Federal Bank

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.

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.

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.

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^⏳.

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.

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.

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.