will be 15 or 16. And we are saying that we will be defend seven or eight basis points. And therefore we are saying something around between 5 and 10 will be the impact. So that’s the answer to your NIM question on the income deducting. I mentioned
Venkatraman Venkateswaran
four to five BIPs. Mahesh has been the impact due to the URI.
M. B. Mahesh
Okay. So the second question, it’s been on the fee income line. This contribution of recovery from written off continues to remain fairly high. Any outlook on that? And this general processing fees contribution also. Continues to remain high. Any color on these two line items.
KVS Manian
General processing fee will remain high. In fact we think as the disbursements go up and gold and all these businesses disbursement goes up, it can become even more robust. So we and general charges are also, as I mentioned in my introductory remark, we have also revamped our fee structures on many, many of our products, liability products. And that has also resulted in some of the change that you see in the fee side. We have also renegotiated some of our partner fee structures and that has also resulted. So some of those are sustainable increases in fee structure.
So there is no one time stuff on the fee, general fee that you see there. The second question,
Venkatraman Venkateswaran
second question. Recovery from return of assets, Mahesh in this quarter has been relatively lower than last quarter. Last quarter obviously Q4 you will see a very large uptake. Every year has been lower. But in Q1 like every year we have the reval of the unlimited investments. So we get the benefit of that in the other income in Q1.
M. B. Mahesh
Yeah. Okay. And this will decline as we go forward. That’s a safe assumption to me.
KVS Manian
Recovery, recovery will continue. So I don’t think that will decline substantially. That should remain or get better. Actually as we get towards the last quarter again next year it usually seasonal wise or maybe the effort wise. It tends to be better in the last few last couple of quarters.
Venkatraman Venkateswaran
Next quarter we should also get benefit of some pslc. Yeah.
KVS Manian
So some other positives will come.
M. B. Mahesh
Oh perfect sir. Done. Thank you.
Venkatraman Venkateswaran
Thanks Manish.
operator
Next question is from line of Param Subramanian from Investec India. Please go ahead.
Param Subramanian
Yeah. Hi, good evening. Thanks for taking my question. Firstly sir, if you could call out the slippage in MFI and AGRI separately. For this quarter and last quarter.
Venkatraman Venkateswaran
We normally don’t Give that split Mahesh. But the large part of the agri part is the mfi. Param. Sorry.
KVS Manian
A large part, large part of this that you see there is MFI.
Param Subramanian
With say the write off number broadly. Because
KVS Manian
what write off?
Param Subramanian
I mean the write off has also been high for the last couple of quarters. So roughly, will it be equal to. The write off that you know?
Venkatraman Venkateswaran
No, no, no, no.
KVS Manian
It has no connection at all.
Param Subramanian
Okay. Okay. And sir, the recovery NPL recovery number. Is also softer than what we’ve seen. Over the last three, four quarters. So which is why your next slippage. Is also looking high in this quarter. So anything to call out over there.
Venkatraman Venkateswaran
Usually Q4, you know, is higher.
KVS Manian
So Param, please don’t compare Q1 with Q4. If you do that, it will always look like that every year. The way to look at it is Q1 what it was last year and compare that. And if you look at that, it is more or less at the same position. It is not very different.
Param Subramanian
Okay. Okay. There’s no change in our recognition of. Recoveries or any such thing?
Venkatraman Venkateswaran
No, no, no, no. Nothing, nothing, nothing.
Param Subramanian
Okay. Okay. And one last question. So on your loan processing fee it. Is down YoY by 11% in the fee breakup. So what exactly is happening there?
KVS Manian
Yeah, so that is largely some. The products which give us more fees when on disbursement like gold, were lower in this quarter. Like I told you that the gold loan actually whatever growth you see is actually only a June phenomena after RBI clarity happened on the gold business. So some of those businesses which give higher processing fee were low in this quarter and we are hoping that some of that will recover. In fact, in spite of that, our overall fee performance was fairly strong actually.
Souvik Roy
Varam, are you with us? Hello, operator.
