Federal Bank

The Directors take great pleasure in presenting the 77th Annual Report
 on the business and operations of your Bank together with the audited
 accounts for the year ended March 31, 2008.
 
 FINANCIAL PERFORMANCE
 
 The financial highlights of your Bank for the financial year 2007-08
 are given below:
 
                                                          Rs. in Crore
                                                For the year ended
 Financial Parameters                    March 31, 2008   March 31, 2007
 
 Net Interest Income                            868.01           732.39
 
 Fee and Other Income                           394.99           286.69
 
 Net Revenue                                  1,263.00         1,019.08
 
 Operating Expenses                             468.88           406.10
 
 Profit before Depreciation and Tax             529.37           422.20
 
 Net Profit                                     368.05           292.73
 
 Profit Brought Forward                          14.46            13.47
 
 Total Profit Available for Appropriation       382.51           306.20
 
 Appropriations:
 
 Transfer to Statutory Reserves                  92.02            73.19
 
 Transfer to Revenue Reserves                   131.74           130.21
 
 Transfer to Capital Reserves                    27.68            15.64
 
 Transfer to Special Reserves                    18.00            18.00
 
 Transfer to Investment Fluctuation Reserve      18.41            14.64
 
 Proposed Dividend                               68.41            34.24
 
 Provision for Dividend Tax                      11.63             5.82
 
 Balance Carried Over to Balance Sheet           14.62            14.46
 
 Financial Position:
 
 Deposits                                    25,913.36        21,584.44
 
 Advances                                    18,904.66        14,899.10
 
 Total Business (Deposits - Advances)        44,818.02        36,483.54
 
 Other Borrowings                               791.95           770.21
 
 Investments                                 10,026.59         7,032.66
 
 Total Assets (Balance Sheet Size)           32,506.46        25,089.93
 
 Capital                                        171.03            85.60
 
 Ratios:
 
 Return on Total Assets (%)                       1.34             1.38
 
 Return on Equity (%)                            13.56            21.27
 
 Earnings Per Share (Rs.)                        32.42            28.74
 
 Book Value Per Share (Rs.)                     229.53           175.48
 
 Operating Cost to Income (%)                    37.12            39.85
 
 Capital Adequacy Ratio (%)                      22.46            13.43
 
 The Bank could register all-round improvement in overall performance
 during the fiscal 2007-08. Business volume growth was comfortable with
 a substantial increase in total income.
 
 OPERATING PROFIT
 
 Operating Profit for the reporting period has recorded a growth of
 29.55%, touching an all-time high figure of Rs. 794.12 Crore.
 Corresponding figure for the financial year 2006-07 was Rs. 612.98
 Crore. Operating profit excluding trading profit rose to Rs. 719.07
 Crore for the financial year ended March 31,2008, an increase of Rs.
 155.38 Crore, recording a growth percentage of 25.35%. During the later
 half of the financial year, inflation had shown an upward bias. As part
 of its inflation control measures, The Reserve Bank of India hiked Cash
 Reserve Ratio of Commercial Banks. This resulted in liquidity crunch
 ushering in a rising interest rate regime. The hallmark of the business
 model adopted by the Bank during the year was to rely on retail
 deposits, minimising dependability on high cost bulk deposits and thus
 protecting the net interest margin. Thus the net interest income
 increased from Rs. 732.39 Crore to Rs. 868.01 Crore showing an increase
 of 18.52%.
 
 INCOME GROWTH
 
 Throughout the year, the Bank adhered to the policy of creating good
 quality high earning assets. This has improved earnings and the total
 income for the financial year ended March 31, 2008 was Rs. 2,910.43
 Crore against the previous years figure of Rs. 2,104.04 Crore. The
 increase in total income was Rs. 806.39 Crore thus clocking a growth
 percentage of 38.33%. Total income from advances touched Rs. 1,834.79
 Crore from last years figure of Rs. 1,293.58 Crore with an increase of
 41.84%.  Income from advances net of provisions for non-performing
 assets (Rs. 192.05 Crore) amounted to Rs. 1,642.74 Crore, an increase
 of 36.41% from last years figure of Rs. 1,204.29 Crore. Other income
 amounted to Rs. 394.99 Crore with an increase of 37.78%. Income from
 investments recorded an increase of Rs. 173.97 Crore and touched Rs.
 693.23 Crore. Net income from investments during the year increased to
 Rs. 661.71 Crore from last years figure of Rs. 457.34 Crore. aggregate
 income from advances and investments recorded a growth of 39.45% and
 stood at Rs. 2,528.02 Crore against Rs. 1,812.84 Crore of the previous
 year. Yield on advances increased to 11.46% from 10.16%. Return on
 advances plus investments improved to 10.37% from 9.49%. In spite of
 the adverse movement in the cost of deposits, net interest margin has
 shown a marginal increase to 3.49% during the year from 3.47% of the
 previous year.
 
