Ladies and gentlemen, good day and welcome to the Q3 FY 2023 earnings conference call of The Federal Bank Limited. As a reminder, all participant lines will be in the 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, and good evening. Welcome to our earnings call for the third quarter. I am pleased to report what I'd call one of our best quarterly results ever. The quarter has been nothing short of outstanding, with record-breaking revenue and profits. We saw better mix, better asset quality, and a multi-year high of ROA and ROE. If you remember, this is exactly what I said when I opened the call last quarter and would like to keep saying the same for every quarter year on year. Our diversified business model and focus on risk management has allowed us to drive growth while maintaining a pristine balance sheet. Our digital transformation initiatives have also played a key role in our success, as they have enabled us to reach new customers, improve our efficiency, and increase the adoption of our digital products.
For today, like always, we have our MD, Mr. Shyam Srinivasan, our EDs, Mr. Ashutosh Khajuria and Ms. Shalini Warrier, along with our Group President, Mr. Harsh Dugar, and our CFO and Group President, Mr. Venkatraman Venkateswaran , along with the other senior officials as well. Before I turn the call over to our MD and CEO, let me inform the house that this is our MD's 50th earnings call. With that, over to you, sir.
Thanks, Souvik. Thank you, everybody. Firstly, this is the first call of calendar 2023, so my good wishes and happy 2023 to everybody. Souvik pointed out, we had a good quarter. Yes, we were pleased with the outcomes of Q3 on every count. Not, you know, I don't want to call out any one particular line, but the overall efforts of the bank across quarters, across years has helped shape the bank to this kind of outcome. We believe this is something that we should seek to sustain or improve in quarters ahead, which has been the endear at all points in time. Happily, this financial year on each passing quarter looks more compelling and improving as the, as the year rolls by.
NII at an all-time high, operating profit at an all-time high, net profit at an all-time high, all suggest that we are on course. I want to go back and talk about what we said. Some of you may have been part of a presentation we made in just before COVID in February 2020, when we gave out a three-year roadmap and what we thought we'd exit FY 2023 with. I'm pleased that we are ahead of those numbers despite two horrendous years in the middle. That gives us the, you know, confidence that A, we have a business model that is reflective of the opportunity. More importantly, the language of the bank is consistent with the presentation we put out.
Even more importantly, the team capability to constantly readjust to developing development and yet deliver or not lose sight of the larger objective is impact and growing. I would say that the quarter that went by reflected many of those objectives, and we are actively carving out what our plans for the period ahead would be. Minimally, this will be the new baseline on which we would keep operating. There have been some tailwinds in terms of margin expansion because of the timing mismatch between asset repricing and deposit repricing. Some part of it will have challenges, but we are acutely aware of that, and we all, you know, constructing our business plans to reflect that changes that may happen and yet deliver on the ROA, ROE expansion plans that we have.
I had mentioned that we would exit FY 2023 at about 1.25% ROA. I'm pleased that we've beaten that, and the full year number will probably be 1.25 or better. Certainly that sets the tone for what we would like the year and years ahead to be. The promised 10 basis points ± improvement every year is what we will seek out to do. That's the design of everything we do. Business mix, the mix between retail and wholesale and within retail, secure, unsecured. All the new businesses we spoke of, whether it's credit cards, microfinance, personal loans, business banking, gold, commercial vehicles. All the elements of those businesses are at play as each business leader is looking to scale up.
On smaller basis, they are reflecting 70%-80% growth. We believe that can, you know, that can scale into even a three digit number as we go into calendar, you know, sorry, step up into 2023 and 2024. Momentum is quite strong. We are aware of the headwinds and the narrative around India may not see this kind of credit growth on a sustained basis. We believe our machinery is in place to support growth, and we will of course pull back where we see some pain. Most importantly, share gain will continue, and the momentum that we have in some of our businesses are structural, and we think the year ahead should reflect all these efforts.
Without going into any specific numbers, but I'm sure in the course of the call, all of you will want to know more about, you know, each of those numbers or parse those numbers better. I will, between me and the entire senior team will respond to that. The headline numbers are there for all of you to see. Net profit at INR 804 is certainly very encouraging, and so are the other metrics. Let me pause here. We will have questions, and we'll have the entire team, senior team who are on the line, try and answer. In case there's any data that you need and we can share, we will share offline. Thank you very much, operator, you may open it up for questions with anybody.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star 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. Reminder to the participants, anyone who wishes to ask a question may press star one. First question is from the line of Mahrukh Adajania from Nuvama. Please go ahead.
Yeah, hello, sir. Congratulations to you and your team. My first question is on margins. There has been a fair bit of repricing of corporate loans as well, right? I mean, do you think most of the corporate repricing is done assuming there's no EBLR hike pending? What is the outlook for margins? I heard you on TV saying that 3.35% is what you still maintain for the full year, which could mean that for the fourth quarter also margins will be 3.35%-3.36%, which actually means that 13-14 basis points QOQ decline. What's your outlook on margins? That's my first question. I have two more questions.
I think, Mahrukh, the margin expansion that we saw this quarter had an effect of the timing. A full year blended 335, 340 is indicative of the fact that Q4 may not see this kind of margin. Certainly it will be higher than that number. I think, the repricing that is happening in the corporates have happened, but the deposit repricing will start showing this year. This quarter you saw yields expand on the credit side almost 49 basis points and deposit costs go up about 21 basis points. Some part of the residual increase will happen in Q4 and maybe in early part of Q1. To that extent, the 349 may be a little diminished.
Outlook for margins in the next year, I mean longer term?
Between 3.35% and 3.40%. We are upgrading our guidance from 3.25% to more like mid 3.35% and, you know, plus or minus .
Okay. Longer term as well. Okay. Got it. Got it. Sir, just in terms of loan growth, outlook for 2024 for your bank and if at all you had any for the sector?
