Federal Bank Q2FY18 Concall Summary

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Financial Highlights

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  • Seventh sequential quarter of operating profit improvement
  • Operating profit in last four quarters has grown each one being better than the previous
  • Different businesses of Federal Bank have grown between 5% to 6% sequentially

Overall Growth in Business

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  • The company did 45% more business in terms of new business in deposit clients, retail clients in Q2FY18
  • Average was account opening was about 200,000 accounts in a quarter. This quarter bank opened 290,000 accounts
  • All the four businesses have seen 5% or more growtThe blended 25% growth will continue
  • There are no one offs, no transactions bank either sold or bought. So the growth was led by organic improvements
  • Company will maintain rate of growth in all  businesses  in the mid twenties unless it finds an opportunity to pick up a good portfolio at a price that is valuable
  • 55% to 60% of the business is in mid market, SME and commercial banking and that is expected to continue
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Market penetration strategy

  •  Bank’s approach has been distribution heavy branch light
  • Bank hasn’t added footprint in terms of branches for two years
  • Bank focused consistently on its presence in the newer geographies through their campaign and other outreach activities
  • Campaign related expenses this quarter were Rs. 10 crores and this number to remain same in Q3 & Q4
  • Bank has added presence, reach, distribution, feet on street, RM, Digital, activating Fedfina

Credit Growth

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  • Company faced challenges in credit quality at end of Q1 because of one large corporate
  • If we back out this one company there has been consistent improvement in credit quality
  • Company has steadfastly stayed away from risky sectors,once it gained confidence it put people of the right profile who can drive the growth
  • Credit to cost guidance for next two quarters is expected to have similar run rate or slightly better than where the bank is at present

Retail business

Retail Growth

  •  97% of the book is retail deposits
  • Retail sequentially grew more than 5% all organic this quarter
  • Bank experienced 3x of the rate of growth of network in SME and Retail
  • Retail origination increased to Rs 1688 crore this quarter as compared to Rs 1,000 crores in last quarter
  • 91% of retail disbursements is by bank

Retail Portfolio

  • Retail book is largely home loans and loans against property
  • Retail does not have any unsecured portfolio
  • Retail book geographical breakup currently Kerala to outside Kerala is around 55:45

Retail NPAs

  •  Increase in Retail NPAs largely because of demonetization and the consequence of having to pay a ballooned amount in the end of Q1 and the middle of Q2
  • Retail in particularly in Kerala is impacted by the NR remittances related payments
  • Bank had to pay bulk five dues as opposed to usually paying one or two dues
  • Incremental slippage in retail and non education loan started trending down, in Q2 first month and half was the worst because that was the last month of  dispensation
  • The second month and a half was way better and that momentum will continue into Q3 and Q4.

Corporate Banking

  • Corporate bank portfolio - large institutions, large corporate, emerging corporate, local corporate
  • Average turnover of corporate clients is about Rs. 400 crores and above
  • Average ticket size is about Rs. 40 to 60 Cr.
  • Blended yield is close to about 9 quarter

Fedfina

  •  Fedfina is now beginning to contribute about closer to Rs. 150 crores of credit origination in a month
  • Fedfina has four lines of business.
  1. One is it to originate loans for the bank which is written by the bank. There it operates as a DSA.
  2. They do gold loans.
  3. They do loan against property and construction finance on their books.
  • Fedfina’s book is about Rs. 1,300 crores and is growing quite well
  • Last year Fedfina made a profit of 25 crores and in the first half it made around 15 crores

External investment for Fedfina

  • Company is in very advanced stage of discussion, boiling down to two - three serious investor opportunities
  • Company is looking for fresh infusion and not OFS (Offer for sale)

Housing finance book

  • Housing book will be slightly on the floor as itis much higher weighted outside. But on the stock it will be almost half/half
  • Housing book yield is around Rs. 920 crores - 925 crores.

Provisioning

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  • NPA  is 140 crores
  • Standard advance is 20 crores
  • Income tax is 143 crores

For first half of FY18

  • 230 crores NPA
  • 111 crores for tax
  • 3 crores for standard advances

Slippage

  • The slippage in retail and in Agri in this quarter was almost Rs. 150 crores
  • Slippages in Agri have moved up to Rs. 50 crores and will normalize around that
  • Slippages in SME trended down from Rs. 154 crores to Rs. 106 crore
  • Recovery upgrade is Rs. 163 crores
  • Write off is Rs. 50.22 crores