Param Subramanian
Sorry, I was on mute. Yeah, thanks a lot. All the best.
Venkatraman Venkateswaran
Thank you. Thank you.
operator
Thank you. Next question is from Lionel Sumit from Morgan Stanley. Please go ahead.
Unidentified Participant
Hi, good evening team. What is the decline in savings deposit. Cost on a quarter on quarter basis?
KVS Manian
Okay, let me put it this way. We cut our savings deposit rates. Twice. Twice. Second was in only June. We cut it in June 15th. On June 15th by 25bps, we cut it to 250 from 275. And that has not seen the impact in the full quarter. It has seen only a 15 day impact. That benefit will come entirely next year if that is what you were looking at. Sumit, are you with us?
operator
Thank you, sir. The line for the participant dropped. We move on to the next question. Next question is from the line of Harsh Modi.
Unidentified Participant
Thanks for this.
operator
Please go ahead. Yeah, go ahead.
KVS Manian
What is happening here?
Venkatraman Venkateswaran
Hello, Harsh.
KVS Manian
Hi, Harsh.
operator
So one moment. I think he’s on mute. Just give me a moment.
Unidentified Participant
Yeah. Can you hear me?
Venkatraman Venkateswaran
Yes, yes, yes, now we can.
Unidentified Participant
All right, great. Thanks for this. I would also request if it is possible not to do a briefing on Saturday. That would be a huge help getting put the questions. Yeah. On the mid yield, what I’m trying to understand is where is the risk of higher credit issues coming in with higher yield? Because it is difficult to see a. Scenario where credit spreads have gone up but credit risk has not gone up. So for example, if I want to understand the nature of collateral, let’s say for SME and the business loans, are these still the real estate kind of hard collateral or have you moved to collaterals which are where probably the loss given default is higher while they’re still secured but probably the loss given default may be higher. So could you explain a bit what are the potential risks that comes with higher credit spread? And I have a follow up question on that.
KVS Manian
Harsh. I have been talking about the higher asset yields by change in mix and not necessarily by saying that we will go for higher yield assets with higher risk. So I just want to put on record that we are all on the same page on that. Having said that, on the lower end of business banking in the SME side it is when we say they are secured, we don’t mean other security, we mean property security. At the higher end of SME that we spoke about in the commercial bank it tends to be not fully 100% secured kind of transactions as well.
But at the lower end it is largely. When we say secured, we mean property secured. Retail and commercial. Yeah, retail and commercial. Retail and commercial. Both. Both kind of security is available. I hope that clarifies your question.
Unidentified Participant
Yeah, right. So has the loss given default of these securities, let’s say the last six months? I know too early to see any defaults. But if you think about the assessment of loss given default for loans given in last six months, are they same as let’s say those of loss given default assessment, let’s say two years ago?
KVS Manian
Harsh, we obviously use a historical model to determine what to do going forward. Based on our underwriting, we keep reviewing our data. We keep reviewing our data and keep updating the loss given default as the defaults keep occurring and losses keep occurring. Having said that, please remember that usually in properties both things work, right. While. The risk may play out, the fact is also that property Values also in most places inch upwards and not downwards. So usually the property valuations are higher. And of course we have our own rating models and relatively higher rated customer. We may take less LTV ratios at lower levels, whereas if the customer is rated low we take a more conservative view on ltv. So these are things that play out but we have no reason just now to assume that what we are underwriting now is any higher risk at all than what we have done in the past.
Unidentified Participant
Right, thanks for that and sorry to double click on that but let’s say the LTVs that you talked about for either property, let’s say something like a gold loan which is pure LTV business. Like how has the LTVs of gold loans, let’s say in last three months versus a year ago and also the LTV at origination for some of the mortgage or business related loans with property as collateral. Have you changed the LTVs, increased the LTV to which allows you to probably make higher yield?
