Ladies and gentlemen, good day, and welcome to the Q2 FY 2023 earnings conference call of The Federal Bank Limited. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Souvik Roy, Head, Investor Relations, The Federal Bank Limited. Thank you, and over to you, sir.
Thank you so much, Aman. Good evening, everyone, and thanks for joining us on this call to discuss our Q2 numbers. I'm sure you all had a chance to go through our numbers and our investor deck for the quarter that went by. This has been a very good quarter for the bank. We continued to move forward with clarity and intent in a quarter where the external signals were sort of mixed. We saw strong momentum in credit growth, which was across business verticals. Our balance sheet crossed the milestone figure of INR 3.5 lakh crore. We also clocked the highest ever operating profit, highest ever net profit. We saw better NIMs, better asset quality, and a multi-year high of ROA and ROE. We continued to grow faster and gain market share in our identified segments that provided us better risk-adjusted returns.
On call today, we have our MD, Mr. Shyam Srinivasan, our EDs, Mr. Ashutosh Khajuria and Ms. Shalini Warrier, along with our Group Presidents, Mr. Harsh Dugar, and our CFO, Mr. Venkatraman Venkateswaran, along with other senior officials of the bank. Without further ado, I would hand it over to our MD for his opening remarks, and we will follow it up with a question and answer session. Thank you so much, and over to you, sir.
Thanks, Souvik, and good evening, everybody, for coming on the call. Like Souvik pointed out, we did have a good quarter. I'm sure you've all had a chance to look through the numbers. Our net profit at INR 704 crores was clearly the highest ever in the history of the bank. That's something that we hope will be, I can say, in every call, that this quarter was the highest. That suggests the trend lines are encouraging. Our underlying momentum is strong. It's been broad-based and widely between both wholesale and retail. We've been able to see traction across, and market share gains are visible on the credit side. It is, you know, I'm not going to elaborate on the external environment and the world is going through turbulence.
Most of you are smarter and you know have a better sense of it and have great analytical skills and knowledge of that. I'd only say that from our point of view, our efforts have been strong. We'll continue to be stronger and better in the quarters ahead. We are encouraged by the quarter that went by or the quarters that have gone by. The team remains quite focused on what we should accomplish. At the beginning of this financial year, we had said that our focus remains to ensure that our ROA expansion is well and truly on course and the exit ROA, we thought we would be around the 1.15 mark, and I'm happy that we are able to upfront that.
Therefore, we are thinking that this year, the 1.15% will be more like 1.2% for the full-year with an exit rate closer to 1.25%. Those improvements are driven broad-based across income expansion, material and well-managed cost structure, and our strong area being credit portfolio management is playing out quite well. I think on this call, instead of me speaking for long, we'll be happy to take questions. It suffices to say that it's been a good quarter. We're encouraged by the developments. We are mindful of the challenges in the environment, but it has been no different for very long. I think the bank is well equipped to deal with these challenges. We haven't been very extravagant on underwriting credits that are dangerous.
I think we will live through tough phases and continue to grow. There are challenges in the environment on ensuring that the deposits, deposit growth, is good enough to match the credit demand. We think we have a good and well-constructed models that will help us deliver on both credit and deposit growth. Without much ado, let me just hand it over back to the operator and request questions to come in. Like Souvik mentioned, the entire senior team is with me on the call. We'll be able to answer questions of any nature that comes through in this call. Thank you very much and good luck.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is on the line of Mahrukh Adajania from Nuvama. Please go ahead.
Yeah, hello, sir. Congratulations.
Thank you.
My first question is on your outlook for margins, given that deposit growth for the whole sector is kind of lagging loan growth. How do you see margins pan out in the next two to three quarters? Given that, you know, some of the MCLR book will not yet be repriced. That is my first question.
I think, Mahrukh, the answer is you saw Q2, the margin expansion play through. 65% of our book is either external benchmark and/or MCLR-linked. We pass through, particularly on the repo rate, almost instantly as the MPC announces rate. This quarter, we saw the benefit of it, the full all the increases of the Q1 pass through. Our margin expansion is driven by not just the rate increase, but also by the average earning assets. It's also influenced by lower slippages. Combination of that should help us deliver on the margin number, which we've been guiding for. I at the opening of the call did mention that our ROA expansion is more visible, and that's driven by margin expansion.
Margin expansion, we've been guiding for something for the full-year around 3.25%, and we believe that'll be closer to 3.30% now.
Okay. That's for the full-year, which, but you've already hit that rate this quarter.
Yeah, we have a lag of the first quarter to catch up, right, for the full-year rate to be 3.25%+.
Yes. Got it, sir. Well, my next question is, if at all there could be any quantification in terms of contribution of your fintech partnerships to total deposits or liabilities or even assets, if at all, any such number would be available?
In the interest of privacy of our partners, we don't share those numbers. You may have seen in the deck, the numbers we have shared in, it's indexed and you will see a very rapid growth. I can also point out, you would have seen in our deck the other income and particularly card fee income growing up quite substantially. The run rate, as you know, we have a very effective partnership on the credit side with one of the fintechs, which is doing remarkably well. That is kicking in on the fee other income and the fee income side. On the liability side, we are building up a large base of clients. Balances on the incremental flow of deposits on savings, we are seeing about 10%-12% of incremental deposits comes through the fintech partnerships.
It's 10%-12% of the deposits.
Of the incremental flow. We have a large.
