The Federal Bank Limited

And welcome to Q1 SI26 earnings conference call of the Federal Lines Limited. As an reminder, all participants' 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 call, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded. And now, in the conference, over to Mr. Sourav Kauri. Head, Investor Relations, the Federal Bank Limited. Thank you and over to you, Mr. Roy.

Thank you so much and good evening, everyone. Thank you for joining us, especially on a weekend. I've got quite a few messages over the past couple of days asking if Saturday is going to be the new normal for our earnings call. Well, I can assure you it's still undecided and we promise you this wasn't by design. As always, I'm joined by our full leadership team led by our Indian CEO along with our executive directors and senior business heads. We'll start with some strategic updates from our MD, followed by the CFO walking you through the financials and business performance for the quarter. After that, we'll of course, as always, open the floor for discussions and questions. With that, over to you, sir.

Thank you, Shobhit. Good evening, everyone. Thank you for joining us this Saturday evening. Before we dive into the quarterly numbers, let me make some introductory remarks. While we will present to you a detailed review of our strategy implementation in January 2026, about a year after we first announced it, I thought a quick and a short interim update on the same may be useful. Earlier this February, when we introduced Federal 4.0, it was not just a catchphrase, but was a transformation blueprint to reshape the way we operate, compete and grow. We are focused on execution, as I hope you will realize as we move ahead in this update. If I had to oversimplify our strategy, and I mean oversimplify, it really comes down to getting three things right. Improving our CASA, especially the current account fees, to address our cost of funds. Driving better yield on advances, largely by re-shipping the asset mix. And increasing granularity and volume of our fee income. In the quarter gone by, there is clear evidence that our execution is in sync with all these three objectives. And we are making good progress on all three fronts in spite of systemic headwinds on a few aspects. There remains, of course, a lot more to do. Later on this call, Venkat will take you through these details when he discusses the quarterly results. Coming to the execution element, we began by refocusing our energies on the most vital part of the bank, our branches, people and profitability model. The Free the Branch initiative is now fully under way. We have already created 70 regional business support centers which are our GUB and AGRI hubs which are now fully functional. Helping free up frontline teams from all activities other than relationship and sourcing aspects. The establishment of regional loan service centers which will take care of the retail asset related work at branches is progressing smoothly and should be fully in place in the second quarter. We continue to focus on what we call code, C-O-D-E-S, centralize, outsource, digitize, eliminate, simplify. And several initiatives have already been put in place and more are in the pipeline to operationalize each of these. Our goal here is clear, remove friction from day-to-day work and allow branch teams to focus squarely on customer engagement and business development. This process will continue and gain even more momentum in the next two, three quarters. We are in the final stages of finalization of standardized branch formats and manning models in them. For CASA around opening, turnaround times have been improved by realigning staffing models and improvement in processes. However, task across products is an important area of focus for the future quarters as well. We are investing in capability breeding across all levels. Sales management training is underway for identified managers in partnership with a globally renowned sales training firm. A lower cost sales force structure has already been deployed in select branches and we will enhance the scope of this initiative as we get more comfortable with the outcomes. We have kicked off the process of identifying new branch locations based on data-backed inputs and we have commissioned an external agency to help us assess our network scientifically. We have already begun a process of reviewing our branch locations and performance to evaluate shifting and upgrading branches to improve their attachment and visibility. We are also working with a partner for redesigning our physical branch formats. This may mean slightly lower number of branches this year, but with a better foundational work, we can be surer of the way forward and also gather speed later. We have overhauled our performance scorecards for branches as well as individual officers, RMs, etc. Sharpening focus on CASA growth and profitability. A department level P&L framework going down to the branch level P&L has been rolled out and is now published frequently based on needs. Now the team can see the actual financial impact of their actions. We have also made the branch manager role more aspirational with a higher incentive structure, performance-linked metrics, and alignment to business priorities, and freeing them from a lot of routine. We want to ensure that the branch managers and our regional and zonal heads of all businesses function like being CEOs. That is the final goal. In some sense, we are refueling mid-air, re-engineering the business while we are still delivering the business numbers that we have delivered. Fee income and pricing reforms have kicked off with several important changes. We have revised our fee and charges in line with competition, energized our product partners and improved our revenue structures. Some of the impact of that is already visible in our fee growth for the last quarter. We have also implemented a new loan pricing and delegation structure, our RAROC-based Pricing models and transfer pricing models have been fully revamped, giving a sharper insight into segment-level profitability, product-level pricing decisions across the bank and customer-level pricing and profitability decisions in the corporate businesses. With this methodology, a more holistic customer-level approach to business with the right balance between wallet share and pricing and also the right mix between fund-based revenues and fee revenues is enabled. The wealth management and banka vertical is now well underway. With experienced hires onboarded, head of business, head of products and sales heads are all in place. Technology enablement is underway. Our partnerships are being renegotiated or researched to better align outcomes and ensure we build a scalable platform. We also made strong progress in strengthening our trade and correct capabilities. We also now have a head of global transaction banking who joined us last month. The central teams have been strengthened. A team of IRMs across the branch network, now called PRM business, Priority Relationship Managers business, have been identified and trained to give a push to the retail, trade and product business as well as current account business. Our retail assets team has been restructured to have separate heads for unsecured and secured businesses. Both are now headed by new talent that we acquired last quarter. Also within the secured business, separate verticals have been created for lap and home loan, auto as well as grand distribution of secured assets to bring sharper focus. A retail credit head would be soon joining our team under the Chief Credit Officer. In the corporate bank business, we have created a separate vertical focusing on B6 segment, which will also help us enhance our focus on capital markets and correspondent banking. This allows the rest of the corporate bank to focus more sharply on growing the mid-market corporate segment. Foundational work has been already done for traction and EMI-based business loans and Agri-based SME loans. These products will be rolled out in the coming quarters. Tech is, of course, the backbone of Federal 4.0. Our corporate and commercial trade underwriting automation has just gone live. On the customer side, FedOne, our unified interface for corporates, has gone live with a new collection and payment solution, thereby completing the phase one of rollout and will undergo monthly upgrades with few future additions from here on. Online trade is our next big project within this unified interface. FedMobile app has seen over 15 new features rolled out this quarter. The GenAI powered chatbot as an internal co-pilot for our employees is in alpha testing. It's being trained on our internal knowledge base. And this is just the first step in embedding AI into both customer and employee journeys. At the infrastructure level, we are engaging a partner to undertake a full review of our IT architecture and create a roadmap for the future. ensuring our digital and technology backbone in its future growth. We have strengthened the technology teams with three key new hires just below the CTO level. We have placed customer experience at the center of all this transformation. Our CRM platform revamp has already delivered over 15 key enhancements. We have kicked off a deep-dive study to improve adoption and usage of the platform, ensuring we are not just building tools, but driving value through better account management. lead management and organizing our process processes better. There is a lot more work to be done in this area to leverage the investment we have already made in this platform. This year, we have taken a bolder step in brand building. The Savings Key Vidya campaign featuring Vidya Balan is now live. It is now not just a celebrity endorsement, it's about repositioning the bank in the minds of retail savers. This is an integrated transformation with over 50 large and 100 small projects under execution designed to make federal banks faster, simpler, more profitable and more agile. Federal 4.0 is not just a plan anymore. We are transforming where it matters and we remain focused on doing it at speed. But this is surely a multi-quarter journey. This journey will come with some air pockets at times but we remain resolute in our execution. My team fully shares my excitement as we take this journey forward. Thank you for walking this journey with us. Now let me hand it over to Venkat for a more detailed walkthrough of the quarter in particular that went by. Incidentally, he recently got elevated to the board as executive director. Welcome Venkat and all of you.

