The Federal Bank Limited

Ladies and gentlemen, good day and welcome to the Q1 FY24 Earnings Conference Call of 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 this conference, please signal an operator by pressing star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Suvik Roy, Head, Investor Relations, Federal Bank Limited. Thank you and over to you, sir.

Thank you so much and good evening, everyone. Thank you for joining us on this post-earnings call. We appreciate your time and continued interest in our bank performance. We are delighted to continue our tradition of reporting on numbers early and providing you with the timely insights into our financial results. Today, we are pleased to share, as you may already know, that our total business has crossed an impressive milestone exceeding Polacroil. This achievement reflects the exceptional momentum we have experienced across all our businesses, highlighting a strong start to this fiscal year. To address your questions and to provide deeper insights, we have our MD and our senior management present on this call. They're here to provide you with valuable perspectives on our performance and shed more light on our strategic direction. So, without further ado, I would hand this call over to our MD, who will provide you with additional, you know, details on our region's achievements. Thank you again for your participation, and we look forward to a fruitful discussion.

Over to you, sir. Good afternoon, everybody. Thanks. Thanks, Shavek. By way of introduction and updates, I thought I'd just begin by sharing some senior-level inputs on the bank. Chairman Mr. Bal Gopal retired about 10 days after completing eight years on the board. The next chairman, Mr. Hota, took charge on 27th of last month. He needs no introduction. Mr. Hota has been a pioneer and the original founder sort of father of NPCI, if you will, so we're quite pleased that somebody of his debut and capability is now the chairperson of the bank. And in the board, Ashutosh completed his term as executive director, has stayed on as the chief mentor for another year, and Harsh has become an executive director, so both thanks to Ashutosh and compliments to Harsh, and I thought that's an important starting point for our conversations today. strength and the depth of the team is now both durable and as known and they are executing uh quite well uh uh just now uh sort of shawit talked about the four lakh crore i want to point out uh the one lakh crore from three to four was done in two years and the previous one lakh took us i think three years and the previous one like took us five years so the bank is seeing consistent and steady growth. And it's important to point out that in Q1 of this year, at least in all my time, first time we saw sequential, you know, traditionally Q1 and seasonally a slow quarter. We saw strong momentum and we saw all our businesses growing roughly about 5% sequentially. It's not about the why on why growth. We saw momentum and we believe that that momentum should be sustainable into FY24 and probably beyond. I had guided at the beginning of this year, financial year, we would be able to grow 18 to 20% both on advances and on liabilities, and I'm encouraged to see that that momentum is well in grasp, and we've had a reasonably good start to the financial year. Normally, I resist giving commentary on the environment and the economy and Neither am I an economist, but I thought this time since we are the first bank to declare results, maybe I will just take the liberty of giving a couple of points in specific to the market and the environment as we see it from the ground. The credit growth opportunities, particularly for a bank like us, still is intact and growing quite well. Even through the early part of July or the Q2, we are seeing demand sustained credit opportunities to grow are there. And our choice has been that we don't want to dominate one business, as I've said for long. We have the retail mix, the wholesale mix, between them how it should be. And within those businesses also where the opportunities are. And we're seeing that sustained even in Q2, and I believe that should continue as we go into FY24 and beyond. On the liability side, I do think... and I would think many in the industry do concur. The worst of the rate war is probably behind us, and it did help that the Rs. 2,000 withdrawal aided us all with some additional deposit growing opportunity and provided some much-needed respite for that part of the bank. In particular, for federal, the remittance business, which remittance and the NR deposit business, which was kind of muted in most parts of FY23. Towards the back end of FY23, we started seeing it pick up. You may have seen our slides as well, the market share that had come off has come back to us now. And likewise, NR deposit share, particularly the rupee deposit share for us is growing, and we are seeing that momentum come back in. And it's an interesting dynamic. The period post-COVID, we saw some behavioral changes. I was quite surprised You know, we're watching it quite closely to figure out if there is a sort of a long duration change or is it just, you know, behavior correction. It appears to be the, you know, sort of the rubber band is back and growth on that front seems to be coming back up. And the last point, which is important, which I think I, we, over the last, particularly in the last three weeks of June, we had an opportunity to go out and meet many current or prospective investors of the bank. We did share our business plans and our commitments and our guidance, so to say, on how the year will shape up. And I do think on those points that we mentioned, the first quarter has pretty much stacked up on most of this count, be it growth or be it on the outlook on margins, the near-term impact and the longer-term outlook of margin, the business mix. and the steady overall credit cost that we will anticipate. So I just want to reinforce our Q1 in the context of the environment we are operating in. We remain quite confident that the growth momentum we saw will sustain in FY24. The margin outlook is playing to what I think our model had suggested. As most of us know that Federal Bank reprices T plus 1, so the impact on advance gain was earlier, so was the impact on margin compression. So between Q4 of last year and Q1 of this year, I think we have seen the impact play through. I did mention in my calls earlier today in some of the media interactions that we believe that the compression we saw should start turning the way, you know, there should be margin expansion that will come through because the tail end of the rate increase on deposits have played through, the yield expansion on both credit and also the business mix is beginning to show through. So our belief is that what we had said last quarter, that the full year margins will be somewhere around the 3.3 space, we will see that pick up from Q2 onwards. So in short, we have begun the year reasonably well. On guidance on most of the areas that we spoke of when we met, when we spoke in May 6th, I think, after the Q4 results and the conversations I had subsequently with many of our investors, analysts who were keen to understand us better, our outlook for FY24 remains reasonably intact. We believe 80-20% credit growth is okay, possible. The margin, we said, will be a year of two halves, the first half being softer and the second half picking up. I'm now encouraged to believe that in the second quarter itself, it will start picking up. And lastly, the credit quality and the credit costs are certainly going to be in and around the number which we talked about, about 40 basis points plus or minus. So with that, let me just mention that we are, as usual, the entire senior team is there, and all of us are happy to take questions or clarify. So I'm happy to open it up for questions. 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 touch tone 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 from the line of Nisar Parikh from Native Capital. Please go ahead. Yeah, hi. Thank you for taking my question.

