The Federal Bank Limited

Ladies and gentlemen, good day and welcome to the Q3 FY24 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 a touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Savik Roy, Head, Investor Relations, the Federal Bank Limited. Thank you and over to you, sir.

Thank you so much. Good afternoon and a warm welcome to our Q3 earnings call. I wish you all a very happy new year. I'm sure you've had a chance to delve into our numbers. It's evident they are not just good, they are quite promising. This quarter, we achieved a historic milestone with our first ever four-digit profit number reaching an impressive 1,007 crores. Our NII2 has soared to new heights, standing at an all-time high as well. The strategic expansion of our branch network remains robust. We added close to 65 new branches in H1, 30 of which materialized in the last quarter itself. Our commitment to growth, asset quality, and ROA is paying off quite well, and it's evident in our strong performance across these metrics. Both ROA and ROE, as you already see, are on a trajectory that aligns with our strategy goals as well. The listing of our subsidiary Fedfinna in the last quarter was a standout success, and they do mark their best quarter ever. They just gave out their numbers yesterday. While we acknowledge a slightly elevated credit cost this quarter, it's essential to highlight that it has outperformed our earlier guidance, and we are sure that we'll navigate these dynamics quite well. Please inform all of you that our entire senior management is on this call, and with this, I'll hand it over to our MD to share his insights and perspectives that went by. Over to you, sir.

Thanks, Javed. Good afternoon, everybody, and once again, happy 2024 to everybody. The numbers and the highlights that Shabit pointed out certainly are noteworthy. I am particularly pleased that we did get to that four-digit number. Having been a fair amount of years in this job at some stage many years ago, this looked like a dream, and I'm pleased that our bank has consistently worked our way up to get to this point, and this looks like a new base of which we will work to make sure that the periods ahead are only better. Business momentum for us has been fairly strong along the lines we've been guiding for in the high teens closer to 20. Some of our newer businesses are on course and traction is strong. Environment continues to be challenging for everybody, no less for anybody. I think there will be, there is, and it's likely to remain for a while in terms of the cost of deposits being high. The traditional stronghold of banks able to grow savings at will in a high interest rate environment continues to be sober. That said, our retail deposits are strong. We're still in the high 90s in terms of our deposits being retail in nature. Having said that, the overall CASA, in particular SA growth, and in particular NRSA, is seeing a material change from its past period. Business-wise, credit quality-wise, growth-wise, market share-wise, I remain confident that the momentum, the trajectory, the plans that we put in place are working, some better than others. Credit quality in particular, like Shaui just pointed out, there was one account which was about 70-odd crores slipped in this quarter. It's been our highest per account slip in a long period of time. Thankfully, this quarter, I mean Q4, that account will get upgraded because the client had a fire in their factory and that seems to have come through and they've sorted it out. So we are hoping that that account too will get restored. So overall momentum for business, despite challenging environment, still is intact. I do believe in Q4 we will repeat the same underlying business growth momentum. and that should keep the structural changes going quite well. That said, Q4, there are some challenges in terms of the impact of what may happen on the AIF and what may happen on account of higher costs for provisions in pension. Those are things we are working through, but underlying business, granularity of business, business mix, productivity at individual level, our influence of technology, use of AI, our structural changes that we are putting in place, the business mix, retail, wholesale, within retail, the kind of business we want on the secured and unsecured, the new age businesses. I'm pleased that we haven't taken our eyes off, that traction continues. Through the cycle, there will be ups and downs in terms of interest rate movements. I think we are learning to weather that and still deliver our promised growth on return ratios principally on ROA and ROE, and I'm quite inclined to believe that the period ahead should reflect all this in the numbers, and the federal story will continue quite impressively. So with that as my opening remarks, as always, me and the entire CDM team are there, happy to take questions from any or all of you. Thank you very much.

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchstone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Let's start. The first question is from the line of Maruk Adajania from Nuama. Please go ahead.

Yeah, hello. So I have three questions. My first question is on deposits. You did mention rising deposit costs. But there is a lot of talk about RBI being worried about loan-to-deposit ratios and having discussions with individual banks. And then in general, November, December was very tight for deposit taking with CD rates also moving up. So where do you see your LDR and in general deposit growth settling in FY24 and FY25? And what will be the impact on loan growth because of that and on margin? You know, because it's tighter than what we had expected even in the second quarter. So plus the... all the talks about RBI.

