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Directors Report of Federal Bank Ltd.

Mar 31, 2015

Dear Members,

The Board of Directors has immense pleasure in presenting this 84th Annual Report of The Federal Bank Limited, along with the audited financial statements for the year ended March 31, 201 5.

Financial Results Amount(Rs. in Crore)

Financial Parameters for the year ended 31 March 2015 31 March 2014

Net Interest Income 2,380.41 2,228.61

Fee and Other Income 87831 693.85

Net Revenue 3,258.72 2,922.46

Operating Expense 1,630.93 1,442.07

Operating Profit 1,627.79 1,480.39

Net Profit 1,005.75 838.89

Profit brought forward 787.36 516.38

Total Profit Available for appropriation 1,355.27

Appropriations:

Transfer to Statutory Reserves 251.66 209.73

Transfer to Revenue Reserves 109.87 103.07

Transfer to Capital Reserves 28.76 17.95

Transfer to Investment Reserve 46.28 -

Transfer to Special Reserves 38.23

Proposed Dividend 188.49 171.06

Provision for Dividend Tax 38.37 27.87

Depreciation on Expired assets 2.31 -

Balance Carried over to Balance Sheet 787.36

Financial Position (as on)

Deposits 70,824.99 59,731.28

Advances 51,284.99 43,436.10

Total Business (Deposits Advances) 1,22,109.98 1,03,167.38

Other Borrowings 5,687.96

Investments 24,409.19 24,117.85

Total Assets ( Balance Sheet Size) 82,850.48 74,594.15

Equity Capital 171.33 171.06

Ratios

Return on Total Assets (%) 1.20

Return on Equity (%) 13.77 12.80

Earnings Per Share (Rs) 9.81

Book value per share (Rs) 90.33 80.36

Operating cost to Income (%) 50.05 49.34

Capital Adequacy Ratio (%) Basel (III) 15.46 15.14

Highlights of Performance Growth in Business

Total business of your Bank reached Rs. 1 221 09.98 Cr as on 31 Mar 201 5. Total deposits increased by 1 8.57% from Rs. 59731.28 Cr in FY''14 to Rs. 70824.99 Cr in FY''15. The total advances of your Bank stood at Rs. 51 284.99 Cr at the end of the year.

Average deposit portfolio of the bank had grown by 11.43% to reach Rs. 63342.04 Cr and average advance portfolio had grown by 11.42% to reach Rs. 46689.24 Cr.

NRE deposits led the path showing a growth rate of 27.71%, an increase from Rs. 1 8973.56 Cr to Rs. 24230.90 Cr and Retail deposits followed the suit by growing @ 1 7.86 % from Rs. 57269.57 Cr to Rs. 67499.05 Cr. CASA deposits also displayed a growth of 17.11 % to reach, Rs. 21 549.57 Cr from '' 1 8400.79 Cr.

The Savings deposits of the Bank has touched to 1 7726.91 Cr by growing 1 5.98% over that of the previous fiscal of Rs.1 5284.26 Cr.

The investment portfolio of the Bank registered a growth of 1.21% to reach Rs. 24409.1 9 Cr from Rs. 2411 7.85Cr in the previous fiscal. The average investments on Y-o-Y registered a growth of 4.23% basis as compared to the previous fiscal year.

Net Profit

During the year ended March 31, 2015, your Bank clocked a net profit of Rs. 1005.75 Cr.

As a result of refinement in asset quality, the Bank could rein in the total provisioning to Rs. 622.04 Cr. This was mainly aided by a reduced loan loss provisioning of Rs. 204.35 Cr (even at a provi- sion coverage ratio of 83.94%). An amount of Rs. 51 5.29 Cr was earmarked for taxes.

Return on Average Equity and Return on Average Total Assets stood at 13.77 % and 1.32 % respectively.

Earnings per Share ( face value of Rs 2 each) of the Bank, as on 31 st Mar 201 5 was Rs. 11.75 comparable to Rs. 9. 81 in the previous year. Book value per share has increased from Rs 80.36 in FY 14 to Rs. 90.33 during FY 15.

Operating Profit

The Operating Profit of your Bank had grown as compared to previous year to reach Rs. 1 627.79 Cr

The Net Interest Margin of the Bank for the year stood at 3.27 %, despite the interest rate volatility. Net Interest Income of the Bank for the period increased to Rs. 2380.41 Cr from Rs. 2228.61 Cr. During the financial year ended 31 st March 201 5, the total non- interest income of the Bank grew to Rs. 878.31 Cr.

Expenditure

The fiscal year ended 2015 witnessed an increase in the total expenses of the Bank which reached Rs 6669.98 Cr from Rs.61 59.53 Cr, an increase of 8.29%. Interest expenses increased to Rs. 5039.05 Cr in FY 15 from Rs. 471 7.46 Cr in FY 14. Operating Expenses of the Bank during the fiscal year grew from Rs1442.07 Cr to Rs.1630.93 Cr. This is mainly due to increase in salary & allowances, expenses related to branches expansion etc.

The cost of deposits of the bank has come down during the year. The cost of deposits is 7.31% as compared to 7.40% in the previous year. Average Cost of all funds (Deposits Borrowings Bonds) recorded a marginal decrease and reached 7.44 % from 7.56 %. The Interest expenses as percentage to total income stood at 60.73 %. The Cost to Income ratio of the Bank stands at 50.05 % (49.34 % in FY 2014)

In the current fiscal, the CASA to Total deposits of the Bank de- creased marginally from 30.81% in FY14 to 30.43% in FY15. However, the deposit mix resulted in higher interest expense of Rs.5039.05 Cr, an increase of 6.82% over previous year.

Income

Total income of the Bank during the fiscal year 2015 recorded 8.61 % growth to reach '' 8297.77 Cr from the previous fiscal year figure of '' 7639.92 Cr. The interest income component grew by 6.82 % Y-o-Y while other income increased to Rs. 878.31 from Rs. 693.85 Cr.

Income from advances increased by 8.70 % to reach Rs. 5446.83 Cr from Rs. 5011.08 Cr. At the same time, income from investments registered a steep rise to reach Rs. 1 835.92 Cr from Rs. 1 776.83 Cr clocking a 3.33 % annual growth.

The yield on advances stood at 11.67% and the yield on Invest- ments at 7.1 2 %. The Net Interest Margin for the fiscal year is at 3.27% as against 3.32 %, in the previous year. Focused attention on streams of fee based income and other income resulted in an increase of 26.58%. The total other income grew to Rs. 878.31 Cr in the current fiscal from Rs. 693.85 Cr in the previous fiscal.

Spread

During the fiscal year the Bank''s spread on advances (gross) de- creased to 4.36% from 4.55 % and spread on investments (gross) stood at 0.80% from 0.44 %. The Spread (net of provisions) on advance decreased to 3.92% from 4.01 % of last year.

Loan Asset Quality

In the fiscal 2014-1 5, your Bank consolidated its credit underwrit- ing processes through Hub System which was implemented a few years back. The coordinated efforts of National Credit Hub, Credit Monitoring Cells and the Stressed Assets Management Cell ensure that fresh slippages were reduced to a large extent.

The Bank''s Gross NPA and Net NPA stood at 2.04 % and 0.73% respectively as at the end of 31 st March 201 5 as against 2.46% and 0.74%, respectively during 2013-14.

The total provisions held against non-performing advances, ex- pressed as a percentage of gross NPAs amounted to 83.94 % (including technically written off accounts) at the end of FY 2014- 15.

The Bank managed its NPA portfolio prudently, by considering and executing all options viz. SARFAESI, Compromise, Lok Adalat and DRT that offered the best return to the Bank.

Provision Coverage

As on 31st March 2015, the Bank held a total provision of Rs.666.38 Cr. Provision coverage for NPAs as at 31st March 2015 stood at 63 %. As on 31st March 2015, the provision coverage ratio of the Bank, including written off accounts is 83.94 %. As per the RBI directive, Banks should hold minimum provision coverage of 70 % including technically written off accounts.

Capital Adequacy

Historically, your Bank has been strong on capital adequacy. CRAR of the Bank calculated in line with Basel III norms stood at 15.46% which is considerably higher than the 9 % stipu- lated by RBI. Of this, Tier 1 CRAR is at 14.81 %.

Share Value

Earnings Per Share (face value Rs. 2 /- each) of your Bank has in- creased from Rs. 9.81 to Rs. 11.75 during the year under review. Return on Equity during the year reached 13.77 % in the fiscal year ended 31 st March 201 5.

State of the Affairs of the Bank

Your Bank continued on its consistent performance during FY 2014-1 5 with PAT crossing the land mark figure of Rs. 1 000 Crore. The total Business of the Bank increased by 18.36% to Rs.122109.98 Cr for the year ended 31st March 2015.

There is no change in the nature of business of the Bank for the year under review. Further information on the Business overview and outlook and State of the affairs of the Bank is discussed in detail in the Management Discussion & Analysis.

Dividend

Continuing the Bank''s policy of striking a fine balance between retained earnings and dividend distribution, the Board of Directors have recommended a dividend of 11 0% i.e. Rs.2.20 per Equity Share on face value of Rs. 2/- each for the year 2014-1 5 (previous year 100% i.e Rs. 2 per Equity Share) subject to the approval of the members in the ensuing Annual General Meeting. Enhancing shareholders value has always been a guiding philosophy of the Bank.

The amounts, the Bank proposes to carry to any reserves

Reserve Amount (Rs. in Crore)

Transfer to Revenue Reserve 109.87

Transfer to Statutory Reserve 251.66

Transfer to Capital Reserve 28.76

Transfer to Investment Reserve Account 46.28

Transfer to Special Reserve 35.00

There are no material changes affecting the financial position of the company which have occurred between the end of the finan- cial year of the company to which the financial statements relate and the date of the report.

There are no material orders passed by the regulators or courts or tribunals impacting the going concern status and company''s operations in future;

Deposits

Being a banking company, the disclosures required as per Rule 8(5)(v)&(vi) of the Companies (Accounts) Rules,2014, read with Section 73 and 74 of the Companies Act, 201 3 are not applicable to your Bank.

Increase of Capital

The Paid Up Capital of the Bank was increased by an amount Rs. 26,86,824/- by subscription of 13,40,412 ESOS shares of Rs. 2/- each and subscription of 3000 Rights-2007 released from abeyance. The Paid up Capital of the Bank as on 31.03.201 5 is Rs.1 71,33,1 0,394/- consisting of 8566551 97 shares of Rs. 2/- each.

Employee Productivity

Business per employee of the bank during the period stood at Rs. 11.15 Crore and the profit per employee of the Bank stood at Rs. 9.38 Lakh during the fiscal.

Employee Stock Option Scheme (ESOS)

The Bank has instituted an Employee Stock Option Scheme to enable its employees including whole time Directors to participate in the future growth and financial success of the Bank. Under the Scheme 4,27,58,250 options can be granted to the employees. The Employee Stock Option Scheme is in accordance with the Securities and Exchange Board of India (Employee Stock Option and Employee Stock Purchase Scheme) Guidelines, 1999. The eligibility and number of options to be granted to an employee is determined on the basis of various parameters such as scale, designation, work performance, grades, period of service, annual fixed pay, Bank''s performance and such other parameters as decided by the Compensation Committee from time to time in its sole discretion and is approved by the Board of Directors

The Bank''s shareholders had approved the scheme for issuance of stock options to employees including whole time Directors on December 24, 201 0.

The option conversion price set has to be the closing price on the day previous to the grant date. The Compensation Com- mittee granted 1,73,60,100 options during the year 2011-12, 1,22,42,375 options during the year 2012-13, 130,47,125 options during 2013-14 and 55,78,225 options during 2014-1 5. The options granted which are non transferable, with vesting period of 1,2,3 & 4 years subject to standard vesting conditions, and must be exercised within five years from the date of vesting. As on 31 March 201 5, 14,14,692 options had been exercised and 4,05,62,093 options were in force.

Other statutory disclosures as required by the SEBI guidelines on ESOP are given in Annexure II to this report.

Investor Education and Protection Fund

As per the Companies Act 2013, dividend unclaimed for more than seven years from the date of declaration is to be transferred to Investor Education and Protection Fund. On 15.10.2014 the Bank had transferred Rs. 41,80,576/- to the above Fund, being the unclaimed dividend for the year 2007.

Expansion of Network

Your Bank has 1247 branches and 1485 ATMs as on 31st March 2015. The Bank had opened additional 73 branches and 1 26 ATMs during the year to improve its footprint throughout the country including un-banked centers as per RBI''s guidelines. The Bank had opened maximum number of branches in the states of Tamilnadu, Punjab, Gujarat, Karnataka and Maharashtra and also Kerala.

Corporate Social Responsibility CSR Policy

For us in Federal Bank reaching out to people who needs assistance is part of the values passed down by our Founder Shri K P Hormis. The objectives we intend to achieve through our CSR programs aim at developing communities and create a sustainable future for the generations to come. Our activities touch a wider footprint through areas like Health, Education, Woman empowerment, En- vironment sustainability, and other activities as permitted under Companies Act, 2013, all aimed at creating a meaningful differ- ence in the society where we live and operate in.

Objectives

i. To identify and implement CSR projects aimed at uplifting the weaker sections of the social strata and to support the needy, disabled and elderly people.

ii. To empower youth, children and woman through Skill building programs

iii. To get involved in activities that can build a sustainable environ- ment for future generations

Geographical Coverage

Bank with its presence pan India, will be extending its CSR activi- ties across all geographies.

CSR Expenditure

The amount to be spent by the Bank towards CSR for FY 201 5 as per Section 135 of the Companies Act 2013 comes to Rs. 23.83 Crores. Amount spent by the Bank this year towards CSR was Rs. 7.27 Crore. Your bank is committed to increase its CSR impact including the balance amount of Rs. 16.56 Crore for FY 2015. Since long term sustainability is a key factor that will decide success of CSR programs, a steady and cautionary approach was adopted in the first year so that sufficient platform/expertise is build to take forward Bank''s CSR activities in the future.

Risk Management

The Board of Directors oversees the enterprise wide risk man- agement functions of the Bank. A separate Risk Management Committee of the Board is in place for bringing in a top to down focus on risk management. Risk management is coordinated and administered by the Integrated Risk Management Department. The Department has three dedicated divisions for credit risk, market risk and operational risk management. Treasury activi- ties are separately monitored by the Mid Office, which is a part

of Integrated Risk Management Department. Business Continu- ity plans and Information Security plans also form part of risk management functions in the Bank. Bank has also established a Transaction Monitoring Cell to provide a 360 degree surveil- lance coverage of the operations of the Bank. Risk Management policies are approved by the Board of Directors, and reviewed from time to time. Executive level risk management committees, such as Credit Risk Management Committee, Asset Liability Man- agement Committee, Operational Risk Management Committee, Business Continuity Plan Committee, Information Security Com- mittee, regularly assess the functional efficiency of the Bank in risk management and refine the policies and processes. Responsibility for identification, measurement and controlling of risk in various spheres of activities of the Bank is vested with a senior executive at the level of General Manager, who functions as the Chief Risk Officer of the Bank, reporting to the Managing Director & CEO. All material risks of the Bank, emerging in the course of its business are identified, assessed and monitored and in our opinion present- ly there is no material risk which threatens the current functioning of the Bank.

