In its pre-update on key metrics, the private sector lender reported that its loan portfolio grew 9% in FY21. Management had indicated loan growth of 8-10% for the year. That said, investors should watch the drivers of growth. Much of the growth in the bank’s lending for the December quarter came from gold lending. Gold loans grew at a stellar 67% year-on-year rate this quarter and their share rose to 11% of the bank’s loan portfolio. Gold loans present their own problems as the price of the underlying asset tends to oscillate.

Granted, the Federal Bank’s loan-to-value ratios are below the industry average, at 72-73%, which protects the bank against volatile gold prices. Nonetheless, analysts have pointed out in the past that gold lending injects volatility into earnings and therefore should be watched.

The bank’s business lending growth weakened in the wake of the pandemic. The pound was down 5% in the December quarter and investors should also watch out for lingering pain points in the March quarter. That leaves us with the personal loan portfolio. This showed 16% growth for the December quarter. The lender has performed well here and the bank is expected to continue to show strong growth. In addition, the bank wants to increase its high margin retail portfolio. The bank is looking to acquire a microfinance portfolio, CEO Shyam Srinivasan said as quoted by The Times of India on March 19. The aim is to improve the return on the lender’s assets.

Of course, the greatest risk is the second wave of covid-19 infections which is gaining ground across the country. Regional lockdowns are expected to reduce demand for credit, as mobility restrictions can dampen companies’ production plans. As such, consumer demand is also expected to be affected.

What works for the Federal Bank’s valuations is reasonable growth in its balance sheet despite the headwinds of the pandemic. A big advantage is the growth of its deposits, in part the fallout from household savings to deposits during the pandemic. This growth, especially in low-cost checking and savings accounts, means the Federal Bank can look forward to healthy margins. But a second wave may not signify a similar urge to save in Indian deposits. In contrast, a persistent pandemic would hamper economic recovery. Exercise 21 may have been difficult for loan growth and asset quality, but exercise 22 would be far from easy.