I think the question you asked is in terms of how do we expect CD ratios to play out across, for us, for the banking industry. It's clear that the regulators are probably looking at banks moderating their CD ratio. Banks like us, which have about early 80s, I think some players are probably at the higher end of the spectrum. That said, I think most of us, so the regulators may be comfortable around 80, so we have to work through that over a period of time. There will be a glide path. I think the issue is not about growth. It's the ratio that is important, and we are not sort of overheating the market. Probably that's the direction that they are riding banks towards. can't quite guess what they see at an aggregate level. We only see our numbers. Cost of deposits certainly is something that all of us are dealing with. We have to learn to construct our business models with this as a reality till it changes otherwise. If the interest rates remain where they are and liquidity is kind of tightish, I do believe we will see this kind of environment prevail for some more time. Our Our own direction for ourselves is get closer to an 80% CD ratio over the calendar 24 and which means we have to rebalance our mix of business where we amplify, where we tone down. It's not just one dimension. It's not just C or D. It's C and D and also the kind of C, kind of credit, right? Risk weights to have been adjusted. So, but it may result in margins which may see challenges. I think we have to construct the P&L differently from just looking at NIM as a sole driver. Growth should be intact. NIMs may not be the highest, but I think you have to figure out your other income. You have to look at efficiency and ensure that the credit quality is intact to make sure the return ratios are intact. So banks like us which have been guiding for 1.35 to 1.4% ROA, Thankfully, we are almost there. Now, how do we sustain that and keep improving on it? So I don't think there is one silver bullet to say I will do this and sort this out. I do believe that we, at least for ourselves, are quite clear. We don't want to get spooked by NIM by itself. We want to make sure that we are on course delivering our ROA on trajectory. Ultimately, ROA, ROE are good drivers to determine strength, health, and consistency of a franchise. I am reasonably confident on both those counts we are on course to delivering what we have set out to do. Most recently when we raised capital, we had talked about being closer to 1.4% ROA at the end of 2024. We seem to be on course for that.

Got it. But that would mean that deposit rates would rise from you, correct?

Deposit rates rising from here hopefully would not be material increase. it seems more or less in that space. Yeah, some buckets, some tenors, you could see increase, but I think blended rates going up may start moderating.

Oh, because the ratio for the system.

Maruk, I've been wrong before on this count because I think these are moving parts. We are still a 1.3% player. A 10%, 7, 8% market share player can change course. If SBI or HDFC and or both choose to play market differently, the narrative can change. But I think we are fluid enough to readjust quickly.

Got it. Got it, sir. Sir, and my second question is, you did mention that you're working out on your wages and your EIF, but your employee expenses did go up around 10% QOQ. So have you factored in anything of the wage agreement, either on pension or provision, or that will be separate over and above this?

No, no, we have. You know, if you remember at the last call, we had said we had started planning for 15% from November 22, but looks like it may be 17. So we have done a catch-up. So we don't want to be lagging on that count.

Okay. So this is for both wages and pensions, right?

Some element of pension impact will come through in the quarters ahead. That is something that we will evaluate as the quarter plays out between Q4 and early part of next financial year. We don't know when the final agreement is signed. So those are elements that are indeterminate at this point in time. What we've done is the wage increase part we've factored in.

Got it. And in terms of AIF?

AIF, you know, there is a representation from the banking system to the regulators. I think today's news flow suggests that they may look at it differently for banks. So I can't quite comment at this point in time.

Okay, but any exposure you would like to give out?

No, we do have an exposure. It depends on what the filters and what the carve-outs are, the impact will vary.

Okay, sir. I'll come back for my third question then.

Thank you. Thank you. Our next question is from the line of Suraj Das from Sundaram Mutual Fund. Please go ahead.

Am I audible? Yes, you are. Hi, thanks, sir, for the opportunity and congratulations on a good set of numbers. Just one question, sir, in terms of NIMS. So if I see your yield on advances, that has been pretty stable on a QOQ basis over the past two, three quarters. However, at the same time, I think incrementally your focus has always been on the higher yielding segments. So despite your incremental focus on the higher yielding segments, your overall performance yield on advances is not going up so just wanted to check what is I mean what could be the rationale are you becoming more risk averse on your existing book on the core book or I mean is it the duration that is you know changing the whole game or I mean what could be your reading into that no I think it's very clear the see the fact is higher yielding is relative right relative to our other books these are higher yielding

Certainly, these are not in the teens. The rate of interest charges are not in the high teens. So, to that extent, higher yield but higher than the book. So, I don't believe this will be a single driver. Please look at us in the direction of growth and as we keep building this book, when the markets open up and interest rate opportunities come for us, we will be able to get a higher momentum on that. I would not look at this saying, just because you're doing those businesses, automatically the business momentum shifts and the NIA starts trapping up because that would mean defying gravity. You cannot play price out of the market. With our risk habitat, we are not inclined to grow by flexing our risk. One of our, thankfully, our strengths across long periods of time, both our credit costs have been intact. as also our portfolio has been pretty high quality. So even as we start doing businesses which like credit cards, personal loans, microfinance, commercial vehicles, which are relatively higher yield, we are not growing that by flexing or dropping our credit standards. To that extent, even in those segments, we are picking the better customers. Certainly, there will be a pricing pressure and we believe that in that segment, we are getting better pricing than doing businesses which are lower in price. So will ease pick up materially over time? Yes, it will, but not instantly as the share of these businesses go up. We also believe as cost of funds come down, which I think is not very far from now, we will see that benefit coming through. Yes, there are some things that we have to redo in terms of fixed rate and floating. We're working through that. So are we thinking about what FY25 will look like? Yes, the teams are working on many plans. And our desire first is to ensure that the NIMS composition may vary for the NIMS number that we are currently at is protected, preserved without much violation.