Hard to call. There are, you know, a lot of moving parts. We've always maintained we will grow, in the, you know, much higher than the industry, which we have been. Our outlook at this point in time certainly is in the high teens. We'll have to recalibrate it if things materially slow down, which I don't see signs of. I think bank demand, bank credit growth opportunities continue. Our share gains in those areas. I think in the high teens is what we're guiding for at this point in time.
For yourself, right?
Yes. For the bank.
Got it. Sir, just on employee expenses, because you have somewhat higher proportion of unionized employees, do you follow the wage agreement? If so, what is the kind of hike in employee expenses or provisions that you are likely to make till the wage agreement for the PSU sector is finalized?
We made, I think we mentioned it. We've increased our wage provisions in Q3 itself. For November and December, we've assumed a particular rate increase, and we've applied that. That's reflecting. That will be in the new run rates too.
Okay. Is it possible to quantify? Sorry if you have, I missed it.
We've taken, Mahrukh, what the average has been for many negotiations in the past and taken the higher end of that.
Got it. It's already reflected in the base for two months. That is for it will continue.
In Q3, November and December, we've already taken the higher cost.
Got it. Got it. Sir, I just wanted to squeeze in one last question that your deposit growth was higher than your loan growth this quarter, and last quarter, that is second quarter, you did a fair bit of borrowings as well. Why are liabilities expanding faster? The deposit growth that came last quarter, was it refinanced? Or...
No, it's the customer. We didn't have any refinance in Q3.
In Q2 borrowings? No na. Q2.
Q2 we had some refinance in borrowings. Q3, no. It's Q3 is customer deposits.
Got it. Why are deposits growing faster than loans? Is there anything to read into or it's just an outcome?
We like our CAR, we like our CD ratio in the 84, 85 space.
Got it. Okay, sir. Thank you and all the best.
Thank you.
Thank you. The next question is from the line of Mona Khetan from Dolat Capital. Please go ahead.
Yeah. Hi, sir. Good evening and congratulations on a good set of numbers. Firstly, on the margin expansion, you've had 20 basis points this quarter. Just wanted to understand how much of this would be driven by the, you know, asset repricing and how much could also be driven by higher share of, you know, better yielding assets?
The better yielding assets, Mona, is as a part of the overall portfolio. If you assume commercial vehicle, credit cards, gold, business banking... Sorry, not business banking. Commercial vehicles, gold, microfinance, as the better yielding, that's still a small part of the entire franchise, right? The credit book of bank is about INR 170,000 crores. The cumulative of these businesses, INR 5,000 crores-INR 6,000 crores. Even if they are growing at a rapid pace, which they are, they in order to materially alter the core NIMs. To that extent it's more dominated by the margin-rich assets.
Uh-huh.
Growing quite well.
Uh-huh. What would be the incremental NIMs on corporate loans?
Pardon me, incremental?
The NIMs on corporate loans on an incremental basis. You know, just wanted to understand if the pricing has become more rational because, this quarter even a higher share of growth came from corporate book in your case?
I think corporate we see it as, not just pricing. We certainly are getting better pricing than we did in the past period. Our corporate team has done a remarkable job of passing through rate increase. We I think saw 225 basis point rate increase and the pass-through is close to 200 basis points, both in corporate and retail. When we look to do good credits, in a good corporate, top end of the credit spectrum, we are happy to make sure that the pricing is right, but we're getting more business from them. You saw a material increase in fee income on corporate and, trust link fee income. That's indicative of a full relationship pricing we're getting.
Would we be able to get the incremental NIMs on that wholesale part of the book?
I think it improved about 50 basis. Harsh, are you there on the line? Maybe you want to add incremental pricing. Harsh?
Hello, am I audible? Hello?
Yeah. Yeah.
Yes. Yeah, we have an incremental pricing across the board, and we have about 180, 185 basis points in 13 of the pass-through. The last repo hike, the full impact of it will be felt in Q4.
Okay. Okay. Just finally, you have a gold portfolio of about INR 20,000 crore. Out of this, what share would be co-lending, which is sourced from other NBFCs or, you know, Fintechs. Is this largely part of the non-agri book?
Fintech-led origination is probably about 10%-12% of this total.
That's it. That's it, Shyam. Less than 10. Less than 10%.
Okay. Of the entire gold portfolio of INR 20,000 crore?
Yes. Yes.
This would be Fintechs and NBFCs, right?
No, no. Fintech is the only one. No, we don't have any NBFC co-lending.
Okay, got it. Would it be fair to assume that this is largely the non-agri part of the book of INR 5,000 crore?
This is non-agri.
Got it. Thank you. I'll come back into queue. Thank you.
Thank you. The next question is from the line of Pritesh Bumb from DAM Capital Advisors. Please go ahead.
Hi. Good evening, sir. Just had two questions. One is on the gold loan front. We've seen a dip in Q on Q in the retail gold front, even the balances dropped. Any change there? Any change in strategy? Why would it have dropped by about 10% quarter-on-quarter?
I think in this quarter, there were some readjustments with the Fintech partner for originating based on the new digital lending and some changes that need to be put in place. That's happening. It'll come back in Q4.
Okay. Nothing to read into it, basically.
Not that we are alive to it.
Sure. No, my thinking is because the gold prices are all-time high and generally we tend to see a little bit higher growth in gold loans.
That's what I'm saying. There's nothing to read into it. We remain as enthusiastic about this business and still think 25% year-over-year growth is possible.
Sure. Second question was on the credit card business. Now, we've been organically sourcing this for some quarters now. The growth seems, of course, the growth number seems very good, but the number of card issuance and the business seems to be a little bit dull as yet. Despite the opportunity and the partnerships which you have with from the CASA side as well, we don't see any big, large growth which is happening on the card side. What is your view on that? How do you see that business now?