The first question is, you know, we are obviously growing the retail high-yield book strongly. Can you just talk a bit about how is the credit performance in that book, especially given the slippage rate has gone up further, you know, in the quarter to 1.9%. So can you highlight the reasons for that and give some numbers of six MOV 30 plus for, you know, gold loans or MSME personal loans, et cetera.

The retail assets that are growing in these so-called high margin businesses, as I point out, they are early, so there is really not much in terms of slippages or even SMA positions at this point in time that is uniquely different from our normal ground rates. If you're referring to the slightly higher slippage on retail this quarter, I think we had mentioned that in the past, the moratorium on the March 31, 2021 book of retail, which is the COVID restructuring, a large part of the retail restructuring COVID moratorium book ended in March 31, 2023. So those, their demand would have been in Q1 of this quarter. So of the 250-odd crores of retail slippages, close to 30% of that is from the restructured portfolio. And that's the reason for the slight uptick in retail, but it was within our overall policy basis point that we had visualized as credit costs. So in terms of incrementally, at this point in time, we are also acutely sensitive to the question you ask and the narrative that's going on in the market. We're not seeing any trend shift because the book is secured. The unsecured book is just uh growing at this point in time hasn't shown any adverse outcome any differently from what we have placed in any of our credit books um got it and the uh and the second question was uh you know on the liability on the deposit side uh so uh you know from a geography perspective can you give a split of what percentage of that would be semi-organ

And, you know, is that area of semi-urban rural, is that a focus and are we seeing growth there? And secondly, just one data point, what percentage is outside of Kerala in the deposits?

Let me give you some of the details. First is about 70 odd percent of our network is in semi-urban rural across India, right? In fact, unfortunately or fortunately, Kerala doesn't have anything which is rural. Kerala is a very urban, semi-urban market. But our large part of our network, particularly the incremental 800 branches that are outside of Kerala, are in, hardly 70% are semi-urban. So bulk of the growth that is coming, and therefore you could attribute to geographies that are fairly widespread across India. The non-Kerala, the biggest immediate geography is Tamil Nadu, where we have 200 branches. Out of that, I think the city of Chennai and the city of Coimbatore collectively have about 50 branches. So Baki 150 branches are in sort of spread. We are there in every district in Tamil Nadu. And likewise, we are working to be in every district across the country. And, of course, the incrementally of our incremental deposits, say about 15% or so, has been coming from FinTechs, which are coming from 18,000 PIN codes. They have about close to 800,000 crores of deposits come from all our FinTech partner accounts that we have originated. And that's coming from 18,000 PIN codes in India. India has 19,000 PIN codes. So it's coming from very distributed geographies. There was a question, sorry, I missed the other part of the question. Could you just expand on that? Sorry, I missed it. Yeah, how much, like deposit, what percentage would be outside of Kerala? 45% of the deposit is outside Kerala, 40 to 45. And is that number different for incremental deposits? Are we seeing that? Yeah, incrementally for the last two years because of the expansion outside, that's where it is. The stock is where Kerala is bigger. Rate of growth of deposits outside Kerala has been higher than the rate of growth inside Kerala. Okay, thank you so much. I'll come back and look at it. Thank you. The next question is from the line of Anand Dama from MK Global. Please go ahead.

Thank you for the question.

First, can you explain basically was there any interest reversal?

The line for you is not very clear. We request you to please use the handset while you are speaking.

Am I audible?

Yes, this is much better.

Please go ahead. I was asking that was there any interest reversal on the NPH in the current quarter?

There would have been. NPH is about 495 crores. Correspondingly, there would have been interest reversal, right? The last quarter was 454, so about 40 crores extra. To that extent, there would have been reversal of about 10-15 crores.

Okay. And what basically gives us the confidence that the second quarter onward, basically, we will see a margin expansion?

Because the yield on advances, I think we have shown that, has gone from, I think it's gone to 920, 920 if I remember right? 921. 921. Our model suggests this quarter will go to 927. The cost of deposit which is at 534 looks like start moderating. So, the spread will open up.

So, basically in that case you mean that the yield expansion will happen in the second quarter as well sir?

Yes, we are expecting that.

Yeah, that should be on a higher set, right? Because then only basically our spread would increase.