Internal Control Systems and their adequacy

The Bank has an Internal Control System, commensurate with the size, scale and complexity of its operations. The Inspection and Audit Department monitors and evaluates the efficacy and adequacy of internal control system in the Bank, its compliance with operating systems, accounting procedures and policies based on the internal audit reports. The scope and authority of the Internal Audit function is defined in the Audit Policy of the Bank.

The audit findings are discussed in the internal committees of the Bank and corrective action in their respective areas are undertaken to strengthen the controls. Significant audit observations and cor- rective actions thereon are presented to and reviewed by the Audit Committee of the Board.

Vigil Mechanism/Whistle Blower Policy

Bank has comprehensive "Fraud Risk Management Policy" and "Whistle Blower Policy" which are reviewed and updated from time to time. The Whistle Blower Policy is available in Bank''s website and Bank''s intranet site. As per the Whistle Blower Policy, Directors and employees of the Bank, customers, stakeholders, non governmental organizations (NGO) and members of general public can lodge complaints/disclosures under the scheme. Vigi- lance Department of the Bank has the twin roles of investigation of frauds and prevention of frauds. Preventive measures for en- hancing awareness of fraud risk and for promoting a culture of compliance among the employees preventive vigilance audits, vigilance workshops, circulation of modus operandi of frauds

occurred in banking industry etc are done. Bank is also promoting customer awareness on frauds especially cyber frauds through dif- ferent communication channels, as an effective tool in prevention of frauds.

Website link to Bank''s Whistle Blower Policy/ Vigil Mechanism is http://www.federalbank.co.in/documents71 01 80//44686// Whistle Blower policy.pdf/67c51 21 d-ac8d-4861 -b801 - 5a6ee891 3b4e

Subsidiary and Audited financial statements of the Bank''s Subsidiaries

Fedbank Financial Services Limited is a fully-owned subsidiary of the Bank. The audited financial statements, the Auditors Report thereon and the Board''s Report for the year ended March 31, 2015 of Fedbank Financial Services Limited, is available on the website of the Bank as required under the regulations.

Joint Venture in Life Insurance Business

The Bank''s joint venture Life Insurance Company, in associa- tion with IDBI Bank Limited and Fortis Insurance International N.V. (now Aegeas), namely IDBI Federal Life Insurance Company Limited, (erstwhile IDBI Fortis Life Insurance Company Limited) commenced operations in March 2008. Currently the Bank has a total stake of Rs. 208 Crore in the equity of the company holding 26% of the equity capital.

Corporate Governance

The Bank has adopted a Code of Corporate Governance which while taking care of and safe guarding the interest of sharehold- ers and all other stakeholders also provides good management, adoption of prudent risk management techniques. The Code of Corporate Governance and Code of Conduct for the Board of Di- rectors and Management was amended with effect from January 1 5, 201 5 with the approval of the Board to keep pace with the changing governance structure and to comply with requirements of Companies Act, 201 3, Lisitng Agreement and other regulations applicable to the Banking sector.

The Code also aims at identifying and recognizing the Board of Directors and the Management of the Bank as the principal in- struments through which good corporate governance principles are articulated and implemented, giving utmost importance to identify and recognize transparency, accountability and fair treat- ment amongst all the stakeholders, which is in tune with statutory and regulatory structures. A copy of the Code of Corporate Gov- ernance and Code of Conduct for the Board of Directors and Management is available on Bank''s website.

Board of Directors

The composition of the Board of Directors is governed by the Banking Regulation Act, 1949, the Companies Act,2013, Listing Agreement, and the Code of Corporate Governance adopted by the Bank. The Board comprises of nine Directors as on the date of this report, with rich experience and specialized knowledge in various areas of relevance to the Bank, including banking, ac- countancy, MSME, finance, small scale industry, agriculture, and information technology.

Ms. Shubhalakshmi Panse was appointed as an Additional Inde- pendent Director on the Board of the Bank w.e.f. 29.04.2014 who was appointed as an Independent Director by the shareholders of the Bank at the Annual General Meeting of the Bank held on July 17, 2014.

Dr. M.Y Khan ceased to be a director of the Bank w.e.f. 24.06.2014, on completing seventy years of age as per Code of Corporate Gov- ernance. The Board places on record their appreciation for the commendable contribution made by Dr. M.Y Khan, as a Director, during his tenure in the Bank.

Mr. Abraham Chacko, Executive Director of the Bank retired as Director from the Board of the Bank w.e.f 30.04.201 5 on comple- tion of his term of office.

Excluding the MD & CEO, all other members of the Board are Non-Executive and Independent Directors. Declaration has been obtained from the Independent Directors as required under the RBI Regulations, Listing Agreement and Companies Act. The re- muneration and other benefits paid to MD & CEO of the Bank and Executive Director during the year are disclosed in Annexure I to this Report and in Corporate Governance report. The non- executive Independent Directors apart from Prof. Abraham Koshy, are paid sitting fees for attending every meeting of the Board/ Committees of the Board within the limits as prescribed under the Companies Act, 2013. Prof. Abraham Koshy , Chairman of the Board is paid sitting fees for attending Board / Committee meetings in addition an amount of Rs. 1.25 lakhs per month as honorarium, as approved by the Board and RBI.

In compliance with the Companies Act,2013 all the existing Inde- pendent Directors of the Bank, were re-appointed as Independent Directors at the last Annual General Meeting of the Bank held on 17th July 2014 .

Mr. Shyam Srinivasan, Managing Director & Chief Executive Officer of the Bank is liable to retire at this AGM in compliance with Section 1 52 of Companies Act, 2013, regarding retirement of di- rectors by rotation. The detailed profile of Mr. Shyam Srinivasan, recommended for re-appointment in this AGM is mentioned in the Notice for the Annual General Meeting of the Bank.

Composition of Audit Committee

The Audit Committee consists of four Non-Executives, Independ- ent Directors, chaired by Nilesh S Vikamsey CA, a Non-Executive Independent Director. The Committee was re-constituted once in the financial year 2014-15.The members of the Committee are Nilesh S Vikamsey CA, Mr. Dilip G Sadarangani, Ms. Grace Koshie and Ms. Shubhalakshmi Panse who are Non-Executive In- dependent Directors. Dr. M Y Khan ceased to be a member of the Committee w.e.f. 24.06.2014. Ms. Shubhalakshmi Panse was nominated as a member w.e.f 26.06.2014.

The constitution of the Committee is in compliance with the regu- latory requirements.

The terms of reference of the Audit Committee and incorporated in the Bank''s Code of Corporate Governance, are in accordance with the listing agreements entered into by the Bank with Stock Exchanges where the Bank''s shares are listed, Companies Act, 2013 and RBI guidelines.

Independent Directors

In terms of the definition of Independence of Director as pre- scribed under Clause 49 of the Listing Agreement entered with Stock Exchanges and Section 149(6) of Companies Act, 201 3 and based on the confirmation / disclosures received from the Direc- tors, the following Directors are Independent Directors of the Bank as on the date of this report:

1. Prof. Abraham Koshy

2. CA. Nilesh S Vikamsey

3. Mr. Sudhir M Joshi

4. Mr. K M Chandrasekhar

5. Mr.Dilip G Sadarangani

6. Mr. Harish H Engineer

7. Ms. Grace Elizabeth Koshie

8. Ms. Shubhalakshmi Panse

Woman Director

In terms of the provisions of Section 149 of the Companies Act, 2013 and Clause 49 of the Listing Agreement, a company shall have at least one Woman Director on the Board of the company. Your Bank has Ms. Grace Elizabeth Koshie and Ms. Shubhalakshmi Panse as Directors on the Board of the Bank.

Bank''s policy on directors'' appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under sub-section (3) of section 178;

A. Qualifications, Experience and knowledge

1. The Board should bring to their tasks a balanced mix of knowl- edge, skills, experience, and judgment relevant to the Bank''s policies, operations, and needs. More specifically, the Directors shall be persons having special knowledge, skills, or valuable experience in one or more fields, such as banking, finance, management, economics, law, accountancy, agriculture and rural economics, cooperative movement, trade, industry, infrastructure, engineering, and technology. At least two Di- rectors shall be persons having special knowledge or practical experience in agriculture and rural economy, cooperation, or small-scale industry.

2. The Directors should be able to devote sufficient time and at- tention to the discharge of their duties to the Bank.

3. The non-executive Directors shall preferably be in the range of 35-70 years.

B. Disqualification/Conflicts of interest

1. The Bank''s Directors shall be subject to the disqualifications/ prohibitions contained in the Companies Act 2013 and the Banking Regulation Act, 1949 with respect to directorship of companies in general or banking companies in particular.

2. A Director shall not be a director of any other company, or partner or proprietor of a firm, where such directorship, part- nership, or proprietorship involves or is likely to involve actual or potential conflicts of interest as a Director of the Bank. A Director shall promptly inform the Board/Committee of any actual or potential conflicts of interest with respect to any matter that may come up for the consideration of the Board or of any committee of which he is a member, and shall refrain from participating in a discussion on the matter.

The terms and conditions of appointment of Independent Direc- tors is disclosed on the website of the Bank and a web link thereto is : http://www.federalbank.co.in/shareholder-information

C. Criteria for determining attributes of a director

(i) integrity in personal and professional dealings.

(ii) wisdom and ability to take appropriate decisions.

(iii) ability to read and understand financial statements

iv) ability to deal with others with a sense of responsibility, firmness, and cooperation.

v) refrain from any action that would lead to loss of his inde- pendence.

D. Criteria for determining Independence of a director

The Criteria of Independence of a director is determined based on the conditions specified in Section 149 (6) of the Companies Act, 2013.

The independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence.

Remuneration Policy

A. Policy on remuneration to Non-Executive Di- rectors/Independent Directors

The Policy of the Bank, based on the recommendation of the Nomination & Remuneration Committee for the payment of re- muneration to Non-Executive Directors/Independent Directors of the Bank is that the Non-Executive Directors will be paid only sitting fees for attending Board and Committees of the Board which is fixed within the limits of Companies Act, 2013 and as per the Listing Agreement.

B. Policy on remuneration to MD & CEO, Execu- tive Director, Key Managerial Personnel and other employees

The Compensation / Remuneration Policy of the Bank as approved by the Board contains the policy for payment of remuneration to Executive Directors including MD & CEO, Key Managerial Person- nel and for the employees of the Bank.

As per the guidelines given by RBI, Compensation/Remuneration Policy has been designed with the following Core Principles:

Core Principles

1. Effective governance of compensation.

2. Alignment of compensation with prudent risk taking.

3. Effective supervisory oversight and stakeholder engagement.

Change in the Policy

The following has been incorporated as an objective into the Policy for effective governance of compensation.

As per Section 178 of the Companies Act, 2013, the Nomina- tion and Remuneration committee shall formulate the criteria for determining qualifications, positive attributes and independence of a Director and recommend to the Board a Policy, relating to the remuneration for the Directors, Key Managerial Personnel and

other employees. The Nomination and Remuneration committee while formulating the policy shall ensure that:

a) The level and composition of remuneration is reasonable and sufficient to attract, retain and motivate Directors of the quality required to run the Company successfully

b) Relationship of remuneration to performance is clear and meets appropriate benchmarks; and

c) Remuneration to Directors, Key Managerial Personnel and Senior Management involves a balance between fixed and variable incentive pay reflecting short and long term perform- ance objectives appropriate to the working of the Company and its goals.

Monthly payment is being made to Whole Time Directors ie Managing Director & CEO and Executive Director as per terms and conditions approved by the Board and Reserve Bank of India. For Independent Directors only sitting fee is paid except to chairman of the Board to whom monthly payment is made additionally with the prior approval of Reserve Bank of India.

Compensation of Managing Director & CEO, Whole Time Directors and senior Executives (Non IBA)

The compensation paid out to the referred functionaries is divided into two components:

1. The fixed compensation is to be determined based on the industry standards, the exposure, skill sets, talent and qualifica- tion attained by the official over his/her career span. (Approval from RBI to be taken as per section 35B of the Banking Regula- tion Act while deciding the fixed and variable compensation part for Managing Director & CEO and Whole Time Directors)

2. The variable compensation for Managing Director & CEO and senior Executives (Non - IBA package) to be fixed based on organizational performance and KPAs set for the official. The organization''s performance is charted based on the revenue point index / performance scorecard which takes into account various financial indicators like revenue earned, cost deployed, profit earned, NPA position and other intangible factors like leadership and employee development. Variable pay is paid purely based on performance and is measured through Score cards for Managing Director & CEO /WTDs. The score card provides a mix of financial and non financial, quantitative and qualitative metrics. KPAs to contain targets on risk adjusted metrics such as RAROC, RARORAC, in addition to target on NPAs.

Compensation paid to Senior executives and other staff members on IBA package

The compensation paid to other officials that include Award Staff, Officers coming under Scale I to III and Senior executives coming under Scale IV to VII is fixed based on the periodic industry level settlements with Indian Bank Association. The variable compen- sation paid to functionaries is based on the Performance Linked Incentive Scheme, which has been formulated on the basis of performance parameters set in Performance Management System.

Policy on Board Diversity

Policy on Board Diversity of the bank mainly depends on the quali- fications for appointment of Directors of the Bank as contained in the Banking Regulation Act,1949 and satisfying the Fit and Proper Criteria for directors as per the regulatory requirement of RBI.

The Bank continuously seeks to enhance the effectiveness of its Board and to maintain the highest standards of corporate gov- ernance and recognizes and embraces the benefits of diversity in the boardroom. Diversity is ensured through consideration of a number of factors, including but not limited to skills, regional and industry experience, background and other qualities. In informing its perspective on diversity, the Bank also take into account factors based on its own business model and specific needs from time to time.

The Nomination Committee has responsibility for leading the process for Board appointments and for identifying and nominat- ing, for approval by the Board, candidates for appointment to the Board. The benefits of diversity continue to influence succession planning and continue to be the key criteria for the search and nomination of directors to the Board.

Board appointments are based on merit and candidates will be considered against objective criteria, having due regard for the benefits of diversity on the Board, including gender. While making Board appointments the requirement as per the Companies Act, 2013 for appointment of at least one woman director on the Board of the Bank is also considered.