Incremental deposits. Yes. Yes. Yes. Okay. My last question is on your employee expenses. Obviously your employee expenses have seen a modest growth. Last quarter there was a degrowth. This quarter there's not too much growth also because interest rates are rising. But in terms of the retirement benefits, what percentage of your total employees would be unionized and receiving defined benefits?
I think, Mahrukh may have said that all our workforce who joined us after April 1, 2010, which is about 7,500 employees or more, are on NPS scheme, so that's a defined contribution. Those prior to that is defined benefit. That's about 3,500 employees. Now 3,500-4,000 employees.
Okay. 3,500-4,000 employees. Okay.
Maybe less. Maybe 3,000.
Okay. Thank you, sir. Thank you so much.
Welcome.
It's 3,900, no?
Yeah. Okay.
Thank you.
Thank you. The next question is from the line of Kashyap Javeri from MK Investment Managers. Please go ahead.
Thank you very much for the opportunity. I have just one question. If I look at your margins this quarter, because of the increase in the yield on advances, higher, you know, than the cost of deposit, we have seen a fair bit of margin expansion here. Next year when the deposit rate takes a lead over the, you know, the yield, in terms of probably increase, what are the levers available to maintain margins or at the current level?
I think the answer to that is partly in the question, right? In the sense that as the rate increase happens, the credit pass-through is higher and faster, so deposit will lag. If you talk of the next 12 months and assume there are two rate increases or whatever the rate increases are, then that will pass through, right? Average rate increases, yield increases. Slippages have been well controlled, so the reversal of interest income will be lower. It'll accommodate whatever the increased deposit costs are. The blended mix, and which is why we're not going over the top and saying margin expansion is endless.
Given the levers that you mentioned about, would we be able to retain the margins where they are?
Well, I've given a guidance. That's what I'm saying, no? I've said we are at around 3.30% this quarter, and we think the full-year number will be 3.27%-3.30%. Suggest that we will, right. The mix of business, you-
Okay.
I think we have a slide on showing the mix of business also in the investor deck.
Right.
How some of our newer higher margin businesses are beginning to take shape and traction is coming through and what share of new business they are and what share of the income, new income they are. There's a pie diagram.
Yeah. If I can just squeeze in one more question. I think your fee income this quarter has also seen fairly strong growth. What would be the reason for, let's say something like, you know, loan processing fees and all, you know, jumping fairly high and what is the outlook for next year?
Consistent. If you've seen our fee income, particularly since you mentioned loan processing fees, it's been growing up. As volume of credit picks up, that is directly reflective of it. As we do good business on the corporate side, they are able to generate fee income on the corporate side when particularly when you're lending to top corporates or very good corporates, where pricing on the credit side is challenged, where our teams are able to get constructive fee income from the customers on a blended basis.
Just like the yield on advances, on the fee side also, you know, the scale is tilted in our favor. It's easy to pass on the fees. I mean, there is no, you know, competition undercutting on that side either.
I'm sure you have been in the market long enough. There's nothing that is free or easy, Kashyap Javeri. Everything is a lot of our negotiation and client engagement, but it also ensures that the relationship and the capability of the teams on the ground. I would believe that it can't be easy.
Sure. That's it from my side, sir. Thank you so much.
You're welcome.
Thank you. The next question is on the line of Sagar Shah from PhillipCapital. Please go ahead.
Yeah. Good evening, sir. Actually, I have just couple of questions. My first question was related to your, to our average cost on borrowings and deposits, actually. It has gone up by around only 20 to around 4.4%. In the last quarter, you had guided that, in spite of the 90 basis points repo rate hike, we had passed down on the savings around only 20-25 basis points due to the ALM committee. Going ahead, do you see our average cost on borrowings and deposits going up in the H2 FY 2023?
My second question was that if we compare our deposit growth actually, as compared to March 2022 and H1 FY 2023, our deposit growth has lagged actually the advances growth. Do you expect our deposit growth to be better in H2 FY 2023 versus H1? These are my two questions.
No, I think the deposit growth, lagging H1, I mean, credit growth is, probably an industry phenomenon. We have to be balanced about pricing for deposits and calibrating, the cost of resources, which we do constantly.
The team, you know, continuously evaluates at what price point. When we are at a CD ratio, you know, in the late 70s, early 80s, we have enough opportunity to grow. As we get closer to the mid-80s, we have to be sort of build for pricing for deposits to grow that, and fund our credit growth. As we look into quarters three and four, we believe deposit growth will be in the teens, maybe early teens, and credit growth will be in the late teens.
Between a mix of borrowings, the credit growth, to fund the credit growth, borrowings and deposits, we should be able to ensure that the book remains, well, you know, well taken care of. Our cost of deposits, you know, between Q1 and Q2, the pickup was. I think you also asked about the savings. We realize passing on all the rate increase to the savings rate. It's reasonably price elastic. Term tends to be more price elastic, so we are pricing term appropriately. In certain tenors, we remain attractive, but we don't think we will be, you know, sort of leading the price war. We will be quite competitive but selective.
How much do you think our cost of borrowings and deposits on a blended basis will go up in going ahead?
I think the answer would be the overall NIM number, as I mentioned, factors are increasing cost of resources will be.
Okay. Thank you so much.
Could I request you to go on mute? I think you're in some public place, please. Yeah, go ahead, please. Go ahead, please, operator.
Yes, sir. Thank you. The next question is from the line of Simran from Omkara Capital. Please go ahead.
Yeah. Thank you for, you know, giving me a chance. Sir, first of all, congratulations for a great set of numbers. There are two questions which I want to ask. First of all, in the gold loan segment, what's the, you know, trend, you know, going there, in this particular business segment? Means how the customers are, you know, giving back, you know, money to you. I'm asking in terms of the NPLs in the gold loan segment. Secondly, how is the trend in the SME segment in the southern region of the country?