Yes, and the trend line, particularly the June-July bookings are suggesting that. We made our calendar, FY24 opening and shared our updates and our outlook. It was designed with this, and I did recall distinctly saying it will be a year of two halves with the first half being softer and the second half picking up. Now I'm encouraged to say that first quarter and then we think the pickup will be in second quarter because the model is reflecting that.

Sure, sir. Thank you.

Thank you. Thank you. The next question is from the line of Gaurav Kochhar from Mirai Asset. Please go ahead. Hi, good evening. A few questions. On the 164 crore miscellaneous income that we report... Sir, sorry to interrupt, but we are unable to hear you, sir. It's not very loud enough.

Is it better?

Yes. Please go ahead. Yeah. Sorry. I was asking what is the breakup of the 164 crore miscellaneous income that we have? There's a whole lot of this thing. There's recovery from return of accounts. There's evaluation of investments which is there. So can you just give a break up of this 164 crore and maybe corresponding to this last quarter break up. Venkat, do you want to go?

Yes, Sam. Yeah, I can go ahead with that.

Yeah. We were broadly, in terms of the breakup, there were profit on sale of investments, recoveries on assets previously written off, that was about 25 odd crores. Then dividend from subsidiaries, we had about 15 odd crores. And then profit on revaluation of investment was around 12 odd crores. And PSL, this is the first time we have in net sellers of PSL, so we had a gain of about...

52 crores which came in from the sale of PSL in this quarter. So this is broadly the breakup of that other income.

Okay, 52 crore PSL investment profit of 12 crore, dividend of 15 crore and another 25 crore of recovery from the return of assets and then profit on sale of investment was about 30 odd crores. Okay, okay. Sure, sure. So, this PSL profit of 52 crore, do we expect this to recur in the coming quarters also or this is likely to recur at scale? There will be some, but it's not at the scale. Right. Typically, we can, what we should note is that we have now moved to a situation where we are able to generate more and sell and make income out of it. So, probably a Hopefully every year Q1, because Q1, as we said, is where we maximize for the full year. We should start seeing this recovering on an annual basis, may not be on a quarterly basis. Sure. Understood. And on slide 14, where we give the breakup of the new businesses or so-called high-yielding businesses, the share of that and the overall advances, and there's another chart, what is the share of revenue from these businesses. So I think the revenue includes the revenue of treasury, miscellaneous income, everything, right, here in this case. And the interest income would also include interest income on your treasury book or cash, which may not be the right picture. Like what would be the core income shares? Typically, one would assume that the revenue share from these businesses should be much higher than their overall share in advances. but that same is not reflecting out, right? If you look at the average, 33% is the share in advances, but on the revenue, it's just 30%. Optically, it looks different, but if I were to exclude the treasury and, you know, the non-advances related income from the denominator, probably the advance, the share of revenue of these items would go up. So just wanted to understand, you know, what would that number be? If let's say the share in advances is 33. What would be the like-to-like income share? This wouldn't have a treasury income in this. I don't know where you're reading the part of treasury income in the high-yielding part. Okay. So, here in the clarification down, you've given revenue is equal to interest income plus non-interest income. So, here I'm assuming that interest income includes... Not treasury related. There will be the fee related to these businesses. Okay. So in this interest income line, are you only taking interest income on advances or you're taking interest income, total interest income? Only on advances. Okay. So in that case, sir, then why the revenue share is lower at 30%? Because typically these are higher margin products. So the yield would be higher. So the share of these on the overall book should be much better than 30%. Also, you'd have to look at the period at which this grows in terms of average during the quarter, or is it more towards back-ended?

There are different factors which come into play in the income number.

Cost of origination will be there in the first year. Yeah, the first year it will be there for some of the products. Sorry, sir, this is just revenue, right? So you've also considered cost? Is it net of that?

No, not the... In some products, we will have to do the net, whereas in some of them, the cost is shown in the expense line. That's based on the accounting.

Okay. It's not very clear, sir. Maybe I'll take this offline. Yeah, I can give you the details separately, which products we net off, what cost element.

Okay.

The cost is shown separately. Sure. The idea was that if these are high-yielding, typically they should fetch more on revenue. despite being 33% of advances, ideally the revenue mix should be much higher. But the same is not reflecting in this chart, so I thought maybe on the denominator there is other income also included. I think the observation is valid. We will put out an explanation for everybody to see, not only the Mirai folks. We'll put out for everybody. And the last question, what would be the incremental cost of term deposit? You mentioned that you expect the cost of deposits to trend down in this quarter. So just wanted to understand what would be the incremental cost of term deposits and what would be the stock cost of term deposits? Venkat Mani, you have it?

Yeah, it should be another probably around 10-billion increase from where we are currently, right? Yeah. 6.4, 6.5, 10-billion moment.

Okay, so you're saying current stock is 6.5 and incremental is 6.4. Hello. Okay, stock is 6.4 and incremental is 6.5. Okay. Sure. Thank you so much. Thank you. Thank you. The next question is from the line of Kunal Shah from Citigroup. Please go ahead.

