Federal Bank Ltd Q3 FY22 Earnings Conference Call Insights

Key highlights from Federal Bank Ltd (FEDERALBNK) Q3 FY22 Earnings Concall

Management Update:

• For the first time, bank’s overall income crossed INR2,000 crores and net profit crossed INR500 crores.

Q&A Highlights:

• Gaurav Kochar from Mirae Asset asked that the personal loans book has been sluggish for the past 4-5 quarters and what’s the reason for it. Shyam Srinivasan CEO answered that the company’s credit choices are relatively more conservative. Pre-COVID, the company was running close to INR100 crores/month of disbursement. At the time of peak pandemic, the bank was cautious and as things started improving there was a pick up and expects this to continue to FY23.

•  Gaurav Kochar from Mirae Asset also asked about the ROA target longer term of 1.2-1.25%, what’s the main drivers the bank will be focusing on to achieve this. Shyam Srinivasan CEO said that there is no one silver bullet, it’s many little things all adding up. NIM expansion of 5-10 bps, of which 5 bps is achieved and expects to add another 5 bps. Credit cost is in the right space. And as digital performance gets better, the cost benefit will play through.

• Arav Sangai of VT Capital queried about opex with a cost to income of 55%, where does the company see this cost to income in the next 1-1.5 years. Shyam Srinivasan CEO commented that the company was at 50%. And over FY23, the company will see a 200 bps improvement on this and a similar number in the following year and subsequently.

• Dhaval Gada with DSP Investment enquired about the retail credit growth, related to some larger peers, the sequential momentum was little soft and what’s the reason for it. Shyam Srinivasan CEO answerd that in personal loans, the bank is a bit conservative. Bank’s non-unsecured growth in retail was 20%, blended was lower, which will continue. Commercial vehicle is also doing well. However, commercial vehicle, credit cards, personal loans, micro finance are high margin but won’t dominate the incremental growth, which is the philosophy of the bank.

• Sumeet Kariwala of Morgan Stanley enquired about the historical margin outlook of 3.15-3.2% and does the company see the need to revise that guidance. Shyam Srinivasan answered that the company believes there is another 5-7 bps opportunity in the near term that the bank is working through.

• Vivek Ramakrishnan of DSP Mutual Fund asked about the corporate book which has shown a sharp growth and if it’s more a working capital or investment led growth. Shyam Srinivasan commented that it’s both. However, investment led is much less but three-year loans are picking up. The bank is seeing good progress because corporates have stated to come back to banks as pandemic is easing.

• Mona Khetan Dolat Capital asked on the cost of deposit, is there still scope for improvement there or it’s bottomed. Shyam Srinivasan CEO answered that when the rate cycle is pitched for a turn, there won’t be much opportunity to lower cost. At 4.27, the bank is at its lowest in terms of cost of deposits and compare favorably with banks.

• Mona Khetan Dolat Capital asked about the wholesale book that has seen a healthy growth despite the pricing, and what’s the incremental yield for both commercial banking and CIB book. Shyam Srinivasan CEO answered that incrementally commercial banking is seeing some pickup. In corporate, there is not much of an opportunity for yield pickup. In commercial banking the yield pickup is very good and it’s where the bigger opportunity is.

• Mona Khetan Dolat Capital also enquired that on the fintech and investments around that, what could be the growth in other opex owing to tech investments. Shyam Srinivasan CEO said that roughly in a quarter, the bank expects INR30-40 crores of costs going towards investing in tech or partnership in terms of acquiring the customer. Therefore, annualized it should be in the range of INR70-80 crores.

• Ajit Kumar from Ambit Capital asked that in the last couple of quarter, NRE deposit growth has come down and if there is any pressure for the bank on this stream of deposit. Shyam Srinivasan CEO answered that the gross remittances coming to India have dropped 25% or so. So that’s not a material issue, but the bank’s gain in share and momentum will continue.

• Jai Mundhra with B&K Securities asked that looking at retail loans, on the other portion of retail loan which is seeing a YoY decline, which segment is seeing a de-growing.  Shyam Srinivasan CEO said that personal loans and education loans are the two segments that’s de-growing in retail loan.

• Nitin Agrawal from Motilal Oswal enquired what’s the growth outlook in the gold loan portfolio. Shyam Srinivasan CEO commented that this business cooled off in FY22. However, December did well and the bank is now looking at 10-15% growth for current financial year and mid-20s growth next financial year.

• Renish Hareshbhai Bhuva from ICICI Securities asked that on the new products all put together, what is the total outstanding currently and the target over the next two years.  Shyam Srinivasan CEO answered that adding commercial vehicles it’s about INR2,000 crores; MFI plus credit cards, plus commercial vehicles. The annualized target is that these business will grow between INR2,500-3,000 crores and for two years, post run-off, about INR7,500 crores from today.

• Anand Bhavnani of Vito Capital clarified about the FedFina IPO and the timeline of it. Shyam Srinivasan CEO replied that the Board of the bank has approved and FedFina is in the process of going through the motion. Therefore, somewhere around May, the bank would have approvals in hand. After that depending on market, timing and such things it will happen; no timeline as of now.