Federal Bank Ltd

To The Members

The Board of Directors, Federal Bank is indeed pleased to present to you the 80thAnnual Report of the business & operations along with the audited accounts for theyear ended March 31, 2011.

Financial Performance

Your Bank did well in the financial year 2010-2011. Before we go into the biggerdetails, here's a quick glance through the highlights of the year.

We achieved a commendable net profit figure of Rs. 587.08 crore. In the light of theyear's many challenges, including the stiff competition within the financial sector, theeconomy's inflationary conditions and the tight money policy reflected in the RBI'smonetary policy, this performance is indeed noteworthy. We recommend a dividend of Rs. 8.5per share.

Operating Profit

The operating profit for the year saw a 12.84% increase - from Rs. 1264.85 crore inFY2010 to Rs. 1427.25 crore in FY 2011.

The operating profit excluding trading gains increased by 19.39% from Rs. 1157.14 croreto Rs. 1381.49 crore.

Trading profit decreased to Rs. 45.76 crore from Rs. 107.71 crore.

The profit margin for the year increased to 12.85% from 11.05%.

The net interest income increased from Rs. 1,410.83 crore to Rs. 1746.58 crore but thefall in trading profit led to a decrease in the non-interest income from Rs. 530.91croreto Rs. 516.81 crore.

Net Profit

The year ended 31 March 2011 saw a 26.38% increase in the net profit. From Rs. 464.55crore in FY 2010 to Rs. 587.08 crore, we could display a substantial improvement in netprofit and the profit margin also increased to 12.85% from 11.05% This net profit wasafter taking into account a total provision of Rs. 840.17 crore out of which the provisionfor income tax is Rs. 314.73 crore.

With increased profits, return on average equity and return on average total assetsfollowed suit, from 10.30% to 11.98% and 1.15 % to 1.34% respectively.

Income Growth

In the year ended 31 March 2011, your Bank registered an 8.67% increase in total incomegenerated, growing from Rs. 4204.14 crore (FY2010) to Rs. 4568.84 crore (FY2011). Thisgrowth was primarily facilitated by the increase in interest income, which rose by 10.31%from Rs. 3673.23 crores to Rs. 4052.03 Crores.

The need to offer competitive rates towards maintaining/improving market share combinedwith increase in impaired assets, led to a fall in the yield on advances to 11.09% asagainst the 11.30% recorded on 31 March 2010.

Income from advances (Interest & exchange) as a percentage to total incomeincreased to 69.36% as on 31 March 2011 from 67.78% for the year ended 31 March 2010. Therate of return on advances (net of provisions) decreased to 9.37% from last year's 9.66%.The reduction in yield is partially contributed by the de-recognition of interest in freshNPA accounts and increased provisions. Yield on investments (excluding trading income)increased to 6.95% as on 31 March 2011 from 6.84% as on 31 March 2010.

Income from investments increased by 10.80%.

The volatility of the financial markets brought down the trading profit from lastyear's Rs. 107.71 crore to Rs. 45.76 crore, therefore leading to the decrease in otherincome.

The net interest margin for the year increased to 4.22% from 3.82% in FY 2010.

We could improve the interest margin, which is a major performance yardstick, bybringing down the cost of deposit.

Expenditure

Total expenses for the year ended 31 March 2011 increased by 6.88% from Rs. 2939.29crore to Rs. 3141.59 crore. Interest expenses increased to Rs. 2305.45 crore in FY 11 fromRs. 2,262.40 crore in FY 10. Rs. 2161.98 crore was the interest paid on deposits. We wereable to bring the cost of deposits down to 5.99 % from last year's 6.55%.

Cost of all funds (Deposits + Borrowings + Bonds) decreased to 6.11% from 6.62% as onMarch 2010. We could increase our low cost retail deposits and reduce the high cost bulkdeposits.

Average savings deposits have gone up to Rs. 8392.99 crore from Rs. 6915.20 crore lastyear. 32.19% of our total deposits are low cost deposits. Interest paid as percentage tototal income decreased to 50.46% from 53.81% in FY 2010.

Operating expenses increased to Rs. 836.14 crore from Rs. 676.89 crore.

Staff related expenses stands at Rs. 480.41 crore. The staff cost increased by 31.24%and we grew by 374 employees during the year. Wage revision, increase in DearnessAllowance and additional contribution towards pension liability of second optees ofpension led to the increase in staff expense.