Key managerial personnel who were appointed or have resigned during the year

In compliance with Section 203 of the Companies Act, 2013, Mr.Shyam Srinivasan, MD & CEO, Mr. Abraham Chacko$, Executive Director, Mr. Girish Kumar G, Company Secretary and Mr. Sampath D,CFO were designated as the Key Managerial Personnel of the Bank at the Board meeting held on July 16, 2014. Mr. Sampath. D, was appointed as officiating CFO of the Bank w.e.f. April 29, 2014.

Management Discussion and Analysis

The Management Discussion and Analysis Report for the year under review as stipulated under Clause 49 of the listing agree- ment with the Stock Exchanges in India is presented in a separate section forming part of this Annual Report.

Loans, Guarantees or Investments in Securities

Pursuant to Section 186(11) of the Companies Act, 2013 loans made, guarantees given or securities provided or acquisition of securities by a Banking company in the ordinary course of its business are exempted from disclosure in the Annual Report.

Internal Complaints Committees

Your Bank has upheld the letter and spirit contained in "The Sexual Harassment of Women at Workplace (prevention, Prohibition and Redressal) Act, 201 3" (the Act). Board of Directors had resolved to constitute Internal Complaints Committees to function as per the provisions laid down in the Act and also to support the women employees by way of counseling. Your Bank has constituted ten Internal Complaints Committees (9 at Zones and 1 at Head Office) to prevent and redress the complaints relating to Sexual Harassment and to organize workshops/ awareness programs to empower women employees while handling cases relating to Sexual Harassment. Twenty employees were identified pan India and imparted a certification programme in employee counseling. These employees form part of the Internal Complaints Committee formed in various Zones of your Bank.

a. No. of complaints received in the year 2014 : 01

b. No. of complaints disposed of during the year 2014 : 01

c. Nature of action taken by the employer/ District Officer: As per the recommendations of the committee punishment was imposed on the respondent/ erring employee.

Variations in the market capitalisation of the Bank

Variations in the market capitalisation of the Bank, Price Earnings Ratio as at the closing date of the current financial year and previous financial year is mentioned below.

FY14 FY15 Variation Variation in % Market Capitalisation 8189.61 11312.13 3122.52 38.13 (Rs. in Crores)

PE Ratio 9.76 11.24 1.48 15.16

Closing Price of Federal Bank share was Rs.132.05(Face Value Rs.2 per share) on 31/03/2015.

Year Face Premium Rate Bonus Rate Increase Increase Value (Face (2004) (Face in in % Value) 2:1 Value Amount Rs.10) Rs.2

IPO 1994 10 80 90 30 6 126.05 2100.83%

Right 2007 10 240 250 N.A. 50 82.05 164.10% Issue

Board Evaluation

Pursuant to the provisions of the Companies Act, 201 3 and Clause 49 of the Listing Agreement, the Board has carried out an annual performance evaluation of its own performance, the directors in- dividually as well as the evaluation of the working of its various Committees.

A structured questionnaire was prepared after taking into consid- eration inputs received from the Directors, covering various aspects of the Board''s functioning such as adequacy of the composition of the Board and its Committees, Board culture, execution and performance of specific duties, obligations and governance.

A separate exercise was carried out to evaluate the performance of individual Directors including the Chairman of the Board, who were evaluated on specified parameters. The performance evaluation of the Independent Directors was carried out by the entire Board other than the Independent Director Concerned. The per- formance evaluation of the Chairman and the Non Independent Directors was carried out by the Independent Directors. The Direc- tors expressed their overall satisfaction with the evaluation process but a few suggestions are being incorporated from the next year in relation to the current rating based system to a more qualitative approach.

Performance Evaluation of Non-Independent Directors (MD & CEO and Executive Director)

Criteria:

Attendance at the Board and Committee meetings; Presents fi- nancial reports to the board on a regular basis and submits an annual budget for board review; revision and approval; Appraises the Board regarding the organization''s financial position and operational budget so as to enable the Board to make informed financial decisions; enhancement of internal control processes; monitoring, execution of policies and encouraging suggestions, achievements of performance against budgets , leadership in de- veloping strategy & directions for their execution, implementing Board decisions across IT, Operations, HR, Audit, Risk etc, media interactions & public relations, pursuing Organisation goals, ethics, motivating & guiding employees for better performance, relationship with Industry foras / Regulatory bodies, Compliance etc

Evaluation

The MD,s & ED''s attendance at the Board and Committee meetings is very good; They present financial reports to the board on a regular basis and submits an annual budget for Board review; revision and approval; They regularly apprise the Board on the or- ganization''s financial position and operational budgets that aids the Board to make informed financial decisions; The Executives constantly endeavor to enhance internal control processes,monitor execution of policies and are very receptive to suggestions. The MD has adequate qualities of Leadership in developing strategy & execution for achieving them, The MD & ED adequately endeavor to Implement Board decisions and are very strong in media inter- actions and have put in large efforts in building and reinforcing the Brand and image of the bank. The MD demonstrates his com- mitment to the Organisation goals, is ethical, motivates & guides employees for better performance. His personal rapport and good relationship with industry foras / regulatory bodies, etc are high- lights and testimony of the respect and prominence of Federal Bank in the Indian banking landscape.

Performance Evaluation of Independent Directors including Chairman

Criteria:

Attendance at meetings of Board and Committees, Knowledge & Ethics,; Understanding of the roles, responsibilities and duties as director / Chairman; Contributions at Board/Committee meetings including on strategy and risk management;

Evaluation:

The evaluation done brings out good attendance of Independ- ent Directors in the Board and committee meetings. They are knowledgeable , ethical and bring their respective expertise in the deliberations and make valuable contributions. They have adequate understanding of their role and responsibilities as Inde- pendent directors.

Performance Evaluation of Board and Committees

Criteria;

Size, composition , balance and diversity of background; Pro- portion of Independent to Non Independent Directors; Effective Participation ;candidness of communication, Ability to handle conflicts; Review of Performance / Financial Reporting / Compli- ance / other Agenda of / by Bank ; Information given to Board / Committees, Effectiveness as per Terms of Reference of Board and its committees ; Value addition ; Review of Related Party transac- tions, Potential conflicts of interests; Corporate Governance norms of conduct; flow of information to board

Evaluation

The structure and composition of the Board is appropriate with adequate number of Directors and a good balance of diverse pro- fessional backgrounds, business experience, industry knowledge, skills and expertise in areas vital to the Bank''s success in it''s current and future position; The proportion of independent to non-in- dependent directors is good; The Board demonstrates integrity, credibility, trustworthiness, active and effective participation at Board & Committee meetings which are held at reasonable and regular intervals;

The Board and committee processes and procedures are good with different committees reviewing different functional areas of the Bank''s operations. The Board and its Committees also reviews Bank''s performance, risk management, financial reporting, com- pliances, technology, operations with adequate frequency of meetings etc..

The flow of information to the Board and its committees is gener- ally good.

Meetings

During the year nine Board Meetings were convened and held, the details of which are given in the Corporate Governance Report. The intervening gap between the Meetings was within the period prescribed under the Companies Act, 2013 and also the Listing Agreement.

Director''s Responsibility Statement

The Directors have taken proper and sufficient care for the main- tenance of adequate accounting records in accordance with the provisions of the Companies Act, 201 3 for safeguarding the assets of the Bank and for preventing and detecting fraud and other ir- regularities; and the Directors have prepared the annual accounts on a going concern basis.

To the best of the knowledge of the Directors and belief and ac- cording to the information and explanations obtained by them, your Directors make the following statements in terms of Section 1 34(3)(c) of the Companies Act, 2013:

a. that in the preparation of the annual financial statements for the year ended March 31, 2015, the applicable accounting standards have been followed along with proper explanation relating to material departures, if any;

b. that such accounting policies as mentioned in the Notes to the Financial Statements, have been selected and applied consist- ently and judgment and estimates have been made that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Bank as at March 31,201 5 and of the profit of the Company for the year ended on that date;

c. that proper and sufficient care has been taken for the mainte- nance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of the Bank and for preventing and detecting fraud and other irregularities;

d. that the annual financial statements have been prepared on a going concern basis;

e. that proper internal financial controls were in place and that the financial controls were adequate and were operating ef- fectively;

f. that systems to ensure compliance with the provisions of all ap- plicable laws were in place and were adequate and operating effectively;

Related Party Transactions

All related party transactions that were entered into during the financial year were on arm''s length basis and were in the ordinary course of business. There are no materially related party transactions made by the Bank with, Directors, Key Managerial Personnel who may have a potential conflict with the interest of the Company at large.

Wherever related party transactions took place they were placed before the Audit Committee and also to the Board for approval. Omnibus approval of the Audit Committee will be taken on a quarterly basis for the transactions which are foreseen and of re- petitive nature, which at this juncture is not there. The policy on Related Party Transactions after the approval by the Board has to be uploaded on the Bank''s website. None of the Directors has any pecuniary relationships or transactions vis-a-vis the Bank.

Since all related party transactions entered into by the Bank were in the ordinary course of business and were on an arm''s length basis, form AOC-2 is not applicable to the Bank.

Technology and Digital Updates

The Bank has the following modes of technology related banking:

Mobile Banking

Mobile based transactions and the adoption of mobile based ap- plications is set to increase with growth in usage of smart phones over the generic phones. As part of our Mobile banking strategy we have adopted migration of existing mobile banking applica- tion to a platform based solution in order to achieve the flexibility and agility required in the mobile application development and deployment in all kinds of mobile operating systems (OS).

Introduction of industry first game changing innovations like FedBook and Scan N Pay has taken Customer Delight to unprec- edented heights redefining the benchmark of service excellence.

Fed Book is the Electronic version of a traditional bank pass book offered to Federal Bank customers free of cost. It helps customers to view all the transactions in their bank accounts.

''Scan N Pay'' is an innovative Mobile Application for inter-bank fund transfer using the IMPS (24x7) facility. By using ''Scan N Pay'', customers are freed from the hassles of keying in the details for fund transfer through IMPS. Transactions happening through ''Scan N Pay'' are executed in real time and confirmation messages are instantaneous which adds to the comfort level of Customers to use the application.

Mobile banking migration brings in the following benefits -

* UI change- Improves customer experience

* Availability of additional services to the customer

* Development management - Reduction in development time and cost due compatibility of platform across multiple mobile operating systems

* Adoption of this platform has enabled easy maintenance of applications across mobile OS due to availability of advanced change management system.

Internet Banking

As part of our technology absorption strategy our Internet Banking solution has undergone an upgrade to an advanced product version. Migration of Internet Banking solution facilitates easier interfacing with other peripheral and external systems.

Auditors Statutory Audit

M/s. Deloitte Haskins & Sells, Chartered Accountants, Chennai, and M/s. M P Chitale & Co., Chartered Accountants, Mumbai, jointly carried out the statutory central audit of the Bank during the Financial Year 2014-1 5. Additionally 1 220 number of branches were subjected to Branch Statutory Audit by 691 number of Branch Auditors. The statutory central/branch auditors audited all the branches and other offices of the Bank.

Secretarial Audit

The Board had in its meeting dated November 21, 2014, ap- pointed M/s. SVJS & Associates, Practicing Company Secretaries, to undertake the Secretarial Audit of the Bank during the Fi- nancial Year ended March 31, 2015, in compliance with the provisions of Section 204 of the Companies Act, 2013 and The Companies(Appointment and Remuneration of Managerial Per- sonnel) Rules, 2014. The Report of the Secretarial Audit Report is annexed herewith as "Annexure VI".

Awards and Accolades

Excellence in administration, business and technological advance- ment have made your Bank the recipient of a host of recognitions during FY1 5.

The year witnessed the Bank being showered with a number of awards and accolades for its HR initiatives, which included the Fourth Annual Greentech HR Award for Innovation in Recruit- ment, Fifth Asia''s Best Employer Brand Award for Innovation in Retention Strategies, Asia Training & Development Award for Ex- cellence in Training, ICE Award for Best In-house Magazine and NIB Award for Best In-house Magazine. Besides, Asia Pacific HRM Congress Awards 2014 conferred the citation of ''The CEO with HR orientation'' to Mr. Shyam Srinivasan, MD & CEO; and the citation of ''40 Most Talented HR Leaders'' and ''100 Most Talented Global HR Leaders'' to the HR Head of the Bank, Mr. Thampy Kurian.

As a recognition for innovation in Technology, the Bank won the prestigious Banking Technology Excellence Awards 2014 from the Institute for Development and Research in Banking Technology (IDRBT) in 4 out of a total of 5 categories in the mid-sized Banks segment. The Bank was adjudged as: (a) Best Bank for Use of Tech- nology for Financial Inclusion, (b) Best Bank for Social Media and Mobile Banking, (c) Best Bank for Business Intelligence Initiatives and (d) Best Bank for Best IT Team.

Apart from the above, Federal Bank won the CNBC TV1 8 Financial Inclusion Award for the work done by the Bank towards the cause of Financial Inclusion and empowerment of those at the bottom layer of the economy.

Your Bank was also chosen as the Best Bank among small banks in India in the Best Bank Survey, 2014 conducted by Business World- Price Waterhouse Coopers Combine; and as the ''Best Corporate Brand of the Year 2015'' jointly by Ernakulam Press Club and Public Relations Council of India (PRCI) - Kerala Chapter.

Consolidated Financial Statements

Pursuant to Section 1 29 of the Companies Act, 201 3, the Bank has prepared a Consolidated Financial Statements of the Bank and also of its Subsidiary, Fed bank Financial Services Limited, in the same form and manner as that of the Bank which shall be laid before the ensuing 84th Annual General Meeting of the Bank along with the laying of the Bank''s Financial Statement under sub- section (2) of Section 129 i.e. Standalone Financial Statement of the Bank.

Energy Conservation, Technology Absorption and Foreign Exchange Earnings and Outgo

Considering the nature of activities of the Bank, the provisions of Section 1 34 (3) (m) of the Companies Act, 2013 relating to con- servation of energy and technology absorption do not apply to the Bank. The Bank is, however, constantly pursuing its goal of tech- nological up gradation in a cost-effective manner for delivering quality customer service. Through its export-financing operations, the Bank supports and encourages the country''s export efforts.

Extract of Annual Return

The details forming part of the extract of the Annual Return in form MGT 9 is annexed herewith as "Annexure III".

Particulars of Employees

As required by the provisions of Section 197 read with Rule, 5 of The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the names and other particulars of the employees who were in receipt of remuneration not less than sixty lakh rupees for FY 2014-1 5 are set out in the Annexure to the Director''s Report. (Annexure I).

The ratio of the remuneration of each director to the median em- ployee''s remuneration and other details in terms of sub-section 12 of Section 197 of the Companies Act, 2013 read with Rule 5(1) of the Companies (Appointment and Remuneration of Mana- gerial Personnel ) Rules, 2014, are forming part of this report as Annexure VI.