KVS Manian
No, not for making higher yield. Actually it is the other way. Harsh. Many cases, many cases we in our for example lab business the question is whether we take our LTVs based on market value or fire sale value. Right, for sale value. Obviously the best of customers will never give you their business. If you put. You may think you are safer by doing a LTV based on fire safe value but no good customer will come in so it leads to adverse selection. So what do you think is good credit actually turns to be bad credit. So you know these are. So we are not doing anything. Let me, let me say our objective is to get right pricing for the risk we take rather than take higher risk and therefore get higher pricing.
That is not what we want to do.
Unidentified Participant
Fair point. Exactly. So sorry, the last question then maybe you are not doing it but it seems a lot of your competition is also focusing on the similar and I absolutely love the phrase mid yield segment. A lot of your competition, smaller banks, larger NBFCs are getting into that space. So is the competition for saying some sort of dilution of credit standards is what I’m trying to get to?
KVS Manian
No, there is competition no doubt. But that doesn’t force our credit standards to be low. I mean it’s a big market, it’s a large market. I think the share that we want we are getting at our vira. Do you want to take that
Virat Sunil Diwanji
in that kind of situation? We would rather what you call give a rate discount but not what you call bring down our security level. So that’s the approach that we have taken.
KVS Manian
If you have to choose between the two. We will choose lower rates and lower security.
Unidentified Participant
Got it? Great. Thank you so much. Those are my questions.
Souvik Roy
Thanks. Harsh.
Unidentified Participant
Thanks
Souvik Roy
operator. We can probably just take one final. Question and then close it.
operator
Sure, sir. Participants, we’ll take one last question from the line of Sameer BC from Diamond Asia. Please go ahead.
Sameer Bhise
Yeah, hi. Thanks for the opportunity. So, just wanted to understand from a near to medium term profitability perspective. One is that some of the high. Yielding categories mainly say the MFI business banking cv, the degree of risk has gone up so you would probably be cautious there. So what is going to do the growth heavy lifting when we, when we. Say that we will grow at 1.2. 1.3 times nominal GDP and at the same time help margins. So that’s 1. And secondly, generally even large banks have also been saying that freight cost could normalize upwards. So would it be fair to say. That bulk of the profitability or ROI. Benefits come more in FY27 second half in terms of tangible measurable outcomes? And this is more like building blocks kind of a year. Yeah, Those are my two questions.
KVS Manian
Sameer. FY27 second half is too long for us to start talking about. I think we remain focused on let’s say the next half year. And I will repeat one thing. You know, some of the gains that we are talking about from NIM and therefore from profitability will come on the liability side as well. Right. And that is that part can come without risk. Second, there are still opportunity for us as a relatively small market shareholder in many of the products to continue lab. For example, we have just scratched the surface. We don’t have almost have a lab book. When many other banks are looking at, they are looking at growth from a large book, we are looking from a small book. And therefore for it is possible to grow that business, it is possible for us to. Gold is like I said, I am very optimistic about growing gold which is a reasonable yield book, highly capital efficient, very low npa, highly profit, accretive business for us, fee and interest accretive for us.
So there are enough opportunities for us to grow our book at that to get to that 1.2 times metric that Venkat gave you. I think we still have opportunities within our sphere of operation to do that.
Sameer Bhise
Sure, sure, this is helpful. And finally, generally given the environment is sluggish, you still remain confident on asset quality.
KVS Manian
We are always cautious, so we will remain cautious. Like I said bar mfi, there is no reason for us to be alarmed about anything as yet. If data changes, we will change our mind. But as of now, I have no reason to feel diffident about it. Let me put it that way. I am not diffident about it. We will always be cautious. I will keep watching.
Sameer Bhise
Great, sir. Thank you. This is super helpful and all the best. Thanks a lot.
Souvik Roy
Thanks, Amir. And thanks everybody.
KVS Manian
Thank you everyone. Thank you so much for taking time out on a Saturday and attending our call.
Souvik Roy
Yes, we will try and see if we can stick to Friday evenings next time onwards. Thank you so much.
Harsh Dugar
Thank you.
Venkatraman Venkateswaran
Thank you.
operator
Thank you very much on behalf of the Federal Bank Ltd. That concludes the this conference. Thank you for joining us. And you may now disconnect your lines. Thank you.