The net liability arising on exercise of second option for Pension by employees (otherthan separated/ retired employees) is fully reckoned and disclosed as liability in theBalance Sheet. 1/5th of the said liability amounting to Rs. 33.71 crore, is charged to theProfit and Loss Account of the year and the balance unamortized amount of Rs. 134.72 croreis carried forward to be amortized equally over the succeeding four years. Employee andother costs as a percentage of average advances plus average investments increased to2.03% as on 31 March 2011 from 1.84% as on 31 March 2010. The staff cost as percentage tototal income increased to 10.51% from 8.71%.

The cost to income ratio stands at 36.94% as against 34.86% in March 2010.

Spread

Spread on advances to cost of deposits increased to 5.10% from 4.75% in FY 2010. Spreadon investments (gross) increased from 1.23% to 1.33% this year. The spread (net ofprovisions) on advances grew from last year's 3.11% to 3.38%.

Dividend

We have recommended a dividend of Rs. 8.5 per share as compared to Rs. 5 per sharedeclared for the last financial year. While recommending the dividend, we have taken intoaccount the profit that has to be retained for the future expansion and growth of the Bankand capital adequacy requirement. Retained earnings add to the net worth and is abenchmark of rating your Bank and gets reflected in the share price, which translate intobenefits for our investors in terms of capital appreciation on the shares held by them.

Investor Education and Protection Fund

As per the Companies Act 1956, dividend unpaid for more than 7 years from the date ofissue is to be transferred to Investor Education And Protection Fund. On 15.09.2010, wetransferred Rs. 2053825.00 to the Fund.

Growth in Core Business

Total business (deposits plus advances) increased from Rs. 63008.06 crore to Rs.74968.01 crore as on 31 March 2011.

Our deposits increased to Rs. 43014.78 crore registering a YoY growth of 19.29%.Advances touched Rs. 31953.23 crore, registering a YoY increase by 18.56%. But this growthis not reflected in the case of average deposits and advances, as the spurt in thebusiness was mainly during the second half of the financial year. We are taking measuresto ensure your Bank's consistent and sustainable growth across the year. We avoided bulkdeposits and gave thrust to retail deposits to bring down the cost.

The mix of average core deposits of SB, CD and Term Deposits improved to 23:5:72 from21:4:75 during FY 2010.

Your Bank's investments portfolio increased to Rs. 14537.68 crore showing a 11.36%increase on YoY compared to 7.72% in FY 2010. The growth of average investments on YoYregistered only 8.99% compared to 20.75% in FY2010. The volatility in the financialmarkets forced us to be cautious in terms of expanding the investment portfolio.

Loan Asset quality

Gross NPA as on March 31, 2011 stood at Rs. 1148.33 crore as against Rs. 820.97 crorein the previous year. Gross NPAs as percentage to Gross Advance stands at 3.49% as against2.97% in the previous year. Net NPAs stood at Rs. 190.69 crore (0.60% of Net Advances) asagainst Rs. 128.79 crore (0.48% of Net advances) in the previous financial year. Freshaccretion to NPAs during the period is the major reason behind the rise. We have takenseveral measures to contain impaired assets, including utilising SARFAESI proceedings moreeffectively to improve the recovery of Non Performing Assets and engaging recovery agentsafter complying with RBI guidelines, in respect of their codes of conduct. In adherence toRBI guidelines, negotiated settlement is permitted in deserving cases. To prevent theaccretion to the Non Performing Asset system, we've implemented stricter monitoring ofcredit and in the case of viable units, restructuring is permitted to overcome temporarydifficulties faced by them.

Provision coverage

As on 31.03.2011, the Bank held a total provision of Rs. 942.34 crores. This includes aFloating Provision of Rs. 179.52 crores. The total provision coverage for NPAs as on March31, 2011 is 82.06%. As per the extant RBI directive, Banks should hold minimum provisioncoverage of 70% including technically written off accounts. As on 31st March 2011,Provision Coverage Ratio of our Bank, including technically written off accounts, is89.77%. It indicates that the recovery of such assets will have a real favorable effect onour profitability as these provisions can be reversed to the profit and loss account uponrecovery of the non performing assets. Provisions as percentage of total income increasedto 10.94% from 7.50%.

Financial Inclusion

The first-ever Financial Inclusion Bank Branch in the state of Kerala, 'Grama Jeevan'branch was opened at Thuruthy in Vengoor West village, Ernakulam District. Allotted to theBank for Financial Inclusion, the branch offers full-fledged Banking facilities to thepublic, including round-the-clock ATM facility. Dr. D Subbarao, Hon'ble Governor ofReserve Bank of India visited the Grama Jeevan branch on the inaugural day itself.

"Federal Ashwas Trust" was established by the Bank with the primary objectiveof establishment and running of "Federal Ashwas Financial Literacy and CreditCounseling Centers" (FAFLCCs) to provide financial education and credit counseling tothe public. The branchless Banking model of Financial Inclusion is implemented throughindividual Business Facilitators (BFs). In this model, Customer Service Points (CSPs) aremanned by trained BF agents.