Yeah, thanks for reading my question. So firstly, with respect to yield repricing, no doubt repo has got repriced at P plus one. But last time we were highlighting that there could be benefit of LCLR repricing plus the proportion of high yielding is actually moving up. So is there maybe only either on the business banking, commercial banking, we are seeing some competitive pressures with respect to yield on account of which there is only like seven, eight bits kind of a suspension price.

Indeed, yes. I mean, we are, as a business model, not willing to go at segments that are willing to pay you price but have risk associated higher. Our model has always been where we get competitive price but try to get more business from the customer. And we are seeing that playthrough in all our full engagement. You're seeing our fee income steadily improve, as you've seen this quarter also. So the model of the bank is to ensure that we go after the better rated customers in every segment, be comparatively priced. So we may not enjoy very high margins on that count, but get good credit quality and free income increase. And therefore, the ROA expansion that we have seen will sustain.

Sure, so even in terms of going forward, despite the proportion of high yielding expected to insert, we will not see too much of improvement on the advanced series side because of maybe a more inversely better rated customer segment.

The margin expansion will be there. That's why we said it's troughed out and we believe it will go up by maybe seven, eight basis points in this quarter, the quarter that succeeds. and that sustains from there on. But it is not going to go back, you know, go to, you know, 3.8 or 3.7 in a hurry.

Okay, sure. And last time you highlighted that the bulk deposit increase was largely due to series, and most of it is unwind in one queue. But again, if we look at it, in fact, there is still like 70-80% sequential growth seems to be there in the wholesale deposits. while retail seems to be relatively low at less than 2 odd percent. So maybe if the deposit cost unwinding we are expecting because this proportion could actually come off or maybe what could be the proportion of the gold still maybe if you have to look at it two quarters down the line, three quarters down the line.

At the peak, we were 95% retail in the RBI definition of retail deposits. That's come down to about 86-85% now. This will be the baseline. Between 85 and 88 is where retail deposits will be.

Okay. And we see benefit of this reflected in the cost of deposits. Maybe is there any unwinding of wholesale which is giving us the confidence that cost of deposits should be lower in Q2 compared to that of Q1 because otherwise cost should actually rise upwards only.

We did mention, I did mention even today, so did Venkat, the Q2, our overall cost of funds will move up from I think this quarter was

530 something will go to 540 but the yield on advances expansion will be higher that's why the margin expansion okay okay got that and uh lastly in terms of copy so uh maybe excluding the forex when we look at it in terms of card processing and all there is a decent level of uh correction So should we see maybe what we highlighted in terms of that being one of the incremental data to the ROAs, we are equally confident in terms of given this kind of product segments and the process which is happening, we should be able to sustain this overall momentum on the fee side?

I think yes. So if you see slide 19 where we have given the mix and fee income, It is distinctly pointing out the areas, and many are volume and scale related. They are not one-off or unique to a quarter, other than the PSL one which Venkat spoke of. They are all transactions, and we think that's sustained, right? So we are confident that momentum will play through. In fact, we are pursuing fee as a share of assets closer to 1%.

Okay. Thanks a lot.

Thank you. The next question is from the line of Arvind R. from Sundaram Alternates. Please go ahead.

Hi, sir.

Thank you for taking my questions. So, like, this was already discussed, but I still would like to understand, like, the CASA plus retail term deposit has been coming down, like, even though, like, other peer companies, banks, or CASA has been coming down, CASA plus HLTD has been fairly stable, like what gives you confidence that you will be able to bring it back up. And I know like I wanted to understand like how much of this seven to eight GIFs is attributable to like high-yielding segment. Why I'm asking this is like, As the repricing has already been done, like by now, like year after only the exchange will contribute to higher yielding, sorry, higher yields. That's my question. Yeah, I think you're right. Mixed change and incremental volume coming at pricing higher than what it was traditionally, which is what I said we're extrapolating the last 45 days kind of run rates we are visualizing. And that's how the yield on advances expansion will happen. On the mix of retail deposits, I mentioned, you know, the rate is between 85 and 95%. We were at 95. We were close to 85. You know, there were probably banks which were at 70 and stable at 70, 75. But we were already at a high, so it's likely that we had to support our credit growth in an era where deposit costs were higher. We had to get term from retail customers. These are retail customers' term deposits. We have not... bulk borrowings in the market.

Okay, thank you. So, if I see core fee income to average SS, that is actually fairly stable. Maybe in the first quarter, it is slightly lower because of the seasonality in the first quarter. But you are talking about, you know, it is like a fee income actually inching up, but it is primarily due to treasury income, I mean, you know, treasury gains and PSLV income, right? This is not, these are all not recurring for every quarter.

You're right. I think this 535, which is the core fee income, is the number that I'm also referring to because the rest tends to be, you know, sort of choppy. This is going at about 20-22%. And like the higher yielding segment of like, you know, like I understand like it is 33%, I just know. But do we have any, you know, medium-term target in terms of, like, reaching 40% of the fee? No, I'll tell you where we have, I think we mentioned last quarter also. The overall book of the bank, we wouldn't want these segments to cross 10% of the overall outstanding of the bank. There are three guidelines, retail, wholesale, 55-45. Unsecured as a part of the total portfolio, not more than 10%. And no segment will be more than 15% of the bank. Okay, sir. Just one more thing, like, could you give me, like, a little more color on MSME segment? What is the usual average ticket price? And, you know, maybe, like, what could be the yields? Like, if you can give something like that, and, like, whether it is predominantly working capital, terminal kind of thing, and what kind of sectors do you usually give to?