We remain excited by this business. Between organic and our partnership-led, we've probably crossed INR 1,000 crores of outstanding. This will continue to grow. Yes, the base is very small. We think we can scale this up. But I wouldn't venture to say that this INR 1,000 will become INR 10,000 in a hurry. Right? It has to go through its phases. So yes, it's growing nicely. We are putting in a lot of energy behind it. Further restructuring, creating new capabilities. This business between organic and our Fintech partnerships should scale up to about a meaningful number in the next two financial years. Versus the base, but like I keep pointing out, on our grand total it'll still be only, you know, a percentage of the wholesale business, right? We're not growing these exclusively, nor are we making any giant acquisitions in this.
It's more an organic strengthening of this business, which will grow well. A big opportunity, INR 1,000 crore and growing quite well. Fee income is doing well. You must have seen that this business is have added to if you look at our other income, these have added materially on the income line. Thankfully, no credit issues.
Got it. Last question was on credit substitutes. Though the number is small, but we've seen a strong growth. Is the pricing there better? Because your commentary generally was still that the pricing on the bond market side has not yet improved, on overall basis. Anything you're finding there as an attractive opportunity?
Usually these are used as a way to consummate a relationship. Sometimes we, it could be pricing, sometimes it could be the client convenience. Between credit lending and credit substitute, we find the most optimum mix. It's not the number one choice, but it may end up being an opportunity to complete a relationship. I won't read much into it other than it tends to be choppy.
May I, Shyam?
Yeah, go ahead, Harsh. Please, Harsh.
Yeah. The credit substitute includes 3 basic components. One is commercial paper, NCD, but it also includes P2P transactions, which are in the nature of trade substitutes, investments, and hence classified over there. We do it wherever we feel the pricing is rich, number 1. Number 2, quite a few of our P2P transactions also qualify as priority sector lending as well. These are the primary reasons. The base is small, but there has been a shift towards credit substitutes, partly because the regulator has also been asking the larger corporates to borrow from the debt capital markets. We intend to be in both sides of the market, on the borrowing side through the loans as well as the credit substitutes.
Shyam, thank you so much. Got it. Thanks. Thank you for answering the questions.
Thank you. The next question is from the line of Renish from ICIC. Please go ahead.
Yeah, hi, sir.
Hi.
[audio distotion] Mumbai. Just two q uestions. One on the new businesses, you know, specifically on the PL side. If you can throw some light, you know, in terms of the monthly disbursement run rate, you know, what kind of a yields you are getting, would be helpful, sir.
Shalini, on your...
Hi, Renishsh. Hi. On the personal loan side, for a very long time, as you know, we've been only focusing on existing bank customers and doing a fairly digitally oriented, you know, proposition for them. Over the last couple of months, we've now expanded that. We've started a digital process for new-to-bank customers. We're still in a stage of a group, and we'll shortly expand that to a larger market in terms of the new-to-bank customers. We've also started a couple of propositions with FinTech partners. You see that in the deck, there is a proposition with Paisabazaar, and there's another proposition with FI that's going live from a personal loan standpoint.
The plan is between CP and PL, the whole unsecured higher margin products that we have, we will be scaling it up in the coming days. As Shyam mentioned earlier when he was responding to the question on credit card, to a large extent that also mirrors the answer for personal loans. It's not like, you know, on a low base, yes, we will improve and we will increase our share, but it's not something that's going to make a material shift over the next couple of years. Having said that, cross-sell to existing customers, cross-sell to, through FinTech partners, expanding to new-to-bank customers through a digital platform will remain the cornerstones of the plan and strategy, Renish.
Yeah. Shalini, I mean, you know, just to ask on the specific partnership on the Paisabazaar and FI. Have you already started dispersing? I mean, after in FI you mentioned that you have already dispersed 2,000 loans. These books are specifically to FI and Paisabazaar both put together, right?
They're both combined together for various reasons. Obviously, we don't show the splits, but they are propositions to the. In the case of Paisabazaar, as you know, they have a credit scoring methodology through which they get customers to come in and look at credit scores. We are cross-selling to those customers on it. To FI, the cross-sell is to the customers who have been onboarded as FI savings bank customers over the last 12- 18 months, and therefore we are cross-selling to them part of the deep lean strategy for them. Different propositions. The Paisabazaar re-relationship gets us more new-to-bank customers, Ramesh. The FI relationship gets us more deep lean of the cross-sell and deep lean of the relationship through cross-sell with FI customers.
Got it. Would you mind to share the average ticket size?
Sorry, I didn't get that.
Average ticket size, per the, I mean, per loan disbursement.
The average ticket size you can work it backwards then if I give you that. The average ticket size is about INR 1.5 lakh.
Okay. Okay. Okay. Thank you. Thank you, Shalini. Shyam, my next question is to you in terms of clarification. You know, when you say this, 10 basis point improvement in ROA, what's the base we are assuming? Q3 ROA 1.3 is the base or 1.3-
Stand-in ROA this year will be about 1.25%, fully applied.
Okay. Got it. From there onwards, 10 basis points every year is what we are thinking.
Basically, each year will be 10 basis. I mean, I won't say every year. Right now, outlook is for FY 2024. I'm not committing beyond that.
Okay. Okay. That's it. That's it from my side. Thank you, Shyam. And Kamlesh.
Thank you. The next question is from the line of Madhuchanda Dey from MC PRO. Please go ahead.
Hi. congratulations on a great-.
Madhue, a little louder, please.
Yeah. Hi. Hi. Can you hear me now? Yeah. Hello?
Yeah.
Yeah. Congratulations.
Madhue, can you be in speak mode? the audio is indistinct. Yeah.
Yeah. Am I clear now?
Better, yes.
Yeah. Yeah, congratulations on a great quarter. I have two questions. One is, you mentioned quite a few times about winning market share. If you could just throw some more color on who all are losing market share to you or which are the pockets where you're winning market share?