Thank you. Thank you, Mani and good evening to all of you. Thank you for joining us to discuss our Q1 FY26 financial reports. I hope you have had a chance to go through our investor presentation and detailed disclosure. As always, we will use this forum to discuss key developments and then take questions. Let me begin by providing some macro context. The first quarter of the year is typically soft for the banking industry. The seasonal factors, particularly around collections, discursive effect segments, like MSI, Agri and TV. This year was no different. And as you know, Reserve Bank of India facts are recorded by a cumulative 100 days of points since February, including a 50-day cut in June. This was done with the intent to spur growth and improve liquidity. Inflation is under control and rural consumption is showing signs of devaluation. Credit growth and fuel are seasonally muted across the banking system. Profit loan demand continues to remain selective with many large borrowers opting for bond markets and other alternate sources of funding. At the same time, unsecured retail portfolios, especially microfinance and cards, remain under scrutiny and the industry has seen a celebrated pullback in new originations in certain substations. On the liability side, deposit repricing has commenced in a small way And we see a lagged impact of the rate cut on deposits. From our perspective, we believe the medium-term environment remains conducive for banks with disciplined credit filters and a diversified lending engine. Now coming to the metrics of the bank's performance. We delivered a strong operational performance in Q1. And by the way, we are now the 6th largest private sector bank by total business. Growth advances grew by 9.15% year-on-year and 3% sequentially. On the back of our strategy to grow medium-age businesses, the growth was led by commercial banking, which grew by 5.5% QOQ and 30.28% YOY, credit cards, which grew 8% QOQ, CVC, which grew 5% QOQ. With the recent circular on gold, the Gold loan ratio grew quite strongly in June and we will see the full impact of that playing through from this quarter onwards. As mentioned by Mannion, the retail restructuring is almost complete and this will aid in stronger retail growth in H2. Also, with the festive season around the corner, we expect growth to gain further momentum. We are in line to grow at 1.2x nominal GBPT. On the deposit side, growth was 8.03% YOY and 1.34% QOQ, with retail speed in strong traction and steady CASA growth. In fact, our average CASA growth was 3% this quarter. Our CASA ratio stands at 30.35, which is an improvement of 108 bps year-on-year and 12 bps quarter-on-quarter. And average deposit growth was 6% QOQ. Our net interest income for the quarter stood at 2337 crore, growing at 2%. NIM for the quarter. Now this 2% growth, you must note that by a while, last year the rates were 100 bits higher, whereas we have got 100 bits rate cut impact in this Q1. So NIM for the quarter was 2.94%. As you are aware, we follow a T plus 1 re-pricing for the stock. And the last part of the 100-bis rate cut is already respected. We had some offsets including lower savings rate, which full impact will be seen in Q2. We did quite well to manage the impact of the NIM drops and end at 2.94%. We expect NIMS to bottom out in Q2, subject to no further rate cuts, and improve into H2 at cost of funds cost. Total non-interest income, which was mentioned earlier, That's the highest ever for the bank at 1,113 crores. Core fee income grew by a healthy 20% year-on-year and other income by 22% year-on-year. Operating expenses were slashed sequentially and our cost-to-income ratio is 64.89%. We will continue to focus on operating leverage, especially through digital origination and process optimization. On asset quality, DROPS litigious for the quarter stood at 658.19% with MFI Agri being the last part of it. DROPS NPA was 1.91% and net NPA 0.48% DROPS is saving. CCR stands at a healthy 74.41% and credit cost for the quarter was 65%. Excluding the MFI Agri impact, our credit costs are well in line with historical trend and in fact flat as compared to the last few quarters including last year's same period. Having seen the trend of the slippages in the month of May, June, July and the downward trajectory, we are confident that we will maintain our full year credit cost guidance around 50,000. It is important to reiterate that outside of MFI agree and slight uptick in business banking literature is a stable or improved. Our CAP1 stands at 14.69% and overall capital adequacy is at 16.03. ROA for the quarter was at 1% and ROA at 10.3. Disbursement momentum should improve post-monsoon, especially in retail and MSME. Combination of a better macro drop backdrop declining cost of funds and recovery in unsecured lending should support margin and bottom line normalization. External environment is improving, albeit there are some geopolitical and tariff-related uncertainties. Inflation is moderating and early signs of consumption revival are visible. However, competition remains intense, especially on pricing, and they will be guided by risk-adjusted profitability. We see strong opportunity in secured MSME, business banking, gold-backed lending, and the other medium-yielding segments like labs, CVCs, as highlighted by Manil on the progress made on this regime. We continue to invest in distribution, digital, and data to scale the franchise efficiently. Our focus will remain on sustainable growth, risk discipline, and improving productivity across the board. Thank you and I will now open the floor for questions.