Like, is there any, can I associate to any particular sector of the job profile?

Harsh and Shalini, do you want to go? Maybe Harsh and Shalini on this?

Sure. Yeah. I'll take it. Shalini, you want to go ahead?

Harsh, go ahead. Go ahead, Harsh.

Yeah. Okay. MSME for us goes across all verticals. They come at the higher end of the MSME are in company banking and up to the lower end, which is in business banking. So all three verticals have it. In terms of the things you're looking at, the sectors, we are using every sector agnostic. Some of the places that we are very comfortable at is FMCG suppliers, vendors and suppliers, to some of the large OEMs. And some of the sectors which we are looking at like chemicals, white goods, all those vendors over here. MSME is quite broad-based across sectors, across regions.

So this is on the MSME side. We are Comfortable in terms of growing it through the supply chain initiatives also, which again qualify as MSME. The vendors and the dealers of the large corporates is what we are tacking on and going ahead.

If I can just add to that, on the lower end of the MSME, which is the business banking kind of segment that he calls business banking, typically somewhere in the range of anything up to about five to about seven, seven and a half. Yeah, that would be the ticket size for the MSME, for the lower end of the MSME. In this, we follow really a catchment approach. It's driven, it's very much a grant-centric business. And the catchment area of the branch is what becomes the target customer segment. So industry is not fixed. Grow where India grows. So as you notice, we've added more branches, for example, in Tamil Nadu, Karnataka, Telangana, et cetera, because we're seeing growth opportunities over there from a BOP segment. So MSME kind of spans across all of these areas, and we get the benefit of PSL across all these areas. But within that, we've segregated it to see the lower end of it. The lower ticket sizes is primarily branch-driven, secured, term loans, working capital, a mix of both, but serviced typically by the branch. The So that's really what it is, you know. I mean, the MSME and the DUD, for example, the ticket size would be about 70 or less. Average ticket size, about 10.5% yield, et cetera. But to your broader question, you know, MSME for us, and you see it in slide 14, actually spans across business banking, commercial banking also. Some data is there on slide 14.

Yeah, sure. Just two points I'll add.

On the working capital and term mix, we are roughly about 55% to 60% on working capital. The balance is the term size. The average ticket size, if I look at the medium and the small category of the MSME, it would be the region of about 15-odd crores, 15- to 17-odd crores. Micro will obviously be smaller. Okay. Thank you so much.

Thank you so much.

Thank you. We have the next question from the line of Jayamundra from ICICI Securities. Please go ahead. Hi, good evening, sir. I have this more or less same question on margins, but I wanted a few data points before that. If you can help me with the blended savings account cost for us, maybe for this quarter and last quarter. And the loan mix by benchmark, so Fixed EBLR and NCLR. Yeah, Venkat, go ahead. I have the numbers for the savings in this detail.

So, I'm just thinking whether we should be giving that level of details in the call.

Share whatever we can, and then they can interpret from there. 3.2 for the savings and blended. Sure, sir. And, I mean, just for comparison, if you have a last one.

Sorry, if I can just come in on the savings account, please. You know, like I've given the overall kind of blended number, but a very large part, you know, we, at the lowest end, we really offer only 3.05%. We do have it on the – you'll see it in the public domain as to what our kind of thresholds are and what – not very extravagant in how we pay for our savings accounts, Jay.

Yeah. Right. And also, just for your other question in terms of comparable, it will be around similar levels last quarter also, Jay.

Sure. And, sir, the loan mix by benchmark.

Yeah. The repo length is around 49 plus.

Fixed is 27. And the MCLR is about 14%. Right. So now, sir, the question is, if you see the, let's say on both yield side as well as cost of deposit slash cost of funds, the yields, if I see our reported yields in the last two, three quarters, There has been a sharp, let's say, deceleration in the pace of yield expansion. 49 basis point rise was there in third quarter that decelerated to 35 and this quarter has been 8 basis point. While the loan mix may change and hence, let's say, it remains at similar levels, But then the cost of deposit, as you said, that the incremental TD is still outpacing the outstanding TD cost and the cost of deposit may still remain firm. So it looks like the margin expansion, of course, it could be because of the capital rate if that happens. Or is there any organic mechanism also to sort of help NIMS? Because the high yielding product let me just let me just interrupt and say in my calculation when we have spoken we have not taken capital increase whenever we do that into this conversation when i guided for seven eight business point improvement so trust our mathematics and this is the final answer to this i don't need any more conversation on this sure no no don't try to cross question management's capability to calculate guys No, no, no. I'm putting a final word. I have not calculated capital trace in this conversation that of adding 7, 8 base points. If capital trace happens, when it happens, it will add its own value. But that is not in my conversation.

Right, right.