Stock Exchange Information

The Bank''s Equity Shares are listed on:

1. BSE Limited, Phiroze Jeejeebhoy Towers, Dalal Street, Mumbai - 400 001 and

2. National Stock Exchange Ltd. "Exchange Plaza", Bandra - Kurla Complex Bandra East, Mumbai - 400 051.

The GDRs issued by the Bank are listed on the London Stock Exchange.

The annual listing fees have been paid to all the Stock Exchanges mentioned above.

Acknowledgement

The Board of Directors places on record its sincere thanks to the Government of India, Reserve Bank of India, various State Govern- ments and regulatory authorities in India and overseas for their valuable guidance, support and cooperation. The Directors wish to express their gratitude to Investment Banks, rating agencies and Stock Exchanges for their wholehearted support.

The Directors record their sincere gratitude to the Bank''s share- holders, esteemed customers and all other well-wishers for their continued patronage. The Directors express their appreciation for the contribution made by every employee of the Bank.

For and on behalf of the Board of Directors

Abraham Koshy Chairman of the Board

Aluva Date: 16 May 2015


Mar 31, 2013

Dear Shareholder''s

The Board of Directors has the immense pleasure of presenting the 82nd Annual Report of The Federal Bank Limited on its business and operations front along with the audited accounts for the year ended March 31, 2013.

FINANCIAL PARAMETERS For the year ended (Rs. Crores)

31-03-2013 31-03-2012

Net Interest Income 1,974.66 1,953.40

Fee and Other Income 664.44 532.34

Net Revenue 2,639.10 2,485.74

Operating Expense 1,179.54 979.27

Operating Profit 1,459.56 1,506.47

Net Profit 838.17 776.79

Profit brought forward 296.68 25.78

Total Profit Available for appropriation 1,134.85 802.57

Appropriations:

Transfer to Statutory Reserves 209.55 194.20

Transfer to Revenue Reserves 172.14 98.88

Transfer to Capital Reserves 22.95 5.40

Transfer to Special Reserves 33.70 28.50

Proposed Dividend 153.95 153.94

Provision for Dividend Tax 26.17 24.97

Balance Carried over to Balance Sheet 516.39 296.68

Financial Position (as on)

Deposits 57,614.86 48,937.12

Advances 44,096.71 37,755.99

Total Business (Deposits Advances) 101,711.57 86,693.11

Other Borrowings 5,186.99 4,241.03

Investments 21,154.59 17,402.49

Total Assets (Balance Sheet Size) 71,049.57 60,626.77

Equity Capital 171.06 171.05

Ratios

Return on Total Assets (%) 1.35 1.41

Return on Equity (%) 14.03 14.37

Earnings Per Share (Rs.) 49.00 45.41

Book value per share (Rs.) 364.74 333.61

Operating cost to Income (%) 44.69 39.40

Capital Adequacy Ratio (%) Basel (I) 13.09 13.83

Capital Adequacy Ratio (%) Basel (II) 14.73 16.64

The financial year (FY12-13 ) was marked by macroeconomic and inflationary challenges. Regulatory tightening was also a distinctive feature of the year. Your Bank was able to deliver a consistent set of numbers amidst all these challenges, through systematic and calibrated process corrections, planned de-bulking of exposures and deposits and via focused attention on market demands.

In FY 12-13 the Bank continued its strategic drive in its traditional areas of strength viz. retail, NRI, SME, agriculture and gold loans through value-added offerings. Our retail portfolio grew by 19.09% annually, supported by a growth in retail deposits by 17.45% and retail advances by 25.47%. Priority sector advances of the Bank declined by Rs.857.57 Cr in the last fiscal year and stood at Rs.11794.97 Cr as on 31st March 2013. Advances to the agriculture sector were marked by an increase of 8.89% and reached Rs.4702.80 Cr. The Bank exhibited robust performance in the gold loan business with an increase of 76.67% in the portfolio.

The Bank also continued the strategic expansion of its footprint by opening 153 branches during the financial year. The Bank''s branch strength as on 31stMarch 2013 stood at 1,103. The financial year saw your Bank cross the 1,000 branch milestone. The Bank also added 174 ATMs during the financial year bringing the ATM strength to 1,172 as on 31 Mar 2013. Post 2012-13, the Bank intends to continue its strategy of enhancing its presence in its chosen geographies outside the State of Kerala, which include the States of Tamil Nadu, Karnataka, Punjab, Gujarat and Maharashtra. The Bank will choose to pursue growth in areas where it has accumulated considerable experience over the years viz. agriculture, SME and NRI businesses.

Net Profit

During the year ended March 31, 2013, your Bank registered a net profit of Rs.838.17 Cr, an increase of 7.90% over the previous year.

As a result of a refinement in the asset quality, the Bank could rein in a total provisioning to Rs.621.39 Cr. This was mainly aided by a reverse effect of Rs.36.82 Cr of investment depreciation and a reduced loan loss provisioning of Rs.189.28 Cr (with an overall provision coverage of 80.96%. taking into account all written off accounts). An amount of Rs.355.59 Cr was earmarked for taxes and Rs. 113.34 Cr, for other purposes.

Return on Average Equity and Return on Average Total Assets stood at 14.03% and 1.35% respectively. Earnings per Share of the Bank, for the year FY 2012-13 stood at Rs.49.00 as compared to the previous fiscal year figure of Rs.45.41. Book value per share increased from Rs.333.61 in the previous fiscal year to Rs.364.74 in FY 12-13.

Operating Profit

In the financial year 2012-13, the Bank had continued its policy of reducing its reliance on bulk businesses, selecting advances through a tightly-sieved quality filter, increasing its footprint materially and augmenting its workforce to match the network growth. The Operating Profit of your Bank stood at 1,460 Cr.

The Net Interest Margin of the Bank for the year stood at 3.37%, despite the interest rate volatility. Net Interest Income of the Bank for the period increased from Rs.1,953.40 Cr to reach Rs.1,974.66 Cr.

The financial year ended March 2013, saw Total Non-interest Income of the Bank grew to Rs.664.44 from Rs.532.34 Cr in FY 11-12, clocking a growth of 24.81%.

Expenditure

The fiscal year ended 2013 witnessed an increase in the total expenses of the Bank which reached Rs.5,372.45 Cr from Rs.4,584.26 Cr with an increase of 17.19%. Interest expenses increased to Rs.4,192.91 Cr in FY 12-13 from Rs.3,604.99 Cr in FY 11-12.

Despite the strains on the macroeconomic level and increased costs, your Bank succeeded in reining in the cost of deposits to 7.58% compared to 7.41% of the previous year.

Average cost of all funds (deposits borrowings bonds) recorded a marginal increase and reached 7.67%. The growth in term deposit portfolio, the general increase in rate of interest offered on term deposits coupled with the deregulation of the rate of interest offered on NRE term deposits (INR) by the RBI contributed to an increase in the interest expenses on deposits. The interest expenses as percentage of the Total Income increased to 61.37% from 59.19% in FY 2012.

In the current fiscal, CASA increased from 513402 Crore to 515519 Crore. Average CASA grew by 23.49% from 511630 Crore to 514362 Crore. CASA to total deposits decreased marginally from 27.39% in FY 11-12 to 26.94% in FY 12-13, as term deposits grew at a faster pace. Operating Expenses of the Bank during the fiscal year grew from 5979.27 Cr to 51,179.54 Cr. This has been caused by increase in human capital related expenses (wages, DA, contribution to the New Pension Scheme, retirement benefits of employees among others) and depreciation.

The expenses on account of the opening of 153 new branches during the fiscal year have also contributed to the increase in operating expenses.

The Cost to Income ratio of the Bank stands at 44.69% (39.40% in FY 2012) which was a reflection of the varied strategic initiatives viz. increasing our footprint in chosen geographies and increase in manpower. Income growth was muted due to the reorienting of our sourcing to quality and lower risk segments and the impact on revenue due to slippage of some vintage accounts.

Income

Despite the macroeconomic slowdown, inflationary issues and other uncertainties that plagued the financial year, your Bank could hold its own by maintaining and growing quality assets as well as by implementing a market-oriented pricing policy.

The Total Income of the Bank during the fiscal year 2013 recorded a 12.17% growth to reach 56,832.01 Cr from the previous fiscal year figure of 56090.73 Cr. The interest income component grew by 10.96% while other income grew by 24.81% y-o-y.

Income from advances increased by 10.64% to reach 54,635.66 Cr. At the same time, income from investments registered a reasonable growth to reach 51,464.60 Cr clocking at a rate of 11.31% annually.

The yield on advances stood at 12.28% and the yield on investments at 7.24%. The Net Interest Margin for the fiscal year is at 3.37% as against 3.79% of the last fiscal, owing primarily to the lower yield on advances.

Focused attention on streams of fee-based income and other income resulted in an increase of 24.81%. The total other income grew from 5532.34 Cr in the previous fiscal to 5664.44 Cr in the current fiscal.

spread

During the fiscal year the Bank''s spread on advances (gross) decreased to 4.70% from 5.17% and spread on investments (gross) stood at 0.67%. The spread (net of provisions) on advances decreased from last year''s 4.50% to reach 4.20%.

Dividend

Continuing the Bank''s policy of striking a fine balance between retained earnings and dividend, your Bank''s Board has recommended a dividend of 59 per share on par with the dividend for the previous fiscal. Protecting the value for our shareholders'' has always been a guiding philosophy of the Bank.

investor education and Protection Fund

As per the Companies Act 1956, dividend unclaimed for more than seven years from the date of issue is to be transferred to Investor Education and Protection Fund. On 28.09.2012, we transferred 531,73,731 to the Fund.

Growth in Business

Total business of your Bank reached 51,01,711.57 Cr as on 31st March 2013. The Bank crossed an important milestone of 51,00,000 Cr. Total deposits increased by 17.73% from 548,937.12 Cr in FY''12 to 557,614.86 Cr in FY''13. The total advances of your Bank increased by 16.79% from 537,755.99 Cr in FY'' 12 to 544,096.71 Cr in FY''13.

NRE deposits clocked an increase of 65.21% to reach Rs. 13,156.98 Cr and retail deposits grew by 17.45% to touch Rs.48,484.37 Cr. CASA deposits also displayed a growth of 15.80% to reach Rs.15518.80 Cr.

The savings deposits of the Bank has touched Rs.12,743 Cr, growing by 16.59% over that of the previous fiscal of Rs.10,930 Cr.

The investment portfolio of the Bank burgeoned to Rs.21,154.59 Cr in the current fiscal from Rs.17,402.49 Cr in the previous fiscal, registering a growth of 21.56% compared to 19.71% in the previous fiscal year. The average investments on y-o-y registered a growth of 12.34% as compared to previous fiscal year growth of 44.31%.

Loan Asset Quality

In the fiscal 2012-13, your Bank consolidated its credit underwriting processes, which had been initiated in the previous fiscal by isolating the sourcing and sanctioning legs of the credit vertical. The credit monitoring cells, the Stressed Assets Management Cell and the National Credit Hub were strengthened with sufficient manpower and by making the processes leaner and more efficient. This could to a great extent ensure that fresh slippages can be reduced.

The Bank''s Gross NPA and Net NPA stood at 3.44% and 0.98% respectively as at the end of March 2013. The total provisions held against non-performing advances, expressed as a percentage of Gross NPAs amounted to 80.96% (including technically written-off accounts) at the end of FY 2012-13.

The Bank managed its NPA portfolio prudently, by considering and exercising options such as SARFAESI Act, compromise settlements, Lok Adalats and DRT.

Provision Coverage

As on 31 March 2013, the Bank held a total provision of Rs.1, 097.87 Cr. Provision coverage for NPAs as on 31 March 2013 stood at 70.65%. As per the RBI directive, banks should hold a minimum provision coverage of 70% including technically written-off accounts. As on 31 March 2013, the provision coverage ratio of the Bank, including technically written-off accounts is 80.96%.

Capital Adequacy

Historically, your Bank has been strong on capital adequacy. The CRAR of the Bank calculated in line with Basel II norms stood at 14.73% which is considerably higher than the 9% stipulated by the RBI. Of this, Tier-1 CRAR is 14.09%.

Employee Productivity

Business per Employee of the Bank during the period has grown from Rs. 10.13 Cr in FY2011-12 to Rs.10.75 Cr in and the profit per employee of the Bank stood at Rs.8.91 lakh during the fiscal.

Share Value

Earnings per Share of your Bank increased from Rs.45.41 to Rs.49.00 registering a growth of 7.90%. Return on Equity during the year reached 14.03% in the fiscal year ended 31st March 2013.

Employee stock Option scheme (Esos)

The Bank has instituted an Employee Stock Option Scheme to enable its employees including Wholetime Directors to participate in the future growth and financial success of the Bank. Under the Scheme 85,51,650 options can be granted to the employees. The Employee Stock Option Scheme is in accordance with the Securities and Exchange Board of India (Employee Stock Option and Employee Stock Purchase Scheme) Guidelines, 1999. The eligibility and number of options to be granted to an employee is determined on the basis of various parameters such as scale, designation, work performance, grades, period of service, annual fixed pay, Bank''s performance and such other parameters as may be decided by the Compensation Committee from time to time in its sole discretion and is approved by the Board of Directors.

The Bank''s shareholders approved the scheme for issuance of stock options to employees including Wholetime Directors on 24th December 2010.

The option conversion price was set to be the closing price on the day previous to the grant date. The compensation committee granted 34,72,020 options during the year 2011 -12 and 24,48,475 options during the year 2012-13. The options granted are non-transferable, with vesting period of one to four years, subject to standard vesting conditions, must be exercised within five years from the date of vesting. As on 31 March 2013, 1 1,631 options had been exercised and 54,46,279 options were in force.

Other statutory disclosures as required by the SEBI guidelines on ESOP are given in Annexure-II to this report.

Expansion of Network

Your Bank crossed the landmark of 1,000 branches in the current fiscal year to expand its footprint to 1,103 branches as on 31st March 2013. On 17.08.2012 (1st day of the Malayalam month of Chingam), Shri Vayalar Ravi, Honorable Union Minister for Overseas Affairs, inaugurated the 1,000th branch of your Bank commemorating the opening of the first Branch of Federal Bank some sixty seven years ago by our Founder Shri K P Hormis. The Bank was able to add 153 branches in the current fiscal year which included under- banked and un-banked centres as per RBI''s guidelines. This resulted in a footprint expansion of 16.11% from the previous year''s base. The Bank had opened a number of branches in the chosen five States of Tamil Nadu, Punjab, Gujarat, Karnataka and Maharashtra and also in Kerala.

Corporate Social Responsibility

Corporate Social Responsibility and sustainable development initiatives were incorporated in the Bank''s business strategies/policies. The Bank has a well-defined CSR policy which has been circulated among the employees and also made available in the intranet and in the Bank''s website.

Your Bank has always stood for the assistance and upliftment of the rural/agrarian community by devising specific schemes and inculcating banking habits in them.