Right. Okay. Sure, sir. Understood. Thanks.

Thank you. Thank you. Our next question is from the line of Madhu Chandade from MC Pro. Please go ahead.

I have two questions. You explained the reason for the higher copperous slippage, but anything that you want to call out on the retail slippage, which is also sequentially tad higher?

Madhu, it's only a tad higher, right? If you look at three quarters, it's been 190, 200, 204, 214, 213. So it's not materially off. Second is the denominator is growing quite handsomely. So, really, there's nothing unique to call out or add to. I don't know. Ashutosh, Shalini, if you want to pipe in, you may also want to.

Yes, Shyam. So, I think, as Shyam mentioned, the denominator is also growing quite handsomely on the retail side. So, the small shifts that you see as natural as part of the business growth that we've had, nothing to call out specifically on retail slippages. Madhu.

Okay. Hi. Hi. I have a slightly longer, a long-term question, which is more for the banking sector and also definitely relevant for your bank. As we see now that this deposit growth and deposit cost problem is getting more structural. I mean, banks are really competing with the capital markets to get that saving and there is a definite struggle out there. Should this continue? banks will either have to compromise a bit on the margin, or if they are not willing to compromise on the margin, it will result in higher credit costs. And in any case, this scenario points to higher cost-to-income ratio as banks are growing for branch expansion, et cetera, et cetera, to garner that deposit, which means structurally there is going to be a pressure on ROAs. do you think this scenario could play out? And in that case, where do you see your ROA settling maybe in two years down the line?

Madhu, thank you. That's a good question. And I just want to reflect back on a few quarters back where I had pointed out. It is almost impossible to believe the 2%, 1.8% kind of ROAs will sustain forever even for the best in class. And that's not my job to guess, but that's for them to defend. I do believe for banks like us, getting to 1.4, 1.5 is a good milestone. And from there, we have to fight our way up. But the reasons are that with the capability sets increasing materially in banks like ours, the arbitrage opportunity of somebody creaming away the share is not going to happen. Structurally, even in the West or more advanced markets, if there are any that you can call that, margins tend to be lower. ROAs around this kind of numbers is where the best in class are. It means efficiency, which means other income, which means credit standards have to be sacrosanct, which is a model we've followed for long. We've been faulted for it, but we've followed for long. We have not been a very high margin bank, but our ROAs from 0.7 to 1.4 has come in five financial years. I think we are at a place where we can defend it quite nicely. For the capital we have, 1.4, 1.5% ROA makes us, I think, a good, solid franchise.

So that is like 1.5 is now the aspirational ROA that you are working?

We will work towards it over the next 20, 21 months.

Thank you and all the best in this journey.

Thank you. Thank you. Next question is from the line of Nitin Agarwal from Motilal Oswal. Please go ahead.

Hi, good afternoon everyone. Sir, three questions. First is again taking forward from the CD ratio that you talked about will go on to moderate to 80. So will this have implications on loan growth or do you think Federal Bank has the ability to raise as much deposit as to sustain 80-90% loan growth?

Sir, I think the Ability to grow deposits we've demonstrated for long periods of time. Even though they are toughest of times, we've been growing even as we did in the Q3. The cost of that deposit is something that we have to be thoughtful about and decide where we want to draw the line. At this juncture, we haven't altered our 18% kind of credit and deposit growth capability and plan, and I do think we will be able to hold that.

Right. And related to it, I was looking at the slide 23, wherein we talked about the growth through partnerships. So across most of the MC Cloud segments, we are going very well, both in number of accounts and balances. But since franchise, the account opening run rate is nearly flat over the past many quarters. So while the account balance has almost doubled, YOY. So what is limiting us to step up the account opening run rate here?

I think it's the effect of learning. We started this partnership-led new account opening about two, two and a half years back. We have learned a lot in terms of so that we can cut wastage between us and our partners. We were at some stage doing maybe 13,000, 14,000 accounts a day on the saving side. We've brought it down to 4,000, 5,000. And the good news is we are able to sort of filter out either waste or fraudulent efforts or whatever other combination. So I'm happy that our ability to sort of narrow down and get the right base is improving with each passing month. And balance growth is a function of also vintage on the book. And as we keep getting the better quality and seasoning them, this should continue.

Okay. And sir, if you can also comment on the core ending strategy there. Any changes in underwriting that you have made while working along with Pentax, given all the ongoing noise around the unsecured loans.

I think our co-lending is still starting off. I don't know, Shalini, Harsh, you want to point out? There's nothing much to call out in my view, but Shalini, Harsh?

