Fedbank Financial Services gold-loan mix drives AUM growth and return improvement

Investment View and Valuation

In its October 16, 2026 results update, ICICI Securities maintained its BUY recommendation on Fedbank Financial Services, also known as Fedfina, with an unchanged target price of Rs 200.

The broker’s positive view is based on Fedfina’s transition to a more resilient and profitable lending franchise, supported by a higher gold-loan mix, the restructuring of its small-ticket loan against property (ST LAP) business and the exit from unsecured business loans. Gold loans account for more than half of AUM, while more than 99 per cent of loans are secured. ICICI Securities sees scope for return ratios to improve towards a medium-term RoA of 3 per cent.

ICICI Securities values Fedfina at 2 times September 2027 estimated book value per share. The broker increased its FY27E and FY28E PAT estimates by 6 per cent and 1 per cent, respectively.

Strong Q2FY27 Operating Performance

Fedfina reported strong Q2FY27 operating performance, with AUM growth reviving to 37 per cent year on year from 14 per cent in Q2FY26. Growth was led by a 77 per cent year-on-year increase in gold loans and 6 per cent growth in ST LAP.

Core yields, adjusted for direct-assignment effects, were stable quarter on quarter. Average borrowing cost remained about 7.8 per cent, supporting core NIM of about 8.8 per cent.

Management Guidance and Branch Expansion

Management retained its FY27 AUM growth guidance of 20-25 per cent, including 25-30 per cent growth in gold loans and 15-20 per cent growth in LAP, even if gold prices remain flat.

• Gold tonnage is expected to increase by 10-15 per cent.
• Credit cost is expected to remain below 1 per cent.
• GNPA is expected to remain below 2 per cent.
• FY27 RoA is expected to improve by 25-30 basis points from the FY26 average of 2.4 per cent, with further improvement expected in FY28.
• Management is targeting about 3 per cent RoA and 18 per cent RoE.

Fedfina added 74 branches in Q2FY27, taking its total to 831 branches, and entered eastern India. It plans to add at least 150 branches in H2FY27, including about 100 in Q4FY27.

Asset Quality and Credit Costs

Asset-quality indicators weakened modestly in Q2FY27. Gross stage 3 rose 27 basis points quarter on quarter to 1.8 per cent, net stage 3 increased 22 basis points to 1.2 per cent and stage 2 rose to 3.6 per cent from 2.7 per cent.

Management attributed the deterioration mainly to revised gold-loan repayment regulations, which require periodic interest servicing instead of bullet repayment at maturity. Gold-loan gross stage 3 increased to 0.5 per cent from 0.1 per cent quarter on quarter. However, management expects customers to adjust over one or two quarters and noted that there has been no principal or interest loss from gold auctions in the past six years.

Mortgage gross stage 3 remained stable at 3.4 per cent. Credit cost improved to 0.6 per cent from 0.8 per cent in Q1FY27 and 0.9 per cent in Q2FY26.

Key Risks

ICICI Securities identifies the key risks as credit costs remaining elevated and AUM growth falling below expectations because of more intense competition. Competitive pressure is particularly relevant in gold loans and ST LAP, where lower yields in certain geographies and heightened competition could affect growth or margins.