Operator, we have answered the questions. We are now taking the question and answer session. Anyone who wishes to ask a question may press star and 1 on their 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 questions are assembled. Participants, you may press star and 1 to answer questions. The first question is from the line of Marupaj Jhania from Guam. Please go ahead.

So, one question on NFI. That link. Quite a few lenders recognized MFI stress in third and fourth quarters. And of course, it continues to some extent even in the first quarter. So, for us, it bunched up only in the first quarter, is it? And there would be accelerated or aging provisions on the slippages this quarter and the next few quarters as well, right? Because... The write-offs are not materially different from fourth quarter overall in general. So that's my first question. And then in general, there appears to be a stress in the very retail segments like unsecured business banking. And of course, the NFI stress may peak in one or two quarters. But in CVs, in business banking, we hear a lot of lenders talking about new stress build-up. So, how do you view the environment and do you see credit costs remaining high in the second quarter and then moderating or how do we view it? So, that's my first question. And then my next question is on margins. Of course, you have repriced faster. So, that explains the margin decline. But, you know, you also got benefit on cost of funds. But how much do they fall in the second quarter before stabilizing? The quantum should be much lower or how do we view that?

So, Maruk, multiple questions. So, yes, it's correct that our... MSI stress had begun to show up a little bit on the fourth quarter but yes significantly showed up in this quarter and as I mentioned May, we saw the peak of our slippages in May and in June and July we have seen drop in slippages in MSI. And, of course, you know that we now, since last year, December quarter, we take an accelerated provision on our unsecured loans. So, that policy continues. So, therefore, this effect lingers for a quarter more at best, not more than that, because we take 100% provision by that time. So that is point number one. And second, I will ask her to add something on the business part of that. The second question you asked was a NIM impact. Like you rightly pointed out, because we reprice faster because of our C plus 1 policy, we have repriced faster. But interestingly, as you said, our cost of funds have also dropped significantly over this period of time and we have been able to defend some of our NIM pressures. And since we have rise faster, we don't expect our further mean pressures to be more than 5 to 10 basis point range in the next quarter. I hope that answers your question and on MFI if Harsh wants to add some color. Yeah, on MFI you are right.

We did see it in May as one mentioned and we have seen June to be better than May. and July to be better than June. So, we do see slippages kind of coming off. Also, other indicators such as the estimate book installation efficiency seems to be improving from what it was.

So, we do feel that we should see improvement going forward from here. Maruk, I would add one more thing just to clarify. But for the MSI Agri-T, Our clipages have remained in the same range that they have been all through the last year. In fact, in some products, they are better or equal or very marginally higher. But nothing alarming, nothing out of the way, no significant change in asset quality other than MFI Agri segment.

And business banking is also good? It is also in the same range as it was in the first.

See, business banking, of course, had a very good quarter last Q4. But if you look at seasonality in that and Q1 of last year, it is ballpark in the same range. Very marginal, very, very marginal uptake here.

Okay. Thank you.

Thank you. Thank you. Next question is from Manav Rekhenshah from IISL Capital Service. Please go ahead.