I don't know who is losing. I know we are gaining. One of the recent reports that have come out has taken a 5-year CAGR of private sector bank credit growth, and PNB has been in the top three in that, consistently growing share. It's evident in our numbers, right? We're probably the only bank that has doubled our credit book in the last five years. So evidently credit is growing. Who we are losing to, I can't quite comment, but I can suggest that in our expansion and distribution, all our product lines growing at 18%, 19%. Credit indicates that if the system growth is 17% and some are reporting 12%, 13%, evidently, those banks that are 12%, 13% are losing, and we are gaining at 19% odd.
It's broad-based, and we believe that it's sustained. I can't say who is losing, but I can say that we are gaining, and we should keep that increase that distinction.
Yeah. Thanks. my second question is on this 10 bits expansion in ROA, which is a near-term outlook for FY 2024. If you could give us some color on the ROA expansion tree in terms of what you expect to come from PPOP, from low deposit costs, OPEX, I mean, all these other components. I mean, a rough color on the same.
It's a mix. I've always maintained, it's never one silver bullet. It's steady, regular, all round. The mix of the business, continued improvement in credit standards, and our efficiencies going in, our digital capabilities are getting better. There will always be some opportunities on the treasury and investment side. A combination of it all working in favor of the bank. You know, we don't want to take our eyes of any one line. A little, you know, 2, 3, 4 basis points in each area, Madhu.
Thank you very much, sir. Thank you.
No, no silver bullets.
Yes. Thank you.
Thank you. The next question is from the line of Kaushik Poddar from KD Capital Markets. Please go ahead.
Yeah. thanks. Shyam, as usual, you have been able to tick all the boxes.
Hmm.
The next question is a little complicated, if you may. Okay. In the sense that, right now you're quoting at a price to book of between 1.2, 1.3, FY 2024, 2025, right? And the topmost bank, which is HDFC Bank, is probably quoting at 2.1, 2.2. What do you have in mind so that the price to book value goes up to that level? Is it possible? Are you thinking anything in that line? Ultimately the shareholders are looking at something like that, the price to book value going up. It has already gone up. In the last two, three years, it has already gone up. Are you thinking in something in these terms?
Secondly, you have reached a capital adequacy ratio at around 13% or something. You need to raise capital, I guess, next year. Can we expect some marquee name as to whom you may place your shares? Over to you.
Thanks. Regarding the second part of your question, first, I think, at this point in time, the CR-CAR without plowing back FY 23 profit is in the 13-point something. When we put that back in by end of April, we should be back to 14 odd. Our own internal figure point is somewhere in the 13. We will consider, but we don't have any firm timeline. Certainly in calendar 23, there may be an opportunity and a requirement if we continue to see good growth prospects, which we think, we are seeing good growth prospects. We will wait. Whether we get a marquee name or a bunch of good names or a combination, we'll have to see. We haven't initiated anything on that count. Certainly, we will be looking out.
If there are marquee names interested, we're happy to have a conversation. Right now, right now there's nothing on that count. On the earlier part of your question, what are we doing to get the shareholder returns? I mean, I can only promise, as I have promised every quarter and hopefully delivered on most of them, to make the best for the bank to ensure that our performance levels are continuously improving. We don't take our eyes off that. Unfortunately, stock price is not entirely in our control. I know it's a bad statement for an MD to say. I have to be candid. We can only do that much. We can only perform and communicate. Results are, you know, there are many moving parts.
That said, it's evident that our performance is getting rewarded, you know, in the more recent years. We think it's only a matter of time before we get discovered fully. I would say we are not taking our eyes off the performance and the commitments we gave and the commitments we give are being honored, and we'll keep dialing that up. Like I said, the language of the bank at all levels, the mission and the passion is unhindered, and I believe that our best is sort of yet to come. Beyond that, I can't comment, Kaushik. I'd be happy if you guys as investors influence the outcome and make sure that the stock gets the deserve, you know, we get the deserved pricing.
Okay. Thanks. Thanks. Okay. Okay. Thank you.
Thank you.
Thank you. The next question is from the line of Rakesh Kumar from Systematix Shares & Stocks (India) Ltd. Please go ahead.
Hi, sir. Thanks for the opportunity. The first question is basically pertaining to the NR deposit number, which is looking a little soft, and there is a market share volatility as well, with respect to previous quarter number. Any comment you would like to offer on this issue?
I don't think anything unique. I mentioned in the last quarter also our deposits, I mean, remittance share is constantly moving up. Remittance coming into India, we are getting a larger share. It translating into deposits, there has been a market change. You know, people have either used for various other elements of completing their credit payments or investing in something or going into the market. To that extent, there has been a deposit behavior change of conversion from remittances to deposits. That's something we keep under tight watch. As a bank, we've been able to gain share in resident savings. We keep an eye on those things. I don't know if we can read much into it other than the fact that the remittances share has increased.
What you're seeing in the deck is a point in time. Typically, at the end of Q2 it's lower and it comes back in Q3. We will see how that number goes. I wouldn't read much into it.
Understood, sir. Can you, sir, this SAR deposit, you know, composition industry-wide, we see that, you know, there is a compression because there are various reasons apart from the penalization issue, you know, after TT rates and there are other issues also. Household savings numbers have kind of, you know, come down, especially towards deposit. And we also have seen, you know, some impact there. Any thought that we have put, you know, in terms of guidance, if you can help us that, maybe one year down the line where, how we would be in terms of SAR deposit composition?
I think it's, you may have seen it and observed it across the industry, right? When the interest rates are higher, the difference between your savings rate and term rates being very, very material, there's a migration towards term. Second, when there is a chase and a war for deposits, people are attaching it to higher price term and trying to get customers in. As business velocity increases and momentum of money supply increases, you will start seeing SAR getting generated. Usually credit generates more deposits. I do believe in, you know, hopefully nothing going wrong in India in a three, four quarters from now, situation should change. I'm not this camp that believes that CASA for anybody, will keep endlessly increasing unless you are materially increasing your savings rate, which therefore is equal to term rate.