Fedbank Hormis Memorial Foundation, a public charitable trust instituted by your Bank provides scholarships to the economically disadvantaged students for pursuing professional education courses. The Trust also endeavours to impart better knowledge and awareness in the field of banking to the less privileged particularly in far flung rural areas, through training programmes, seminars, award ceremonies among others.

The Bank runs a customer contact centre manned almost entirely by differently-abled personnel. The Bank, through its CSR cell lends a helping hand by sponsoring ambulances, computers, dialysis machines, medical equipments, elevators, free midday meals, environmental and healthcare projects, and social cultural and educational programmes among others. The cell also engages in community outreach programmes related to health, family welfare, environment, education, providing potable water, sanitation and empowerment of women and other marginalised groups.

As part of its employee engagement initiatives your Bank has participated wholeheartedly in promoting Earth Hour prescriptions, paperless banking, blood donation, adoption of population control measures and scores of such initiatives amongst its employees.

The Bank, leveraging its technological advantages, has influenced the lives of the less privileged in a meaningful way. Such as fishermen, farmers, coolies, construction workers, rickshaw pullers and migrant labourers, by bringing them to the centre from the peripheries. In the last fiscal, the Bank carried forward the initiative christened ''Fedjyothi'' through which the ICT (Information & Communication Technology) model accounts (which are operated using Biometric Smart Cards and Micro ATM) were delivered door- to-door to people in far flung and hard-to-reach areas, as a part of its financial inclusion programme. Long before the bill on Corporate Social Responsibility (CSR) was introduced, the Bank had started practicing CSR activities in line with the lofty ideals of its founder, Shri K P Hormis.

Awards and Accolades

- Your Bank received the NPCI award for being the highest contributor in number of IMPS (Immediate Payment Service) transactions, which is one of the clearest indicators of the technological preeminence of your Bank

- The Bank received the NPCI Award for Excellence in promotion of Inter Bank Payment Service.

- The Bank won the following IDRBT Banking Technology

Excellence Awards for the year 2011-12:

a) Best Bank Award among Small Banks for ''Mobile Banking and Electronic Payments''.

b) Best Bank Award among Small Banks for ''CRM and Business Intelligence Initiatives''.

IDRBT (Institute for Development and Research in Banking Technology) sets the benchmark and recognises technology implementation and absorption among banks aimed at improving customer service, customer convenience and overall productivity.

- National award of excellence ''Quality Brands India 2012- 14''

The Bank received the National award of excellence ''Quality Brands India 2012-14''. National award of excellence ''Quality Brands India 2012-14'' was awarded to the Bank on 20th June 2012. This is a prestigious award instituted by Quality Brands India Private Limited, an independent appraiser organisation established in 2008 to identify, recognise and honour business enterprises that excel in performance, research, growth and brand building in India.

- Rashtriya Udyog Ratna Award

The Bank bagged the Rashtriya Udyog Ratna Award on 20th June 2012. The National Education and Human Resource Development Organisation (NEHRDO) has recognised your Bank''s outstanding contribution to the national economic growth by presenting this award. NEHRDO is an organisation established to ensure the economic and social well-being of the nation through the development of individuals and institutions.

Corporate Governance

The Bank has adopted a Code of Corporate Governance which while taking care of and safeguarding the interest of shareholders and all other stakeholders also provides for good management, adoption of prudent risk management techniques and compliance with required standards of capital adequacy.

The Code also aims at identifying and recognising the Board of Directors and the Management of the Bank as the principal instruments through which good corporate governance principles are articulated and implemented, giving utmost importance towards ensuring transparency, accountability and equality of treatment amongst all the stakeholders in tune with statutory and regulatory requirements. A copy of the Code is available on our website.

Board of Directors

The composition of the Board of Directors is governed by the Banking Regulation Act, 1949, the Companies Act, 1956, Listing Agreement, and the Code of Corporate Governance adopted by the Bank. The Board comprises of nine Directors, as on 4th June 2013, with rich experience and specialised knowledge in various areas of relevance to the Bank, including banking, accountancy, MSME, finance, small scale industry, agriculture, and information technology.

Shri Shyam Srinivasan MD & CEO joined the Bank on 23.09.2010. Shri. P.C. John, Executive Director (ED), who was the Wholetime Director of the Bank, retired on 30 April 2013.

Excluding the MD & CEO and the ED all other members of the Board are Non-Executive and Independent Directors.

Prof. Abraham Koshy and Dr. M.Y.Khan were re-elected/ appointed as Directors of the Bank at its last Annual General Meeting held on 2nd August 2012.

The other Directors who are retiring at this AGM are Shri Suresh Kumar and CA Nilesh S. Vikamsey. Shri Suresh Kumar and CA Nilesh S. Vikamsey both being eligible, have offered themselves for reappointment.

Shri Suresh Kumar holds a Bachelor''s degree in Economics & Commerce (Hons.) from the University of Bombay. He started his career as a probationary officer in the State Bank of India (SBI). In 1979, he continued his banking career as a member of the Senior Management and Executive Committee (ExCo) of the Emirates Bank Group; following senior treasury and general management positions in Government of Dubai''s projects. He is a fellow of the Indian Institute of Bankers and has also completed several Advanced Management

Programmes at London, Wharton and Columbia Schools of Business. He has been the Founder-President of the Indian Business & Professional Council, Dubai and an active member of the Regional Chief Executive Forum of the Institute of International Finance (IIF). He retired in April 2012 as a CEO in the Emirates NBD Group, Dubai, and as a member of the Board of its subsidiaries. Currently, Shri Suresh Kumar is also Chairman of Federal Bank Financial Services Ltd and a non- executive Director on the Boards of IDBI Life Insurance Co. Ltd and ICICI Prudential Asset Management Co. Ltd. He has been a recipient of several accolades and recognition and was awarded the ''Hind Rattan'' (Jewel of India) on the 25th of January 2012. Shri Suresh Kumar holds 105,710 GDRs of The Federal Bank Limited

Shri Nilesh Shivji Vikamsey is a Chartered Accountant by profession, and holds a diploma in Information System Audit and was also associated with the Business Consultancy Studies course at the Bombay Chartered Accountants Society jointly with Jamnalal Bajaj Institute of Management Studies. He is the senior partner of Khimji Kunverji & Co, Chartered Accountants, a firm which has over 75 years of experience in the areas of auditing, taxation, corporate and personal advisory services, business and management consulting services, due diligence, valuations, inspections, and investigations. He is a member of the Central Council of the Institute of Chartered Accountants of India (ICAI). He has also acted as a Speaker/Chairman at various seminars, meetings, lectures held by various committees. He is a director in India Infoline Limited, India Infoline Investment Services Private Limited, Rodium Realty Limited, ICAI Accounting Research Foundation. Apart from being contributor to various articles, he has been managing audits/consultancy of large nationalised banks, foreign banks (Indian operations), large listed public and private limited companies.

CA Nilesh Shivji Vikamsey did not hold any shares of the Bank as on 31st March 2013.

Dr. T.C. Nair resigned from the Board of the Bank w.e.f 01.05.2013.

The Directors who were co-opted by the Board as additional directors are Dr. K. Cherian Varghese on 20.10.2012, Shri Sudhir M Joshi on 20.10.2012 , Shri K.M Chandrasekhar on 06.12.2012 and Shri Dilip Gena Sadarangani on 4.6.2013.

Dr. K. Cherian Varghese was co-opted to the Board as an Independent Director w.e.f 20.10.2012. He received his Ph.D (Commerce) in Business Policy and Administration from University of Mumbai. Presently, he is the chairman of Union KBC Trustee Company Private Ltd. He is also a member of Government of India''s MOU Task Force for PSUs. He has 36 years of experience as banker. During this period, he was the Chairman & Managing Director / CEO of Union Bank of India, Corporation Bank, and South Indian Bank Ltd. He also served as Executive Director of Central Bank of India and General Manager of Indian Bank. He was also the Chairman of the Board for Industrial and Financial Reconstruction (BIFR) of Government of India and the President of Indian Institute of Banking and Finance. He is an Associate of the Chartered Institute of Bankers, London. He was included in the roll of honour of the top fifty, of those who passed the Associate Examination of the Chartered Institute of Bankers, London from all over the globe and was awarded a honorary fellowship by the Indian Institute of Banking and Finance.

Dr.K.Cherian Varghese did not hold any shares of the Bank as on 31st March 2013.

Shri Sudhir Moreshwar Joshi was co-opted to the Board as an Independent Director w.e.f 20.10.2012. He is a professional banker with vast experience in the banking industry. He holds a Bachelor of Science degree in Chemistry from University of Pune and is a Certified Associate of the Indian Institute of Bankers. He was the Head of Treasury at HDFC Bank. He is also on the Board of National Securities Clearing Corporation of India Ltd. and is a member of its Executive Committee and Audit and Risk Committee. Previously, he has held key positions with State Bank of India. Shri Joshi was also part of the Times Bank Core Management Team as Executive Vice President (Treasury).

Shri Sudhir M Joshi did not hold any shares of the Bank as on 31st March 2013.

Shri K.M.Chandrasekhar was co-opted as an Independent Director of our Board on 06.12.2012. He is the Vice Chairman of Kerala State Planning Board. He entered the Indian

Administrative Service in 1970. Prior to that, he did his B.A (Honours) in Economics and M.A. in History from St. Stephen''s College, University of Delhi. After entering Government Service, he got the degree of M.A. in Management Studies from the University of Leeds in United Kingdom. He spent the first 25 years of his career in Kerala, holding positions as Managing Director of the State Civil Supplies Corporation, District Collector, Idukki, Director of Fisheries, Principal Secretary (Industries) and Principal Secretary (Finance). In 1996, he left Kerala on Central Government deputation and rose to the highest position that any Indian civil servant can occupy that of Union Cabinet Secretary. As Cabinet Secretary, he was the Head of all the Civil Services in India and reported directly to the Prime Minister of India. He retained that position for a full four years, a tenure that has not been matched by any other officer during the last 40 years. He retired from Government Service in 2011 at the age of 63, having served Government for 41 years. He also served as Joint Secretary in the Key Trade Policy Division of the Ministry of Commerce, Union Revenue Secretary, Deputy Chief of Mission in the Embassy of India, Brussels and the Ambassador and Permanent Representative of India in the World Trade Organisation in Geneva. It was he who introduced for the first time, the Performance Management and Evaluation System in the offices of Government of India. He has considerable management experience having been associated - as Chairman, Managing Director or Member of the Board of Directors - with more than 40 companies in the public, joint and private sector. He has written several articles and presented papers. He has also been consultant to the Commonwealth Secretariat and to the UN Food and Agriculture Organisation.

Shri K.M.Chandrasekhar did not hold any shares of the Bank as on 31st March 2013.

Shri Dilip G Sadarangani was co-opted as an Independent Director on 4.6.2013. He has wide experience in the realm of banking/technology/operations, and includes management, maintenance and support of IT software projects as well as IT operations. He has developed and put in place processes and IT policies and continuity plans in three leading Banks in India, Australia and Kuwait

Shri Dilip G Sadarangani holds a Bachelor of Science (Hons) degree from University of Bombay. He also holds a post graduate diploma in Computer Management from Jamnalal Bajaj Institute of Management, University of Bombay. He has developed business-technology strategies for ANZ Grindlays Bank, Standard Chartered Bank (SCB), India, Gulf Bank, Kuwait and Man Power, Asia Pacific. He was a key member of the Global Leadership team in ANZ Bank (Australia), Standard Chartered Bank (India & Global), and Gulf Bank (Kuwait) and Manpower Inc (Asia Pacific & Global) He was also a core member of the team which automated the first 50 branches of one of the largest financial institutions in the world -State Bank of India and led the replacement of disparate legacy systems with modern banking systems in ANZ Bank across Pacific Island nations, South Asia and Middle East. He drove the off-shoring of large volume of IT acitivities in ANZ and Standard Chartered Banks to India and Malayasia.

subsidiary

FedBank Financial Services Ltd. is a fully-owned subsidiary of the Bank. As required under Section 212 of the Companies Act, 1956, the financial statements relating to this company, the sole subsidiary of the Bank, for FY 12-13 are attached.

Annual Financial statements and Audit report

As required by Section 212 of the Companies Act, 1956, the Bank''s Balance Sheet as on 31 March 2013, its Profit and Loss account, and the Statutory Auditors'' report and statements required under the Section, are attached.

statutory Audit

M/s. Deloitte Haskins & Sells,Chartered Accountants, Chennai, and M/s. M P Chitale & Co., Chartered Accountants, Mumbai, jointly carried out the statutory central audit of the Bank. The statutory central/branch auditors audited all the branches and other offices of the Bank.

Joint Venture in Life insurance Business

The Bank''s joint venture Life Insurance Company, in association with IDBI Bank Limited and Fortis Insurance International N.V. (now Aegeas), namely IDBI Fortis Life Insurance Company Limited, renamed as IDBI Federal Life Insurance Company Limited, commenced operations in March 2008. Currently the Bank has a total stake of 5208 Cr in the equity of the company holding 26% of the equity capital. statutory Disclosure stock exchange Information

The Bank''s Equity Shares are listed on:

1. Bombay Stock Exchange Limited, Phiroze Jeejeebhoy Towers, Dalal Street, Mumbai - 400 001.

2. National Stock Exchange Ltd. "Exchange Plaza" Bandra - Kurla Complex Bandra East, Mumbai - 400 051.

3. Cochin Stock Exchange Ltd. MES, Dr. P.K. Abdul Gafoor Memorial Cultural Complex 4th Floor, 36/1565, Judges Avenue, Kaloor, Kochi - 682 017.

The GDRs issued by the Bank are listed on the London Stock Exchange.

The annual listing fees have been paid to all the Stock Exchanges mentioned above.

Through its export-financing operations, the Bank supports and encourages the country''s export efforts.

Considering the nature of activities of the Bank, the provisions of Section 217 (1) (e) of the Companies Act, 1956 relating to conservation of energy and technology absorption do not apply to the Bank. The Bank is, however, constantly pursuing its goal of technological upgradation in a cost-effective manner for delivering quality customer service.

Personnel

As required by the provisions of Section 217 (2A) of the Companies Act, 1956, read with Companies (Particulars of Employees) Rules, 1975, as amended, the names and other particulars of the employees are set out in the Annexure to the Directors'' Report. (Annexure I).

Director''s Responsibility statement

As required by section 217 (2AA) of the Companies Act, 1956, the Directors state that:

The Bank has in place a system to ensure compliance of all laws applicable to the Bank;

In the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures;

The Directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Bank at the end of the financial year and of the profit of the Bank for that period;

The Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the Bank and for preventing and detecting fraud and other irregularities; and

The Directors have prepared the annual accounts on a going concern basis.

