The Federal Bank Limited

Ladies and gentlemen, good morning and welcome to the Q3 FY25 earnings conference call of the Federal Bank Limited. As a reminder, all possible lines will remain 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 the operator by pressing star, then zero on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Swavik Roy, Head of Investor Relations of the Federal Bank Limited. Thank you and over to you, sir.

Thank you and good morning, everyone. Thank you for joining us on this early call today. Now, we truly appreciate your flexibility in accommodating this one-off schedule change and we are hopeful to return to our regular timelines moving forward. Most of you know we have scheduled our analyst meet on the 21st of February at Trident BKC, which was announced on the exchanges a while ago. Given the limited seating capacity, we encourage you to register at the earliest. Registration will certainly close by 30th of January and confirmations will follow in early February. At the analyst meet, we will discuss our strategic roadmap in greater details. But for today, let's focus on the quarter that went by and the progress that we've made. This quarter is particularly noteworthy as it marks the full first quarter under the leadership of our new MDN CEO, Mr. Kavya Smanian. And joining him today, as always, is our senior leadership team, who are here to address your questions, provide deeper insights into the numbers and key developments. With that, I'm pleased to hand over the call to Mr. Mannion. Over to you, sir.

Thank you, Shobit. Good morning, everyone. Thank you for taking time to join us today. This moment is particularly special for me, as it marks my first opportunity to address you after my completing the initial quarter as MD and CEO of Federal Bank. I want to begin by expressing my heartfelt gratitude for the warm welcome I have received and the incredible support from this remarkable team. The last three months of 2024 have been quite a learning curve, perhaps more accurately a listening curve. This period has been a journey of exploration, understanding and most importantly, listening through a process that I call my listening to us. where I traveled extensively across all zones, meeting with over 2,000 federals. When I visited each of the nine zones with the sole intention of listening, I gained some deep understanding of how our bank operates. I heard the aspirations, ambitions and apprehensions and also witnessed the fierce pride that the team has as federals. I have endeavored to make these exchanges a two-way process, to exchange ideas, challenge norms, and forge a new way of thinking within the bank, one of being astute, agile, and alert, what I call the triple A culture. From these interactions and others, we have formulated a detailed strategic plan, which reflects the collective aspirations of our people. This plan is not just about scaling, it's about scaling with purpose, with responsibility, and with quality. It's about building a future where every aspect of what we do, whether it is the quality of our franchise, earnings, people, or our service, is held to the highest standards. When I presented the strategy to the board, I did emphasize our aspiration to gain more relevant scale beyond Kerala. As we look ahead, we need some breakthrough effort to make this happen. Our priorities are clear. This quarter, we made some pivotal decisions that I would call a strategic reorientation without disruptions. These changes are essential for creating a solid foundation on which we can build federal to the next level. While reorientation is never an easy task, I am proud that my team has embraced these adjustments with remarkable clarity and purpose. The transition process to these new changes is smooth, focused and largely free of disruptions. As we recalibrate our strategy, we are firmly grounded in a philosophy of granular growth, growth that strengthens the very foundation of the bank. It is abundantly clear to us that high value deposit driven asset growth is not our path forward. While such growth may appear impressive in the short term, it is inherently risky and unsustainable. Our reorientation on the liability side of our balance sheet has been a critical pillar of our overall approach in this quarter. We have implemented several changes aimed at improving the quality of our reliability base and I am pleased to report that we are seeing clear and tangible signs of progress. One of the most significant changes has been shifting our internal focus to average CASA as a key metric. This shift is both operational and cultural. aligning our internal scorecards with a more meaningful and sustainable measure of performance. Externally, we have ensured that our reporting reflects this strategic shift as well. Implemented two months ago, the impact is already evident. While our EOP CASA shows a decline, primarily due to a drop in wholesale business current accounts, our average CASA metrics tell a much more compelling story. SA averages grew by over 2.5% quarter-on-quarter and CA averages grew by 1% overall. Average CASA grew by 2.3% this quarter. This shift to average metrics ensures that we focus on quality, stability and sustainability in our deposit base rather than short-term, end-of-period fluctuations. Moving beyond EOP metrics, we are freeing up bandwidth of our teams to concentrate on more meaningful activities and aligning our efforts with a strategy that genuinely supports the growth and funding of the balance sheet. we federals are now better aligned with a philosophy that prioritizes long-term value creation over short-term optics. While our total deposits have marginally dropped from 2,66,563 crores to 2,64,829 crores, it is important to unpack the context behind this reduction. Much of this change is attributable to the strategic changes that I just spoke about. However, if you look deeper, into the numbers, there are many points that become discernible. Firstly, the end-of-period CASA decline, particularly CAR accounts, account for nearly 1,100 crores of reduction. Additionally, wholesale term deposits, specifically those above 3 crores, have decreased from 37,821 crores to 33,848 crores, representing a drop of nearly 4,000 crores. The concentration from our top 20 depositors has decreased by over 33%. aligning with our broader goal of reducing risk by diversifying our deposit base. Deposits from LCR unfriendly sectors, such as financial sector, have dropped significantly from 18,912 crores to 13,593 crores, a reduction of over 5,000 crores. Furthermore, the wholesale deposits plus CDs and IP, interbank term deposits, have fallen from being 19.5% of our total base to 18.2% of our base. reflecting a drop of approximately 4,000 crores as well. This is another step towards de-risking our deposit base and aligning with our quality first strategy. On liquidity and deposit-related metrics from this quarter, which reflects our deliberate focus on building a more stable and sustainable liability base, our LCR has seen remarkable improvement. Last quarter end, our LCR stood at 111%, and at this quarter end, it stands at 133%. While I don't intend to maintain it at this level, the fact is it has moved