Gold loan continues to be reasonably strong. You know, NPA, as you know, is very negligible. More than NPA, I think it's really the fraud that we should worry about in gold loans, and that continues to be strong. If your question is that, did you say what is the growth in gold loan or I didn't know what really was? Other than NPA quality, was there a question on gold loan?
I'm, you know, asking about the quality of the customers, means in terms of the repayments in the gold loan.
Effectively, that's on credit quality. Gold continues to be very robust and strong in terms of credit quality, except, you know, there is an odd instance of fraud or something like that we have to watch out for. That continues to be pretty okay. SME business, did you want to know about what? The quality?
No, no. I you know I want to understand more about your particular region because you are operating from Kerala and, you know, your, that is your main you know geographical thing. I just want to understand how the-
I would encourage you not to view it. We are operating from Kerala and
No, no. Just, I'm just asking from, you know, that perspective.
I'm only sharing with you.
Yeah.
The business growth in commercial banking and business banking is fairly widely spread, and I don't see any geographical behavioral difference, except in the past if there were some geographies that were affected either by some floods or local events. Thankfully in the recent past there has been nothing unique that I could call out in any one geography to suggest that some geography is facing greater stress or otherwise. Thankfully the COVID related supports have worked well, and we are not seeing any alarming trends and even the restructured books are behaving reasonably well, along expected lines.
Great. Nice to hear this. Thank you, sir. Thank you.
You're welcome.
Thank you.
Thank you. The next question is from the line of Nitin Aggarwal from Motilal Oswal. Please go ahead.
Hi, congratulations on a very good quarter.
Nitin, the question through the handset, please. You're not clearly audible.
Hello?
Yes.
Am I audible now?
Better now.
Yeah. Congratulations on a very strong quarter. Few questions. Firstly is on like, personal loan segment, has reported very sharp growth this quarter. It's almost 75%. How do you see this trending for the year?
Shalini, would you want to take the personal loan? I would think it includes the credit card piece also.
Yes. That particular number that you're referring to, Nitin, includes the credit card ones. Both personal loans and credit cards put together have shown a significant growth as you rightly indicated. A couple of things. One, obviously our credit card business is relatively more nascent. We started in mid of last year to about September of last year, and between us and our fintech partners, we're growing quite well on the credit card front. Personal loans is something we've been conscious about and how do we kind of calibrate our personal loan growth from a risk appetite perspective. It's only very, very recently in September that we started doing some new to bank personal loan bookings. So on a low base you will see an increased growth.
The higher focus for us is to make sure that credit cards grows well, which will happen over the coming quarters. Nitin, if you remember that this is coming off a very low base, so percentages can be a little misleading actually.
Right. Of course, I understand. I mean, I was just trying to assess as to where can we be in next one or two years if we make in anything, whatever the case are.
It's growing well, Nitin. It's growing well. It's a focus for the bank, and we think we will continue to give it high attention.
Sure, sir. Sir, secondly, on the wholesale portfolio wherein we have seen a pretty healthy pickup in growth until last year around 10%. Now we are closer to 20+. We were earlier cautious on growing this portfolio due to concerns on the pricing. If you can suggest now which verticals are driving the growth in corporate segment and how are the pricing trends now?
Harsh, you wanna go?
Yeah, the pricing is much saner today than it was about six months back. It's partly because of the correction of the demand supply situation. The surplus liquidity in the system was of course INR 8 lakh crore for a very long time, which today has come down to INR 1 lakh crore, plus interest rates have hardened. Third and most importantly, the optics has improved. Between these three factors, the pricing power and especially the pricing of the most finely priced assets has actually been more than the repo hike in the range of 2-25 basis points. The sanity is coming back in the market. The correction which was long due has come in, plus the optics has improved.
These are the two factors which are guiding in terms of a better growth and an expansion in the limits there as well.
Sure. Any select segments, verticals you want to highlight the highest growth?
As of now, working capital has been the one which has been more in demand, but on the CapEx side there's very clear uptick and interest coming in over there as well. We do see the rebound being robust and steady over the years. Sectorally, if you look at it, I think it's been across. We are seeing this with auto, we are seeing this with CV, we are seeing it with renewables, we are seeing that this is with chemicals. There are quite a few broad-based sectors which are coming in over here. No particular sector which I would define as of now. It's very pretty broad-based.
Okay. Sure. Last question is on the divergence between the credit and deposit growth. While you have talked about the focus on liabilities and like you will not participate in the rate war there, but how do you plan to mobilize the deposit to support this growth momentum? In context to the recent INR depreciation, how are the trends on the NRE deposit growth side, NRE franchise side?
On the NR, we are seeing remarkable inflow. That's, I think we have shared this in the deck. Our remittance share has gone up even further to 22%. I think the last time we spoke it was in the late 20s. Almost every passing quarter we're gaining share, which is a very significant development. All of it is not translating to deposits. I think there is a revenge spending going on by the NRIs, so it could be seasonal, so we'll have to see how that plays out. Our deposit growth is sort of predicated on a bunch of stuff. One is, wherever required, we'll be competitive in pricing. It will continue to be as granular as possible. NR is beginning to show higher traction in terms of remittance, and it only leads to deposit flow.
Domestic deposits is growing quite nicely. We are expanding our footprint even further. Even in Q1, first half, we added about 25 or 35 branches. We believe we'll add another 30, 40 branches this year. Between branch expansion, our fintech partnerships beginning to mature, our NR remittances are pricing appropriately on term and selectively borrowing, we will be able to meet our credit demands.