Hi, good evening and thank you for the opportunity. Just three quick questions. The first one, you know, we spoke briefly about business banking and MFI, but would you be able to supplement it with some more color and data specifically on business banking? Wanted to understand what proportion of the book is secured versus unsecured, how much of that is backed by any government guarantee scheme, and how the smittages have kind of moved YOY. Coach, you did mention it was very strong. And even on MFI, if you could talk a bit more about ex-market collection efficiency in April, May, June, and how that has moved in July, that will help us to understand how the forward flows are and how much of improvement we can expect in the second quarter. So, that's my first question. Maybe I'll ask the other two questions after this.

So, written on business banking, almost very large part of that book is secured book. It is not unsecured book. Almost entirely it is secured book. And there is very little of CGT SME and those kind of products we have done. Largely, it is pure lending, secure lending. That's the nature of that business. I hope that clarifies your doubt on that. On MFI, of course, we don't disclose the roll forward and those kind of, but let me clarify to you again that we saw the peak of this in May. And both in the month of June and in July, we have seen secular fall in slippages even in our MSI book. And we are hoping that the trend is there to stay. And also our SMA book, which is a precursor to slippage, is also lower than, as we exist, the quarter is lower than previous quarter. So, I would say that clearly on this part, as things stand now, we think the worst is behind us. Of course, the reasoning comes with the lag as with some lags, so it may moderate down, but with the lag of a quarter, but slippages have at least shown a trend onwards.

Got it. The second one was more like a clarificatory. The credit cost guidance has actually been up to 55 basis points, right? I think we used to earlier guide below 50 basis points. So, is that a correct understanding?

Not really, Rikim. Last time, we guided 50 to 60 bits. So, right now, the guidance is around the midway on that.

We used to guide that lower figure last year, Rikim. This year, we are in the last time itself, we had said 50 to 60 as the guidance. Got it.

And sir, last question is for Mani and sir. Sir, you know, historically, the one comforting factor for the bank has always been a very stellar and stable kind of outcomes on asset quality. For a much lower share of unsecured loans, we have started seeing stress, 3QV2 accelerated provisions. Again, this quarter, this is happening. And Margin is given the starting point for Federal Bank itself was low and then you have this cyclical downturn. How do we really think about the ROAs, right? Because, you know, you had guided in the analyst day earlier that we aspire to improve our ROAs meaningfully. Is this now pushed back given how the macro environment is or would you want to kind of revisit your ROA growth trajectory of guidance? Those are all my questions.

So, Rikhin, if you see even this quarter performance, And if you were to take the NI net interest on average assets and fee on average assets, our fee on average assets has also grown. In fact, if you technically look at it, we have been able to defend the ROA, but for the MFI provision that we have taken, we would have defended our ROA at the same level as last quarter, but for the MFI provision. So, I remain optimistic. The structure change, as you can also see in our presentation, of the mid-yielding assets is consistently happening, right? You have even this quarter seen improvement in mid-yielding asset proportion compared to last quarter. And Venkat mentioned that we are more optimistic about some of the products like, you know, gold, for example. The real change in regulation happened in June. So, the growth you see in this quarter is effectively a month growth. And this will give us more growth in the coming quarters. And retail assets, like Venkat mentioned, we have restructured the business. We are more hopeful that things are now in place to push for growth. So, mediating assets is part of the strategy. So, I continue to say that our ROE is defined by improvement in CASA, which you can see evidence of in the quarter one results. Improvement in fees, which again you can see the evidence in the first quarter results and change in mix on assets, which again you can see the evidence of that in the results. So, all those three that the guided improvement in ROA based on, all those three parameters are playing out clearly. Yes, the asset quality likely again clarified, but for the MFI, the asset quality on the rest of the book has remained absolutely at the same levels that it was till last year.

Thank you very much.

Thank you. Next question is from Ryan of Peran Engineering from CLS in India. Please go ahead.

Hi, Tim. Thanks for taking my question and congrats on the quarter. Just a couple of questions. Firstly, on free income, we have done a good job on free income. over the last three four quarters since you joined is this more a case of low hanging fruit being plucked and now fees will grow in line with balance sheet or you know can fees continue to sustainably grow for a long period faster than the balance sheet and if so then what are the drivers of course

We would like to believe that of course this is there to stay and not just because we hope for it. You know, I just mentioned that our wealth vertical is just about falling in place. We will have to grow our wealth business which will add to fees. I also mentioned that we now have a team in place on the transaction banking side and therefore we are expecting our trade and product fees to grow from here. our current bank assurance growth has been very good even in this quarter if you see the para banking fees have grown very very handsomely so I think we are still scratching the surface and our card business continues to grow which will add to fees so I think there are enough levers for us to sustain the fee growth at a good momentum much faster than the growth in balance sheet for some Many more wonders to come, I am hoping.

Okay, fair enough. Secondly, just on growth, two questions are both related to growth. One is, I think I heard us mention that growth will be 1.2x of nominal GDP. Did I hear that answer only for FY26? Because we used to usually grow at 18-20%. Then we did this recalibration.

Piran, he has been always saying 1.2 to 1.5 times. But that also depends on the environment. If the environment is of a low growth environment, then the faster growth becomes tougher and that's why we guide towards the lower end of that band.

But it is only for FY26, right?

And see, 18-20%, you should know the context that just an economy, let's say, was growing at 7 and inflation was 7. And then you apply the 1.2 to 1.4x, you'll still get to that 18-20%. So, it's a context to that growth and that's why we stick to nominal GDP and a multiplier.