I, you know, I think it's better to lock in money longer than to keep savings which can be in and out. It's a point in time what we have to watch out. I don't think it's the end of the road for CASA. SAR will be impacted as it has been impacted for the entire industry. You know, I think that will cure itself as the economy starts liberating better.
Got it. Got it. Thank you. Thank you so much, sir.
Thank you.
Thank you. The next question is from the line of Saket Kapoor from Kapoor and Company. Please go ahead.
Hi. [audio distortion] and thank you for this opportunity. Sir, first thing, sir, how is this cost to income going to shape up going ahead now with the rising interest rate scenario? What should we factor in terms of how this line item will be going ahead?
We had, you know, we had mentioned that we will try and improve that by 100 basis points each year. Happily, we have delivered this year. We're at about 48 and change. Our target is to push it closer to 48 or 47.5 in the next financial year. That's what we'll be focusing on. It's a bunch of things, both, and you know, the cost income is both cost and income. It's not one or the other. Efficiency and better mix of business and income growth, both, on both counts work is going on. We've demonstrated it at this point in time, and we believe that it will continue.
Sir, we have factored into higher cost of deposit going ahead. That is the figure. How is that figure here?
When we're modulating our NIM guidance to some extent, it factors in the potential higher cost of deposit in periods ahead.
Didn't get you, sir. Come, come again.
In the NIM guidance, which we had some moderation from the high of 3.49%, it factors in the increased cost of deposits in the period ahead.
Okay. Sir, as you mentioned that there is a strong demand for credit and majority of the banks are continuously focusing on the retail segment. If you could give us some more general details, where is this demand arising from, and what are the factors that have led to it and the strength of this going ahead, this demand in credit that we are witnessing for the last few quarters?
As a bank, those of you who've been following us for long, we've always said we will be reasonably equally weighted retail, wholesale. Within wholesale, the different businesses, within retail, the various businesses. We are not suggesting that one business alone will carry us. That is not our mantra. It served the bank well, both through bad periods and good. No different for the future ahead. I think there are opportunities for all our businesses, particularly our share being low, there's opportunity for us in all our businesses, some more than the other is where we would say. To that extent, Supose, I think the opportunity for us is not in any one business, and I think all our businesses have an opportunity to scale up, and we are pushing that hard.
Did I miss some part of your question? Is that what you said, or is there something else?
No, sir. Sir, I am trying to look at the factors which have led to the bankers like you, putting all or having comfort in the statement that there's a strong credit demand. Just wanted to understand the favorable factors that the banking system has today that is leading to this huge demand, credit demand, and the sustainability of the same going ahead. What are the factors that are contributing to it?
Got it. I got it. I think the big one that shifted the needle in the last, you know, let's say three, four quarters, has been the fact that, A, there was pent up, B, the other cost of money, was higher, and therefore people shifted to the more formal banking system. These were drivers of banks' credit. Banks had more appetite. Everybody had capitalized well, credit quality had improved. Banks were willing to lend and there was an opportunity. Now, as that moderates, as we go into FY 24 and beyond, those banks that continue to be well-positioned will have a larger chance of getting the share. Those who have increased their distribution in all the businesses will get a larger share. Those who have increased their product offerings and are hungrier for, you know, credit growth will pick up share.
you know, we think the formalization of India is giving rise to more credit opportunities. I know these are not headline statements. There are lots, you know, GST collections are going up, that many more people are filing GST, that many more data is available, that much more digital footprint is available, that much more pre-approved capabilities are coming into banks. The use of bureau, the use of credit scorecards, the use of third-party digital data are all enabling.
Right. Right. If I look at the line items of this two small points, when we look at your, the line item in the treasury part, on a Q on Q, they say there is a decline. What explains this decline in both the revenue part booking as well as on the bottom line, under the segment results?
Hrash, do you wanna give?
What you are seeing is there is a one-time impact of RBI circular which came in December. This is more about a clarification on securitization receipts. Prior to 2018 also, they have included all the securitization receipts to follow the norm which is applicable post 2018. That means you have to consider as if you are invested in securitization receipts, wherein the underlying is your own asset, you have to treat as if that asset was continuing as a loan and accordingly provision should be made. As a result of that, we have made the provision for the remaining entire balance of SR. Now our net securitization receipt balance is zero, nil. Whatever is the outstanding, the same amount of provision is also standing.
That has created an impact of additional INR 46, INR 47 crores. That is showing in your treasury line because it comes above the line, not below the line. It comes, it gets netted off against the profit on sale of investments, schedule 14.
Correct. Just, and also want to point out one factor that we investors are also receiving emails as the members, that's a good exercise that I think was started by the bank, maybe for this quarter. I congratulate the team for sending out the key highlights over the registered email. That is a good, a good point of acknowledgement from the IIT itself.
Thank you. Thank you. We'll make sure that it gets better.
It gets better.
I think, Supose, you mentioned that in the AGM, and I, we've taken note of that.
Thank you, sir, for remembering me and highlighting that factor. That is again, sir, a point also on the artificial intelligence, how is AI going to help us in detecting the NPA or the stress in the system or the early detection? What steps the bank is taking and how are you ahead of the curve in this aspect in detection of the stress and the NPA?
Right. As a bank, adoption of technology using contemporary practices has been our very keen focus all through, you've observed. For every part of the bank, whether it's origination, underwriting, collections, credit, deposit structure, we use technology and are no different from a point of view of early detection. Our collections and credit monitoring teams have invested materially in technology that reads ahead of the, ahead of the cycle in terms of various parameters. They have, I think, coined about 112 or 113 indicators, which are early indicators, which enable them to look at an account, long before it has, you know, it has any potential stress developing. The intervention starts very early. They are building models and using technology to enable that.
AI is only, as all of us know, is only a means to an end. It's not an end in itself. The teams are working on that.