Sure, sir. Thanks so much, and wish you all the best.
Thanks, Nitin.
Thank you. The next question is from the line of Renish Bhuva from ICICI Securities. Please go ahead.
Yeah. Hi, sir. Congrats on a great set of numbers. Sir, first question is on the sort of sustainability of this current loan growth momentum. Of course, the recovery has been broad-based, and, you know, most of the segments are growing in 15%-20% range. If I have to look at, let's say, from next couple of years perspective, which segment do you feel will drive the growth?
Renish, I think it would be inappropriate to talk two years in a very turbulent environment. I think our line of sight is two to three quarters. Not that we are not looking beyond.
Mm-hmm.
The businesses that we sowed our seeds some time back have all started flowering.
Mm-hmm.
That is why in our investor deck, we have started calling that out. I think slide number 20-
Yes.
29 captures that.
Yeah, yeah. I saw that. Yes.
Therefore, that is a promising new opportunity. We think that's scalable. Those are segments that have both potential, where we have low penetration in the country. We have low share.
Mm-hmm.
We believe we have built expertise to grow these segments. I do think in the coming quarters, year ahead.
Mm.
These will be on relatively higher margin businesses too.
Mm.
Not to suggest that they won't get disintermediated, but I think this will remain higher margin. Our belief is that as we scale into these, credit growth-
Mm.
Of this kind of order of magnitude is possible. I always caveat it by saying the environment should not become counterproductive. As long as it's supportive, yes.
Okay.
We have demonstrated reasonable clarity around growing without trying to be too cowboyish.
Yes, yes. I mean, that has been the core strength of our, I'd say, franchise. Sir, any broad, let's say, range do we have in mind that, you know, this CV, MSME, credit card, which is currently contributing 20% to the loan book, is there any number?
Renish Bhuva, that is the incremental flow.
Yeah.
It's not our stock.
Yeah. Okay. Got it. That should remain in that range or quarter by quarter it should increase?
Incremental flow, it will increase.
Okay.
On the stock, it will still be reasonably small, but on the flow it will increase, go to 25%.
Got it, sir. Just, sir, again, sorry to coming back to the NIM question, but if I look at the balance sheet mix over last two to three quarters, our borrowing has gone up from around INR 8,000 crore to INR 20,000 crore now, you know, which is essentially suggesting that we are funding the incremental growth via borrowing. If you can just broadly highlight, is there any rate differentiation between cost of deposit and cost of borrowing?
Yeah. I think, beginning of calendar 2022 and middle of calendar 2022, we did see the war on deposits and the pricing war for deposits.
Mm-hmm.
We identified some relatively lower cost borrowing opportunities, which are CRR, SLR free.
Mm-hmm.
That is a point in time that cannot be sustained because you won't get the money at that kind of pricing sustained basis. We did get three-year money. We locked in.
Mm.
It enabled credit growth. As we see, that's why I said we continuously calibrate credit, deposit growth.
Mm-hmm.
between paying top dollar versus these opportunities, and we keep blending that up.
Got it. Just to follow up on that, sir, we are already at, let's say a peak CD ratio of 85, okay? You know, we might accelerate deposit mobilization in coming quarters. Of course, next couple of quarters, you clearly said that margins will remain, you know, around 3.25%-3.3%. On a sustainable basis, you know, keeping in mind, the peak CD ratio, of course, as well as the high-yielding products, you know, start contributing, incremental growth. On a sustainable basis, where do you see our margin settling down, sir?
Somewhere in the three thirties is where we are working on. You know, hopefully improving, but three thirties.
Got it. Okay, fantastic, sir. Thank you.
Which you would notice is higher than what I've been guiding in the past quarters.
Absolutely. That is why, sir, I was just trying to reconfirm that next couple of quarters, 3.30% will be, let's say, the benchmark. Going ahead, it should at least remain at that range, is what we're working as a plan.
Yes.
Okay. Thank you, sir.
Thank you. The next question is from the line of Kaushik Poddar from KB Capital Markets Pvt. Ltd. Please go ahead.
Yeah. Hi, Shyam. You seem to have ticked all the boxes. Is there any other box which remain unticked? That's question number one. Question number two is, in the result, for the note number, just a minute. I think note number eight or something that talks about the resolution assets, and you have given the breakup and all those things. If you can explain that note. Just a minute.
Venkat, do you have the results document in front of you? I don't. Venkat?
Shyam, I do have it.
It's note number eight. Yes. On the resolution plan. First, about the boxes that should be non-ticked.
Yeah, I think, you know, Kaushik, unfortunately this is not a static list, right? It keeps changing, and you as an investor will demand more, we as a leader will demand more. It's a continuous journey, but yeah, we would like to make sure that the 1.2% ROA becomes 1.25%, the NIM improves. We're pushing on all the buttons and I think we are on course, at least, the team is marching to a rhythm and we believe we are doing the right things. As you may have observed over the years, we won't do the wrong things, that I can assure.
Come again. I didn't get that.
I said you may have observed over the years, we won't do the wrong things, and I assure you that, I said. Certainly, yes, we are pushing on all the buttons.
Okay. This cost to income ratio has improved massively. I mean, do you see that at the 48% level or improving from there?
No, I think we are basically up-fronted one year of all our deliverables through this year. If you remember, we said by FY 2024 we will get closer to 48. We are up-fronted. That's also because income growth has been strong and we've never been extravagant in cost.