And also on growth and business banking, you know, we've slowed down quite a bit. Is this more of pricing related tweak? Is it very competitive?

Yeah, no, no. So, Piran, what we are doing in business banking is, of course, you know, there is generally the environment is, I mean, you have heard many calls where people are warning against SME credit. While I mentioned that our book is not seeing particularly higher sales than in the past, but it is important for us to be cautious. So, we have made some internal rejects on our credit buying decisions and we have been slightly more cautious while growing that while on the commercial bank side we have continued to grow faster and because we have felt more confident of the market as well as our book on that. And this is the upper end of the SME. So, we are pushing the upper end of SME growth faster than the lower end. But we have also created a new team there. There is a new leader there. There is a set of new RLs that we have created dedicated to that business. So, some of that is playing out. But I am sure that in quarters to come, we will pick up some growth in that segment as well.

Got it. Okay. That was all that I had. Just one thing since Sravik mentioned it about this Saturday thing. I hope this is just a one-off. You'll get much more clients on the call when you do it on weekdays. And literally every bank has started doing it on Saturday, which is very surprising. And when it flashes... Imagine if you all flash with an ICSR, of course, our people will obviously give more importance to it. I'm just being very honest here. Try and not follow the pattern here.

Let's see. Yeah, it's better on a weekday. Not that you are being that evil.

Yeah, thank you and wish you all the best. Thank you so much.

Thank you. Next question is from Ryan of Anandama from MTA Global. Please go ahead.

Thank you for the opportunity and cooperation for the strong operating performance. My question is on this stress again like these are the microfinance we have seen a stress in this quarter. If we can quantify what the capital is in microfinance and I believe our portfolio is towards Kerala rather than Karnataka or state of you know where there were original stated impact. So what basically led to this kind of higher capital in microfinance? That's my first question. Second is that the CDC book that also seems to be now seizing out and for business banking. Can there be some surprises over there in terms of asset quality that you see going forward?

So, Anand, right? Yeah. Anand, on MSI, Our portfolio is not Kerala. Our portfolio is actually across the country over multiple states, but 20 odd percent is in Karnataka. So that is where the big pain is coming. And our clip-on numbers are there in our desk. in MSI, Agri, we call it Agri MSI. So, it is there in the deck for you to get. On CVC and business banking, as I mentioned, yes, we have seen marginally higher stress than in the past, but I would say it is not yet something that is alarming. On the CV and CE, we are largely not on the very retail end of that business. We are in the medium to large size strategic customers and retail premium customers if you might want to call them. So, we are not at the lowest end in the LCG and the lower end of the business. So, while we are seeing marginal deterioration, it is not yet alarming us. Of course, if the data tells us something else, we will change our mind. But right now, it does not give us any reason to change our mind on wanting to continue to grow the CVC. Business banking, I mentioned to you again. Very marginal change, broadly in line with what we have seen in Q1 of last year and Q1 of this year is similar. That, of course, in D.B. we have more Kerala-focused book. About 30% of the book is Kerala. But, like I said, that is not showing any abnormal signs to us. just now again we have been cautious we have not grown that book very fast and we have taken some protective measures over the last two three quarters on that book and we have done some tinkering with our underwriting as well there to make sure that we have because there are too many people calling out stress in that sector and we don't want to wade into the storm so we have been cautious though our portfolio per se has not exhibited any alarming tendencies

I hope so. I am trying to give some buffer on provisions, right? Because, I mean, you may never know the statement.

I hope so. Incrementally, obviously, you can. I mean, it is a secured book. It is not an unsecured book. So, we are not yet thinking in terms of that.

The second cost implications of your transformation process, how that would look like in FI26 in terms of overall effects? Because you talked about branch transformation, you talked about people, changes that you are doing and stuff. So, if you can just talk about that in terms of what kind of effects that we should build in for FI26 and FI27.

So, you know, Anand, we have always guided that don't assume any benefits out of cost of income and they will remain in the same range that they have been. As you can see, even this quarter, while we have taken all those initiatives, we have created the 70 RBSCs We are also trying to optimize. We have not, the fact that we have created 70 retail business centers does not mean we have added people from outside. We have also, you know, optimized internally, we transferred people from one role to other and created, when I said we have created 70 business PRMs, it is not an addition to our manpower, it is more realignment of our manpower. So, we are trying to optimize whatever we can and we are trying to get efficiencies that we can get. However, as per our past guidance, I continue to say that Since we will be in the investment mode and we will, you know, all these talent that we have added will of course add cost to us and therefore we have to continue to optimize this. So, we don't want to guide for any benefits arising out of. So, we will remain in the mid-15s range that we have always guided.

Thank you.

Thank you. Next question is from line of Madhu Chanda Day from Uncontrolled Key.

Yeah, hi. Hi. I have couple of questions. The first is, you sounded quite confident on the MSI asset quality not deteriorating from 0. And you also said that there is marginal downtick in the expected in Q2. So, is it correct to assume that 1% is kind of the bottom of ROA for us?

Yeah, I think we are close to the bottom of the ROA side. Like I mentioned to you, had it not been for the extra MSI provision that we took this quarter, we would have defended our ROA as 1.24 itself almost. so assuming no risk so of course who knows we are assuming no risk can happen from here yes we would say in 5 to 10 basis points downside possible but hopefully we can defend that to fees and other means and ROAs will sustain from here and upwards yeah my second question is on the asset quality you sounded quite confident on broad array of asset classes

So, is there any pocket of worry incrementally from here on?