 The net revenue, that is the net interest income plus other income, of
 the Bank increased by Rs. 243.92 Crore to Rs. 1,263 Crore as on March
 31, 2008 from Rs. 1,019.08 Crore as on March 31, 2007, registering a
 growth of 23.94%. The Bank made special efforts to improve the
 fee-based activities to increase earnings from the segment. The
 realisations from written off advance accounts amounted to Rs. 101.32
 Crore during the year. The Bank continued to be a major player in
 remittances business and the total remittances through Vostro accounts
 increased from Rs. 6,969 Crore during 2006-07 to Rs. 7,954 Crore in
 2007-08.
 
 EXPENDITURE ANALYSIS
 
 Total expenses for the financial year 2007-08 increased to Rs. 2,116.31
 Crore from Rs. 1,491.06 Crore, registering an increase of 41.93%. Cost
 of deposits has gone up by 117 bps to touch 6.72%. In spite of the
 general increase in the interest rate of deposits in various time
 buckets, which was very sharp during the last quarter due to tight
 liquidity conditions that prevailed, we could contain the cost at
 6.72%. Operating expenses increased by Rs. 62.78 Crore and amounted to
 Rs. 468.88 Crore. Employee costs came to Rs. 271.23 Crore during the
 year compared to last years figure of Rs. 260.45 Crore. Other expenses
 came to Rs. 197.65 Crore. Employee costs as percentage to total income
 has come down to 9.32% for the year ended March 31, 2008 from 12.38%
 for the year ended March 31, 2007.
 
 NET PROFIT ANALYSIS
 
 Net profit of the Bank has further improved for the second year in
 succession. The net profit for the year increased to Rs. 368.05 Crore
 as on March 31, 2008, an increase of Rs.  75.32 Crore from Rs. 292.73
 of financial year 2006-07. The percentage increase was 25.73. Total
 provisions touched Rs. 426.07 Crore, an increase of Rs. 105.82 Crore
 from Rs. 320.25 Crore of the last financial year. Provision for
 investment losses has decreased by Rs. 30.40 Crore to Rs. 31.52 Crore.
 Fresh provision for loan losses for the financial year 2007-08 was Rs.
 192.05 Crore compared to Rs. 89.29 Crore for the financial year ended
 March 31, 2007. Provision for taxes at Rs. 132.10 Crore compared to Rs.
 105.50 Crore during the last financial year. Return on equity has
 decreased to 13.56% from 21.27%, because of increase in net worth.
 Earnings per share stood at Rs. 32.42 as against Rs. 28.74 of the last
 financial year. The return on assets was at 1.34%.
 
 Book value has improved substantially touching Rs. 229.53 from Rs.
 175.48 as of March 31, 2007.
 
 DIVIDEND
 
 Your Bank aims to balance the multiple objectives of rewarding
 shareholders with cash dividends and of retaining capital to support
 future growth and to add further value to the shareholders.
 
 In view of the satisfactory performance, the Board of Directors
 recommends dividend of 40 % on the increased paid up capital of the
 Bank, thus maintaining the same percentage of dividend as that of
 previous fiscal.
 
 GROWTH IN BUSINESS
 
 The Bank has been following prudent business policy throughout the
 year. The underlying principles of this policy are efficient cost
 structure, competitive pricing, asset quality, retention of existing
 customer base and expanding our reach to new areas and new customer
 segments. The policy on deposits was to increase low cost retail term
 deposits and to reduce dependence on high cost bulk deposits. Advances
 plus deposits of the Bank grew to Rs. 44,818.02 Crore during the year
 from Rs. 36,483.54 Crore as on March 31, 2007, recording a growth of
 22.84%.  Deposits registered a growth rate of 20.06% and touched a
 figure of Rs. 25,913.36 Crore against last years figure of Rs.
 21,584.44 Crore. In Savings Bank deposits, the Bank could attain a
 quantum increase of Rs. 806.93 Crore and the figure stood at Rs.
 5,036.60 Crore compared to last years figure of Rs. 4,229.67 Crore,
 registering an increase of 19.08%. The interest differential between
 savings Bank deposits and Term Deposits widened and this hampered the
 efforts to increase the Savings Bank.  In current deposits, the Bank
 did well and improved the figure to Rs. 1,321.17 Crore from a base of
 Rs. 1,108.80 Crore. The NRI deposits of the Bank stood at Rs. 5,163.56
 Crore, showing a decrease of Rs. 351.34 Crore from the previous
 financial year. Advances increased by 26.88% to move to Rs. 18,904.66
 Crore from a base of Rs. 14,899.10 Crore. Net investments have grown to
 Rs. 10,026.59 crore from a base of Rs. 7,032.66 Crore, registering a
 growth rate of 42.57%. The size of the balance sheet for the year was
 Rs. 32,506.46 Crore against Rs. 25,089.92 Crore as on March 31,2007
 with a growth rate of 29.56%.
 