Okay.
As branch expansion increases, some of the you know, deliverables that we need to put on the system side, somewhere in the 48 is what we are guiding for. Between 48, 49.
Yeah. If you can explain the note number eight?
Yes, I can do that. This note is nothing but the RF one and two in terms of the exposure and what is turned into NPA and which are the accounts which have paid us. This is a format which has to be disclosed as per regulatory requirements. This is pertaining to RF one and two.
Restructuring during COVID, Kaushik.
Do you see that I think INR 138 crore have fallen into NPA. Do you see the similar kind of run rate every quarter or in that ballpark figure?
For the first half, right. Half year is INR 138.
Yeah, yeah. I mean, do you see that, at INR 150, around INR 150 crores for the next half years also?
It could be. It'll be in our overall slippage number. In the first half, our overall slippages was about INR 800-odd crores.
Right.
In the second half, this overall slippages could be around INR 900 crore-INR 1,000 crore, and this will be within that.
Okay. This is part of that overall slippage, right?
Yes. We have made excess provisions. Thank you for pointing it out. We're carrying excess provisions on the restructured book. Also, this quarter, most of you would have observed, we have further increased our PCR by 250 basis points.
that includes that excess provision, right?
No, no. That is separate. That is outside of this.
That's outside of it. Okay.
Standard asset is separate from the.
Provision is on standard assets, restructured standard assets. Provision coverage ratio is on NPAs.
Okay. Thank you.
Thank you. The next question is from the line of Lalitabh Shrivastawa from Angel. Please go ahead. Lalitabh, your line is unmuted. Yes.
Yeah. Thanks for the opportunity and congratulations for the great set of numbers. First of all, one thing I wanted to ask, if you can share the break-up of the provisioning expenses for this quarter. Yeah. That's all.
Did you want the breakup of provisions?
Yes, sir.
I think it's there in the deck, right, Venkat?
Yes, yes. It's there. I'm just looking at which page I'll send you.
Yeah. Please, I wanted to know, you know, this credit cost has gone up on a sequential basis and so any comments you have on that?
I mentioned just now that we've increased our provision coverage from 65%- 67.5%. That's INR 100 crore extra. Every 100 basis points is about INR 40 crore.
Right. Okay. Great. Thank you.
Gross NPA is INR 4,031 crores, so every 1% would have a 40 crores additional, you know, if you want to increase the coverage, and we have increased by about 2.5%.
Thank you. The next question is from the line of Subrat Dwivedi from SBI Life. Please go ahead.
Yeah. Thanks for taking my question, sir. Two questions. First is, just wanted to know, in terms of the increase in your cost of lending, how much has it been for retail and how much has been for large corporate over this quarter?
You mean the rate increase?
Yes.
I think, between the two businesses, both have been able to pass on the rate increase. Of the 140 basis points, between 110 basis points-115 basis points have been passed on to on the lending side.
No, the Q1 to Q4, I think, sequentially.
Sequential what? Rate increase?
Yes. Yes.
In that mode about 35 basis points, right, Venkat?
Yes, 36. Correct. Yes.
No. How much on the retail side and how much for large corporate?
More or less, more or less equally weighted.
Okay. My second question is, when you say that, you have met some of the liability requirements through borrowing, opportunistic borrowings, what sort of borrowings were these?
Some from financial institutions like SIDBI, NABARD.
Refinance, which is CRR SLR free. No CRR SLR applicable.
Okay. That's all from my side. Thank you.
Thank you. Next question is from the line of Krishnan ASV from HDFC Securities. Please go ahead.
Yeah. Hi. Man, many thanks. Shyam, just wanted to understand your thoughts on the EBLR transmission a bit. You seem to have a lot of discretion on the deposit side in terms of not wanting to pass it on. Yet on the asset side, there seems infinite elasticity there. I just want to understand, does the RBI allow this? Could they be looking at this a lot more closely in terms of exercising discretion? The second related question is, at some stage if it begins kind of you're breaking the camel's back, do banks have discretion to typically not pass it on completely at all?
If there's a 50 basis points increase in the repo rate, do banks, including Federal, have a choice to pass on only, say, 20 basis points out of that?
No, I think it's bunch of things, Krishnan. I don't think I can give an answer saying yes or no. Every time there's an MPC and a rate change, we look at portfolio by portfolio, segment by segment spread, yeah, and then take a call. In certain areas, we may not be able to offer the entire increase. In certain areas, we may have to offer the entire increase. I don't think I have an answer saying yes or no or it's very nuanced, very layered. For some ticket sizes, we may have passed on the entire also.
Just between how this acts from the deposit side versus the loan side. On the deposit side, when you don't pass it on completely, it's obviously not hurting us right now, right? I mean, it's.
No, it's, you know, it's not like it's not hurting. There is a transmission delay and there is a quantum that changes between credit and deposits.
No, I mean.
If I may respond to your question further is that you know, I think on the loan side there is a mandatory linkage to external benchmark. You have for a particular segment like retail, MSME and all, you have to necessarily link your loan pricing to an external benchmark unless it is fixed rate. Whereas on the deposit side, presently there is no such regulatory requirement of you know, linking your deposit rate to any external benchmark also. Therefore, you know, savings bank any day, I mean, like you know, some banks who earlier had you know, their savings bank linked to repo have delinked it. That's the difference here.
You can delink and decide based on how the competition is and how much you want to, you know, encourage the saver to put money with you because that's a very tough competition. I would say almost similar rate is passed on the term deposit side. If you see the way term deposits have moved from less than 5% or so to now nearly 7%. With 190 basis points hike, you have seen almost 200 basis points hike on the term deposit side.