So, Madhu, as we mentioned, if we go back to the data and clip it off the MSI situation, our MSI agrees if I take that out, that segment out and look at the rest of the book, we have currently no reason to assume that there is any stress building up in our book. Our current SMS position, even as of July, not only June, but July as well, is not indicative of any stress that is building up in our book as of now. So, is there a marginal deterioration in BUB CVC? Yes, there is. But like I said, there is a marginal deterioration, but that is not yet, I would say, alarming or anything like that to us. Unless this data changes, yes, we remain confident of our asset qualities.

And your last small question, is it, will it be possible to quantify what percentage of loan book or borrowers have exposure to the U.S. market?

That's a tough one. Difficult to say that. Madhu, I know where you are getting there. But, you know, the way I look at the tariff situation is first, It may not be the last word yet. There will be more developments on this and sure government will get into some negotiations, do something to defend the situation. So, we may not have yet have the last word on it. But once it is there, then I would say this is some monitorable for us. But difficult to say what the impact of this will be. Difficult to say. Frankly, we have never looked at our portfolio from this lens and analyze it in that manner.

Thanks a lot and all the best.

Thank you.

Thank you. Next question is from Ranav Kunal Shah from Citi Group.

Please go ahead. Hi. Thanks for taking the question. Firstly, if you can highlight in terms of have you aligned the KRAs of the employees you indicated that now you are seeing the capacity at the branch and focusing on more business development, customer engagement, the para-banking plus CASA. So, how have the KRAs of the employees changed and eventually in terms of the priorities, fair to assume that maybe CA and pre-income are the initial priorities and would we be tweaking the KRAs 6 months, 12 months down the line? Because now maybe you are well aware of how it's working and what are the low-hanging fruits.

Yes, Kunal, all branch scorecards have been changed. All employees in sales profiles have a scorecard which reflects our bank's priority. And that has been rolled out across the bank for all profiles. So, that has been implemented and is in place and scores are declared every month for every profile. So, that's all in place. Yes, car and fee, but asset mix too. I mean, if you look at Kunal Agar data that we have shown you, asset mix is showing steady improvement towards the medium yield. Even in this quarter, we have made a 50-60 basis point improvement in the mid-yield. And as I told you, the retail products as we get traction, gold as we get traction, will all add to this bucket. And therefore, all three, as I said, oversimplified strategy of CASA, getting car right, getting fee right and getting asset mix right, all three are absolutely built into the scorecards of people and the way we are evaluating them. It is very much.

Okay, okay, got it. So, the weightages would have gone up for this three in particular.

Yes, absolutely. Branches, for example, the CASA weightage for branches has gone up dramatically more than it used to be. If you can quantify. Let me put it this way. More than half the weightage is for liability products.

Oh, great. Okay, okay. And earlier it would have been more tilted towards assets.

Well, that's the part, Kunal. For now, it's more than 50. Let's stick to that.

Yeah.

Yeah. Okay. Okay. Got it. Got it.

And two more questions. Firstly, fair to say the increase in Agri is purely on MFI or MFI is very retail as well? No, no, no. There is no MFI anywhere other than what we classify as Agri MFI. Yeah. So, Danny, what is leading to the increase in the retail slippages when we look at it? Maybe there also it's gone up a bit in the first quarter. Is it more of seasonality or maybe some... Is it more seasonality?

Kunal, even if you compare it with last year, we have seen the trend. In the first quarter, it is generally slightly higher. But, in fact, we are already seeing July itself, SMA is lower. July itself, the slippages are lower. So, it is more... I won't say there is a trend of any big deterioration there, yes.

Okay, got it. And lastly on EBLR, so EBLR is now coming off you in indicator in terms of how you are transitioning maybe from floating to fixed pregnancy of the portfolio. Are we largely done or still there is a scope to get the EBLR for the town from here on?

Yes, yes, there is scope to get it further down. As you would have noticed, we were 51 odd percent, close to 51 percent sometime back.

That's down to 48.

That's down to 48 now. And there is scope to further reduce this. And as we build, for example, car loan business, gold loan business are all fixed.

So, car is fixed.

Commercial vehicle is fixed. So, some of the areas which are growing faster are fixed. So, there is definitely more scope to get it down from 48.

I think that's also more nicely from around 25-26% levels to now 33%. Yeah.

So, fixed book has moved up from 26 to 33, right? Yeah. So, very clear. See, some of these priorities we said clearly our execution is keeping pace with some of those priorities that we have fixed on all these parameters. So, I think 48 is still very upside on that.

Okay. Got it. Thanks. Thanks a lot and all the best. Yeah.

Thank you. Thank you. Next question is from the line of MB Mahesh from Kodak Security.

Please go ahead. Hi. Three questions from my side. One is, can you walk us through as to why would NIM only decline by five basis points the next quarter? And within this, if you could spell out in this quarter, what was the contribution of interest-free recognition on account of some of the high-read link segments? Slipping in the current quarter.