Capital adequacy

CRAR of the bank is 15.39% as per Basel I and as per BASEL II it is 16.79% as on31.03.2011 which is far in excess of the 9% stipulated by RBI and it adds to the strengthof our balance sheet.

Employee productivity

Business per employee increased to Rs. 9.23 crore from Rs. 8.13 crore in FY 2010.

Profit per employee increased to Rs. 7.26 lakh from Rs. 6.01 lakh as in the previousyear.

Share value dimensions

Increase in net profit brought about more earnings per share, from Rs. 27.16 in FY 2010to Rs. 34.32 and return on equity increased to 11.98% (10.30% in FY 2010). The bookvalueincreased to Rs. 298.67 as on 31 March 2011 from Rs. 274.24 as on 31 March 2010.

Expansion of Network

During the period, we grew by 71 branches and 73 ATMs. As on March 31, 2011, the totalnumber of branches and ATMs of the Bank increased to 743 and 805 respectively, as against672 and 732 in the last financial year.

To enhance the reach and geographical spread, your Bank seeks to add around 200branches, subject to approval from RBI based on the cluster based model. With thisapproach, rather than one or two branches, we will open a cluster of branches in apotential locality and thereby enhance visibility and build on the Bank's brand image.

Restructuring of the bank

We have constituted a Marketing Department to promote our products better and toenhance the brand image of them. We now have Credit Hubs to improve the quality of ourcredit portfolio and for better credit risk management. The present regional set up hasbeen given a facelift with the introduction of zonal set up and modified role of regions,to give focused attention on business development.

Challenges ahead of us

RBI is evaluating to deregulate interest rates on Savings Bank accounts. They havealready hiked the regulated interest rate on savings deposits from 3.5% to 4%. This wouldresult in higher interest expenses and maintaining the present level of interest spread,which is ahead of industry levels, will prove to be a challenge given the competitivescenario, where we have to offer best interest rates for quality advance customers.

Reserve Bank of India has been continuously raising the policy rate in order to containthe inflationary pressures of the economy and maintaining the present level of netinterest margin will be a real challenge.

Introduction of Basel III is under consideration by RBI. This may result in highercapital adequacy requirements. As we currently have a ratio of 16.79%, it wouldn'timmediately pose a challenge to us. But eventually, we may have to increase our capitalfor business growth. Working Group constituted by RBI has recommended Financial HoldingCompany structure for Banks and other financial institutions. Once the recommendations getimplemented, we will have to comply with the regulations.

Corporate governance

The Bank has adopted a Code of Corporate Governance, which simultaneously takes care ofthe interest of shareholders and other stakeholders, and provides for good management,adoption of prudent risk management techniques and compliance with required standards ofcapital adequacy. The code also aims at identifying and recognizing the Board of Directorsand the Management of the Bank as the principal instruments, through which good corporategovernance principles are articulated and implemented. This gives utmost importancetowards identifying and recognizing transparency, accountability and equality of treatmentamongst all the stakeholders, thus being in tune with statutory and regulatory structures.A copy of the Code is available upon request.

The corporate governance practices followed by the Bank are given in the annexure.

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 Governanceadopted by the Bank. The Board consists of 8 persons with rich experience and specializedknowledge in various areas of relevance to the Bank, including banking, accountancy,finance, industry, agriculture, and information technology.

Shri. Shyam Srinivasan MD & CEO joined the Bank on 23/09/2010 on retirement ofShri. M. Venugopalan, MD & CEO who retired on July 31, 2010 after his tenure ofappointment of 5 years and 3 months.

Shri. P. C. John, Executive Director, is whole time Director of the Bank. Excluding theMD & CEO and the ED all other members of the Board are Non-Executive and IndependentDirectors.

Shri. P. R. Kalyanaraman, Executive Director, retired on 1st January 2011 after histenure of appointment of 3 years.

Mr. Abraham Chacko has joined the Bank as Executive Director effective 21st of May2011.

Shri. P. C. Cyriac, Shri. Abraham Koshy and Dr. T. C. Nair were re-elected/ appointedas Directors of the Bank at its last Annual General Meeting held on 13th September 2010.

The Directors who are retiring at this AGM are Shri. P. H. Ravikumar and Shri.SureshKumar. Shri. P. H. Ravikumar will be retiring after rendering 7 years of valuable serviceto the Bank. Shri. Suresh Kumar being eligible have offered himself for reappointment.Shri. Nilesh. S. Vikamsey was appointed as a Director of the Bank, as an AdditionalDirector in the place of Shri. P. H. Ravikumar. A proposal moved by a member to appointShri. Nilesh S. Vikamsey as Director in this vacancy is placed before this AGM.