So, yeah, Nitin, on co-lending per se, honestly, nothing much. We've done some work on the microfinance side, which Harsh can speak to. But on the others, we're reviewing what the partnerships available are from a co-lending perspective and getting the technology operational aspects kind of worked on. The other part of, I think, what your question was is when we do underwriting, when we do, you know, FinTech-led partnerships for credit cards, personal loans, are there any differences? From an underwriting perspective, clarify completely the underwriting criteria are entirely as laid down by the bank in accordance with the bank's risk appetite and completely governed by the bank. We have not done anything on the risk appetite side to change how we work with partners. Harsh, I don't know whether you want to add on something on co-lending.

Just one point. We have obviously started co-lending as Shani also mentioned. The credit standards and stipulations of filters remain just the same. We are, at this point of time, experimenting to see how scale works over here. We started with microfinance for two reasons. One, we can cover deeper geographies. And secondly, the manpower cost in the coal ending port is something which we can leverage on with both sides. The NBFC is having low-cost structures over here. We can leverage on that. So that's how we are looking at doing it. And at certain scale and size, we decided that we can now take it forward. Right, thanks. And so last question is on the management succession, given the recent communication from the RBI. So how do we plan to approach like shortlisting two more means? Will we be open to external candidates? Will we be hiring an external search firm? And because the time that we have is still limited versus the planned succession that happened at some of the other large private banks. So how do you look at that?

Yeah, I think the board has already commissioned a search process I think our exchange announcement also sort of reflects the regulatory letter. So there's a very effective and active search process using top quality search form is on. We believe in the next two to three months between our internal candidates and an external option, the board will choose the most preferred list in 10 to 20 days.

Okay. Right. Thank you. I wish you all the best.

Thank you. Thank you. Our next question is from the line of Pritesh Bum from DAM Capital Advisors. Please go ahead.

Hi, sir. Good evening. So one question from my side is on the risk rate side. You touched upon it, but when I look at the credit risk which has gone up this quarter, how much will be from the changes of RBI and how much will be from the regular business growth which we are having in the unsecured? If you can quantify...

I think blended comes to, if I remember right, what 35-watt basis points. Lastly, driven by the change in the regulatory standards reflected in the business we are writing.

Damodaran or Venkat, do you want to add?

Venkat? Hello. Can you hear me?

Yes, Venkat.

Yeah, so credit risk moment has been increased, has been around 10,000 crores of which nearly 75%, 7,200 crores is driven by the regulatory change. That's in the absolute value terms.

I think it's in the slide number 20.

Sure, so that will be predominantly because we have a slightly higher NBFC book, right? So that's because unsecured is relatively low.

And NBFC both put together.

That's the number 16th regulation. Got it. Okay. And second question was in terms of other income. What would be our breakup from this trading gains? I believe you will have about 1890 crores from FedFina proceeds?

Yes.

Okay. Thank you so much.

Thank you. Our next question is from the line of Gaurav Dilip Kochhar from Mirai Asset. Please go ahead.

Yeah, hi. Good evening, team. Sir, couple of questions on... Sorry to interrupt, sir.

May we request you to use your handset, sir? You're not audible, sir.

Is it better?

Yes, sir. Yes, it is. Yes.

Yeah, sure. Thanks. Good evening, everyone. Just on the provisions, slide number 16, I think there is... Can you explain the 112 crore reversal... on standard asset provision that we have taken. And also there is a 62 crore provisions for other purpose. So just wanted to understand these two line items.

Venkat, do you want to go?

Yes, so you're referring to the standard asset provision reversal, right Gaurav?

Yes, 112 crore reversal. First, what is that? And second, there is a 62 crore provided for other purposes. So is it the AIF provision that is lying over there, 62 crores, or what is that 62 crores?

That 62 is not related to AIF. Like Shyam said, the AIF impact will take it based on what comes through in Q4. That's a different one. Gaurav, I'll share the details with you separately. I don't want to take the time of others in this. On the 112, we have reviewed the the restructuring provisions which we had, RF1, since all of them have now started repayment and all that, we had assumed a certain percentage of slippage in that and the actual has turned out to be much lower. So, basis that, there has been some reversals which we have done, but that pertains only to RF1.

Okay. So, now, cumulatively, what would be the provisions that we are carrying on restructured book?

Around 20-odd percent.

Okay, 20%. Got it. And second question is on the wage revision. So we would have done some backlog provisioning as Shamsur also pointed out too. Can you quantify what was the one-time hit in this quarter?

50 plus.

Sorry, 50 close?

Yeah, I think it's higher than 50, right, Venkat? It's a catch-up of the past period for the last two years or 18 months.

Yeah, 18 months, yeah. That's the catch-up.

Okay, okay. So, going forward, so 693 is what we reported. So, 693 minus 50 odd crores would be the run rate going forward.

Right, yeah.