Okay? You can now do your mathematics. Yeah, yeah, sure. Next question, please. Yeah. And so just a small question on PSL. So I see that the CV, proportion of CV which contributes to PSL is 69%. So is that the, I mean, is that a broad number to be taken, or there is some, you know, some, let's say, one-off? I would have thought that the CV proportion to PSL would have been much higher, just a small observation. It's actually 69% of the presentation, Harsha. It's 69%. It's roughly about, because we also classified once we get the basic certification, which we have been getting, and it's closer to 76% now. it typically covers around 75% to 77%.

A large portion of the school buses also which we finance come under commercial vehicles, but they don't qualify under UHC because schools don't qualify for that.

So given all of that, roughly about 70% to 80% would remain under PSS. Right. And also of this, about 15% to 20% would be micro. Right. Understood, sir. Thank you and all the best, sir. Thank you. Thank you. The next question is from the line of Maro Kadajania from Nuwama. Please go ahead.

Yeah, good evening, sir. So my question was firstly on deposit growth. Of course, it looks very good right now. It's on a sequential basis, even for the sector, it's higher than loan growth because of the, possibly because of the 2000 note deposits. but a lot of bankers point out that this is not permanent flow, right? And then papers also point out that the FM has asked PSU banks to focus on deposit mobilization given ADFC banks merger. So given all this new flow, do you see a situation possibly when growth picks up in the second half that banks may have to hike deposit rates through special schemes even though RBI does not hike repo rate, or does liquidity look like comfortable and sustaining? Because if PSU banks start attractive schemes, you know, they had started festival schemes for deposits even in October last year, like that.

I think that challenge is an ongoing challenge. I mean, it could be PSU, it could be another private sector bank. But I think if credit expansion happens, deposit automatically follows, Maruk. You know that, right? Credit creates deposits. So I don't believe we will be in a situation of no deposit creation, but only asset creation. Then there is a fundamental problem. I do think the deposit, and for us, I mentioned, we have seen marked and quite defining changes in the deposit momentum, and in particular to the non-resident deposit momentum in the last 45 days. Quite meaningful. I don't believe, in the positive direction, I don't believe it will, I mean, nothing is easy, right? Our business is not like you can sit back and believe it will come to you. There will be competition, but I think the deposit, certainly at a price, it will be available, whether it will be at all CASA or whether it will be retail term and CASA, that as long as the wedge between savings and term is not very distinct, then you will see SA grow. If savings and term is 400 basis points gap, you will see a positive growth in the form of term. We've seen that for long periods of time. I can see that slowly compressing.

Okay, sir. So, my second question is on low deals again for this quarter, that is for the first quarter, that the mix has changed dramatically. very favorably, right, the growth in, of course, on a low-based growth in CVs, MFI has, credit cards has been very, very strong. So, even so, yields may not have risen at the pace of the change in loan mix, and that's because of competitive pressures in those price segments, is it?

Partly that. Partly, you know, it's the growth could have been more at the second half of the quarter, so you didn't get the full benefit of it in the quarter. But yes, it's a combination. I don't believe it's just one. It's a combination of all of this. Even in the TV business or the microfinance business, while they have higher yield than our average, we are not going after 24% or 36% or 28%. We are still If our run rate is 12, we'll go at 14 because we don't want to go into risk here of the nature, at least in the early days till we understand these businesses much better.

Sure, and sir, in general for the sector, there has been some, even based on sectoral data, some moderation in growth in home loans. Is it just seasonal or what is your take?

We've also We've been talking about it, but I think you may have seen our numbers. It's still being consistent and growing, but we are seeing pressure on pricing in the segments we have. There is a real fight for, you know, taking share. And in home loans, there is no cost. There is no foreclosure, nothing. So people can move with gray, gay abandon. So we have to worry about that. But yes, not seen any, and we are, our home loans are quite concentrated in five, six geographies. We are not very deeply in every part of the country in home loans. In those geographies, we haven't seen any slowdown. Shalini or Sitra Bhanu, if you're on the call, you can add.

Yeah, you're right, Shyam. We haven't seen any slowdown. Yes, there is competitive pressure on pricing, particularly new sourcing in some of the metros that leave, kind of compete in Mumbai or Bangalore or Chennai or Delhi, et cetera. There is that pressure on pricing. So we're being quite disciplined about pricing. We look at the overall relationship, look at other aspects and do it. But momentum per se, haven't seen any concerns such as. Okay. Thank you so much.

Welcome. Thank you. We have the next question from the line of Saurabh Kumar from JP Morgan. Please go ahead. So just two questions. One is, you know, how would you think about OPEX growth, especially employee cost growth this year? Should we see any operating leverage come through? And the second is again on NIM, sorry. So this is your guidance of 330, 335. Fair to say that your second half NIM will be touching 350? First quarter, 350. We think second quarter onwards, it will start picking up. No, I'm not even venturing into talking about last quarter as yet, but we still think the full year name will be closer to 330. Okay. Okay. And on the OPEX piece? Okay. Do you want to comment? I think people cost is pretty much running on course, Saurabh, because whatever the increments and the expected raises have been factored in, that's on the people cost. On the operating expenses, It should be more like a single-digit or early double-digit kind of growth, but Venkat can expand on that.

Yeah, I think on the OPEX two parts, the staff and the other OPEX, staff cost, what we have seen is the impact of the yield moments for the pension gratuity provisioning, which is actually a liability, which we have taken in.