Right. What portion of our loan book is on floating rate risk that gets affected with the every change in the repo rate?
Yeah. The external benchmark is about 50% of the book. 50.8%.
That is because of the gold portion also having a significant part of the loan book or, is it lower to the industry average?
I wouldn't know about the industry average, but our in our advances, EBM is about 50.4%.
Thank you, sir. Thank you.
Thank you.
The next question is from the line of Jai Mundra from BNK Securities. Please go ahead.
Hi, good afternoon and congratulations on a great set of numbers, sir. First of all, sir, you mentioned EBLR is 50%, 50.4. If you can provide the detail for other MCLR and base rate and maybe the fixed rate book.
Yeah, the fixed rate is, about 24.8% or 25%, and MCLR is 14.5%. The rest is all FX, base rate, staff and others.
Sure. sir, considering 50% is EBLR, right? maybe we are nearing the peak of interest rate cycle, barring maybe one hike. going into 2024, how comfortable you would be with, you know, kind of a stable NIMs or maybe marginal improving NIMs outlook? because as you said that the cost of deposit rise may surpass the yield increase in fourth quarter. ideally that should be the case for the entire year 2024, or there is some different thinking there.
I think we moderated our credit, NIM to in the 3.35%, right? That factors all that in.
Okay. So sorry. I thought 335- 340 is for this year, the same is for 2024.
Yeah. Which is what you are also saying, right? FY 2024 around these numbers. Everything is factored in, mix of the business, the credit quality, the pricing on both assets and deposits, the incremental credit flow, the quality of the book, the offset because of higher slippages or lower slippages, all that influences the NIM.
Right. Okay. Secondly, sir, on security receipts, right? You have taken a probably prudential step because you have taken the entire SR as if they were, let us say, doubtful free, and hence you have provided 100%. If I were to calculate the, let's say, the normalized cost, which would have been there, if, you know, you would have just followed RBI circular. In that sense, what out of this INR 47 crores or INR 47 crores-INR 48 crores, how much was, let's say, mandated provisioning and how much was, you know, prudential provisioning? Just to understand that aspect.
The entire provisioning was as per RBI's, 5th December circular. It's not a judgment or prudential element hasn't come in. Whatever RBI has prescribed, they have said it has to be provided 100%. That's what we have done.
Okay. Correct me if my understanding is wrong, because RBI had said that you have to, I think, Ashutosh had also mentioned that you have to treat SR as if they are on your books or loans, right? As per IRAC, which is followed in loan groups, most of your SRs were D3 category, right? Is that what you are saying?
Actually, we have not taken any SR. I mean, no loans under, with underlying NPAs and all that. None of the SRs have been taken in past four to five years. Naturally they would be moving to this 100% requirement.
Okay. Okay.
Rather than doing it, valuing the securities and accordingly arriving at the valuation through third party, which is advised by RFCs, which was the practice earlier. You still have for those NPAs some securities. I mean, some realizability is there and all. Now because the aging has happened, one shot, everything has been provided 100%.
Right. The entire portfolio was prior to 2018, right? That is what you're saying.
Yes. All prior to 2018. Absolutely.
Sure. Great. Last thing, sir, Shyam, you mentioned the, that you wage provisions you have been making, you know, basis the earlier settlements. If you can provide a number that you know, what you are estimating to start with, and what is that number in rupees crores so that, you know, just to get an understanding what could be the steady-state provisioning and maybe the, you know, staff cost number?
Roughly INR 20 crores a month we are providing, sir.
If I were to strip this INR 40 crores from this quarter, the rest should be BAU, and then you add three months of this wage provision. Is that the way to look at it?
No. It's from November, December. It's effective November 1.
Right. From next quarter, maybe additional INR 20 crores because for one additional month.
No, additional INR 20 per month.
Right. That is what I said.
What you are saying is correct. 40 plus another 20. Yeah. 40 for two months, this is 20 per month. Right.
there is no other, let's say, you know, any other one-off or maybe, super normal kind of, wage, expense there.
I think in the past bipartite and all, I think, the increase has been somewhere between 10%-15%, 13%. We have gone conservatively and taken the highest of that. 15% we have straightaway started from the day, buy protect has become due. From 1st November 2022, it's due. From that date itself, we have started providing 15%.
Understood, sir. Yeah. That is all from my side, sir. Thank you and long live.
Any part would remain on, you know, what, how the yields move.
Right.
Yields fall suddenly, you will have to then look at the, you know, the pension benefits based on the discount rate and all those things. That is something which is beyond anybody's control. That as it comes, then we'll be assessing it.
Sure. Thanks so much, sir.
Thank you. The next question is from the line of Krishnan ASV from HDFC Securities. Please go ahead.
Yeah. Hi, Mayank. Thanks. Wish you all a very happy New Year. Just a very quick question on the fee income traction that we have been seeing and it seems very consistent, so that's nice to see. Just, Shyam, your thoughts on how much of this is a tailwind of where we are at the macro, the fact that the high quality large corporates are allowing you a certain environment where the pricing power is relatively free because every other bank is also willing to pay this. Versus how much of this is purely the capabilities given the fact the share of wallet has gone up and hence... I mean, is there any way to split hairs on this at all?
No, I can only confirm that it's not opportunistic or arbitrage. It is structural. If you by any chance see slide 29, you will see quarter on quarter sequentially loan processing, exchange commission brokerage, and other fee income growing very steadily, reflecting the underlying business growth. In many quarters back, we said credit growth 2% more fee income growth, and that's holding out quite well.
Right, just the other thing around asset yields as well, given that you have been building towards a high quality, portfolio for a fairly long period of time, but it was not reflecting in asset yields because it was a very crowded trade. Even now it seems that way. I think the pricing power seems to have come back with more and more banks exercising it. Is that just a function of where we are in the repo rate cycle? Do you think that comes off at any point, I mean, at any stage at all?