Shri. Suresh Kumar is an Independent Director on our Board. He holds a Bachelor'sdegree in Commerce (Hons.) from the University of Bombay and has completed advancedgeneral and investment management programmes at London, Wharton and Columbia Schools ofBusiness. He has been part of the Senior Management of Emirates Bank group since 1989.Prior to that he had held senior treasury and general management positions in Governmentof Dubai projects and the banking sector in India. He is a fellow of the Indian Instituteof Bankers and the founder/ past President of the Indian Business and Professional Councilin Dubai. He is also a member of the Regional Chief Executive Forum of the Institute ofInternational Finance (IIF). He is currently the CEO of Emirates Financial Services PSC .

He is also the Chairman of the Board of Directors of Fedbank Financial Services Ltd.

Shri. Nilesh S. Vikamsey is a Chartered Accountant with over 16 years experience, andis partner of Khimji Kunverji & Co., Chartered Accountants. At present he is a memberof many Committees of ICAI, including those noted below:

a) IFRS Implementation Committee

b) Disciplinary Committee (under Section 21B)

c) Accounting Standards Board

d) Auditing & Assurance Standards Board

e) Expert Advisory Committee

f) Professional Development Committee

g) Internal Audit Standards Board

Currently he is an Independent Director in the following Companies:

Listed Companies:

1) India Infoline Limited

2) Rodium Realty Limited

Private Companies:

1) HLB Offices & Services Pvt Limited

2) TruNil Properties Pvt Limited

3) BarKat Properties Pvt Limited

Subsidiary

FedBank Financial Services Ltd. is a fully owned subsidiary of the Bank. As requiredunder Section 212 of the Companies Act, 1956, the financial statements relating to thiscompany, the sole subsidiary of the Bank, for FY11 are attached.

Annual Financial Statements and Audit Report

As required by section 212 of the Companies Act, 1956, the Bank's Balance Sheet as on31 March 2011, its profit and loss account for FY11, and the statutory auditors' reportand 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 theBank. The statutory central/branch auditors audited all the branches and other offices ofthe Bank.

Special Reserve created under section 36(1)(viii) of the Income Tax Act 1961.

As per section 36(1)(viii) of the Income tax Act, 1961, deduction is available for anySpecial Reserve created and maintained to the extent of 20% of the profit derived from thebusiness of providing long term finance for industrial or agricultural development ordevelopment of infrastructure facility or housing in India. With the Bank's term lendingfor housing, power, bridges, roads and other segments of infrastructure in the last yearand the availability of the tax benefit under the section 36(1)(viii) of the Income taxAct, the Bank has created a Special Reserve of Rs. 36.56 crore during this year (previousyear Rs. 31 Crore), being the eligible amount of deduction available under the saidsection.

Joint Venture in Life Insurance Business

The Bank's joint venture Life Insurance Company, in association with IDBI Bank Limitedand Fortis Insurance International N.V. (now Ageas), namely IDBI Fortis Life InsuranceCompany Limited, renamed as IDBI Federal Life Insurance Company Limited, commencedoperations in March 2008. Currently the Bank has a total stake of Rs. 182 cr in the equityof the company holding 26% of the equity capital.

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.

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

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

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

Personnel

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

Directors' Responsibility Statement

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

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

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

c) the Directors have taken proper and sufficient care for the maintenance of adequateaccounting records in accordance with the provisions of this Act for safeguarding theassets 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 andoverseas for their valuable guidance, support and co-operation. The Directors also placeon record the gratitude to investment Banks, rating agencies and stock exchanges for theirexcellent support.

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

Statement pursuant to Section 217 (2A) of the Companies Act, 1956, read with theCompanies (Particulars of Employees) Rules, 1975, (forming part of the Director's Reportfor the year ended March 31, 2011) in respect of employees of the Bank.

# Net of Taxes Paid

@ Over and above this, an amount of Rs. 16.25 Lakhs was paid towards gratuity and Rs.14.95 Lakhs towards leave encashment to Shri. M. Venugopalan, at the time of hisretirement.

* Over and above this, an amount of Rs. 7.50 Lakhs was paid towards gratuity and Rs.4.80 Lakhs towards leave encashment to Shri. K. S. Harshan, at the time of his retirement.

a Over and above this, an amount of Rs. 3.55 Lakhs was paid towards leave encashment toShri. P. R. Kalyanaraman, at the time of his retirement.

++ Over and above this, an amount of Rs. 4,28,716/- was paid to Shri. P. C. Johntowards salary arrears pertaining to previous years of his employment with the Bank.