Impact of high interest re-recognition. Okay. Let me take the meme part first. We have a residual, see 50 bips that came in June have had a one month impact, right? So we need to yet get two month impact on 50 basis which is roughly 33 basis points. If 48% of our book is there, the 33 will be 15 or 16. And we are saying that we will be different 7 or 8 basis points. And therefore, we are saying something around between 5 and 10 will be the impact. So, that's the answer to your limb question.

On the income-directing of income-directing... About 4 to 5 times, Mahesh, has been the impact due to the URI. Okay.

So the second question, it's been on the C income line, this contribution of recovery from return of continuous remains fairly high. Any outlook on that? And this general processing fees contribution also continues to remain high. Any color on these two line items?

The general costing fee will remain high. In fact, we think as the disbursements go up and gold and all these businesses' disbursements go up, it can become even more robust. And general charges are also, as I mentioned in my introductory remarks, we also revamped our fee structures on many of our products, liability products, and that has also resulted in some of the change that you see in the fee size. We have also renegotiated some of our partner fee structures and that has also resulted. So, some of those are sustainable increases in fee structure. So, there is no one-time stuff on the fee, general fee that you see there. The second question. Second question. Recovery.

Recovery. Recovery from return of assets Mahesh in this quarter. has been relatively lower than last quarter. Last quarter, obviously, Q4, you will see a very large uptake every year. But in Q1, like every year, we have the reval of the invested investment. So, we get the benefit of that in the other income in Q1.

Yeah. Okay. And this will decline as we go forward?

That's a safe assumption to me. Recovery will continue. So, I don't think that will decline substantially. That should remain or get better actually as we get towards the last quarter again next year. It usually, usually seasonal wise or maybe the effort wise, it tends to be better in the last few, last couple of quarters.

Next quarter we should also get benefit of some CSLC.

Yeah.

So, some other policy will come. Will come. Oh, okay. Thank you.

Thank you very much. Next question is from Param Subramanian from India. Please go ahead.

Yeah, hi. Good evening. Thanks for taking my question. Firstly, sir, if you could call out the slippage in MFI and Agri separately for this quarter and last quarter.

We normally don't give that split, Mahesh. But the last part of the Agri part is the MFI. Param, sorry.

A large part.

Large part of the space that you see there is MFI.

Very large.

Can you say the write-off number broadly? What write-off number? I mean, the write-off has also been high for the last couple of quarters. So, roughly, will it be equal to the write-off? No, no, no.

No, it has no connection at all.

Okay. Okay. And, sir, the recovery, NPL recovery number is also softer than what you've seen over the last three, four quarters. So, which is why your net snippets are also looking high in this quarter. So, anything to call out over there?

Usually Q4, you know, is highest.

So, Param, please don't compare Q1 with Q4. If you do that, it will always look like that. Every year, the way to look at it is Q1, what it was last year and compare that. And if you look at that, it is more or less at the same position. It is not very different. Okay, okay.

There is no change in our recognition of recoveries or anything? No, no, no, no, no.

Nothing, nothing, nothing. Okay, okay.

And one last question. So, on your loan processing fee, it is down YOY by 11% in the fee breakup.

So, what exactly is happening there?

So, there is largely some, the product which gives us more fees when on disbursement like gold, were lower in this quarter. Like I told you that gold loan actually, whatever growth you see is actually only a zoom phenomena after RBI clarity happened on the gold business. So, some of those businesses which give higher costing fee were lower in this quarter and we are hoping that some of that will recover. In fact, in spite of that our overall fee performance was fairly strong actually.

Samaram, are you with us? Hello?

Operator, can you hear us? Hello?

Sorry, I was on mute. Yeah, thanks a lot. Yeah, all the best. Thank you. Thank you.

Thank you. Next question is from Rano Sumi from Morgan Stanley. Please go ahead.

Hi, good evening, Kim. Hi. What is the decline in savings deposit cost on a quarter-on-quarter basis?

Okay, let me put it this way.

We cut our savings deposit rates twice. April.

April.

Second was in only June. We cut it in June 15th. On June 15th. By 25 days, we cut it to 250 from 275. And that has not seen the impact.

in the full quarter it has seen only a 15 day impact that benefit will come entirely next year if that is what you are looking at Sumit are you with us thank you from the line for the participants we move on to the next question next question is from the line of Harsh Modi hi hi thanks for this go ahead yeah go ahead

What is happening here?

Hello, Harsh.

Hi, Harsh.

Just one moment. I think he is on mute. Just give me a moment.

Yeah, can you hear me?

Yeah, we can. All right, great.

Thanks for this. I would also request if it is possible not to do a briefing on Saturday. That would be a huge help. Can you put the questions? Yeah. On the mid-eal, what I'm trying to understand is where... is the risk of higher credit issues coming in with higher yield because it is difficult to see a scenario where credit spreads have gone up, but credit risk has not gone up. So, for example, if I want to understand the nature of collateral, let's say for SME and the business loans, are these still the real estate kind of hard collateral or have you moved to collaterals which are where probably the loss given default is higher while they're still secured, but probably the loss given default may be higher. So could you explain a bit what are the potential risks that comes with higher credit spread? And I have a follow-up question on that.

