The Federal Bank Limited — Q3 FY25 earnings call

Call held 28 Jan 2025

Management summary

Federal Bank reported a quarter of strategic reorientation, focusing on granular, quality growth and a more stable liability base. Despite a marginal drop in total deposits and a slight increase in slippages, the bank improved its LCR significantly and maintained its credit cost guidance. Management emphasized a shift towards fixed-rate loans and mid-yield segments, acknowledging short-term headwinds but expressing confidence in long-term value creation and asset quality.

Highlights

  • Average CASA grew by 2.3% this quarter, reflecting a strategic shift to quality and stability in the deposit base. (KVS Manian, Page 4)

  • LCR improved remarkably from 111% last quarter to 133% this quarter, indicating enhanced liquidity. (KVS Manian, Page 5)

  • Commercial Banking grew 5.65% quarter-on-quarter and 24.5% year-on-year, showing healthy momentum. (KVS Manian, Page 5)

  • The Bank successfully protected its P&L while implementing strategic measures, with the one-time impact of reorientation on PBT being 292 crores. (KVS Manian, Page 6)

  • Credit cost guidance for the full year remains at 40-45 basis points, despite accelerated provisioning, demonstrating confidence in asset quality. (Venkatraman V., Page 7)

Concerns

  • Total deposits marginally dropped from ₹266,563 crore to ₹264,829 crore, primarily due to a decline in end-of-period CASA and wholesale term deposits. (KVS Manian, Page 4)

  • Fresh slippages increased slightly from 428 Crores to 486 Crores compared to last quarter. (KVS Manian, Page 6)

  • MFI segment is experiencing a high level of stress, although the Bank's asset quality in this segment is better than the industry average. (Harsh Dugar, Page 8)

  • RBI guidelines may slightly impact growth in Gold Loans in the near future. (KVS Manian, Page 5, Harsh Dugar, Page 14)

  • Short-term headwinds are expected due to the strategic reorientation and transition to new approaches. (KVS Manian, Page 6, 13)

Key financials

  1. Total Deposits ₹2.65L Cr -0.65%QoQ
  2. Average CASA Growth 2.3% +2.3%QoQ
  3. Exit LCR 133% +19.8%QoQ
  4. Fresh Slippages ₹486 Cr +13.6%QoQ
  5. Write-offs ₹496 Cr
  6. PBT Impact from Reorientation ₹292 Cr

What they filed

Q1 FY27: revenue up 8.2%, net profit up 36.5% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue6,577 6,809 6,648 6,687 6,742 +3%6,868 +1%7,399 +11%7,238 +8%
Net profit1,057 955 1,030 862 955 −10%1,041 +9%1,259 +22%1,177 +37%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

  • Commercial Banking
    5.7% QoQ Growth24.5% YoY Growth
  • Business Banking
    13% YoY Growth
  • Gold Loans
    30% YoY Growth
  • LAP
    20% YoY Growth
  • Auto Loans
    25% YoY Growth
  • MFI
    1% QoQ Growth
  • Unsecured Portfolio (Cards, MFI, Personal Loan)
    5% Share of Total Advances

Capital allocation

high confidence
  • Liquidity Liquidity disclosed Tier 1 Capital Ratio is 13.8%. LCR improved from 111% to 133% (exit LCR).
    Last quarter, our LCR stood at 111%, and this quarter, it has increased to 133%. (Page 5); So, we are at 13.8% Tier 1. (Page 12)

Guidance & targets

Credit Cost

  • Annualized Credit Cost Credit Cost · FY25 · High confidence 40-45 basis points
    our guidance for the year continues to be 40 to 45 basis points.

    — KVS Manian

  • Credit Cost Range Credit Cost · Going forward · High confidence 40-45 bps
    But going forward as well, we do expect the credit cost to be in the 40-bps range.

    — Venkatraman V.

Loan Growth

  • Loan Growth vs System Loan Growth · Medium term · Medium confidence 1.5 times system growth
    Our intention is to get back to a growth which is, I would say a broad number of one and a half times the system growth is what we will typically tend to target. Yes, that remains our target.

    — KVS Manian

NIM

  • Net Interest Margin NIM · Medium term · Low confidence Improve NIMs
    But obviously, the objective is to improve NIMs

    — KVS Manian

Unsecured Lending

  • Unsecured Portfolio Growth Unsecured Lending · Next few quarters · High confidence Not expecting change
    That guidance we gave you that we are not, just now, proposing to grow our unsecured side so much-therefore, we are not expecting that to change in the next few quarters.

    — KVS Manian

What to watch in Q4 FY25

Credit Cost

Next quarter (Q4 FY25)
Current 41 bps YTD annualized
Target 40-45 bps for full year FY25

Why it matters

To confirm the bank's ability to maintain its credit cost guidance despite accelerated provisioning and MFI stress.

our guidance for the year continues to be 40 to 45 basis points.