Because the 626... Some element of that which pertains to the quarter also got up. So, last quarter was 626, if I'm not mistaken. Correct, correct. Yeah, yeah.

So, you should assume 650.

Yeah, we'll have impact for that quarter as well. 650-ish.

Got it. And another question on recovery. So there is one account, I guess, who have the ADAG group exposure, which has been in the news for resolution. So is that account resolved in this quarter or that resolution will be in fourth quarter?

Right. It's not in any number as of now. We hope it is in the fourth quarter.

Okay. But what is the total exposure you have to that group?

The NBRC part is about 100 crores. The other account is about 180 crores.

Okay. Put together, 280 crores.

In that zone. But they come with different structures.

Sure. Sure. And just lastly, just to clarify, the tier one that you have mentioned does not include the nine month profit.

No.

No, that's not added. If we add 75%, assuming 25% payout borrow, the total prior would be over 16%, 16.15, 16.2. Got it.

Got it. Perfect, sir. Thank you. Those were my questions.

Thank you. Our next question is from the line of Param Subramaniam from Nomura. Please go ahead.

Yeah, hi. Thanks for the opportunity and congratulations on the quarter. My first question is on the unsecured piece. Hello?

Yeah.

Is this better?

Yeah, please go ahead.

Yeah. My first question is on the unsecured. So after this RBI increase in risk weight, Has there been any rethink in our thought process when we're talking about scaling up the unsecured piece from, say, about 5% to, say, 10% of the book over the next two, three years? Because that was something that we directed earlier. And also, there are some media reports saying that we are scaling down the partnerships in, say, credit cards. Is that just a one-off case or, you know, are we sticking to our guns as far as unsecured is concerned? Yeah, that's my question.

Param, I think two things there. Media has... probably greater intelligence than what we actually have on this matter. They have correlated two events and made a story. The line cut was specific to a particular program where we believe it was higher than the normal utilization. So the line is like a normal line intervention in any unsecured program. At this juncture, given the size and shape of our unsecured and the growth and the early indicators, we haven't revised anything on the directional cap But if we were to get to 8% and things were not looking good, we could revisit. But at this point in time, nothing has changed. Our growth continues. But we haven't dropped any filters. In fact, we are only tightening it to reflect the time. But our growth rate of 40%, 50% on the low base continues.

Perfect. That's clear, Shyam. My other question was on the margins. Again, picking up from a previous question, Now, see the unsecured has now scaled up to like, you know, 4.5% of the loan goal. And this business is like, ideally it should be more than double the margin of your existing book, right? So why is it not exactly reflecting in a margin uptake or when does it actually start, you know, reflecting in our, you know, headline margin number?

See, I think the, I mean, I know I'm not very popular in saying this, unsecured doesn't equal to very high, Extraordinarily high margins. Higher than our normal run rate. Because the revolve rate in this is about 30%, the EMI is about 30%. Right? So, if you're growing 100 rupees, only 30 is revolving. And another 30 is EMI and the balance is zero revolve. It's a transactional account. So I would encourage not to extrapolate all growth equal to all high yield equal to all high margin. Therefore, the overall should happen. As the book gathers size and stabilizes, I think this will start reflecting a higher yield. But I think it's another year, year and a half away from a scale point of view.

Perfect. Okay. And just one question. On your core fees, you've shown a decline in the loan processing fees this quarter. So, is there anything to read into that?

Well, actually, it's a slight decline, Param, but please look at the quarter 2, quarter 1, and quarter 3. It's more like quarter 1. Quarter 2 has exaggerated because we had two very good corporate bank transactions which gave us higher fees. Otherwise, it's normalizing around 150 crores.

Perfect, perfect. Very helpful. Thanks a lot, Shyam. All the best to you and your team. Thank you.

Thank you. Next question is from the line of Rikin Shah from IIFL. Please go ahead.

Thanks for the opportunity. Had a couple of questions. First one, in this quarter, there seems a meaningful difference between the cross and the net loans, probably attributable to IBPC. So just wanted to understand the thought process of doing more IBPC in the quarter. And secondly, in the earlier remarks, you mentioned that you would want to get closer to 80% CD ratio in this calendar year itself versus 83%. But in the same breath, we are holding our loan growth guidance of 18%, 18, 19%, whatever that number would be around that. How do you bring down the CD ratio? Would you be meaningfully accelerating on the deposit growth from the current levels? Because that is what it would imply.

You're right. We are hoping to make sure that happens. Don't hold as if it's 18 becomes 17% on credits and 19% on deposits. That is also a formulation we are happy to live with. The mix in the 17 will vary. How do we get relatively high yield businesses? That's how we will ensure that we get closer to the 80%. Sorry, the first part of your question I missed. I mean, I can't quite recall. What was the first?

The IBPC. So in this quarter, there seems there was around 4,500 crores of IBPC done. So just wanted to understand the thought process behind doing this. This seems to be a larger number than the usual run rate.

Harsh, you want to talk about that?

