Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- The Federal Bank Ltd (BOM:500469, Financial) achieved its highest-ever quarterly net profit of INR1,010 crore and operating profit of INR1,501 crore.
- The bank recorded its highest-ever Net Interest Income (NII) and other income, showcasing strong financial performance.
- Credit and deposit growth were robust, with nearly all business segments showing sequential growth of 4% to 5%.
- Significant recovery in deposit growth was driven by recent expansions and product launches.
- Credit quality remained stable, with a low credit cost of 27 basis points, indicating strong risk management.
Negative Points
- Despite the strong performance, the cost-income ratio remains elevated at around 53%, with a target to reduce it to 50% over the next four to five quarters.
- Yield on advances decreased by 5 basis points sequentially, raising concerns about the sustainability of interest income growth.
- The bank faces challenges in maintaining high-margin business growth without taking on additional risk.
- There are ongoing regulatory challenges, particularly with the RBI embargo on co-branded cards, which could impact future growth strategies.
- Non-staff operating expenses grew by 30% YoY, driven by investments in distribution and technology, which could pressure future profitability.
Q & A Highlights
Q: Firstly, in terms of the other miscellaneous income, if you could quantify what the PSLC income was and what the revaluation on investments was, if you could give a breakdown because it's much stronger even than last year.
A: Between the investments, the revaluation and PSL, the net benefit incremental to last year would have been about INR75 crore to INR80 crore. Last year was about INR52 crore. This year, I think is about INR90 crore. And the investment revaluation net is about INR45 crore to INR50 crore. - Shyam Srinivasan, CEO
Q: On slippage and credit cost side, you've done very well. Your slippage and even your credit cost is contained within 30 basis points. Where do you think the normalized level settles at and when do you reach it?
A: We believe 30-35 basis point credit cost is what we should operate at. This quarter was 27 basis points, so we are in that ballpark. Credit quality should hold because we've been quite thoughtful about where we write the credit, how we write the credit, and we've also upfronted our collection capability even more materially. - Shyam Srinivasan, CEO
Q: Just wanted to get an update on where are we in terms of the RBI embargo on the co-branded cards? And more importantly, once that gets lifted, is there going to be any fundamental change or shift in the strategy of sourcing the cards and personal loans over a medium term?
A: We are working with RBI and believe we are in good discussions. Sometime between now and end of Q2 or early Q3, we should have some clearance. We want to remind ourselves that co-branded credit cards with fintech partners was to increase reach and distribution. The risk is as the underwriting criteria is us. - Shyam Srinivasan, CEO
Q: On the cost income ratio, why sequentially, of course, there is an improvement, but still we are fairly elevated at around 53%. How do you see this over a medium term?
A: We are targeting 50% over a longer period of time. We would have liked it earlier, but it will require us income momentum further gathering steam because some of the costs are good costs and we don't want to cut down on that technology people and branch expansion costs. - Shyam Srinivasan, CEO
Q: What are the drivers of potential improvement in deposit growth?
A: Distribution is largely branch lead. We've done some calibration on the scorecard, which recognizes the role that they play in deposits and how we can make sure that we get more deposits through them. This is both new-to-bank customers and deepening of existing relationships. We've done a range of changes from a process standpoint, particularly for non-resident accounts. - Shalini Warrier, Executive Director
Q: How is the asset quality showing up in our own portfolio, especially in retail and credit cards and personal loans?
A: Overall the mix of slippages in a quarter in retail has been in the INR210 crore to INR240 crore per quarter despite a good denominator growth. We may see about 60% coming in from retail. Of that, the mix could be plus, minus depending on how our home loan, LAP, credit cards, personal loan is. - Shyam Srinivasan, CEO
Q: What would explain the cost of deposit decline on a sequential basis?
A: The interest payable is once a year in March in Q4, which we filed last quarter. So if we exclude that, that's the reason why you see the difference in this quarter. - Venkatraman Venkateswaran, CFO
Q: What is the branch addition plan for the next 12 to 24 months?
A: We added 140 in last financial year. We are targeting in that zone for 100 or plus depending on our costs shape up, but we believe we've got our 100 branches this FY. We will do about 40-odd in the first half and the balance in the second half. - Shalini Warrier, Executive Director
Q: What are the reasons for the decline in gold loan yields?
A: One is the ticket size which we have as compared to that of an NBFC almost threefold. And as a result of that, the cost to income is also different. Another point is that the fee, the average fee to ASIC ratio in gold has been steadily rising. - Venkatraman Venkateswaran, CFO
Q: What is the impact of the new investment norm on net worth and investment yield?
A: On the reserves, it's about INR339 crore net of tax. That's the impact due to the new investment guidance. Approximately like around 10 bps increase in investment yield. - Venkatraman Venkateswaran, CFO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