from 111% to 133%. On the asset side, we have taken significant forward-looking measures this quarter as part of our broader reorientation strategy. We are navigating these times with measured prudence and strategic foresight, adopting a deliberate and calculated approach. This is not the moment to accelerate growth in unsecured lending. Instead, we are waiting for the credit cost environment to stabilize before expanding in that segment, with the exception of credit card I would say. While increasing high yield unsecured loans like MFI and personal loans is not an immediate option, we are tweaking other variables to enhance yields and optimize our portfolio's performance. Our approach to low yield assets such as home loans reflects this strategy, with the segment growing only 9% year on year and achieving 80% penetration for savings account with home loan customers. However, rate competitiveness in this segment remains a challenge. Our auto loan portfolio grew 25% year on year despite a slightly slower growth in this quarter due to a strategic pivot we made from a floating rate model to a fixed rate model, which I think is also important in the construction of our balance sheet. In one quarter, we transitioned to 80% of our new disbursement being fixed rate disbursement causing short term volume and revenue impacts but positioning us for medium term gain improvement. Yields in this segment have already shown a small uptick. Our medium and high yield businesses have grown faster than the book average. Commercial banking grew at 5.65% quarter on quarter and 24.5% year on year reflecting healthy momentum. Business banking grew at 13% year on year with record disbursements in December. Gold loans increased over 30% year on year, though we see some regulatory headwinds which may slightly impact this growth in the near future. LAP grew 20% year on year with marginal improvements in pricing. The microfinance portfolio remains an area of cautious navigation for us, focusing on managing risks for the long-term sustainability. Our credit card business is growing rapidly. both in organic sourcing and ENR, albeit on a small base. In our corporate and institutional banking portfolio, we have taken deliberate steps to ensure a prudent and balanced approach, particularly in our exposure to certain sensitive sectors like NBFCs and power. By actively managing these exposures, we are reinforcing the strength and stability of our loan book. We are revamping our RAROC network, RAROC framework ensuring that profitability and risk-adjusted returns at the customer level remain central to our decision-making. We have also made strategic decisions to refrain from engaging in the direct assignment business as it does not align with our broader goals of building a sustainable and high-quality franchise. Despite all these shifts, I am pleased to report that we have been able to maintain our NIMS even though the cost of deposits has increased marginally. This reflects the success of our proactive margin management efforts, which are already yielding results. Some of the measures we have implemented to improve NIMS will take time to truly reflect fully, but they are designed to deliver a positive impact over the medium term. To sum up, our asset price strategy is underpinned by balance, discipline and long-term view. We are methodically aligning our portfolio to ensure higher yields, responsible growth and a focus on quality. Each of these measures from optimizing low-yield products to pivoting business models and enhancing pricing bring us closer to a more profitable, sustainable and well-rounded franchise. While some transitions may create short-term headwinds, they are deliberate choices that will deliver significant benefits in the medium to long term. Our confidence in the resilience and potential of our asset book remains strong and we are well positioned to capture opportunities in the quarters to come. One of the key changes we have made in our approach to NPA provisioning for retail unsecured loans. We recognize the need to adopt a more robust provisioning framework, one that more closely reflects the reality of potential credit risks in terms of both quantum and timing. This shift is not just a technical adjustment. It is a strategic step to ensure that our foundations are solid as and when we scale this portfolio. By aligning our provisioning norms with the industry best practices, we are creating a framework that supports sustainable growth while bringing our operating teams closer to the realities of risk management. With this change, while our year-to-date annualized credit costs has increased to 41 basis points. Our guidance for the year continues to be 40 to 45 basis points. You would have noticed that we have taken this accelerated provision even while the overall quality of the book has remained very stable. There has been a slight increase in fresh flip pages rising from 428 crores to 486 crores compared to the last quarter. This quarter, we have also written off 496 crores of assets, effectively reducing our net advances. This move is also part of our broader effort to maintain a clean and focused balance sheet, ensuring that we operate with a higher degree of transparency and efficiency. These steps represent a significant reorientation of our asset side strategy. While there has been an immediate impact on profitability due to the provisioning changes, we are confident that this proactive approach will yield long-term benefits. Even more importantly, We have managed to execute all these changes without compromising on our employee connect and engagement. Our teams remain motivated and aligned with the bank's vision, which is a critical factor in our continued success. I also want to highlight that we have successfully protected our profit and loss account while implementing these measures. The one-time impact of the reorientation of profit before tax is significant. of the reorientation on the profit and loss is 292 crores. Had it not been for this provision, we would have ended the quarter with record profits. What we are effectively doing is keeping the plane flying while refueling its mid-air. While this might sound risky, let me assure you that it is anything but. We have a clear roadmap ahead and every decision we make is deliberate, strategic and aligned with our long-term objectives. As I conclude, let me leave you with a thought that is inspired by my time in Kerala as well as something I recently read about what Steve Jobs had said. Fishermen repair their nets before they set sail. When the sea is too rough to sail, the smart ones don't wait. They get to work. They mend their nets, sharpen their tools and prepare for the moment that storm breaks. Even in moments of stillness, there is progress. It's not about waiting passively. It's about preparing actively. Every measure we have implemented this quarter is part of our preparation. We are building a stronger foundation, sharpening our processes, and positioning ourselves to sail faster and farther when the winds permit. Because even in stillness, there is growth, and in preparation, there is strength. Thank you. Thank you so much. We are open for questions. Operator, can you help us with that?