Yes. Two things on the IBPC side, we are looking at IBPC not just from a point of view of asset management, but from a resource mobilization point of view. So we saw opportunities of raising funding at a reasonably attractive cost through the IBPC sale assets, which is what we have leveraged on. Secondly, between the various categories of PSL, we can look at doing swaps on IBPC, which helps us in NIM accretion without diluting any kind of standards or anything. It's more like a treasury management and a fundraising opportunity, and also leveraging on the PSL book. The two areas. Got it. Perfect. That answers both the questions. Thank you so much.

Thank you. Our next question is from the line of Manav Mehta from Access Securities. Please go ahead.

Congratulations for your wonderful call, sir. I wanted to ask you that, what is the new innovative product line that the bank is aiming for?

Sorry, you're very feeble, my friend. Mehta, could you please use your handset?

Hello, can you hear me now?

It's still feeble, but please quiet. We will train ourselves to listen.

Hello, could you hear me?

Yes, yes, yes.

Sir, I wanted to ask you that the bank is always aiming for some innovative products in the field of fintech or credit cards. So what is the current innovation that the bank is aiming for, keeping in mind that the bank is tied up with OneCard and Skapia and other brands like that?

Give us two weeks and you will see it in the media.

All right, all right. Sir, could you give us a brief about what it would be about?

It will be an area of ease of payment for clients. And yeah, it will be quite cutting edge.

All right. Looking forward.

Thank you.

Thank you. Our next question is from the line of Kunal Shah from Citigroup. Please go ahead.

Yeah, hi. Thanks for taking the question. So firstly, Shyam, after long we are seeing that the cost of deposits are almost like 30-40 bips premium. We are at 7.5. Otherwise, we have been neck-to-neck with some of the leading banks earlier. But still in terms of the traction, maybe if you can highlight how the traction has been and would there be the need to further increase it given the given the intensity from other banks as well, to go beyond 7.5 as you want to maintain like still 18, 20% kind of a deposit growth?

Like I mentioned earlier in the call, Kunal, in certain buckets, certain tenors, based on our outlook on rates, we will be comparative. Over the last 18 months, we've been on term quite comparative and benchmarked against the better banks. We're certainly not competing with the small finance or some of those banks which pay disproportionately higher. But among the leading banks in the country, we benchmark. In one or two buckets, we try to be more attractive so that we can, based on our life liquidity profile, we try to get in those bases. That will continue.

Okay. No, but the only thing was maybe earlier, given that we are now at 7.5, even in this bucket of one to three audios, maybe generally we used to be... One or two tenors, we will be, you know, like a 15-month bucket, a 500-day bucket.

We will be quite compelling and in the better paying so that we get share and our view on interest rate and our book build will reflect that.

Okay, sure. And secondly, with respect to the NBFC exposure, post this entire increase in the risk rates, how much have we been able to pass it on in terms of the higher lending rates? So how much we would have asked for the NBFC? And finally, what has been the effective increase post the risk rate increase in lending rate to NBFCs?

Harsh, you want to come in? Yes, I'll go ahead. Two things. One is on the stock value and the flow. On the flow, in general, in the industry, you're seeing an uptick of anywhere between 30-35 basis points to 40-45 basis points, depending on breaking bracket, where the costs have gone up for NBFC. This obviously is the non-PSL, non-housing category. Even on the existing side, we have managed to reprice some of our existing book. Obviously, there have been pushbacks, but that's also being done. So the fresh origination, is clearly about 30, 35 basis points higher. And depending on the rating also, it could be even going up to as high as 50 basis points.

Okay. Because the question was given that we also have like 11 odd percent, but still maybe in terms of the yields, it has not yet reflected. So just wanted, would there be like, maybe it would come with a lag or something? How should we look at it?

Yes, like I mentioned, for the new, exactly like what I mentioned, it typically will apply for the new institution, new business person, number one. Secondly, you also note that this does not apply for HFC. It does not apply to PSL category. So significant portion of our MDFC lending actually qualifies for PSL and is done keeping PSL in mind. So I think the risk linkage over there has been there. It's not that it wouldn't be there, but it's been largely also been managed because of the PSL or housing finance company as well within the MDFC category.

Okay. Sure. Thanks. That helps. Thank you.

Thank you. One or two more and then we can wind up, please.

Thank you, sir. Our next question is from the line of MB Mahesh from Kotak Securities.

Please go ahead. Hi. In continuation to Kunal's question, also the changes that you have done, you would have done on the personal loan side as well, on the unsecured portfolio. What kind of interest rate changes would you be doing there?

Shalini, you want to come in?