Krishnan, to some extent, yes, it's where we are in the cycle. I also think having seen this for as long as I have, at any point in time, somebody has discretion problems in the industry. Somebody ends up being creamy. It's not something that you can always say. Yeah, broadly, the power is now not entirely to some maniacal behavior. There is some order that is restored.
Got it. I'm done with my questions. Thanks. Thanks for the opportunity.
Thank you. Thank you. The next question is from the line of Prakhar Aggarwal from Elara Capital. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. Just couple of questions. One is on MSME. How do you see the competition level moving in there? Are you able to pass on the rate hikes efficiently in that, or probably the competition is preventing that back? A related question to that is essentially on a fixed rate book as well. Have you been able to pass through the entire rate hikes at a certain level to these loans, or probably, that also is lagging the transmission?
That will, you know, by the nature of a fixed rate it cannot be, you cannot pass it right away, right? It has to only on maturity.
On a fresh disbursement.
On fresh disbursement, yes.
Sorry, sir.
On fresh, yes. Fresh, yes. MSME, I think, general theory, we hold just a little more pricing opportunities. Even there the better customers are getting both opportunities and are demanding. If you want the better credits, there's a price, you know, price trade, and we try to use that trade opportunity by getting in other businesses of the client. We're seeing meaningful progress there. Both rushes, both businesses have seen a good traction on other income and so has business banking.
Second, just on the second part, a clarification. On the fixed rate book, the part that I meant was for a fresh disbursement, are the loan yields driven by the similar amount that the fixed rate has gone up or it's lower?
Shalini or Harsh on the auto loans?
Yeah. Yeah. See, on the fixed rate loan, it's not that, fixed rate loans have gone up by 2.25% across the board. Obviously that will be passed on, but not necessarily the same intent, same spread.
Even auto loans have not gone up by 200 basis points.
Yeah, exactly.
What would be the level of pass-through that probably you could quantify? I know it's a broad number, but...
80 basis points.
Okay. Up to 25, 80% because of the pass-through.
Shalini, would that be right, Shalini, on the auto loan?
Yes, Shyam. That would be about right. Yes.
Okay. Just last bit on your expansion. You probably highlighted that you'll probably plan to add around 55 branches for this financial year. How would you, how are you looking at branch network over a period of next two, three years? We have been fairly stagnant over the last five years. Just from that and going forward, how you look at that?
Yeah. In the April call, April-May call 2022, we had said we'll add 70, between 50 and 75 in FY 2023. Similar numbers two years from there or a little more. 250 branches is what we said we'll add over a 3-year period. As I speak to you, I think we've crossed 60 this financial year and well on course to make it maybe 75 branches this financial year. Roughly between 80-90 branches each year, the next two years. Roughly 250 branches. Yeah, the size of a branch changes. The role of the branch is more sales and service oriented. I don't see branch alone. We are putting into a lot of mobile capability as in not digital mobile, as in physical mobile, as in bus branches.
We are the only bank that has got two buses plying in Madurai and Lucknow as branches. We've got our DBUs and of course various mobile related solutions.
Got it. That is it from my end. Thank you so much.
Thank you. The next question is from the line of M.B. Mahesh from Kotak Securities. Please go ahead.
Yeah, hi, sir. Congratulations on the great results. Just a couple of questions. First one. Again, this question was asked, but again asking this again. If you were to look at your cost of funds moving between now and the next few quarters, keeping things as where they are, where does it peak out? Correspondingly on the loan side, a similar trend as well.
Ash, sorry, yeah. Ashutosh, you want to go? Sorry, please come again, Mahesh.
Ashutosh, the question is simple. See, today if you look at the cost of funds, and you look at the rate of change that you're seeing out there, between now and the next couple of quarters, how does it move? Like, it's gone up from 4.4 to 4.6. Where does it peak out? At what pace does it change?
Where will it peak out would depend on where the RBI stops raising the, you know, policy rates. It could be a function of that. I think, this 20- 25 basis points hike per quarter till the rates are moving up in next at least a couple of quarters is possibility.
If you keep interest rates unchanged, and that's what I'm keeping that unchanged, you'd say that it's, how does it move?
Yeah. 20 basis points per quarter it should happen.
On the asset side, how much is pending now?
Asset side I think should grow with, you know, another. It should be higher than in the fourth quarter, my expectation is that it would be higher. If it is 20 basis points increase on the deposits, I think on yield side we should have anything between 25- 30 basis points.
Okay, perfect. The second question to Shalini, ma'am. Ma'am, just the progress on the Federal Bank subsidiary, how has it gone? What has been progress in terms of efficiency that you've been able to extract so far? Thank you.
Mahesh, are you referring to the insurance subsidiary or?
No, no. He's talking of FedServ, Shalini.
Okay. FedServ. Okay. FedServ. Sorry. I think Venkat will come in on that one, I'm sure, in addition to what I will say. Venkat wants to say a few words, I think. Clearly, we're seeing a huge amount of energy or potential that has come out of it. A lot of the activities that were normally being done in the branch are now being done in a more effective manner. The FedServ number of employees has crossed, if I'm not mistaken, it's in the 700 range right now. We've also migrated a lot of the activities of the call center into it, both inbound and outbound collections activities. And we are in the process of migrating a few more activities that we do in the branch here. Clearly we're seeing the benefits of it.
Probably won't see the direct benefit on the cost information. That's because there are so many things that are moving in the cost information. The best way to look at this, Mahesh, is what would we have been the cost if we had to do some of these activities as we've been growing in the bank. If you see that, in terms of the benefit, clearly you can see that FedServ giving us benefits. Venkat, I think you are closer to it now and, you should probably be able to add to what I said here.