Acknowledgement

The Board of Directors places on record its sincere thanks to the Government of India, Reserve Bank of India, various State Governments and regulatory authorities in India and overseas for their valuable guidance, support and cooperation. The Directors wish to express their gratitude to Investment Banks, rating agencies and stock exchanges for their wholehearted support.

The Directors record their sincere gratitude to the Bank''s shareholders, esteemed customers and all other well-wishers for their continued patronage. The Directors express their appreciation for the contribution made by every employee of the Bank.

For and on behalf of the Board of Directors

Aluva suresh Kumar

Date: 4th June 2013 Chairman of the Board


Mar 31, 2012

The Board of Directors has great pleasure in presenting the 81st Annual Report of The Federal Bank Limited on its business and operations front along with the audited accounts for the year ended March 31, 2012

In Financial Year 2011 - 2012 we delivered balanced and strong results attributing to year on year growth in all major parameters in the business front

For the year ended (Rs In Crores)

Financial Parameters 31-03-2012 31-03-2011

Net Interest Income 1,953.40 1,746.58

Fee and Other Income 532.34 516.81

Net Revenue 2,485.74 2,263.39

Operating Expense 979.27 836.14

Operating Profit 1,506.47 1,427.25

Net Profit 776.79 587.08

Profit brought forward 25.78 23.14

Total Profit Available for appropriation 802.57 610.22

Appropriations:

Transfer to statutory Reserves 194.20 146.80

Transfer to Revenue Reserves 98.88 232.11

Transfer to Capital Reserves 5.40 0.00

Transfer to Special Reserves 28.50 36.56

Proposed Dividend 153.94 145.39

Provision for Dividend Tax 24.97 23.58

Balance Carried over to Balance Sheet 296.68 25.78

Financial Position

Deposits 48,937.12 43,014.78

Advances 37,755.99 31,953.23

Total Business (Deposits Advances) 86,693.11 74,968.01

Other Borrowings 4,241.03 1,888.36

Investments 17,402.49 14,537.68

Total Assets ( Balance Sheet Size) 60,626.77 51,456.36

Capital 171.05 171.05

Ratios

Return on Total Assets (%) 1.41 1.34

Return on Equity (%) 14.37 11.98

Earnings Per Share (Rs) 45.41 34.32

Book value per share (Rs) 333.61 298.67

Operating cost to Income (%) 39.40 36.94

Capital Adequacy Ratio (%) Basel (I) 13.83 15.39

Capital Adequacy Ratio (%) Basel (II) 16.64 16.79

Your Bank could achieve this growth by addressing the challenges in macro-economic conditions, inflationary trends and stringent regulatory norms along with tight monetary measures. A focussed and defined approach in this fiscal year resulted in better performance on various strategic fronts which the Bank had identified.

In FY 12 we endeavoured to nurture Retail, NRI, SME, Agriculture and Gold through improved value propositions. Our retail portfolio grew by 21.16% annually, supported by a growth in retail deposits by 23.59 % and retail advances by 12.58 %. Your Bank took several initiatives in FY 12 to augment the advances to rural, agriculture and priority sector. Priority sector advances of the Bank scaled up by Rs 1,551.63 Cr in the last fiscal year and stood at Rs 1,2652.54 Cr as on 31 Mar 2012. Advances to agriculture witnessed a steady increase of 15.21 % and reached Rs 4,318.74 Cr. During the year the Bank delivered a healthy performance in gold loan business with an increase of 80.76 % in the portfolio.

The year also witnessed an aggressive footprint expansion with a 27.86 % growth in network. Your Bank's branch strength as on 31-March-2012 stood at 950. This included a healthy addition of 207 branches during FY 12. During the year the Bank's ATM network also grew by 202 thereby crossing the 1000 milestone and reaching 1005 ATMs as on 31 Mar 2012. The Bank has systematic plans to scale up its presence across select geographies outside the state of Kerala, which include the States of Tamilnadu, Karnataka, Punjab, Gujarat and Maharashtra. The Bank will focus on Agri, SME and NRI business in these states, which are segments where the Bank has accumulated invaluable expertise through its 66 years of existence.

Net Profit

During the fiscal year ended March 31, 2012, your Bank recorded an impressive growth in Net Profit and achieved Rs 776.79 Cr, registering an increase of 32.31 % over the previous year. Rationalised underwriting processes along with granular attention to asset management led to this healthy show in profits.

Consequent to the improvement in the asset quality of the Bank, we could curtail provisioning by a very large extent. The total provisions of the Bank during the year was Rs 729.68 Cr, of which Rs 34.86 Cr was for investments and Rs 392.71 Cr was for income tax. Provisions on account of loan losses for the year were reduced by 54.63 % to reach Rs 221.77 Cr from Rs 488.85 Cr. and Rs 80.34 Cr was marked for other purposes.

Return on Average Equity and Return on Average Total Assets rose up to 14.37 % and 1.41 % respectively along with the profit. Earnings per Share of the Bank, as on 31st Mar 2012, increased by 32.31 % to reach Rs 45.41 as compared to the previous fiscal year figure of Rs 34.32. Book value per share increased from Rs 298.67 in the previous fiscal year to Rs 333.61 in FY 12.

Operating Profit

Your Bank could deliver substantial growth in top line and bottom line overcoming the challenging macro environment. During the year the Bank posted an operating profit of Rs 1,506.47 Cr.

In FY 12 Risk Adjusted Net Interest Margin of the Bank scaled up to 3.36 % compared to the previous fiscal year rate of 3.04 %. The Net Interest Margin of the Bank for the year stood at 3.79 %, despite the interest rate volatility. Net Interest Income of the Bank for the period increased from Rs 1,746.58 Cr to reach Rs 1,953.40 Cr registering an annual growth of 11.84 %.

For the financial year ended March 2012, the total non-interest income of the Bank stood at Rs 532.34 Cr as against Rs 516.81 Cr in FY 11.

Expenditure

The fiscal year ended 2012 reported an increase in the total expenses of the Bank that reached Rs 4,584.26 Cr from Rs 3,141.59 Cr, registering an annual increase of 45.92 %. Interest expenses increased to Rs 3,604.99 Cr in FY 12 from Rs 2,305.45 Cr in FY 11.

During the year the cost of deposits of Bank climbed to 7.41 % as compared to 5.99 % in the previous fiscal year. Average Cost of all funds (Deposits Borrowings Bonds) recorded a marginal increase and reached 7.56 %. The growth in term deposit portfolio, the general increase in rate of interest offered on term deposits coupled with the deregulation of the rate of interest offered on NRE Term deposits (INR) by RBI contributed to increase in the interest expenses on deposits. Interest expenses as percentage to total income increased to 59.19 % from 50.46 % in FY 2011.

Your Bank in FY 12, as part of strategy, reduced the proportion of high value deposits and simultaneously increased the quantum of low cost deposits. As on 31 Mar 2012, the total high value deposits of the Bank stood at Rs 7,169.05 Cr as compared to Rs 9,272.42 Cr in the previous fiscal year. The share of current account and savings bank deposit account (CASA) to total deposits of the Bank improved from 26.5 % to 27.4 % as on 31 Mar 2012.

Operating Expenses of the Bank during the fiscal year grew to Rs 979.27 Cr from Rs 836.14 Cr. However, Employee cost of the Bank over the period has increased by 13.21 % from Rs 480.41 Cr to reach Rs 543.85 Cr. Wage revision, increase in Human Capital, Dearness Allowance, additional contribution towards New Pension Scheme, retirement benefits of employees etc. contributed to the increase in staff expense. Employee cost as percentage to total income declined from 10.51 % as at the end of last fiscal year to 8.93 % as at 31 Mar 2012.

The expenses on account of the opening of 207 new branches during the fiscal year have also contributed to the increase in operating expenses.

The Cost to Income ratio of the Bank stands at 39.40 % (36.94 % in FY 2011) and is by far one of the best in the Industry. This figure is maintained despite the opening of new branches and even after the spurt in recruitment during the last 2 financial years and increase in the other operating expenses.

Income Growth

Despite the compounded slowdown and uncertainties that prevailed throughout the year, your Bank could stride forward with its policy of creating select good quality assets. With its strong fundamentals, the Bank could navigate through this turbulent environment with its natural pace.

Total income of the Bank during the fiscal year 2012 recorded a 33.31 % growth to reach Rs 6,090.73 Cr from the previous fiscal year figure of Rs 4,568.84 Cr. This growth was primarily fuelled by increase in interest income, which grew by 37.18 %.

Income from advances increased by 32.22 % to reach Rs 4,189.76 Cr. At the same time, income from investments registered a steep rise to reach Rs 1,315.74 Cr clocking a 51.58 % annual growth.

The yield on advances increased to 12.58 % from the previous year's rate of 11.09 % and the return on advance (net of loan loss provisions) improved to 11.91 % from 9.37 % in 2011.

The yield on investments excluding trading income increased to 7.32 % as on March 2012 from 6.95 % as on March 2011. The net interest margin for the fiscal year is at 3.79 % against 4.22 % in March 2011, mainly contributed by the general hike in the cost of deposits.

Concerted efforts to increase the Fee Based Income and Other Income of the Bank resulted in Rs 532.34 Cr as against Rs 516.81 Cr in the previous fiscal year.

Spread

During the fiscal year the Bank's spread on advances (gross) increased to 5.17 % from 5.09 % and spread on investments (gross) stood at 0.36 %. The Spread (net of provisions) on advance grew from last year's 3.38% to reach 4.50 %.

Dividend

Adding value to shareholders continues to be one of the major objectives of the Bank. The Board of Directors recommended a dividend of Rs 9 per share as compared to Rs 8.5 in the previous fiscal year. The Bank has been traditionally rewarding its shareholders through cash dividends by striking a balance between cash dividends and future growth through retained earnings.

Investor Education and Protection Fund

As per the Companies Act 1956, dividend unclaimed for more than 7 years from the date of issue is to be transferred to Investor Education And Protection Fund. On 20.10.2011, we transferred Rs 29,23,183.00 to the Fund.

Growth in Business

Total business of your Bank has reached Rs 86,693.11 Cr as on 31 Mar 2012 with an increase of 15.64 % on a Y-o-Y basis. Total deposits increased to Rs 48,937.12 Cr registering a Y-o-Y growth of 13.77 %, while retail customer deposits recorded a growth of 23.59 % in FY 12. Advances increased in tandem with Deposits to Rs 37,755.99 Cr registering a Y-o-Y increase of 18.16 %.

As mentioned earlier, the Bank reduced its bulk deposits and gave added thrust to retail/low cost deposits to bring down the overall cost of resources. The growth achieved in retail customer base helped the Bank in reducing dependence on certificate of deposits and bulk deposits. The share of high value deposits were brought down to 14.65% from 21.56% in the previous year.

The average deposits of the Bank during the period grew by 24.57 % and average advances by 15.96 %.

Savings deposits of the Bank during FY 12 moved up by 19.48 % to reach Rs 10,929.95 Cr as compared to the base figure of Rs 9,148.29 Cr. During the fiscal year NRE deposits clocked an increase of 35.64 % to reach Rs 7,963.61 Cr.

Your Banks investment portfolio increased to Rs 17,402.49 Cr registering a growth of 19.71 % on Y-o-Y basis as compared to 11.36 % in the previous fiscal year. The average investments on Y-o-Y registered a growth of 44.31 % as compared to previous fiscal year growth of 8.99 %.

Loan Asset Quality

Your Bank could combat the delinquency levels for the year by sourcing quality proposals selectively and by continuous monitoring. The new credit hub system, succeeded in professionally isolating the sourcing and sanctioning functions of asset procurement. In the earlier system, Branches were the focal point for both credit sanctioning and dispensation. The institution of Credit Monitoring Cells (CMC) and Stressed Asset Management Cell (SMAC) (attached to various Zones/Regions) for continuous monitoring and managing the asset quality yielded the desired results.

The Bank's gross NPA and Net NPA improved to 3.35 % and 0.53 % respectively as against 3.49 % and 0.60 % as at the end of March 2011. Net NPAs of the Bank during the year marginally increased to Rs 199.00 Cr from 190.69 Cr as on 31 Mar 2011.

The Bank had taken stringent measures to contain fresh accretion to the NPA portfolio as well as to scale down the existing portfolio. SARFAESI proceedings were effectively employed and recovery agents were judiciously deployed after complying with RBI guidelines in respect of their codes of conduct. During the year the Bank launched a special campaign which was christened "War on NPA". The campaign was successful in educating the field and motivating them to act. This has resulted in successful reining in of the NPA portfolio. In adherence to RBI guidelines, one time settlement was permitted in deserving cases. These efforts have yielded positive results.

Provision Coverage

As on 31 Mar 2012, the Bank held a total provision of Rs 1,055.33 Cr. Provision coverage for NPAs as at 31 Mar 2012 stood at 81.13 %. As per the RBI directive, Banks should hold minimum provision coverage of 70 % including technically written off accounts. As on 31 Mar 2012, the provision coverage ratio of the Bank, including written off accounts is 88.85 %. It has been a prudent policy of the Bank to be conservative on the Provision Coverage Ratio as indicated by the figure above.

Capital Adequacy

Your Bank enjoys very strong capital adequacy. CRAR of the Bank calculated in line with Basel II norms stood at 16.64 % which is significantly in excess of the 9 % stipulated by RBI. Of this, Tier 1 CRAR is at 15.86 %.

Employee Productivity

Business Per Employee of the Bank during the period has grown to Rs 10.11 Cr from Rs 9.23 Cr in the previous fiscal year.

Profit Per Employee of the Bank increased by 25.48 % to reach Rs 9.11 Lakh from Rs 7.26 Lakh in the previous fiscal year.

Share Value Dimensions

Earnings Per Share of your Bank has increased from Rs 34.32 to Rs 45.41 registering a growth of 32.31 %. Return on Equity during the year grew by 19.88 % to reach 14.37 % from the previous fiscal year's figure of 11.98 %.

Employee Stock Option Scheme (ESOS)

The Bank has instituted an Employee Stock Option Scheme to enable its employees including whole time Directors to participate in the future growth and financial success of the bank. Under the Scheme 85,51,650 options can be granted to the employees. The employee stock option scheme is in accordance with the Securities and Exchange Board of India (Employee Stock Option and Employee Stock Purchase Scheme) Guidelines, 1999. The eligibility and number of options to be granted to an employee is determined on the basis of various parameters such as scale, designation, work performance, grades, period of service, annual fixed pay, Bank's performance and such other parameters as may be decided by the Compensation Committee from time to time in its sole discretion and is approved by the Board of Directors

The Bank's shareholders approved the scheme for issuance of stock options to employees including whole time Directors on December 24, 2010.