Yeah. Hi, Mahesh. So effective December, after due advance notice, we've done it. The existing stock, we can't do anything. It's a fixed rate book that we have. But the flow has on personal loans. It's graded by Sybil's scores. It varies according to the profile of the customer. But broadly speaking, about anywhere between $75 to $125. basis points increases have been passed on effective December, Mahesh. On the personal loan book, credit card book, as Shyam mentioned in response to an earlier question, the revolver rates are a very small percentage, and you know revolver rates are already at a high interest rate, so we haven't really touched that, but the EMIs were again calibrated by Sybil's course, all of which went into effect in December. The impact will probably come in this quarter because we only had one month's impact, and it's a small book even now, Mahesh.

I'm just one additional question. If your partnerships slow down growth by any chance, would there be any impact on the pre-income line that you have today?

Partnerships on the liability slide are slowing down, not on the credit side. And liability slide, less fee, more balance bill.

Okay. I'm just one final question then.

My apologies, it's not slowing down, it's filtering out because slowdown suggests that there's a problem. It's a lesson or a learning using analytics.

Yeah, so just to add to what Shyam is saying on the liability side, based on the history that we've had now for about 18 months, we've been able to understand what's the profile of the customer, what's the kind of usage on debit cards that we see, what's the kind of usage on UPI that we see, and what kind of balance buildup we have. That coupled with the fact that MOV, you know, savings account book grows on MOV as has does. So yes, we've calibrated through the door population for a savings account perspective, but Mahesh, no, we're not likely to see any impact on the fee income side here.

Okay. Shyam, just one last question. If you speak to your branch managers or the regional managers and you ask them why has deposits not grown of your customers, what is the usual response that you get today? Because you can keep increasing interest rates and everyone can keep increasing interest rates, but if deposits itself is a problem, how do you mobilize that?

I think I'm sure Shalini and others will give you even more advanced answer. The share of deposit per customer that the branch is getting, they are trying to maximize that. In a very competitive environment, just love and affection and relationship alone won't work. That gives you some edge. So some pricing benefit or something because now the customer is faced with opportunities from a range of banks and small finance and whatever the other players who are trying to lure with 8 and 9%, right? So to that extent, the branch manager or the branch staff needs some ammunition beyond just relationship. So we try to provide that. And we demand of them get a higher wallet share per customer. And we try to see that that is happening. Will we win every case? No. Do we win more cases? Yes.

Okay. Done. Thanks. Thanks.

So just to add to that a quick one, Mahesh, I think the way to look at it is as we look at it is term deposits difference to CASA. In term deposits, honestly, it ends up being a price issue more than anything else. Any amount of relationship management can compensate for small differences but not likely to compensate for material differences when it comes to it. From savings account perspective, there is obviously the, you know, the stock market, other competing kind of investment opportunities have grown materially in the last 12 to 18 months. So that coupled with, you know, the whole digital technology and the ease of investing, the ease of moving money around has meant, you know, people are optimizing their cash management. This is happening for small corporates. This is happening for individuals. So I think we need to look at each of these differently. No easy answers, but we're working through this.

Sure, ma'am. Thanks a lot.

Thank you. Yes, our next question is from the line of Saurabh from J.P. Morgan. Please go ahead.

I have just two questions.

So one is, you know, on the OPEC side, how much do you think you can pull back from this 2.3 odd percent that you're running at today? you know, can you get back to the 2% or should we assume that it should stabilize at a higher level? And the second is just on the NRE deposits. So I understand your market share is intact, but broadly what will explain this lower growth? Is it just higher yields outside or is there anything else?

I'll keep in mind, Shalini and Venkat also added in each of these points. On the OpEx part, The nature of the spend is changing. We are, in some sense, quite pleased with some of the spend because technology costs, which are sub six is now six and a half, 6.6% of our operating costs. So to that extent, this number is getting some efficiency that is building up, is getting repriveted into these costs, which probably is a good cost given where we are in the cycle. And I don't believe you will see much come out because there are certain regulatory costs of compliance, costs of Technology for compliance is increasing quite materially. For example, if we book more accounts, the VKYC costs are also, it's done by employees of the bank, right? So these are all slowly the cost creeping. Will it all disappear? No. But are we trying to accommodate that cost by using technology, which means the technology cost is going up? Yes. On the part of this, Other parts are slightly blanked out. Shalini, does the second part... NRE deposits, some NRE deposits. Yeah, you want to go? I'll come in later.

I think to some extent, what I said to Mahesh earlier, the NRE customers are obviously having a lot of choices. One is, I think you alluded to it, the fact that investment opportunities in their country of residence have become a lot more attractive. There are a lot more opportunities and the interest rates arbitrage has kind of narrowed down, particularly on U.S. dollar deposits. If you look at some of the banks in the Middle East paying U.S. dollar deposits, which are probably equivalent to what we're paying. So that plus the opportunities for investment in stock market, real estate, et cetera, has gone up. So again, this is a little bit of a structural shift that is happening in the savings piece. We've identified the fact that if you're, you know, on SCNR, for example, we've gained market share, but it's obviously, you know, at a certain rate. So whatever resident opportunities are there, the NR seem to have even more opportunities. You know, that's really what's happening out there on the saving side.