Okay, I get that. I mean, what I was trying to understand, I guess, Ashutosh is more around the fact that on the loan side at least there is obviously a spread, right? That spread ideally does not change. If a Krishnan was already pegged to repo plus say 200, 300, whatever that number was, that spread of 300 stays constant no matter what the RBI does, right? Or do you have discretion to bring that down if you believe that the risk is going up?
No. The spread changes based on the risk profile of the customer. The customer risk profile deteriorates, then the spread changes.
Spread can change in two ways, you know. One, if the credit quality deteriorates, you can increase the spread and all like internal rating change or external rating change or something like that, or some covenants being, you know, defaulted and all. On the other hand, you know what I mean, deposit side, there is nothing called, you know what I mean, you have an external benchmark to which it could be linked. On the loan side again, you can reduce the spread when the renewal happens or reset happens. It's not that if your account is performing very well, the right is there available with the bank to reduce the spread.
On both sides, you know, you can increase it as well as you can decrease it, subject to certain, you know, requirements. Otherwise, normally spread is non-negotiable.
Got it. Just the other thing was about it's not hurting us now. It's not on the P&L front that I meant, but the fact that because 90% plus of the bank's deposits are franchise deposits in a manner of speaking. They keep coming no matter. They are kind of rate inelastic, right? At some stage.
Not all of it.
Krishnan, not all of it. Part of it is.
None of the deposits. I think a good chunk of deposits these days are not rate inelastic. People demand, you know what I mean, based on the competition that you're facing.
Got it. This is extremely helpful. Thank you. Thanks and extremely good. Thank you.
Thank you. The next question is from the line of Prashant Kumar from Sunidhi Securities. Please go ahead.
Thanks for the opportunity, sir, and congratulations for good set of numbers. As per commentary, most likely to continue further. I have couple of questions. One is on the capital adequacy side. Actually in last quarter, we have consumed around roughly 75 basis points of CRAR. Just maintaining the current loan book growth, I already mentioned in last quarter that the bank is going to raise INR 120 billion of fund, 40 and 80 of equity and debt. If you could give some that. Because I think that in this growth, maybe we have a highly needed to re-raise in last of this financial year. First one is that, give some outlook.
Second is on asset quality side, the restructured books are almost stable, I mean, but not has come down even in the better picture of the economy. I mean, MSME is doing better but still it is remained at same level. But I mean, it is not on the hurting level. I mean, it is on very controlled as per the other banks. But if you could give some that when we will achieve the pre-COVID level on the especially restructured book side. Otherwise, asset quality, I think so it is very good. Thank you, sir.
No, the restructured book will, as the restructured, you know, the demand on it increases, you know, bulk of it will be in Q3 and Q4. We'll see that performance and how it's shaping up. Therefore by end of financial year, you'll see a better sort of consistency versus the pre-COVID period. On the first question, I think you mentioned about capital consumption. Yes, we think this financial year, when we put back our full-year profits, as you know, the Q2 profits are not in the ratio. When we get back to a closing of financial year, we will get back to somewhere near 14% CRAR, and that's our model.
Having said that, in early financial year 2024, if situation is conducive, we can consider, but we are not in any, it's not in our planning horizon just now.
Okay.
The INR 12,000 crore was an enabling resolution we took from shareholder should the need arise. I mentioned that in the last call also.
Yeah, yeah. Thank you so much, sir. That's it from us.
Thank you. Here's the next question from the line of M. B. Mahesh from Kotak Securities. Please go ahead.
Hey, good evening, sir. My first question is on the OpEx line, sir. Just wanted to understand, the growth rate on the staff side, even if you adjust for the family pension has been on the lower side. Directionally, how are you seeing this number, especially with wage costs likely to be seeing a revision from the next wage settlement cycle? Correspondingly, on the other OpEx line also has been quite high for the kind of loan growth that you're showing.
It will continue to be this kind of run rate. Neither of them will dramatically alter. There are no one-offs one way or the other. This trend line will continue.
There's no pension related, lower provisions, higher provisions in this quarter, right? Or it's just a normal run rate at which you're running on?
Nothing material. Venkat, would you want to answer that? Is there anything that's uniquely different? I mean, there, of course, yield-related, some benefits are there.
Largely driven. There's no one-offs or any material pension related. It's the normal run rate. On the other OpEx, it's largely driven by volume related costs.
Okay. Second question, sir. On the deposit side again, sorry, this question has been asked repeatedly, but just kind of taking it again, a different way to look at it. Are there any segments within the deposit book that is seeing a slower growth in the sense that, when you look at your, let's say, retail deposits or households, are they saving less? Are they drawing down?
No, NR savings I mentioned is rate of savings. Rate of remittance is much higher. Rate of savings is lower.
That's on the savings side, right? On the deposit side?
That's what I'm saying. NR savings deposits.
On the term deposit side, sorry.
Term deposit, we are not seeing anything different. It's price elastic and, in segments that we are offering good pricing, we are seeing good traction.
Okay, perfect, ma'am. Thanks a lot.
Thank you. The next question is from the line of Saket Kapoor from Kapoor & Company. Please go ahead.
Namaskar, sir, and thank you for this opportunity. Firstly, just to sum it up, sir, we are looking for an ROE exit of closer to 1.3 for FY 2023 and NIMs inching up to 3.30. This is what some of the substance.
No, I said ROA ex-ECL closer to 1.25%, not 1.3%.
Okay.
Yeah, NIM of 3.3%, yes.
