Fedfina's Q2 FY26: Strategic Shifts Drive Robust Growth and De-risking

Fedbank Financial Services Limited, or Fedfina, has reported a dynamic second quarter for fiscal year 2026, showcasing a strategic pivot towards secured lending and enhanced operational efficiency. The company's latest investor presentation and concall transcript reveal a period marked by significant AUM growth, improved asset quality, and a proactive approach to risk management. For Q2 FY26, Fedfina recorded a Profit After Tax (PAT) of ₹80.2 crore, marking a substantial 24.2% year-on-year increase. Net Interest Income (NII) also saw a healthy rise of 10.9% year-on-year, reaching ₹293.9 crore, underscoring the company's strong financial performance.

The quarter's performance highlights Fedfina's twin-engine strategy, focusing on Gold and Loan Against Property (LAP) businesses. The Assets Under Management (AUM) grew by 13.5% year-on-year to ₹16,136 crore. Notably, Gold Loan AUM surged by 36.4% year-on-year to ₹6,731 crore, contributing 41.7% to the total AUM. Mortgage AUM also demonstrated strong momentum, growing 22.6% year-on-year to ₹8,796 crore. Total disbursals for the quarter increased by 36.6% year-on-year to ₹5,205 crore, primarily driven by a 70.3% rise in gold loan disbursals. This growth, however, was optically impacted by the strategic derecognition of unsecured business loans totaling ₹886 crore during H1 FY26, which, on an ex-business loan basis, would have pushed AUM growth to 28% year-on-year.

De-risking and Asset Quality Enhancement

Fedfina has made significant strides in de-risking its balance sheet and enhancing asset quality. The company successfully sold a deep delinquent pool of Small Ticket LAP and Housing Loan assets, amounting to ₹79.5 crore, to an Asset Reconstruction Company (ARC) for an upfront cash payment of ₹32.6 crore. This move included technically written-off principal outstanding value of ₹41 crore, facilitating capital release and improving the portfolio's overall health. Furthermore, the 100% assignment of the business loan portfolio in H1 FY26 (₹770 crore in Q1 and ₹116 crore in Q2) has reduced the total on-book exposure of unsecured lending to less than 1%. This strategic decision not only ring-fences the company from potential deterioration in unsecured lending but also enables reinvestment into higher-return products.

Asset quality indicators reflect these efforts, with Gross Stage III decreasing quarter-on-quarter to 1.9% in Q2 FY26, and Net Stage III standing at 1.3%. The Provision Coverage Ratio (PCR) for Stage III assets, post the ARC sale and an ECL refresh exercise, stands at 32.0%. Management emphasized that while the PCR saw a temporary drop due to the sale of highly provisioned NPAs, the revised PCR is within their guided range, aiming for a normalized credit cost of 1% plus or minus 10 bps for FY26.

Operational Expansion and Efficiency

Operational expansion, particularly in the gold loan segment, remains a key focus. Fedfina commissioned 57 new Gold Loan branches in Q2 FY26, bringing the total branch count to 699. The company plans to open approximately 90 more gold loan branches in the next two quarters, targeting around 150 new gold branches for the entire fiscal year. This expansion is crucial for increasing ground presence and doorstep coverage, which is expected to boost gold loan tonnage growth, which was flat in the first two quarters. In a move towards efficiency, Fedfina has also successfully merged and co-located 49 small ticket LAP branches within gold loan branch premises, optimizing infrastructure and restricting operating expenses.

On the collection front, Fedfina has significantly strengthened its infrastructure. The senior leadership team for collections was on-boarded in Q1 and Q2, and the collection framework has been verticalized with additional resources for call centers and legal teams. The small ticket LAP collection team has been expanded from 200 to 400 people. These initiatives are part of a broader effort to effectively manage delinquencies and improve resolution rates, particularly for the older small ticket LAP book, which had faced challenges in the past.

Outlook and Strategic Priorities

Fedfina's management reiterated its commitment to several strategic priorities: conserving and allocating capital to businesses with high ROA/ROE, focusing on the twin-engine strategy of Gold and LAP, moving towards a fully secured lending portfolio, and continuously strengthening collection infrastructure. Despite facing some yield pressure in the Medium Ticket LAP business, the company disbursed ₹554 crore in this segment, achieving a 23% quarter-on-quarter growth while maintaining yields. The Small Ticket LAP business, after fortifying credit policies and transitioning to a system-driven BRE, disbursed ₹206 crore. Management expects operating expenses and cost-to-income ratios to normalize in FY27 as capacity-driven spending on new branch infrastructure stabilizes.

Fedfina's Q2 FY26 results demonstrate a clear strategic direction towards a secured, high-quality lending portfolio, supported by robust operational expansion and proactive risk management. The company's focus on strengthening its core businesses and improving efficiency positions it for sustained growth and predictable performance in the coming quarters.