Federal Bank - Q1 FY24 - Quarterly Earnings Call

Among the key takeaways, the call does give a decent overview about the management's guidance on margins, deposts and credit costs. But given the high number of questions asked around the guidance for margin expansion, there seems to be a gap between the analysts understanding and management communication around the maths behind the guidance on margin expansion in the coming years. Would be interesting to watch how the business unfolds in the coming quarters.


7/28/20236 min read

Business mix:

1. Are we planning to increase the proportion of high yielding segment going forward? - There are three guidelines, retail, wholesale, 55%, 45%. Unsecured as a part of the total portfolio, not more than 10%. And no segment will be more than 15% of the bank.

2. Could you provide color on the MSME segment for average ticket size, yields, sector, geography mix, etc? - MSME goes for all verticals including business banking and corporate banking. We are comfortable with FMCG suppliers, vendor/ suppliers to large OEMs, chemicals, etc. The vendors and the dealers of the large corporates is what we are tapping on and going ahead. The MSME under BuB, for example, the ticket size would be about 70 odd lakhs. Average ticket size, about 10.5% yield, etc. The average ticket size of the medium and the small category of the MSME would be in the region of about INR15-17 crore

3. What is the loan mix by benchmark? - The repo link is around 49% plus. Fixed is 27%. And the MCLR is about 14%. Staff is about 5.5%, and the rest base rate foreign currency.

4. In general for the sector, there has been some, even based on sectorial data, some moderation in growth in mortgages, in home loans. Is it just seasonal or what is your take? - Our home loans are quite concentrated in five, six geographies. We are not very deeply into every part of the country in home loans. In those geographies, we haven't seen any slowdown. Yes, there is competitive pressure on pricing, particularly new sourcing in some of the metros.

5. On the demand environment, if you could just kind of briefly kind of highlight across the segments, how is it shaping up? - We saw good traction in Q1. Even in Q2, just two weeks have passed, our credit committee has met four times. So we are seeing reasonable momentum in most of our businesses in volume and at least new proposals coming in.

Credit Costs/ Slippages:

6. Credit performance in retail high-yield book and the related slippages? - Higher slippage in retail this quarter was due to end of covid related moratorium. Not seeing any concerning trend in the secured book and the unsecured books hasn’t shown any adverse outcome.

7. Was there any interest reversal on the NPAs in the current quarter? - Yes, about 10-15 cr

8. Since retail NPA has been higher for this quarter. Which segment under retail has shown this kind of a stress? - Higher slippages on Retail (secured home or LAP).

9. How much will be the outstanding provisions on the standard restructured book? - At the peak, the restructured book was INR3,600 crores -- so we had made that plus we made a significant overlay of another 10%.


10. What kind of deposit growth we are seeing in semi-urban rural area and what % is outside of Kerala? - 70% of our network is in semi-urban rural across India and Kerala doesn’t have any rural. 45% deposits outside of Kerala. Next big geography outside Kerala is Tamil Nadu. 15% of incremental deposits are coming from FinTechs partners from 18000 pincodes across India (India has a total of ~19000 pincodes).

11. What would be the incremental cost of term deposits and what would be the stock cost of term deposits? - It should be another probably around 10 bps increase from where we are currently. Stock is 6.4 and incremental is 6.5.

12. What could be the proportion of deposits in wholesale and retail going forward? - 85% - 88% retail deposits.

13. What is majorly giving us the confidence that cost of deposits should be lower in Q2 compared to that of Q1? - Our overall cost of funds will move up from ~530 to ~540 in Q2, but the yield on advances expansion will be higher.

14. As per the industry trend, CASA-plus retail term deposit has been coming down. What gives you confidence that it will go up? - Our guidance is 85% to 95% and in order to support our credit growth in an era where deposit costs were higher, we had to get term from retail customers. We have not done bulk borrowings in the market.

15. Could you provide the blended savings account cost? - 3.2 for the savings and blended.

16. Do you see a situation, possibly when growth picks up in the second half, that banks may have to hike deposit rates through special schemes, even though RBI does not hike repo rates? Or does liquidity look like comfortable and sustaining? Because if PSU banks start attractive schemes, they had started festival schemes for deposits even in October last year like that? - No, I think that challenge is an ongoing challenge. It could be PSU. It could be another private sector bank. But if credit expansion happens, deposit automatically follows.

17. Why are we seeing certain level of slowdown in NR deposits? - We did see post COVID remittance is coming in, but not all of it translating into deposits, particularly this -- non FCNR. In NRE savings and NRE terms, we have ~8.4% of India's share. We have observed that remittances are coming, but not translating into deposits as it did in the past period.

Margins/ Yield:

18. What gives us the confidence that the second quarter onward, we will see a margin expansion? - Yield on advances are expected to increase while cost of deposit will moderate going forward.

19. Share of high yield segment in total advances is 33% but ideally they should have a higher component of share in the total revenue which is currenty 30%. Why is that the case? - Such high yielding products have cost of origination associated with them in the initial years and that’s what is being reflected in the revenue here.

20. We don't see any benefit from MCLR repricing and also from increasing proportion of high yielding assets. Is it due to competitive pressure in other segments? - Our model of the bank is to ensure that we go after the better rated segments in every segment and be comparatively priced. So we may not enjoy high margins on that count but get good credit quality and fee income increase.

21. Going forward, despite the increasing proportion of high yielding expected, will we not see too much of improvement on the advanced side because of maybe moving towards the better rated customer segment? - The margin expansion will be there and is expected to go up by 7-8 basis points in this quarter, the quarter that succeeds

22. As the repricing has already been done by now, like hereafter only the mixed change will contribute to higher yields? - Mixed change and incremental volume coming at pricing higher than what it was traditionally is expected to expand the yield and advances.

23. Are you also considering capital raising into calculations when expecting the margin expansion? - We have not taken capital raising into considerations for this.

24. Any guidance on NIM? - First quarter 315, we think second quarter onwards, it will start picking up. We still think the full year NIM will be closer to 330.

25. For a 250 basis points increase in lending rates, the corresponding increase that we've seen so far is about 130 basis points. Where are you seeing the pressure on the lending side from a pass-through perspective? - I don't believe you can just transfer it entirely and expect because we are playing in a very competitive environment. We did think that about 150 basis points is a maximum that can pass through.

26. Have we increased any spread on the fixed rate loans from March end to June end? - Only when it comes up for renewal

27. If there is no change in MCLR, repo, fix rate book then what is driving the increase in yield for the quarter? - Part is composition change, part is fresh booking as well.

28. How one should see the ROA guidance going forward in the next 2 years? - we ended last year at 128. We said 78 basis point improvement in FY '24 and a similar repeat in FY '25.


29. How would you think about opex growth, especially employee cost growth this year? - People cost is pretty much running on course. I think on the opex two parts, the staff and the other opex. Staff cost what we have seen is the impact of the yield movements for the pension gratuity provisioning, which is actually a liability, which we have taken in. And that will move subject to the yields movement during the next few quarters. And also in Q1, we traditionally see a slightly higher uptake on staff cost on leave encashment, leave travel and all that stuff.

30. Will we be able to sustain the momentum on the fee side that we are saw in this quarter? - Based on the mix and fee income for the quarter, it is distinctly pointing out the areas and many are volume and scale related. They are not one-off or unique to a quarter. In fact, we are pursuing fee as a share of assets closer to 1%.