Risks & concerns

  • MFI segment stress

    medium

    High level of stress in MFI compared to the sector, though the bank's asset quality is better. Expect some pain in Q4 but improving thereafter.

    On MFI, there is definitely a high level of stress compared to what it has been across, mirroring what the sector has been facing... You could see some pain in Q4, but nothing substantial. And then it should start improving in the field which we get from the sector also.

    Management acknowledged

  • Impact of RBI guidelines on Gold Loans

    medium

    New RBI guidelines may slightly impact growth in Gold Loans, causing 1-2 quarters of disruption before stabilization.

    Gold Loans increased over 30% year-on-year, though new RBI guidelines may slightly impact growth in the near future. (Page 5); We may see one or two quarters of disruption before things stabilize and growth comes back. (Page 14)

    Management acknowledged

  • Short-term headwinds from strategic reorientation

    medium

    Transitioning from one approach to another involves friction and short-term volume/revenue impacts.

    While some transitions may create short-term headwinds, they are deliberate choices that will deliver significant benefits in the medium to long term. (Page 6); So, of course, there headwinds in the sense as we choose each area and try to transition any transfer, any transition from one approach to another approach does go through some friction, right.

    Management acknowledged

  • Rate competitiveness in low-yield assets (e.g., home loans)

    low

    Rate competitiveness remains a challenge for low-yield assets like home loans.

    Our approach to low-yield assets, such as home loans, reflects this strategy, with the segment growing 9% year-on-year and achieving 80% penetration for savings accounts with home loan customers. However, rate competitiveness remains a challenge.

    Management acknowledged

Q&A highlights

7 direct
Impact of reorientation on deposits, loans, margins, and write-offs Direct
reorientation is never complete, I think it's a process. We cannot expect it to be over in a month, but like I said, we will balance growth and reorientation all the time... The credit cost for YTD is 41 bps... the right offs are all basically fully provided accounts.

Clarifies that the strategic reorientation is an ongoing process, not a one-time event, and confirms the nature of the write-offs and credit cost guidance.

Asked by Mahrukh Adajania

Shift from floating to fixed rates in auto loans and other products, and overall loan growth target Direct
There are other products where this is possible. In fact, what I did not mention is even in our small business segment, BUB segment, we have moved almost 20 or percent of the portfolio to fixed rate... Our intention is to get back to a growth which is, I would say a broad number of one and a half times the system growth is what we will typically tend to target.

Reveals the broader strategy of moving more loan products to fixed rates and sets a clear, ambitious target for loan growth relative to the system.

Asked by Jai Mundhra

Stress in MFI segment and strategy for unsecured business growth Direct
On MFI, there is definitely a high level of stress compared to what it has been across, mirroring what the sector has been facing... I don't think we are going to press the pedal on these segments because it will be like wading into the storm. So, we are not planning to do that.

Acknowledges stress in MFI but indicates a cautious approach to unsecured lending growth in the short term, prioritizing stability over aggressive expansion.

Asked by Nitin Agarwal

Nature of the 292 crores provision and potential for early bucket stress Direct
these are provisions against NPAs. That is why you can see our GNPAs has not gone up and our NNPA has gone down and PCR has gone up. So, these are provisions against NPAs... I do not see significant dramatic change or surprises coming out of that.

Clarifies that the provision is an acceleration of existing NPA recognition, not for new stress, and management does not foresee significant deterioration in early buckets.

Asked by MB Mahesh

Capital adequacy and future plans for capital Partial
No thinking just now. As you know, we have not taken the current year's profit and the rate of dividends, of course, into the capital adequacy calculation as of now. And that will add something to the 13.8 number. So, just now, I would not guide on anything on capital.

Management defers specific guidance on capital plans, indicating that current year's profits and dividend decisions will influence future capital ratios, but no immediate action is planned.

Asked by Param Subramanian

Impact of strategic changes on cost of deposits and current account management Direct
On the cost of funds, Kunal, of course, these things are playing out. It is a in two months, we cannot change the cost of funds quickly. Directionally these efforts will show results. I am sure over medium term... the current account EOP is showing negative, but average in current account has grown during the quarter by 1.5, 1.6 percent.

Explains that cost of funds improvement will be a medium-term outcome and clarifies that average CA growth is positive despite an EOP decline, highlighting the focus on quality over end-of-period numbers.

Asked by Kunal Shah

Headwinds in gold loan growth due to RBI guidelines and growth in CV/CE segment Direct
On the gold piece, as you are aware, the RBI letter of 30th September has been sent across to all banks and NBFCs, and there are quite a few changes in terms of processes and practices... We may see one or two quarters of disruption before things stabilize and growth comes back. Coming to commercial vehicles, the growth has been good. It's on a smaller base, and we continue to look at growing this significantly more.