And that will move subject to the yields growth. movement during the next few quarters. And also in Q1, we traditionally see a slightly higher uptake on staff costs on leave and cash flow and leave travel and all that stuff.

So that has come in. So I don't expect staff cost movement to be very high from now on. On the other OPEX, you've seen between Q4 and Q1 also there's been a slight increase.

And the last part of it is variable business related. There's impact of some flow-through depreciation coming through for projects which have gone live over the last year. Other than that, there is no significant non-volume-related costs which are likely to come through. Okay. Got it, sir. And, sir, on that pension piece, I mean, as it rolls down, the benefit is still at 253,000 crores? Sorry?

Okay. The defined contribution, I mean, as your, on the employee cost as a defined contribution shared, you know, increases.

Okay. Thank you. Thank you. The next question is from the line of M.B. Mahesh from Kotak Securities.

Please go ahead. Hi. Just a few questions. One, on the demand environment, if you could just kind of briefly kind of highlight across the segments, how is it shaping up?

I open thing, Mahesh. We have reasonable traction. We saw good traction in Q1. Even in Q2, just two weeks have passed. Our credit committee has met four times. So we are seeing reasonable momentum in most of our businesses in volume and at least new proposals coming in. Yes, I must admit, we are pursuing segments which are relatively on the lower risk spectrum. So to that extent, it will be a very competitive price, but we are seeing reasonably good traction even now. And outlook for Q2 looks quite similar.

Okay. On the second question on NR deposits, there has been some level of slowdown there. Some clarification on that?

NR deposits, I did mention at the beginning of the call, and this is reiterated. In fact, we are reasonably happy to see the comeback of it in the second part of Q1 and the early part of Q2, and hope that's sustained. We did see post-COVID remittances coming in, but not all of it translating into deposits, particularly this non-FCNR. We are not a big FCNR player. So our focus is on NRE, savings and NRE term. That's where we have a large share. That share has gone up. In fact, from 8 to 8.38 or 8.4% of India's NRE deposit in that category is with us. So we're gaining share there. What was a little behavioral change we saw is that remittances were coming, but not translating into deposits as it did in the past period. We thought there was some structural change or whatever post-COVID. Looks like those either they were making investments or one-time whatever, you know, commitments being fulfilled. That is beginning to build back. In the normal quarter, we've seen in the past as high as 2 to 2,500 crores of incremental deposit build. For then it fell off materially. We're seeing it come back about 1,000 crores or so now. So there's a build back coming.

Okay, perfect. My last question is for a 250 basis point increase in lending rates, the corresponding increase that we have seen so far is about 130 basis points. Where are you seeing the pressure on the lending side from a passive perspective?

Across the spectrum, Mahesh, I think we've discussed this at length, right? We have seen about 130 basis points, and there will be another residual of another 10-odd basis points will come through, 10 to 15 basis points that will come through. We did think that about 150 basis points is the maximum that can pass through. Again, going back to the segments that we are, I don't believe you can just transfer it entirely and expect Because we are playing in a very competitive environment. Everybody is going after the best.

Sure, sure. Perfect, sir. Nan, thanks a lot.

Thank you. The next question is from the line of Rakesh Kumar from B&K Securities. Please go ahead. Yeah, thank you, sir.

So just... couple of questions.

Firstly, with respect to the increase in the cost of deposit, which is close to around 20 bits quarter on quarter, but we haven't increased our MCLR. Correct me if we are wrong. I think last month, Damodaran, if you were there, MCLR went up, right, last month?

Actually,

There was one reduction in between due to minor reduction in the operating cost factor. You see MCNR actually is driven by a formula given by RBI. So whatever is the number we are computing, accordingly it will come.

We have increased MCNR quite very well based on the increase in the marginal cost factor.

From the original level, if you see, I will come back with the, say, total increase from the date we started increasing the report. I will come back with the number very quickly. There is a reasonable increase in our MCNR across this period.

I was looking at the RBI number, which is giving MCNR at 9.35 in March and 9.05 in February and 9.35 in June. So I was thinking like, you know, our ROE, so if you look at, you know, MCLR template, what RBI gives, so like, you know, OPEX to asset ratio, you know, your marginal cost, your ROE number. You're right. I think your point about MCLR 935 going to 905 coming to 935. So the, because the 935 coming down to 905, like Damodaran pointed out, is not just cost of deposits, it's the operation cost also. Some cost reduction happened that also has to be passed through. So the formula dictates not just entire cost of deposits alone, right? Cost of deposits is one element of the MCLR calculation. So I was thinking, sir, like 14% of loan, as you mentioned, is on MCLR and 49% on RippleLink EVLR, 27% on fixed rate. Where the remaining 10% would be, sir? Staff is about 5.5%, and then we have 10%.

Base rate. Base rate for currency.

And, sir, have we increased any spread on the fixed rate loans from March end to June end? So, have we, like, you know, there is some, you know, there is some struggle to increase the spread on the fixed rate loans.

So, what is our experience there, sir?

Only when it comes up for renewal, right? Harsh, do you have any experience?