Okay, thank you. For the fundraising exercise, you just earlier commented that there is no plan, at least for H2 to raise capital. We would be looking forward for capital fundraising only post our financial accounts, full-year numbers are there. Looking at the environment, we would be contemplating whether a fundraising would be the need of the hour or not. That is what the
That is a fair assessment, yes.
Okay, sir. Now, sir, coming to the line item of treasury income, sir. If we look at the treasury income part, sir, how much, what is the contribution from GSEC, sir, in under this line item? How has the GSEC portfolio performed, and its contribution, for under the treasury segment? What are the key parts of this treasury income of INR 671 crore?
Ashutosh Khajuria Sir, do you wanna go?
Yeah, sure. See the GSEC contribution, I think from the interest rate products, the contribution in first and second quarters has not been considerable. You know, in first quarter it was single digit. In second quarter also it has been hardly INR 25 crore or so. You know, I mean, what is important is I mean, this is the time when it was required to protect the portfolio. From mark-to-market point of view, there had not been, as I you know, shared with all of you know, on the first quarter itself, after first quarter results, there had been a massive reduction in modified duration, which resulted in a you know, I mean, lower provisioning requirement in first quarter.
This quarter the yields are, have actually, you know, been flat or rather they have come down a little bit because one sees only the benchmark. If you see the other papers and all, I mean, there has not been much of a change, you know, barring very short and all that. Therefore, you know, our portfolio for second quarter again had some little bit of, I mean, INR a couple of crores of write back rather than providing. That's on the treasury fund. There had been good earnings on non-interest rate related products also like equity and all that.
Very strong progress on FX.
FX had been very strong, but FX is in core fee income because that's related to merchant transactions. Basically with corporate credit growth, there had been opportunities, more opportunities to provide the hedging and all that. Through that there had been a good, you know, growth there.
Sir, in this fee income part, we have again good put a net profit figure of Forex transaction at INR 94 crore.
Yeah.
That is different.
That's what I'm talking about. Yeah.
Okay. That is on account of the improved business transactions on the foreign-
Absolutely.
On the foreign exchange front.
We call it merchant Forex. This is the profit related to our relationships.
This is not proprietary trading, this is client-based income.
Client-based income.
Okay, client-based income. Sir just wanted to understand the nature of the transaction. I mean, what service are we offering that results in these kinds of profit and whether these are sustainable numbers. I think through quarter on quarter it is.
We are offering the entire range of hedging products which are permitted by Reserve Bank of India with all, you know, required, so-called mitigants like, you know, the, customer appropriateness and all. Based on that, you know, this entire range, whatever is permitted to be offered in India is being offered.
What should be the value of the transaction, sir, on which we have booked this INR 94 crore profit? How much is the business transacted on account of for this Forex hedge?
I need to check that because there had been lot of volatility and all that. I think transactions have been quite high. I mean, as far as the remittance is concerned, there also, you know, you have your counterparties like exchange houses and all. These are also, you know, I mean, covering their transactions and all. There has been a mix of all that. Because of volatility, there were other arbitrage opportunities as well. All put together, this comes to this number.
Right, sir. Last point is that on the basis of the other income component or the fee income part, the line item of INR 540 crores, which we posted for this year, taking into account the composition, how likely is that this could be a sustainable number going ahead? Because it has various variables and parts to it. How should one look going ahead? Because this is a constant jump.
Structurally it's granular, it's structural and it's consistent. Variability in that can be 5% this side, that side.
Right, sir. The last line item was on profit on sale of security. That was INR 70 crores. That is a one-off item only. That won't appear.
That could have had some recovery gains.
Yeah. That's not entirely on account of profit on sale of investment. Let me clarify that. It has multiple things. You know that other income other than this core fee income. You are. I think you are talking of the difference between INR 610 and INR 540. 540-
Yes, sir. Yes, sir. Yes.
610 being non-interest income. That includes dividend from, associates and, you know, subsidiaries. That includes, you know, recovery in return of assets, that has partly some profit on sale of investments. All put together that number is INR 70 crore. Correct, sir. Anything you want to speak on the NPA front, sir, on whether where are we going to likely end the year on the gross and the net NPA front, the numbers which we are targeting?
No, at the beginning of this financial year.
Sorry, go ahead.
Let me just close that. At the beginning of the financial year, we had said that the full-year slippages, if you remember, first quarter was about INR 450 crore. We said the full-year slippages will be in that 450 x 4, around INR 1,800 crore. Second quarter was exceptionally good. We think Q3, Q4 will be between INR 900 crore-INR 1,000 crore for the rest of the FY. The credit cost of around 50 basis points-55 basis points.
On a percentage return, sir, any ballpark which we are targeting to end the year or how that second half? We have a gross NPA of 2.46% and the net at 0.78%.
Yeah, I think I've mentioned credit cost 50-55 basis points. Coverage ratio at 67.5%. We will seek to improve those, so it should only keep improving there or thereabouts.
Okay, sir. To conclude, sir, the trajectory is very strong and on this strong path, we are continuing to march ahead. The factor that has enabled us to post these numbers are gaining strength rather than being one-off. This will be the summary substance.
I would like to believe that. That's how I opened the call. It's broad-based, it's granular, it's organic, it's deep-rooted.
Thank you for all the elaborate answers, sir. All the best to the team, sir, going ahead. Stay safe, sir. Namaskar.
Thank you. Thank you so much.
Thank you.
Thank you.
Thank you. The next question is from the line of Suraj Das from B&K Securities. Please go ahead.