Harsh, you know, I have been talking about higher asset yields by change in mix and not necessarily by saying that we will go for higher yield assets with higher risk. So I just want to put on record that we are all on the same page on that. Having said that, on the lower end of business banking in the SME side, it is, when we say they are secured, we don't mean other security, we mean property security. At the higher end of SME that we spoke about in the commercial bank, it tends to be not fully 100% secured kind of transactions as well. But at the lower end, it is largely, when we say secured, we mean property secured. Retail and commerce. Yeah, retail and commerce. Retail and commercial, both kind of security is available there. I hope that clarifies your question.

Yeah. Right. So, has the loss given default of these securities, let's say over the last six months, I know it's too early to see any defaults, but if you think about the assessment of loss given defaults,

for loans given in last six months are they same as let's say those of a loss given default assessment let's say two years ago we obviously use a historical model to determine what to do going forward based on our underwriting we keep reviewing our data we keep reviewing our data and keep updating the log given default as the defaults keep occurring and losses keep occurring. Having said that, please remember that usually in properties, both things work, right? While the risk may play out, the fact is also that property values also in most places inch upwards and not downwards, right? So, usually the property valuations are higher and of course, we have our own rating models and, you know, relatively higher rated customer, we may take a less LTV ratios at lower levels whereas if the customer is rated low, we take a more conservative view on LTV. So, these are things that play out but we have no reason just now to assume that what we are underwriting now is any higher risk at all than what we have done in the past.

Right. Thanks for that. I'm sorry to double click on that but let's say the LTVs that we talked about for either property and let's say something like a gold loan which is pure LTV business like how has the LTVs of gold loans let's say in last three months versus a year ago and also the LTV as origination for some of the mortgage or business related loans with property as collateral. Have you changed the LTVs, increased the LTV to which allows you to probably make higher yield?

though not for making higher yield, actually it is the other way, Harsh. Many cases, many cases, we, in our, for example, lab business, the question is whether we take our LTE based on market value or fire sale value, right, or Obviously, the best of customers will never give you their business. You may think you are safer by doing a LTV based on a fire safe value, but no good customer will come in. So, it leads to adverse selection. So, what you think is good credit actually turns to be bad credit. So, we are not doing anything Let me say our objective is to get right pricing for the risk we take rather than take higher risk and therefore get higher pricing. That is not what we want to do.

Fair point. Exactly. So, sorry, the last question then. Maybe you are not doing it, but it seems a lot of your competition is also focusing on the similar, and I absolutely love the phrase mid-yield segment. lot of your competition, smaller banks, larger MBSs are getting into that space. So, is the competition forcing some sort of dilution of credit standards is what I'm trying to get to.

No, there is competition, no doubt, but that doesn't force our credit standards to be low. I mean, it's a big market. It's a large market. I think the share that we want, we are getting at our Viraj, you want to take that?

In that kind of situation, we would rather, what you call, give a rate discount but not, what you call, bring down our security level. That's the approach that we have taken.

If we have to choose between the two, we will choose lower rate than lower security.

Got it. Thank you so much. Those were my questions. Thanks, sir.

Operator, we can probably just take one final question and then close it.

Sure, sir. Participant, we'll take one last question from the line of Samir B. from Diamond Asia. Please, go ahead.

Yeah, hi. Thanks for the opportunity. So, just wanted to understand from a near to medium term profitability perspective. One is that some of the high-yielding categories, mainly say the MFI, business banking, See the degree of risk has gone up. So you would probably be cautious there. So what is going to do the growth heavy lifting when we say that we will grow at 1.2, 1.3 times nominal GDP and at the same time help margins. So that's one. And secondly, generally even large banks have also been saying that trade costs could normalize upward. So, would it be fair to say that bulk of the like profitability or ROI benefits say come more in FY27 second half in terms of tangible measurable outcomes and this is more like a building blocks kind of a year.

Yeah, those are my two questions. Sameer, FY27, second half is too long for us to start talking about. I mean, we remain focused on the next half year. And I will repeat one thing. You know, some of the gains that we are talking about from NIM and therefore profitability will come on the liability side as well, right? And that part does come without risk. Second, there are still opportunities for us as a relatively small market shareholder in many of the products to continue. Labs for example, we have just scratched the surface. We don't have, almost have a lab book. When many other banks are looking at, they are looking at growth from a large book. We are looking from a small book and therefore for us. It is possible to grow that business. It is possible for us to, gold is a, like I said, I am very optimistic about growing gold in the, which is a reasonable yield book, highly capital efficient, very low MPA, highly profit-accreditive business for us. The fee and interest are accretive for us. So, there are enough opportunities for us to grow our books. to get to that 1.2 times metric that Venkat gave you. I think that we still have opportunities within our sphere of operation to do that.

Sure, sure. This is helpful and finally on generally given the environment is sluggish you still remain confident on asset quality.

Okay.

We are always cautious. So we will remain cautious. Like I said, bar MFI, there is no reason for us to be alarmed about anything as yet. If data changes, we will change our mind. But as of now, I have no reason to feel diffident about it. Let me put it that way. I am not diffident about it. We will always be cautious. I will keep watching.

Great, sir. Thank you. This is super helpful and all the best. Thanks a lot.

Thanks, everyone. Thank you so much for taking time out on a Saturday and attending our call.

Yes, we plan to see if we can stick to Friday evening next time also. Thank you so much. Thank you. Thank you. Thank you.

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