The option conversion price was set to be the closing price on the day previous to the grant date. The compensation committee granted 34,72,020 options during the year 2011 - 12. The options granted which are non transferable, with vesting period of 1, 2, and 3 & 4 years subject to standard vesting conditions, and must be exercised within five years from the date of vesting. As on 31 March 2012, 30,35,875 options were in force and none of them has been vested as first vesting date is 31st May 2012 or on completion of one year from the date of grant subject to standard vesting conditions and statutory approvals for the options granted during 2011-12.

The valuation method adopted at the time of the grant was fair value method and it has been changed to intrinsic value method as approved by the compensation committee of the Bank.

Other statutory disclosures as required by the SEBI guidelines on ESOP are given in Annexure II to this report.

Expansion of Network

Commemorating the 66th Founders day, 66 branches were opened in a single day on 18th October 2011. Another 100 branches were opened on 10th March 2012 across the country by the then Hon'ble Finance Minister of India, Shri. Pranab Kumar Mukherjee. The Bank was able to add 207 branches in the current fiscal year which included under-banked and un-banked centers as per RBI's guidelines. This resulted in a record footprint expansion of 27.86 % from base. Out of the 207 Branches opened in FY 12, more than 82 % fall in select five states Tamilnadu, Punjab, Gujarat, Karnataka and Maharashtra and also in Kerala.

Corporate Social Responsibility

Corporate Social Responsibility and Sustainable Development initiatives were incorporated in the Bank's business strategies/ policies. The Bank has a well-defined CSR Policy crafted in consultation with the stakeholders and circulated among the employees and also available in the intranet and Bank's website.

Your Bank has always stood for the assistance & upliftment of the rural/agrarian community by devising specific schemes and inculcating banking habits in them.

Fedbank Hormis Memorial Foundation, a public charitable trust instituted by your Bank provides scholarships to the economically needy students for pursuing professional education courses. The Trust is striving hard to inculcate better knowledge and awareness in the field of banking through training programmes, focused seminars, awards and so on.

The social & community initiatives of your Bank include setting up of Bank's own customer contact center manned by the differently abled personnel, supporting scores of NGOs/institutions with various types of assistance including building fund, sponsoring ambulances, computers, dialysis machines, elevators, offering free midday meals, supporting environmental and healthcare projects, social, cultural and educational programs etc. The mission includes partnering communities in health, family welfare, education, environment protection, providing potable water, sanitation, and empowerment of women and other marginalized groups.

The Bank has taken up credit-plus program called 'Samrudhi'which are extended to villages through the Community Development Societies (CDS).

By promoting paperless banking, blood donation, adopting small family norms, the Bank has come out successful in making employees a part of its CSR.

In consonance with RBI directives, Federal Bank has established a Trust- Federal Ashwas Trust - with the main objective of establishing and running the Federal Ashwas Financial Literacy and Credit Counselling Centers for providing financial education and credit counselling to the public.

In different ways, the Bank could reach out to the less privileged group such as fishermen, farmers, coolies, construction workers, rickshaw pullers, migrants at their convenience near their homes. Christened as 'Fedjyothi', the ICT (Information & Communication Technology) model accounts which are operated using Biometric Smart Cards and Micro ATM turned out to be an effective tool in the process of implementation of the Financial Inclusion program. The Bank opened a GramaJeevanBranchwhich aims at providing formal banking services to the entire unbanked village in a meaningful way. 'Farmers Club'- a grass root level informal forum of farmers - Organised by our rural and semi-urban branches with the support and financial assistance of NABARD stand for the benefit of the village farming community/ rural people. At Federal Bank Corporate Social Responsibility (CSR) is an embodiment of our commitment to the Society at large.

Awards and Accolades

- Your Bank has won the International ACI Excellence Award 2012 in the Payments Transformation category for two prestigious projects - Visa Money Transfer (Visa Fast Funds) & Federal Bank's Aadhar (UID) Based Authentication of Payments.

- The Bank has also won awards in 2 categories from the Kerala Management Association in 2011 - Innovative Cost Management Measures and Excellence in House Magazine.

- The Bank has won the Blue Dart World CSR Day - Global CSR Award for Best Corporate Social Responsibility Practice Overall.

- The Bank was ranked as the Best Bank among old private sector banks in 2010, by Financial Express.

- Your bank was ranked 497th bank in the world by "The Banker", the Internatinal Financial Affairs publication edited from London, in their July 2011 edition.

- The Golden Peacock Award, a prestigious award instituted by The Golden Peacock Awards Secretariat (GPAS), on the CSR front was awarded to us in this fiscal year.

Corporate Governance

The Bank has adopted a Code of Corporate Governance which while taking care of and safe guarding the interest of shareholders and all other stakeholders also provides for good management, adoption of prudent risk management techniques and compliance with required standards of capital adequacy.

The Code also aims at identifying and recognizing the Board of Directors and the Management of the Bank as the principal instruments through which good corporate governance principles are articulated and implemented, giving utmost importance to identify and recognize transparency, accountability and equality of treatment amongst all the stakeholders, which is in tune with statutory and regulatory structures. A copy of the Code is available on request.

Board of Directors

The composition of the Board of Directors is governed by the Banking Regulation Act, 1949, the Companies Act, 1956, Listing Agreement, and the Code of Corporate Governance adopted by the Bank. The Board comprises of 8 Directors with rich experience and specialized knowledge in various areas of relevance to the Bank, including banking, accountancy, MSME, finance, small scale industry, agriculture, and information technology.

Shri. Shyam Srinivasan MD & CEO joined the Bank on 23.09.2010. Shri. P.C. John, Executive Director (ED), is the Whole Time Director of the Bank. Excluding the MD & CEO and the ED all other members of the Board are Non-Executive and Independent Directors.

Shri. Suresh Kumar was re-elected/appointed as Director of the Bank at its last Annual General Meeting held on 3rd September 2011.

Shri. Nilesh S Vikamsey was appointed as a Director of the Bank on 24.06.2011 and was elected as a Director of the Bank at its last Annual General Meeting held on 3rd September 2011.

The other Directors who are retiring at this AGM are Prof. Abraham Koshy and Dr. M.Y.Khan. Prof. Abraham Koshy and Dr. M.Y.Khan, being eligible, have offered themselves for reappointment.

Prof. Abraham Koshy, Ph.D (Fellow, IIM Ahmedabad), MBA, is an independent Director on the Board of the Bank since May 18, 2007. He was a member of the faculty at the School of Management Studies, Cochin University and thereafter the Centre for Management Development, Trivandrum. He subsequently became a member of the faculty of the Indian Institute of Management, Ahmedabad. He currently serves there as a Professor of Marketing . He is a Visiting Professor of various European Business schools/Universities and he conducts executive training programmes for senior executives of companies in India and abroad. He also provides advisory services for various companies. Apart from publishing several research papers and case studies in reputed journals, Prof.Koshy has co-authored a book on Marketing Management with legendary marketing guru, Prof. Kotler.

Prof. Koshy is also a Director of Malayala Manorama Printing and Publishing Co. and Autoline Industries Ltd. He is Chairman of the Risk Management Committee, Customer Service & Marketing Strategy Committee and Committee for Human Resources Policy of the Federal Bank Ltd. and also member of its Nomination, Remuneration and Ethics Committee. Prof. Abraham Koshy held 1000 shares of the Company as on March 31, 2012.

Dr. M. Y. Khan is an Independent Director on our Board since June 06, 2009. He is a professional banker with vast experience in Banking Industry. He is a Post Graduate in Science and also holds an Honorary Degree, Doctorate of Philosophy in Business Management (Ph.D) from Burkes University in U.K. He was former Chairman of Jammu & Kashmir Bank and made significant contributions for its growth. He was also heading J & K Tourism Development Corporation for 5 years as Managing Director. Dr.Khan had been nominated member of the Chattisgarh Economic Advisory Committee, Government of India, Member of the Banking and Financial Institutions Committee of FICCI and Member of the Managing Committee of Indian Banking Association Mumbai, Dr.Khan is the recipient of several prestigious awards like "Udyog Rattan" award, "Pride of India & IMM" award, for excellence as top professional manager, "Excellence Award" by Institute of Economic Studies, "Star Achievers Award" among several others. Currently he is on the Board of Zee Entertainment Enterprises Ltd, Bharath Hotels Ltd, ETA Star Health & Allied Insurance Company Ltd, United Corporate Park, Dhir Investments Plc and Unitech CIG Realty Fund.

He is the Chairman of the Audit Committee of Bharath Hotels Ltd and a member of the Audit Committee of The Federal Bank Ltd. Dr. M.Y. Khan did not hold any shares of the Company as on March 31, 2012.

Subsidiary

FedBank Financial Services Ltd. is a fully owned subsidiary of the Bank. As required under Section 212 of the Companies Act, 1956, the financial statements relating to this company, the sole subsidiary of the Bank, for FY 12 are attached.

Annual Financial Statements and Audit Report

As required by section 212 of the Companies Act, 1956, the Bank's Balance Sheet as on 31 March 2012, its profit and loss account, and the statutory auditors' report and statements required under the section, are attached.

Statutory Audit

M/s. Varma & Varma, Chartered Accountants, Kochi, and M/s. Price Patt& Co., Chartered Accountants, Chennai, jointly carried out the statutory central audit of the Bank. The statutory central/branch auditors audited all the branches and other offices of the Bank.

M/s. Price Patt & Co., one of the joint statutory central auditors of the Bank whose period was to expire at the conclusion of this Annual General Meeting, submitted their resignation vide their letter dated 14.06.2012, consequent to their appointment as statutory central auditor of Union Bank of India, a public sector bank for the year 2012-13, in view of the RBI guidelines that an audit firm cannot do the central audit of a private sector bank if they are statutory auditors in public sector banks effective from the year 2012-13. The same has been taken on record by the Audit Committee of the Board.

Joint Venture in Life Insurance Business

The Bank's joint venture Life Insurance Company, in association with IDBI Bank Limited and Fortis Insurance International N.V. (now Ageas), namely IDBI Fortis Life Insurance Company Limited, renamed as IDBI Federal Life Insurance Company Limited, commenced operations in March 2008. Currently the Bank has a total stake of Rs 208 Cr in the equity of the company holding 26 % of the equity capital.

Statutory Disclosure

Stock Exchange Information

The Bank's equity shares are listed on:

1. Bombay Stock Exchange Limited

Phiroze Jeejeebhoy Towers

Dalal Street, Mumbai - 400 001.

2. National Stock Exchange Ltd.

"Exchange Plaza"

Bandra - Kurla Complex

Bandra East, Mumbai - 400 051.

3. Cochin Stock Exchange Ltd.

MES, Dr. P.K. Abdul Gafoor

Memorial Cultural Complex

4th Fl, 36/1565, Judges Avenue,

Kaloor, Kochi - 682 017.

The GDRs issued by the Bank are listed on the London Stock Exchange.

The annual listing fees have been paid to all the Stock Exchanges listed above.

Through its export-financing operations, the Bank supports and encourages the country's export efforts.

Considering the nature of activities of the Bank, the provisions of Section 217 (1) (e) of the Companies Act, 1956 relating to conservation of energy and technology absorption do not apply to the Bank. The Bank is, however, constantly pursuing its goal of technological upgradation in a cost-effective manner for delivering quality customer service.

Personnel

As required by the provisions of Section 217 (2A) of the Companies Act, 1956, read with Companies (Particulars of Employees) Rules, 1975, as amended, the names and other particulars of the employees are set out in the Annexure to the Directors' Report. (Annexure I).

Director's Responsibility Statement

As required by section 217 (2AA) of the companies act, 1956, the Directors state that:

The Bank has in place a system to ensure compliance of all laws applicable to the Bank;

In the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures;

The directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Bank at the end of the financial year and of the profit of the Bank for that period;

The directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the Bank and for preventing and detecting fraud and other irregularities; and

The directors have prepared the annual accounts on a going concern basis.

Acknowledgement

The Board of Directors places on record its sincere thanks to the Government of India, Reserve Bank of India, Various State Governments and regulatory authorities in India and overseas for their valuable guidance, support and co-operation. The Directors wish to express their gratitude to investment Banks, rating agencies and stock exchanges for their excellent support.

The Directors record their sincere gratitude to the Bank's shareholders, esteemed customers and all other well-wishers for their continued patronage. The Directors express their appreciation for the contribution made by every employee of the Bank.

For and on behalf of the Board of Directors

Aluva P.C. Cyriac

Date. 29th June 2012 Chairman of the Board


Mar 31, 2010

The Directors take great pleasure in presenting the 79th Annual Report on the business and operations of your Bank together with the audited accounts for the year ended March 31, 2010.

FINANCIAL PERFORMANCE

The financial highlights of your Bank for the financial year 2009-10 are given below:

Rs. in crore

For the year ended

Financial Parameters March 31,2010 March 31, 2009

Net Interest Income 1410.83 1,315.46

Fee and Other Income 530.91 515.77

Net Revenue 1941.74 1,831.23

Operating Expenses 676.89 571.45

Profit before Depreciation and Tax 909.73 835.85

Net Profit 464.55 500.49

Profit Brought Forward 21.93 14.62

Total Profit Available for Appropriation486.48 515.11

Appropriations:

Transfer to Statutory Reserves 116.14 125.12

Transfer to Revenue Reserves 208.27 197.25

Transfer to Capital Reserves 8.20 29.75

Transfer to Special Reserves 31.00 11.00

Transfer to Investment Fluctuation Reserve 0.00 0.00

Transfer to Contingency Reserve 0.00 30.00

Proposed Dividend 85.52 85.52

Provision for Dividend Tax 14.21 14.54

Balance Carried Over to Balance Sheet 23.14 21.93

Financial Position:

Deposits 36057.95 32,198.19

Advances 26950.11 22,391.88

Total Business (Deposits + Advances) 63008.06 54,590.07

Other Borrowings 1546.76 748.94

Investments 13054.65 12,118.97

Total Assets (Balance Sheet Size) 43675.61 38,850.86

Capital 171.03 171.03

Ratios:

Return on Total Assets (%) 1.15 1.48

Return on Equity (%) 10.30 12.13

Earnings Per Share (Rs.) 27.16 29.26

Book Value Per Share (Rs.) 274.24 252.93

Operating Cost to Income (%) 34.86 31.21

Capital Adequacy Ratio (%) 17.27 20.14

Considering the economic slowdown and the risks in going for exponential growth, your Bank had opted for a consolidation phase. But at the same time, the Bank used the opportunity for reaching out to new areas through Branch expansion, putting up of new ATMs and to improve and enhance various channels. Strategic investments were also made to enhance the shareholder value .

OPERATING PROFIT

Operating Profit registered a small growth from Rs.l, 259.78 crore to reach Rs. 1,264.85 crore. The liquidity overhang throughout the period under review affected the growth of operating profit. There was an increase in net interest income from Rs.l, 315.46 crore to Rs. 1,410.83 crore and the non-interest income has gone up from Rs.515.77 crore to Rs. 530.91 crore.