 Performance of the Bank in NPA management during the FY ended on
 31.03.2008 was commendable. Gross NPAs as on 31.03.2008 stand at Rs.
 468.58 Crore as against Rs. 450.80 Crore in the previous year.  Gross
 NPAs as percentage to Gross Advances came down to 2.43 % from 2.95% in
 the previous year. Net NPAs were reduced to Rs. 43.20 Crore (0.23% of
 Net Advances) from Rs. 65.05 Crore (0.44% of Net Advances) in the
 previous financial year. The Bank held Total Provision of Rs. 422.57
 Crore as on 31.03.2008 as against Rs. 377.51 Crore in the previous
 year. Total provision coverage for NPAs increased to 90.18% from 83.74%
 of the previous financial year. Recovery tools like Recovery Camps, Lok
 Adalaths and Negotiated Settlement with the delinquent borrowers
 supplemented in maximising recoveries.
 
 Provisions of SARFAESI Act were invoked to boost recovery in
 appropriate cases.
 
 EXPANSION OF NETWORK
 
 During the financial year, the Bank added 67 new branches crossing the
 600 mark and opened 141 new ATM centres. As on March 31, 2008, the
 total number of branches and ATM centres of the Bank increased to 603
 and 532 respectively, as against 536 and 391 of last financial year.
 
 CAPITAL ADEQUACY
 
 The Capital to Risk-weighted Assets Ratio (CRAR) as on March 31, 2008
 stood at 22.46%. Tier-1 CRAR (core CRAR) is19.09%.
 
 BUSINESS PRODUCTIVITY
 
 The business per employee and profit per employee increased to Rs. 6.40
 Crore and Rs. 5.30 lakh respectively as on March 31, 2008 as against
 Rs. 5.44 Crore and Rs. 4.43 lakh respectively of March 2007.
 
 EXTERNAL RATING
 
 The certificate of deposits and short-term deposits of the Bank are
 rated PI + by Crisil. Tier II subordinated debts issued by the Bank
 during December 2006 are rated AA by Care and AA-(ind) by Fitch.
 
 CORPORATE GOVERNANCE
 
 Pursuing its continued commitment to maintain highest levels of ethical
 standards, professional integrity and regulatory compliance in
 corporate governance, the Bank followed sound corporate governance
 practices, which are detailed in the annexure.
 
 BOARD OF DIRECTORS
 
 The Board consists of nine members, of which Chairman & Chief Executive
 Officer (Shri. M. Venugopalan) and Executive Director (Mr. K. S.
 Harshan) are whole time directors and all others are Non-Executive and
 Independent Directors.
 
 CA S. Santhanakrishnan and Prof. A. M. Salim, Directors, are due to
 retire by rotation at the forthcoming Annual General Meeting (AGM). As
 per the Articles of Association of the Bank and the provision of the
 Companies Act, 1956, CA S. Santhanakrishnan and Prof. A. M. Salim,
 Directors, being eligible, offer themselves for re-appointment.
 
 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 2008 are attached. FedBank Financial Services Ltd.
 acts as the marketing arm of the Bank.
 
 ANNUAL FINANCIAL STATEMENTS AND AUDIT REPORT
 
 As required by Section 212 of the Companies Act, 1956, the Banks
 Balance Sheet as on 31 March 2008, its profit and loss account for the
 financial year 2007-08, and the statutory auditors report and
 statements required under the section, are attached.
 
 AUDITORS
 
 M/s Sundaram & Srinivasan, Chartered Accountants, Chennai, together
 with M/s Brahmayya & Co., Chartered Accountants, Chennai are the
 retiring Joint Central Statutory Auditors of the Bank who have been
 functioning in the said capacity for the last four years. As per
 Reserve Bank of India guidelines pertaining to the appointment of
 Central Statutory Auditors of banks, the Central Statutory Auditors
 shall not be appointed for more than four years continuously. M/s
 Sundaram & Srinivasan, Chartered Accountants, Chennai, together with
 M/s Brahmayya & Co., Chartered Accountants, Chennai will, therefore,
 cease to be the auditors of the Bank at the close of business of this
 meeting. The Audit Committee of the Board selected a panel of reputable
 audit firms based on selection criteria determined by the Committee
 taking into account the RBI requirements for selection of auditors for
 Banks. The Committee recommended the appointment of M/s Varma & Varma,
 Chartered Accountants, Ernakulam and M/s Price Patt & Co., Chartered
 Accountants, Chennai from among the panel. The Board endorsed the
 panel, and has sent to RBI for approval. The Board, subject to RBIs
 approval, recommends the appointment for your approval
 
 STATUTORY AUDIT
 
 M/s. Sundaram & Srinivasan, Chartered Accountants, Chennai, and M/s.
 Brahmayya & Co., Chartered Accountants, Chennai, jointly carried out
 the statutory (central) audit of the Bank. The statutory central/branch
 auditors audited all our branches and other offices.
 