Yeah. Thanks for giving the opportunity. First of all
Sir, your voice is breaking. I request you to please use the handset and come on network, please.
Yeah. Am I audible now better?
Better now.
Sir, the first question is on the restructured book. If you can explain, I mean, how much of the book would be, you know, out of moratorium and has resumed billing, and how much percentage of the book is still under moratorium. Also, you mentioned some excess provision on the restructured book. If you can quantify, what would be the, you know, excess provision on the restructured book? Yeah. That is the first question.
Yeah. I think Venkat mentioned INR 138 crores is the excess provision, more than the mandatory provision. We're holding close to INR 650 crores on the restructured book.
Okay. Sir, how much percentage of the book would be, you know, out of moratorium and has resumed billing? What kind of we are seeing from this book?
In the coming two quarters. Raj, if you're there on the line, I think in the coming two quarters about between this quarter and the next, close to INR 1,000 crore would come. Right, Raj?
300 plus 300, sir.
INR 600 crores.
INR 600 crore and 70% of the book has already come out of the moratorium as of 30th of September. We've got only 30% of the book left to come out from moratorium.
Okay. Okay, understood. Sir, the second question is more of rate linking. You know, you have mentioned some during this call that around 65% of the loans are, you know, floating rate linked. If you can bifurcate that, how much would be the repo linked percent and how much would be the MCLR fixed rate and others?
50% is repo, 15% is MCLR, 25% is fixed, 10% is employee and FX and so on and so forth.
Okay.
Advances against deposits.
Understood, yes. Okay. That is all from my side. Thank you, sir.
Thank you. The next question is from the line of Manish Shukla from Axis Capital. Please go ahead.
Good evening and thank you for the opportunity. First question is that over the last few months we've seen RBI make lot of changes to regulations around fintech. Has that made you revisit how you engage with fintech?
I think it's encouraged us because our model has been very. You know, I've said this in every call. We believe very firmly in the fintech partnership model. We have created capability, capabilities that are very fintech sort of enhancing and which is why through all this process, we didn't see either our partner getting nervous or we getting nervous and we are quite confident that this momentum will continue. We've looked at fintechs for liabilities differently from assets. All our top four, five fintech partners, we have many, but the top four, five have are continuing to storm ahead and we think that model works for us. We haven't been nervous by any of the changes. Some tweaking in relationship and pricing has been done. We're quite pleased with that. Shalini, you want to add, please?
Yeah, Shyam. Just to kind of expand that further. If you look at just the digital lending guidelines as one of the areas which has come up, clearly we believe that it has helped in terms of transparency from a customer standpoint and clarity on what, how a relationship should work. That is the basis to kind of structure some of our fintech partnerships. You'll see in the investor deck, for example, one of the ones we launched towards the end of September, fully compliant with all the digital lending guidelines is the one with PaisaBazaar. So the broader point is, you know, these regulations are actually quite useful in making sure we understand how the, collaboration works and how the, you know, linkages work.
We do believe that they're in the right direction and they really reinforce our continued emphasis and strategy on fintechs.
Sure. Thank you. Thanks for that. Second question, Shyam, is that everything that we've discussed on the call so far, right, points towards a very benign environment, loan growth, margin, asset quality. What is it that worries you on this?
I think I've said this in every call. I'm a worrier, so we worry about everything that can go wrong. Certainly, you know, the things that have looked robust need not look robust. There can be some stress in the environment building. I think structurally we have, we believe that the COVID has taught both the bank and the customers to navigate very tough periods. Those who have withstood the last two years, I think can withstand any of the forthcoming stresses. That gives us the confidence. Yes, the war for deposits will intensify, but so will our abilities. Am I worrying about everything? I think yes. I think structurally we are better off than we ever were.
That's very helpful. Thank you. These are my questions.
Thank you. Our next question is from the line of Darpin Shah from Haitong India. Please go ahead.
Thanks. All my questions have been answered.
Souvik, I think we should bring it to a close. Maybe one last question, please.
Sure, sir.
Sure. We'll take the next question as the last question from the line of Pankaj Agarwal from Ambit Capital. Please go ahead.
Yeah. Good evening, sir.
Hello.
Am I audible?
Yes, Pankaj. Go ahead.
Sir, how much extra liquidity you'll be carrying at this point of time versus the regulatory requirement?
Meaningful.
No. Reason I'm asking is that, you know, that for some, for how much more, you know, you can, you know, you can grow your loans without, you know, growing your deposits. I think the mechanics.
Sir, I got your question. I said meaningful. We can grow credit, like I've said in the beginning of the call, between a mix of deposits, borrowings, our own, resources. I think credit growth of high teens is possible.
Okay. That can last for another couple of quarters. I mean, my broader question was that the gap between deposit growth and loan growth. I mean, can it sustain for another two quarters?
Rest of financial year, yes. We have a plan and we have the ability.
Okay. Thank you very much. Thank you.
Thank you. Ladies and gentlemen, that would be our last question for today. I would like to hand the conference over to Mr. Souvik Roy for closing comments. Thank you and over to you.
Thank you so much, Aman, and thanks again to all the participants who dialed in today on a Friday evening. If we have left any questions unanswered, we would be very happy to engage with you offline. With this, we'll close the call. Happy Diwali in advance and see you all on the other side of Q3. Thank you so much.
Thanks everybody. All the best.
Thank you everybody. Happy Diwali in advance.
Happy Diwali to everyone. Thank you.
Bye. Bye.
Thank you very much. Thank you. Ladies and gentlemen, on behalf of The Federal Bank Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.