Yeah, let me clarify. Let me clarify, yeah. A fixed rate loan, technically speaking, we cannot change the spec because by the very nature of it, it's fixed.

But let me clarify the number given as fixed by RENCA. It also includes short-term ones which have been given. So it's not that they're carrying a long term or a low rate or something like that. So fixed rate, the fresh one gets done at revised rates. Like to give you an example, in commercial vehicles, the loans have gone to as less below 7%. Today, the loans are being done well above 9%.

But these are for fresh ones. The stock remains at what it is.

Similarly, a fixed rate loan done with a large corporate remains fixed for the tenor or the period for which it has been fixed for. So actually, sir, if we have not changed the, you know, MCLR, and obviously repo rate has not changed, fixed rate book, there is, like, you know, we have not done much, then whatever the increase in yield is there in this quarter is basically because of composition change. Part is composition change, part is fresh booking as well. To give an example, if a fixed-rate loan book, we have obviously constant maturities also. The lower end of the fixed rate, which was booked two years back or three years back, obviously comes off as maturities. And the fresh ones booked are 1.5%, 2%, 2.5% higher than that. So that is also the freshness, but you also add to that. It's not just the mix alone. No, but I was looking at, you know, the NSFR data. So that was showing that, you know, the amount on asset side which was coming for repricing, that number was quite low, actually.

The number given in the March quarter number, NSFR disclosure, as per that number, you know, the repricing was scheduled in this quarter or maybe for the six months. Number was not much.

This is repricing talking about. Our March 2022, our MZLR was 791 year MZLR, whereas it is now at 930.

So, there is an increase of 140 BCS across this period. And, you know, this may again pick up based on the changes.

It can go up or down, but generally the trend may be slightly higher.

And sorry to come back to this, sir. Incremental TD cost and outstanding TD cost. So incremental TD cost, sir, is 6.4 and outstanding is 6.5.

Correct me, sir?

The way it is worked out is slightly different. You need to take our latest cost of deposits that we are offering for different slabs. And the factor to which we need to multiply it is basically our historical distribution across those slabs.

So, though we call it marginal cost, the formula is slightly and slightly marginal.

The assumption is that your growth, incremental growth also is in the same proportion for different buckets. Okay.

Okay. Okay, sir. Thank you. Thank you, sir. Thank you. Thank you.

Thank you. The next question is from the line of Tanika Agarwal from Green Portfolio Private Limited.

Please go ahead.

Sorry, we can't hear you, please. We can't hear you.

Not quite. Maybe you have to, if you're on a headset or something, remove that. Mr. Agarwal, the line for you sounds muffled. It's not clear.

Okay. No, it's still not clear, ma'am.

Sure, thank you, ma'am. We will move on to the next question.

Operator, we can probably close off the two more questions.

Thank you, yes, sir. The next question is from the line of Bunty Chawla from IDBI Capital. Please go ahead. Thank you, sir. Thank you for giving me the opportunity. Small data point that you can share. this quarter retail NPA has been higher. So which segment under retail has shown this kind of a stress? And secondly, the restructured assets, as we have seen, it has declined, but still it remains 2.5, 2,500 crores kind of a thing. And as you said, almost two years moratorium, I believe all this portfolio has been completely out of the moratorium. So how we can see the NPA pressure coming from these groups? No, the The restructured book is restructured standard. As you know, the regulations require it to continue to be one year of servicing before you can upgrade it. So that's the period that's going on. The peak of the demand of the restructured book in Q1 that we saw, that is where I mentioned a third of the retail slipages is from restructured. Retail book is secured home or lab. So the slipages is from that one. Okay, okay. And lastly, previous guidance was 5 to 10 bits improvement in ROA should be there in coming years as such. Now, what is the guidance currently discussed? As we have said, the margin should be remaining stable as compared to last year and credit cost should be also similar kind of. So, how one should see the ROA guidance going forward next two years? We had said when we started financial year, we ended last year at 128. We said 78 basis point improvement in FY24 and a similar repeat in FY25.

So we maintain that guidance.

Yes.

Yeah. Thank you. Thank you and congratulations.

Thank you. Thank you. We will take the last question from the line of Darbin Shah from Haithong, India. Please go ahead.

All my questions have been answered. How much will be the outstanding provisions on the standard research book?

Including management overlay, we have a significant sum not touched close to I don't know if you've shared in the past, but yeah, a meaningful sum. Regulation required us to have if I remember right, 15% provision on the restructured book. At the peak, the restructured book was 3,600 crores. So we had made that, plus we made a significant overlay of another 10%, so you can do the math. And we haven't touched that.

Okay. That's helpful. Thank you. Thank you.

Thank you. I would now like to hand the conference over to Mr. Sovik Roy for closing comments. Over to you, sir.

Thank you so much. And thanks to all of you for joining us today. As always, we are committed to delivering value and we continue to focus on our growth and strategies. As always, the management team is available to answer any questions that we may have today. I believe we have answered all. And we, of course, appreciate your continued support. And we will keep in touch and we'll keep updating you on our progress in the future. Thank you all and have a great day. Thank you.

Thank you. Thank you.

Thank you. With that, we conclude the conference on behalf of Federal Bank. Thank you for joining us. You may now disconnect your lines.