Provides context on regulatory challenges impacting gold loans and confirms continued focus on growing the commercial vehicle segment, which is still on a smaller base.

Asked by Suraj Das

Sustainability of 40-45 bps credit cost and deposit growth strategy Direct
For the full-year guidance, it's 40 to 45 bps. But going forward as well, we do expect the credit cost to be in the 40-bps range... I understand that you want to choose better-quality deposits. But it's a slightly more difficult thing to do than being choosy on loans... I think we have to be deliberate. We have to make the right choices.

Reiterates the long-term credit cost outlook and emphasizes the strategic choice to prioritize quality and sustainability in deposit growth, even if it means slower growth compared to peers.

Asked by Abhishek

3 min read 7 chapters

Detailed narrative

Strategic Reorientation and Granular Growth Philosophy

Federal Bank has embarked on a strategic reorientation under its new MD & CEO, KVS Manian, focusing on 'granular growth' rather than high-value deposit-driven asset growth. This involves building a solid foundation for future growth by prioritizing quality, responsibility, and sustainability. The bank aims to achieve a 'triple A culture' of being astute, agile, and alert, with a detailed strategic plan reflecting collective aspirations. The reorientation is viewed as an ongoing process, not a quick fix, with the goal of balancing growth and strategic shifts.

Liability Side Focus and CASA Improvement

A critical pillar of the reorientation is improving the liability base, with a shift in internal focus to Average CASA as a key metric. This quarter, Average CASA grew by 2.3%, with SA averages up 2.5% and CA averages up 1% quarter-on-quarter, despite an end-of-period CASA decline. Total deposits marginally dropped from ₹266,563 crore to ₹264,829 crore, attributed to a decline in end-of-period CA and a ₹4,000 crore reduction in wholesale term deposits (above ₹3 crore). The bank is actively de-risking its deposit base by reducing concentration from top 20 depositors by 33% and decreasing deposits from LCR unfriendly sectors by over ₹5,000 crore.

Asset Side Strategy and Portfolio Tweaks

On the asset side, the bank is adopting a measured and calculated approach, not accelerating growth in unsecured lending due to credit cost environment. Instead, it's tweaking variables to enhance yields and optimize portfolio performance. Low-yield assets like home loans grew 9% YoY, while auto loans grew 25% YoY, with a strategic pivot from floating to fixed rates (80% fixed-rate disbursements this quarter). Commercial Banking grew 5.65% QoQ and 24.5% YoY, Business Banking grew 13% YoY, and Gold Loans increased over 30% YoY. The unsecured portfolio (cards, MFI, personal loans) constitutes about 5% of total advances.

Asset Quality and Provisioning Changes

The bank has adopted a more robust provisioning framework for retail unsecured loans, aligning with industry best practices. This led to an accelerated provision of ₹292 crores this quarter, which, if not for this, would have resulted in record profits. Fresh slippages increased slightly from ₹428 crores to ₹486 crores, and ₹496 crore was written off, effectively reducing net advances. Despite these changes, the year-to-date annualized credit cost increased to 41 basis points, but the guidance for the full year remains at 40-45 basis points, with expectations for it to remain in this range going forward.

NIM and Profitability Outlook

Despite a marginal increase in the cost of deposits, the bank maintained its NIMs due to proactive margin management efforts. The NIM improvement is influenced by average advances and liabilities. Management aims to improve NIMs in the medium term by focusing on granular growth, improving CASA, and pivoting towards mid-yield segments. While acknowledging that rate drops could impact NIM, the bank will adapt its strategy. The one-time PBT impact of ₹292 crores from reorientation was highlighted, indicating underlying profitability strength.

Regulatory Impact and Unsecured Lending Caution

The MFI segment is experiencing high stress, though the bank's asset quality in this area is better than the industry. The bank is not planning to aggressively grow unsecured segments in the short term, viewing it as 'wading into the storm.' New RBI guidelines for Gold Loans are causing disruption, with 1-2 quarters of impact expected before stabilization. The bank is compliant with all regulatory changes and is in discussion with RBI regarding smoothing out the gold loan process. The overall unsecured portfolio remains small, at about 5% of total advances.

Capital Adequacy and Future Growth

The bank's Tier 1 Capital Ratio stands at 13.8%. Management indicated that the current year's profit and dividend decisions will contribute to capital adequacy, but no specific guidance on capital was provided for the immediate future. The improved LCR (133% exit) also reflects a stronger liquidity position, supporting future growth without immediate dilution concerns. The bank's strategy is to prepare for better growth by strengthening its foundation and processes.

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