 Explanations are offered below on the Auditors qualification on Item
 No. 2 - Reconciliation in Notes on Accounts - Schedule 19 to the
 audited Balance Sheet.
 
 The outstanding unadjusted entries as on 31 March 2008 in the
 reconciliation in inter-branch accounts adjusted till this date have
 not materially affected the published accounts. Reconciliation of
 outstanding entries and adjustments/eliminations has been done as per
 the relevant RBI directive on an ongoing basis. Every effort is being
 made to adjust the outstanding entries in these accounts within the
 shortest time.
 
 Special Reserve created under Section 36(1 )(viii) of the Income Tax
 Act 1961
 
 As per Section 36(l)(viii) of the Income Tax Act, 1961, deduction is
 available for any Special Reserve created and maintained to the extent
 of 40% 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 the Banks term
 lending for housing, power, bridges, roads and other segments of
 infrastructure in the year under report, it was decided to avail the
 tax benefit under the Section 36(1 )(viii) of the Income Tax Act.
 Accordingly, the Bank has created a Special Reserve of Rs. 18 Crore
 during this year (Rs. 18 Crore in the previous year), 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 obtained all the
 statutory/regulatory clearances and commenced its operation in March
 2008. The Bank has infused Rs. 52 Crore as its share of capital into
 this company.
 
 REPRESENTATIVE OFFICE IN U.A.E
 
 The Bank opened its Representative Office at Abu Dhabi, Capital of
 U.A.E. The Representative Office is operating as the gateway of the
 Bank to the whole of Middle East and also as an interface between its
 existing customers of GCC countries and its Branches/Offices in India.
 
 BULLION TRADING
 
 The Bank has started sale of gold coins and ingots through its selected
 branches and expects to generate more income out of this business.
 
 CAPITAL EXPANSION THROUGH RIGHTS ISSUE
 
 During the year under review, the Bank had successfully completed its
 Rights Issue of 8,56,58,955 new equity shares of Rs. 10/- each at a
 premium of Rs. 240/- per share on rights basis from the existing equity
 shareholders in the ratio 1 equity share for every 1 equity share held
 as on the record date. The issue was subscribed fully and, as a result,
 the Bank was able to enhance the net worth by Rs. 2,135.74 Crore. The
 Board of Directors takes this opportunity to thank all the investors
 for the confidence reposed in the Bank and its management.
 
 AWARDS RECEIVED DURING THE YEAR
 
 I.  In the annual survey conducted by Business Today in association
 with KPMG Consulting, Federal Bank was adjudged the most efficient Bank
 in the large Bank category. The Bank has won this award for second year
 in a row.
 
 II.  Survey conducted by The Financial Express in association with
 Ernst & Young, on the basis of five key parameters, viz. strength and
 soundness, growth, profitability, efficiency and credit quality,
 adjudged Federal Bank among top three Banks in the Old Private Sector
 Banks category. This recognition has also been bestowed for a second
 time.
 
 III.  Federal Bank won the Best Core Banking Project Award 2007 at
 the Asian Banker IT Implementation Awards 2008.
 
 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, 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 professional securities
 market segment of 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.
 
 The Bank supports and encourages the countrys export efforts through
 its export-financing operations.
 
 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.
 
 DIRECTOR RESPONSIBILITY STATEMENT
 
 As required by Section 217(2AA) of the Companies Act, 1956, the
 Directors state that:
 
 a) The applicable accounting standards have been followed along with
 proper explanation relating to material departures in the preparation
 of the annual accounts;
 
 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
 
 Your Directors would like to place on record their sincere gratitude to
 the Reserve Bank of India and other government and regulatory agencies
 for their support and guidance. Your Board places on record its sincere
 gratitude to the Banks shareholders, customers and well wishers for
 their goodwill, patronage and support.  The Board also takes this
 opportunity to express its appreciation of the dedicated services and
 contribution of the members of staff for the overall performance of the
 Bank.
 
                             For and on behalf of the Board of Directors
 
 Place: Aluva                                 M. Venugopalan
 Date : June 6, 2008                             Chairman