Capitaline

Analyst Meet / AGM 29-Jan-25

Conference Call

Federal Bank

Focus on strategic reorientation without disruptions, maintains credit cost guidance of 40-45 bps for FY25

Federal Bank conducted a conference call on 28 January 2025 to discuss its financial results for the quarter ended December 2024. KVS Manian, MD&CEO of the bank addressed the call:

Highlights:

New MD has completed one quarter since taking over as the MD of the bank. The MD aims to forge a new way of thinking within the bank – astute, agile and alert, being called AAA culture.
The bank has formulated a detailed strategic plan which emphasize to gain more relevant scale beyond Kerala and the bank need some breakthrough effort to make this happen.
The bank has made some pivotal decisions about a strategic reorientation without disruptions. These changes are essential for creating a solid foundation.
The focus is on granular growth that strengthens the foundation of the bank.
The bank has implemented several changes aimed at improving the quality of the liability base. The most significant change has been shifting internal focus to average Casa as a key metric. The end of period Casa shows a decline primarily due to a drop in wholesale current accounts. However, the average Casa improved 2.3% qoq with saving deposits rising 2.5% and current account by over 1%. The focus is on quality, stability and sustainability in the deposit base.
Total deposits dropped from Rs 2.67 lakh crore end September 2024 to Rs 2.65 lakh crore, as the period and Casa deposits declined by Rs 1100 crore, wholesale terms deposits of Rs 3 crore+ declined by Rs 4000 crore to Rs 33848 crore from Rs 37821 crore.
The concentration of top 20 deposits has declined by 33% aligning with the broader goal of reducing Risk by diversifying deposit base.
The LCR unfriendly deposits from the financial sector have dropped by Rs 5000 crore to Rs 13593 crore from Rs 18412 crore. LCR has shown remarkable improvement from 111% to 133% end December 2024.
On the asset side, the bank has taken significant forward-looking measures in Q3FY25, as a part of broader reorientation strategy.
The bank sees current time not right to accelerate growth in unsecured lending instead it is waiting for the credit cost environment to stabilize before expanding in that segment. The credit card segment is an exception.
The bank is tweaking various variables to enhance yields and optimize portfolio performance
The low yield home loan book rose 9% yoy with 80% penetration for savings accounts. However, rate competitiveness in this segment remains a challenge for growth.
Auto loan portfolio grew 25% yoy despite a slightly slower growth due to strategic shift from a floating rate model to a fixed rate model with 80% of new disbursement being fixed rate
The medium and high yield businesses have grown faster than the book average.
Commercial banking grew 5.65% qoq and 24.5% yoy, reflecting healthy momentum.
Business banking grew at 13.3% yoy with record disbursements in December 2024.
The gold loans increase over 30% yoy though bank expects some regulatory headwinds to have slight impact on growth in the near future.
LAP loan book grew 20% yoy with marginal improvements in pricing.
The microfinance portfolio remains an area of cautious navigation with focus on managing risks for long-term sustainability.
The credit card business is growing
The corporate and institutional banking portfolio has taken a prudent and balanced approach particularly in exposure to certain sensitive sectors like NBFCs and power by actively managing these exposures.
The bank has maintained stable NIMs even though the cost of deposits has increased marginally
The bank has made a key change in approach to NPA provisioning for retail unsecured loans, by adopting a more robust provisioning framework close to the industry best practices
With this change, annualized credit costs have increased to 41 bps in 9MFY25, while the guidance continues to be 40-45 bps for FY25.
The bank has taken accelerated provision even while the overall quality of the book has remained very stable.
The fresh slippages rose slightly to Rs 486 crore in Q3FY25 from Rs 428 crore in Q2FY25.
The accelerated provisions are on account of the existing NPAs.
The bank has also written off NPAs of Rs 496 crore in Q3FY25 reducing net advances.
The implementation of these measures, the one-time impact on PBT is Rs 292 crore in Q3FY25. Without these provisions, the net profit would have been at record high in Q3FY2025.
In a small business loan portfolio, the bank has shifted 20% of the portfolio to the fixed rate model.
The bank expects to do auto business on 100% fixed rate from Q4FY2025 from 100% variable rate 3 months ago.
The bank targets loan growth at 1.5 times of the system growth.
The fresh slippage ratio is below the annual target of 1% at 0.83% and the bank does not expect surprises on the asset quality front.
The bank aims to maintain the margin at current levels.
The bank did not provide any guidance on capital raising.

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