Sure, Shalini. Yeah, thanks. Mahesh, we have a fairly ambitious plan to scale up what activities can be done by the operations subsidiary. Currently as we speak, we are close to 900 accounts spread within two locations. There are clear visibility of adding at least another equal number to support all the bank's activities which are permissible as per the RBI's approval. There are some additional activities as well which we will now start performing from the operations subsidiary. We are looking at more than, you know, cost saves. Yes, there will be. What we are looking at is creating operational centers of excellence where the process will be reengineered and use of, you know, earlier there was a question about AI and all that.
To the extent possible, where processes can be automated using some of the new age technologies, we will do that. That through that route we bring in the efficiencies which will be eventually reflected in the bank's numbers. To sum up, very ambitious plans to scale it up. We have grown from almost 600- 900 in a year, and probably the pace at which it will grow will be further speeded in the next 12 months- 18 months.
Perfect, sir. Thank you.
I think with this we are close, Souvik. If there are more questions you can take it offline. Souvik?
We can close it, sir. No problem. There are a few more questions. We can close it as of now. I think, yeah, we can.
How many are standing in the line? I mean, if they're signed up and waiting, it's unfair to cut them off.
Sir, there are two, three persons, sir.
For sure. Is there any burning question?
We can check, sir. We have Manish Shukla next on the line and few have again joined for the second time, I think, in the queue.
Okay. We'll take five minutes more.
Should we take the next question?
Yeah.
Okay.
Next two questions, please.
The next question is from the line of Manish Shukla from Axis Capital. Please go ahead.
Yeah. Thank you for taking my call.
Thank you.
You said that individually, credit card or PL will probably not be a large part-
Mr. Shukla, sorry to interrupt you. Please use handset mode. The audio is muffled.
Yeah. Am I audible now?
Yes, you are.
Yeah. Thank you. I'm saying that, while individually credit card and PL may not be a large part of the portfolio, the high-end segments that you added, collectively how large do you think they become, let's say, a year or 2 down the road?
If you recall, Manish, a few years ago, I said by FY 2023 end, around this March, these three businesses, commercial vehicles, credit cards and microfinance, these three businesses will be about INR 67,000 crore, and we think that will double in the next two years or a little more than double.
In terms of the credit underwriting, the only reason I ask this question is that we'll probably see the margin-related benefit or yield-related benefit being frontended. Whereas typically, credit costs come and hit us with a lag. We've seen this could play out elsewhere in the system and-
Not in, not in Federal Bank, Manish. That I will say with some degree of confidence and arrogance. We have not allowed that to happen.
Sure. You remain confident that there will not be a broad ROE trajectory?
By now it'll be INR 5,000 crores, INR 10,000 crores. We are extremely adamantly focused on that.
Got it. The last question, Shyam, is that the better part of last 10 years, the risk-weighted asset density for the bank has been hovering around 60%, which is lower than some of your larger private sector bank peers. Going forward, you think we'll still be in this ballpark trajectory or there are plans to push it higher?
Sorry, repeat. Come again.
The risk-weighted asset density, the risk weights to total assets.
Yeah.
for the bank has been hovering around 60%, between 58%-62%.
Yeah.
Whereas most of your larger private sector bank peers would be 65, 30%+ and that explains the yield and margin difference obviously. Any plans of pushing it higher or you will ballpark be in the same vicinity?
It is an outcome of the business model, Manish. It's not so much as that's the number we chase. The businesses that we are pursuing and the mix of the business will reflect in that. There will be some movements and that will reflect in the NIM and the ROE. That's how we've brought it up from. Unfortunately, it went down to 0.76 and we brought it up to 1.25 and credibly and consistently we'll keep pushing that up and that's our commitment.
Got it. Thank you very much.
Thank you. Any other question, operator? Does anybody want last question?
we have-
There's one more, sir.
The next question is from the line of Gaurav Jani from Prabhudas Lilladher. Please go ahead.
Thank you, sir and congratulations. Firstly just want to theoretically understand, you know, say for example, RBI raises the repo by 250 basis points. Is it safe to assume that the entire 250 basis points will be passed through in terms of overall use?
Over a passage of time, yes. May not be penny to penny, but largely, yes. I think for repo-linked rate accounts, yes. For, you know, others, it could be, you know, some part of it or, you know, I mean, maybe entire amount. Depends on which segment we are into.
Understood. Just wanted to theoretically understand as to, you know, how much would the.
On the retail loan side, we have been able to do it nearly 200 basis points out of 225 and the last hike has happened only in December, 35 basis points. Out of 190 hike, we could, you know, move to somewhere around 200 basis points on the retail side. A similar number was there even for corporate CIB, somewhere closer to 181, 182 basis points or so. I think. And there is another segment where it was just 155, 160. It depends on, you know, what type of intensity, competitive intensity is there in the market.
Understood. Just last question, sir. Sorry to harp on this a bit more. You know, the cost of funds have sort of beaten estimates. You know, how should we look at it in terms of the fact that this quarter we saw a fair bit of increase in the wholesale deposits, but it seems that, you know, the cost of funds were pretty much controlled.
Despite increase in wholesale deposits, the percentage of wholesale deposits to total deposits still is very small. Even if that segment has, you know, seen some, you know, sharp hike in rates of interest, it's not impacting the whole stock to that extent.
Understood. It's totally decreed, okay. Thanks. Thanks for that.
Granularity is the retail nature of deposits, which gives us an edge.
Understood. Understood. Thanks a lot.
Thank you. Ladies and gentlemen, we will take that as the last question. I now hand the conference over to Mr. Souvik Roy for closing comments.
Thanks, Prashan. In closing, I want to thank you all for joining us today. We are committed to delivering value and we will continue to focus on our growth and strategy. As always, the management team and I are available to answer any questions that we may have skipped today. We appreciate your continued support and look forward to updating you all on our progress in the future. Thank you all and have a great year ahead. Thank you.
Thank you everybody.
Thanks everybody. See you. Bye bye. Thank you.
Thank you.
Thanks.
Thank you. Ladies and gentlemen, on behalf of The Federal Bank Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.