But I think the underlying point, Sarav, is that structurally the non-resident behavior post-COVID has changed. And we've said that in earlier calls, so I'm re-emphasizing. Remittance part is okay. We're holding out quite well. In fact, we're gaining share. The behavior of that converting to deposits has changed. Some of them Shalini explained. And we are sort of flexibly, fluidly readjusting to gather that and gain share. It's not like we are losing somebody else's gaining. It's just that the structure has changed.

I just want to add two points to the cost question, Saurabh. The other way of looking at it is how do we make the cost which we are incurring? And these are costs which we believe is right investment. How do we make it more productive? For example, we are investing in new branches. We have opened 65 branches in the nine months. Last year, we added 75 branches. And we believe adding branches in the right locations is to our advantage, given the need to get deposits and various other reasons.

Now,

We are taking steps to ensure that we get the break-even for these branches faster than what we used to see in the past. For example, one data point is last year after 75 branches we opened, 41 of them have already touched break-even in less than one year, which is a significant productivity enhancement. Similarly, on the staff cost line, How do we invest in tools which will make some of the regular operational processes more automated, technology driven and then the existing people are able to absorb additional work which comes through so that we don't have to add more people as we grow in the future. So a combination of all this will continue. We will invest in branches. We will invest in technology. It's a question of how do we make sure it as well in the coming years. Okay.

Thank you, sir. Thank you. Our last question for today is from the line of Pranav from Rare. Please go ahead.

Hello. Yeah, Pranav. Yeah. So, sir, what is RBI exactly alluding, saying that they should improve, like banking should improve cost to, sorry, credit to deposit ratio and what is the mechanism that it can do it by?

I think they are saying not improve, they are saying unimprove, as in reduce your fee ratio.

I think they are indicating the credit markets are probably overheated or certain segments are growing at much higher speed than they would like it. So I think they are asking banks to apply caution in some fashion and readjust their business models. I don't think it's a generic statement. I think they're working bank to bank, to my knowledge. And their guidance could vary by bank to bank. It's getting interpreted as everybody should reduce the CD ratio. I don't know if that's a universal truth. I would think they're guiding banks to bank based on each bank's asset liability profile, credit profile, mix of credit, and probably credit quality. So that's my interpretation. I can't speak with authority, but I sense that's how they are doing it.

Right. So the last question from my side, out of total customers that we have, active customers, how much is the percentage penetration from personal loans and how you view growth in existing customer in personal loans vis-a-vis, say, microfinance growth in a little bit newer category of loans in terms of risk adjusted over a cycle?

Personal loans, Shalini will come in, but all our personal growth is pre-approved or pre-qualified on our base. Only when we do partner-led personal loans, it's pre-approved, pre-qualified on their base. We don't do new to category, fresh, unverified DSA source personal loans. Shalini, is that right?

Yes, Sam. So, Just to kind of elaborate what Shyam said, in all our partnerships, we work with the partners to do a pre-qualification of their base to meet our risk criteria and basis which the offer is made to the customer. If the customer takes the offer, it goes through the underwriting process. Our entire organic book is also grown on the back of pre-approved offers to our existing customers using score cards and a range of metrics that are there, including a lot of civil and other related stuff. So we don't do open market, if I can just frame it that way, we don't do open market sourcing for personal loans or credit cards, Pranav.

Right, so won't it be less risky to say triple this book rather than say double the microfinance book, which is the new category?

I think it's not an either or.

I don't think it's either or.

Sorry, go ahead.

Hang on, hang on. You said it. Please go ahead.

No, no. I think both of us were going to say the same thing. Pranav, it's not an either or. Each of these meet a certain customer need, have a certain risk profile, have a certain distribution mechanism. So we've got to make sure that. And that's been kind of the foundation on which we built our book, right? It's more diversified by geography. It's diversified by product type. It's diversified by kind of security. So, you know, we will do personal loans. We will do microfinance for now.

Okay.

Okay. Thanks a lot. Thanks a lot.

I think, Vizhar, you should call it because I have another meeting to enter, please.

Yes, sir. Thank you. Ladies and gentlemen, that was the last question of our question and answer session. I would now like to hand the conference over to Mr. Sovik Roy for closing comments.

Thank you so much, and we all appreciate your time and attention. I'm sure our results reflect the kind of dedication our management has towards sustaining this positive momentum. Thank you for all your questions, and I'm sure we look forward to more personal engagements going ahead. It's result season, so I'm sure you're going to have a long evening ahead. Thank you again for joining and for staying with us.

Shabik, on a lighter note, some of them must be dialed into two calls. I'm told HDFC call has started.

Quite possible, sir. So, yes, before we sign off, wish you all a very happy New Year again. Thank you. Thank you very much. Bye.

Thanks, everybody. Bye, everybody. See you. Thank you, everyone.

Thank you. Thank you. On behalf of the Federal Bank Limited, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.