Reason for slippages

Slippage due to

  • Demonetization led dispensation and the farm loan waivers
  • Negative impact significantly pronounced in Kerala where bank has a larger share and also the state is going through its challenges
  • SME loans in certain geographies in Kerala which was impacted by cashew, rubber and the local business  have been recognized as NPA so the residual portfolio is relatively less challenged
  • Certain set of waivers are expected as of 31st of October for student loans in Kerala which could have impact on slippages on education loans

Cost of borrowing

  •  Cost of borrowing is less than the retail term deposits and about 40 basis points benefit on account of CRR
  • Bank has SLR benefit also because this borrowing isrefinance taken by one of the eligible institutions and that has replaced the purchaser means the CD issuance and the bulk deposits.
  • Refinance amount is Rs.20 million

Cost to income ratio

  • Cost to income ratio should be 50% to 51% as the run rate for the next six quarters
  • Bank plans to invest in lot of areas and build franchise

Yield on loans

  • Yield on loans has fallen steadily down around 300 basis points YoY and QoQ also down 45 basis points
  • Net Interest margin in first half is 325 crores
  • NIM for second half is projected to be between Rs. 320 – 325 crores
  • Bank is focussing on controlling regularity of credit growth, quality of credit growth, therefore lower reversals, higher CD ratio and mix of products
  • Regulatory points in terms of NCLR and the change in pricing and external benchmark may impact the yields
  • The benefit of capital on yield increase is about 5 to 6 basis points

Loan mix

  •  Loan mix opportunities – lower end and mid-market opportunities
  • Composition of products in mid market and SME is a good opportunity that produces a higher yield compared to the corporate or the home loan kind of market

Rating of corporate loans

  • 70% of incremental origination is rated A and above

Impact of IndAS

Risk weighted Assets

  •  Company is trying to move away from ROA to risk weighted
  • Companies risk weighted assets is 1.4 and the IndAS numbers are going to be all risk weighted related
  • Company is awaiting the final guidelines from Reserve Bank of India on credit side ECL
  • Positive impact could be in the form of valuation of securities and amortization of discounts

GST impact on SME

  • Federal Bank is positioned to be the most admired digitally enabled mid market SME bank of the country

Organisation structure

  • Verticals have been created and each of the heads are driving their verticals
  1. Business banking head
  2. Commercial banking head
  3. Mid market large corporate head

OPEX

  • OPEX was 11% in Q4 of ‟17, it went to 14% and now it is at 18%
  • Q1 typically tends to be the lower expense quarter
  • Components of operating expenses
  1. Investments done on branding side
  2. Distribution related expenses on Fedfina and DSAs
  3. Three months services charges for retail portfolio acquired last year
  • Retraining and remobilizing staff for customer service under program called Atithi DevoBhava

CASA

  • Pre-demonetization there was about 20% Y-o-Y growth in savings
  • Post demonetization CASA momentum has slowed
  • Quarter we ended post demon CASA was about Rs. 32,000 crores and this quarter we it is about Rs. 31,500 odd crores
  • In Kerala where bank enjoyed highest growth there is certain degree of slowdown
  • Non Kerala growth has moved up almost 700 basis points higher than our past run rate
  • This quarter savings have grown by 6% and on full year basis it will grow by 20%
  • Bank does not have plans to price higher to get higher share
  • Average current account growth has been more than 14%

Core Fees

  • Distribution or commission related fees w.r.t Mutual Funds and Investments have grown just 9% YoY
  • Distribution of Mutual Funds is just improving and bank is going to put more efforts in the vertical in second half of FY18 and in FY19
  • FX has done well
  • Company is focusing on

o Fees on credit processing

o Processing fee and commission exchange brokerage in terms of the insurance business, mutual fund business

Consumption of capital

  • Company will consume another 200 basis points in the next 24 months and that will bring it to somewhere in the mid 12
  • Company will look at time opportunity situation, the willingness of the market to support for future spending of capital
  • The bank will wait for Tier 1 bond opportunities

Exposure to IBC referred cases

  • Federal Bank has investment exposure of only one company Amtek Auto among those referred by IBC
  • On the investment 50% provided, on the credit 100% provided.
  • Total exposure investment (15 crores)  plus credit is Rs. 22 crores

MCLR

  • 77% of the book is in MCLR

Digital

  • 60% plus accounts opened in this quarter are by digital instant account openings

Employee expenses

  • Last quarter Federal bank had rolled out cost to company model the top 700 employees
  • The rest of the employees are in IBA terms
  • Company is calculating the OPEX change due to this model and is expecting that to be about 15% which is being factored into budget
  • Employee cost has gone up by 6% YoY

Security Receipts

  •  Book value of security receipts was around Rs. 873 crores
  • Provision of Rs. 5 crore was made.

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