(MENAFN- IANS) Mumbai, Aug 2 (IANS) Federal Bank, India's sixth-largest private lender, on Saturday reported a drop in profit for the June 2025 quarter (Q1 FY26) due to a sharp jump in provisions, even though its asset quality and core business showed improvement.

The bank's net profit fell 14.6 per cent to Rs 861.8 crore, compared to Rs 1,009.5 crore in the same quarter previous year (Q1 FY25), according to its stock exchange filing.

The decline was mainly because provisions and contingencies, excluding tax, surged 177.4 per cent to Rs 400.2 crore from Rs 144.3 crore a year ago.

Most of these provisions were linked to the agricultural and microfinance sectors.

Managing Director and CEO KVS Manian said the bank delivered a strong operational performance despite the higher provisions.

He added that the microfinance segment has likely reached its peak in terms of bad loans and is expected to improve from the current quarter.

Manian also noted that expectations over a possible interest rate cut by the RBI were divided and warned that any reduction could impact earnings.

The bank's operating profit rose 3.7 per cent to Rs 1,556.3 crore from Rs 1,500.9 crore a year earlier, supported by growth in lending.

Net interest income (NII) increased 2 per cent to Rs 2,336.8 crore, as interest earned rose 5.6 per cent to Rs 6,686.6 crore.

However, interest expenses grew at a faster pace of 7.7 per cent to Rs 4,349.8 crore, which put pressure on margins.

Federal Bank's loan book continued to expand, with net advances up 9.2 per cent year-on-year (YoY) to Rs 2,41,204.3 crore.

Retail loans grew 15.6 per cent to Rs 81,046.5 crore. Deposits also rose 8 per cent to Rs 2,87,436.3 crore from Rs 2,66,064.7 crore in the year-ago period, the company stated in its regulatory filing.

Asset quality improved, with the gross non-performing asset (NPA) ratio dropping to 1.91 per cent from 2.11 per cent previous year, and the net NPA ratio easing to 0.48 per cent from 0.60 per cent.

The bank's capital adequacy ratio under Basel III standards increased to 16.03 per cent from 15.57 per cent, helped by strong internal accruals.

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