INCOME GROWTH

The interest/discount income from advances has gone up from Rs.2564.25 crore to Rs.2, 849.73 crore. In spite of the uncertainties prevailed in the economy, the Bank could create select good quality earning assets. Bank continued to enjoy a decent interest spread (4.75%) on advances. Based on the increase in interest income, total income has gone up from Rs.3831.15 crore to Rs.4204.14 crore registering a growth of 9.74%. Income from advances as percentage to total income was 67.78%. Income from investments recorded an increase of Rs. 118.86 crore and touched Rs.894.90 crore. Cumulative income from advances and investments recorded a growth of 11.92% and stood at Rs. 3,744.63 crore against Rs. 3,345.79 crore of the previous year. Yield on advances moved in tandem with the market movement of interest rates and decreased by 100 bps to 11.30%. Return on advances plus investments decreased to 10.20%% from 11 %. As a result of the adverse movement in the yield on advances, the net interest margin declined from 4.28% to 3.82% , still one of the best in the industry. The growth in other income was marginal with a growth of 2.93%from a level of Rs.515.77 crore to Rs.530.91 crore. Recovery from written off accounts contributed Rs.l 27.70 crore as against Rs.l 32.77 crore during the last financial year.

The net revenue, that is the net interest income plus other income, of the Bank increased by Rs. 110.51 crore fromRs. 1,831.23 crore as on March 31, 2009 to Rs. 1,941.74 crore.

EXPENDITURE

The Bank embarked upon organic expansion adding 60 branches and 115 ATMs. Total expenses for the financial year 2009-10 increased from Rs. 2,571.37 crore, to Rs. 2,939.29 crore registering an increase of 14.31 %. Interest expenses increased from Rs. 1,999.92 crore in FY 09 to Rs. 2,262.40 crore in FY 10. Cost of all funds (deposits plus borrowings plus bonds) decreased to 6.62% from 7.08% of last financial year. Cost of deposits witnessed a downward trend and has fallen by 43 bps to 6.55% from last years 6.98%. The Bank was conscious in shedding bulk deposits and concentrated on retail deposits. Interest rates did not show large movements during the last financial year. Operating expenses increased by Rs. 105.44 crore and amounted to Rs, 676.89 crore. Employee costs came to Rs.366.05 crore during the year compared to last years figure of Rs. 317.45 crore. Other operating expenses came to Rs. 310.84 crore. Employee costs as percentage to total income has gone up from 8.29% for the year ended March 31, 2009 to 8.71% for the year ended March 31, 2010. Cost to income ratio is 34.86% (31.21% % in FY 2008-09) which is still one of the best in the industry. This figure is maintained even after the spurt in recruitment during the last 2 financial years and increase in other operating expenses including expenses for technological advancement.

NET PROFIT

The net profit for the year after making all provisions, was Rs.464.55 crore as on March 31,2010 as against Rs. 500.49 crore showing a marginal decrease of 7.18%. Total provisions amounted to Rs. 800.30 crore, excluding Income Tax provisions amounting to Rs.395 crore. The profit margin decreased from 13.07% to

11.05%. Return on average equity stood at 10.30%. Earnings per share was at Rs.27.16 and the return on average total assets at 1.15%. Book value increased from Rs.252.93 as on March 31, 2009 to Rs.274.24 as of March 31, 2010.

DIVIDEND

The Bank has been consistently rewarding shareholders through cash pay outs after taking into account the requirement for ploughing back of profits to support growth. Retained profits add impetus for the future growth and enhance the value of the stake of the shareholders. In view of the satisfactory performance, the Board of Directors recommends a dividend of 50% on the paid up capital of the Bank which is the same percentage as that of last financial year.

GROWTH IN BUSINESS

Attracting new customers and further enhancing relationships with the existing customers were the cornerstones of the business philosophy of the Bank. New products were introduced taking into account the customer preferences. The policy of the Bank is to enter new geographies to enhance visibility of the Bank. Tiered Current and Savings Bank account products have started attracting customer interest. Most of the back office functions were centralised to take advantage of volume as well as expertise. Deposits grew to Rs.36057.95 crore clocking 11.99% growth. The Bank had assiduously avoided bulk deposits and hence the fall in growth rate of deposits. However, average deposits have shown a decent growth of 23.33%. Advances registered 20.36% growth touching a figure of Rs.26, 950.11 crore. Savings Bank deposits has grown from a base of Rs.6, 445.84 crore to Rs.7, 611.13 crore. The NRI deposits of the Bank stood at Rs. 7,350.71 crore. Investments grew to Rs. 13054.65 crore from Rs.12,118.97 crore. The size of the balance sheet for the year grew to Rs. 43,675.61 crore from Rs. 38,850.86 crore.

LOAN ASSET QUALITY

Loan delinquencies were higher during the year which was a fall out of the economic recession. Gross NPA as on March 31, 2010 stood at Rs.820.97 crore as against Rs.589.54 crore in the previous year. Gross NPAs as percentage to Gross Advance is 2.97% as against 2. 57 % in the previous year. Net NPAs stood at Rs. 128.79 crore (0.48% of Net Advances) as against Rs. 68.12 crore (0.30% of Net advances) in the previous financial year.

The Bank has initiated various measures to contain the NPA. Maximum thrust is given for recovery through SARFAESI Act. Proceedings and settlements are reached through compromise with a humanitarian approach. Services of Recovery Officers/Agents are used strictly adhering to Codes of Conduct prescribed by RBI. During the financial year 132 recovery camps and 14 Lok Adalaths were held at different centres and the results were overwhelming. A Mega Adalath was held exclusively for the Bank, which was inaugurated by the acting Chief Justice of Kerala.

As on 31.03.2010, the Bank held a total provision of Rs 684.43 crore. This includes a Floating Provision of Rs.l 79.52 crore. The total provision coverage for NPAs as on March 31, 2010 is 83.37 %. As per the extant RBI directive, banks should achieve provision coverage of 70 % (by Sept. 2010) including technically written off accounts. As on 31st March 2010, Provision Coverage Ratio of your bank including technically written off accounts is 91.82%.

EXPANSION OF NETWORK

During the financial year, the Bank opened 60 new branches and 115 new ATM centres. As on March 31, 2010, the total number of branches and ATM centres of the Bank increased to 672 and 732 respectively, as against 612 and 617 of last financial year.

CAPITAL ADEQUACY

The Capital to Risk-weighted Assets Ratio (CRAR) as per BASEL I as on March 31, 2010 stood at 17.27%. As per BASEL II CRAR came to 18.36%. As per RBI guidelines lower of the above two shall be reckoned and accordingly CRAR is 17.27%. Tier-1 CRAR (core CRAR) was 15.27%.

BUSINESS PRODUCTIVITY

The business per average employee increased to Rs. 8.13 crore as against Rs.7.50 crore of the fast financial year. Profit per employee stood at Rs. 6.01 lakh on an enhanced workforce.

EXTERNAL RATING

The certificate of deposit and short term fixed deposits (with a contracted maturity upto one year) of the bank are rated "PI +" by Crisil. Tier II subordinated debts issued by the bank aggregating to Rs.320 crore is rated "CARE AA" by Care and "AA - (Ind)" by Fitch.

CORPORATE GOVERNANCE

Your Bank is committed to achieving highest levels of ethical standards, professional integrity, corporate governance and regulatory compliance. The corporate governance practices followed by the Bank are given in the annexure.

BOARD OF DIRECTORS

The Board consists of nine members as on 31 March 2010, including Managing Director and Chief Executive Officer and two Executive Directors (whole time directors). All other members of the Board are Non-Executive & Independent Directors.

Shri. M. Venugopalan, Managing Director & Chief Executive Officer has laid down the office on July 31, 2010 after being at the helm of affairs for 63 months. He was Chairman & Chief Executive Officer of the Bank from May 01, 2005 to July 30, 2008. Pursuant to the implementation of the Dr.Ganguly Committee recommendations on Corporate Governance, he was designated as Managing Director & Chief Executive Officer from July 31, 2008. Shri. M. Venugopalan made significant contribution towards the development, growth and visibility of the Bank. He could successfully position the Bank with capital and bring in strategic structural and technological changes to remain agile to meet todays competition. The Board acknowledges his valuable services.

The Board has appointed Shri. Shyam Srinivasan, as the MD & CEO of the Bank on the retirement of Shri. M. Venugopalan. RBI has also accorded their approval vide letter DBOD No: 1785/08.38.001/2010-11 July 29, 2010 for the appointment of Shri. Shyam Srinivasan,

Shri. P. R. Kalyanaraman has taken charge of the office of MD and CEO from 31st July, 2010, as an interim arrangement as approved by RBI (Shri P. R. Kalyanaraman has been designated as MD & CEO in charge during the interim period,) and will work subject to the overall control of the Board, until Shri. Shyam Srinivasan, the new MD & CEO designate assumes office.

Prof. A.M. Salim retired from the Board on August 22, 2009 after rendering 8 years of valuable service in the Board. The Board extends its appreciation to the meritorious services of Prof. Salim as a member of the Board of the Bank.

Executive Director, Shri. K. S. Harshan retired from the Bank after completing a five year tenure in the Bank, out of which three years as a member of the Board, The Board acknowledges his valuable services.

Shri. P C Cyriac and Prof. Abraham Koshy are due to retire by rotation at the forthcoming Annual General Meeting (AGM), as per the Articles of Association of the Bank, our Code of Corporate Governance and the provisions of the Companies Act, 1956, Shri. P C Cyriac and Prof. Abraham Koshy being eligible, offer themselves for re-appointment.

Shri P Surendra Pai is retiring at the forthcoming AGM, after completing his term of appointment of three years as approved by the Board at the time of his initial appointment and is not offering himself for re-appointment. The Board records its appreciation of the valuable services of Shri P Surendra Pai as a member of the Board of the Bank.

A shareholder of the Bank has expressed his intention to propose Dr.T.C.Nair as a candidate for the office of directorship in this vacancy and has given notice in writing along with deposit of Rs.500/- in terms of Sec.257 of the Companies Act, 1956.

The Board also co-opted Shri. P.C. John as Executive Director from 1st May 2010 and RBI approval has been received vide letter DBOD No: 21949/08.38.001/2009-10 dated June 24, 2010.

SUBSIDIARY

Fedbank Financial Services Ltd. is a fully owned subsidiary of the Bank. As required under Section 212 of the Companies Act, 1956, the financial statements relating to this company, the sole subsidiary of the Bank, for FY10 are attached.

ANNUAL FINANCIAL STATEMENTS AND AUDIT REPORT

As required by section 212 of the Companies Act, 1956, the Banks balance sheet as on 31 March 2010, its profit and loss account for FY10, and the statutory auditors report and statements required under the section, are attached.

STATUTORY AUDIT

M/s. Varma & Varma, Chartered Accountants, Kochi, and M/s. Price Patt & Co., Chartered Accountants, Chennai, jointly carried out the statutory central audit of the Bank. The statutory central/branch auditors audited all the branches and other offices of the Bank.

Special Reserve created under section 36(l)(viii) of the Income Tax Act 1961.

As per section 36(1 )(viii) of the Income tax Act, 1961, deduction is available for any Special Reserve created and maintained to the extent of 20% of the profit derived from the business of providing long term finance for industrial or agricultural development or development of infrastructure facility or housing in India. Because of Banks term lending for housing, power, bridges, roads and other segments of infrastructure in the last year and the availability of the tax benefit under the section 36(l)(viii) of the Income tax Act, the Bank has created a Special Reserve of Rs.31crore during this year (previous year Rs.l 1 Crore), being the eligible amount of deduction available under the said section.

JOINT VENTURE IN LIFE INSURANCE BUSINESS

The Banks joint venture Life Insurance Company, in association with IDBI Bank Limited and Fortis Insurance International N.V., namely IDBI Fortis Life Insurance Company Limited commenced its operation in March 2008. The Bank has infused Rs. 117 crore as its share of capital into this company holding 26% of the equity capital of the company. The performance of this Life Insurance Company is encouraging and it has a range of customer-centric products.

AWARDS RECEIVED DURING THE YEAR

- Most Efficient Bank in India in the large bank category by Business Today - KPMG survey

- Federal Bank was adjudged, as the best bank among the Old Private Sector Banks category in the survey conducted by the Financial Express in association with Ernst & Young.

- Federal Bank has won the Great Mind Challenge award for implementing the most innovative solution for business. This award was introduced by IBM for the first time in India for business development initiatives. Federal Bank is the first Bank in India to receive the award

- Ranked 8th among all banks in India, in a study conducted by Economic Times under four parameters of growth, efficiency, financial strength and shareholder returns. Of these, our Bank was ranked No. 1 in Efficiency and Financial Strength.

STATUTORY DISCLOSURE

STOCK EXCHANGE INFORMATION

The Banks equity shares are listed on:

1. Bombay Stock Exchange Limited Phiroze Jeejeebhoy Towers Dalai Street, Mumbai - 400 001.

2. National Stock Exchange Ltd. "Exchange Plaza"

Bandra - Kurla Complex Bandra East, Mumbai-400 051.

3. Cochin Stock Exchange Ltd. MES, DrPK Abdul Gafoor Memorial Cultural Complex 4th Fl, 36/1565, Judges Avenue, Kaloor, Kochi - 682 017.

The GDRs issued by the Bank are listed on the London Stock Exchange.

The annual listing fees have been paid to all the Stock Exchanges listed above.

The requirement of disclosure of steps taken for conservation of energy and technology absorption does not apply to the Bank.

Through its export-financing operations, the Bank supports and encourages the countrys export efforts.

The requirement of disclosure under section 217(2A) of the Companies Act, 1956, is given as a separate annexure.

PERSONNEL

As required by the provisions of Section 217(2A) of the Companies Act, 1956, read with Companies (Particulars of Employees) Rules, 1975, as amended, the names and other particulars of the employees are set out in the Annexure to the Directors Report.

DIRECTORS RESPONSIBILITY STATEMENT

As required by section 21 7(2AA) of the Companies Act, 1956, the Directors state that:

a. in the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures;

b. the Directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Bank at the end of the financial year and of the profit of the Bank for that period;

c. the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the Bank and for preventing and detecting fraud and other irregularities; and

d. the Directors have prepared the annual accounts on a going-concern basis.

Acknowledgement

The Board of Directors places on record its sincere thanks to Government of India, Reserve Bank of India, various State Governments and regulatory authorities in India and overseas for their valuable guidance, support and co-operation. The Directors also place on record the gratitude to investment banks, rating agencies and stock exchanges for their excellent support.

Your Directors record their sincere gratitude to the Banks shareholders, esteemed customers and all other well-wishers for their continued patronage. The Directors express their appreciation for the contributions from every employee of the Bank.

For and on behalf of the Board of Directors

Aluva P.C. Cyriac

August 6, 2010 Chairman of the Board

 
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