The Federal Bank Limited (FEDERALBNK) Q2 FY24 Earnings Concall Transcript

The Federal Bank Limited  (NSE:FEDERALBNK) Q2 FY24 Earnings Call dated Oct. 16, 2023

Corporate Participants:

Souvik Roy — Assistant Executive Vice President and Head – Investor Relations

Shyam Srinivasan — Managing Director and Chief Executive Officer

Venkatraman Venkateswaran — Group President and Chief Financial Officer

Harsh Dugar — Executive Director

Ashutosh Khajuria — Executive Director

Damodaran C — Chief Risk Officer

Shalini Warrier — Executive Director

Analysts:

Gaurav Kochar — Mirae Asset — Analyst

Mahrukh Adajania — Nuvama — Analyst

Nitin Aggarwal — Motilal Oswal — Analyst

Kunal Shah — Citigroup — Analyst

Saurabh Kumar — JPMorgan — Analyst

Rakesh Kumar — B&K Securities — Analyst

Madhuchanda Dey — MC Pro — Analyst

Kaushik Poddar — KB Capital Markets — Analyst

Jai Mundhra — ICICI Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Q2 FY ’24 Earnings Conference Call of The Federal Bank Limited. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Souvik Roy, Head, Investor Relations, The Federal Bank Limited. Thank you, and over to you, sir.

Souvik Roy — Assistant Executive Vice President and Head – Investor Relations

Thank you. And ladies and gentlemen, thank you for joining us on this busy results afternoon. We hope you’ve had a chance to review our latest quarterly figures. It’s my pleasure to share that we have had an outstanding quarter, and I would like to highlight some key points.

First and foremost, we have reported broad-based growth across all segments and businesses, which is a clear sign that our strategies are yielding positive results. In particular, our net profit number for this quarter is the highest we have ever achieved. Our ROA continues to trend well, and our ROA certainly underscores our commitment to efficient and sustainable operations.

We have also successfully completed a significant capital raise in Q2, which now bolsters our financial position and allows us to pursue growth opportunities more aggressively. I’m also pleased to report that our NPA numbers remain well under control, which is a testament to our prudent risk management practices. Overall, we can confidently say that this quarter was a good one for us and the positive momentum continues.

To provide further insights and discuss these results in detail, we have our entire senior management on this call. And I’ll now hand over the call to our MD for a more in-depth analysis and to answer any questions you may have. Thank you again for being a part of this call and please feel free to ask any questions that you may have as of now.

Over to you, sir.

Shyam Srinivasan — Managing Director and Chief Executive Officer

Yeah. Thanks, everybody. Good evening. This is Shyam here. Like Souvik mentioned, the entire senior team is there. We’ll be happy to answer questions.

I think the key messages, he did read them out, but that just reinforced the fact that many of our initiatives — I think this is a sigma of all our initiatives coming together quite well. Over the last six, seven quarters, sequentially every quarter has been a strong performance. In Q2, environment continued to be challenging, as it is likely to be for the periods ahead in certain areas.

We’ve seen good progress on all accounts [Phonetic]. Credit and deposit growth has been quite consistently good. I do believe, structurally the deposits market has changed probably globally, certainly in India, certainly for us. And not daunted by that, we are reorganizing ourselves to make sure that through this period also we will be able to grow and expand both the balance sheet and also the quality of assets. And this quarter is a good testimony to a pivot that we’ve had in terms of kind of businesses that we are ramping up on, with a keen eye on the credit quality being intact.

Notable in Q2 are the features that Souvik just spoke and the provisional results that we had shared early in the part of the quarter and the results that we announced today. The NII for the quarter grew quite smartly, in fact it grew 7% sequentially. Credit grew about 5%. Evidently, the higher yield businesses are beginning to make an impact on the overall numbers, and we do think that will sustain.

Fee income for the quarter and generally on the — in the trend lines has been quite encouraging. And here, again, our philosophy of being a — moving from being a pure lender to a banker, particularly as we seek out our business model, just at the cost of repeat, is about getting the better risk-weighted clients, pricing competitively, but asking for more business from the same client through I think the last two, three quarters are beginning to show results.

Earlier in the financial year, when we were meeting some of our potential investors, I explained the theory of trying to migrate from being a pure lender and being a peripheral banker to a more important banker, we are seeing traction on that account. Fee as a share of assets is almost near 1%, and we believe we have a path to get to 1.1% or better in the coming years.

So the environment for deposits continues to be challenging. Our term deposits have grown remarkably well through the quarter; Y-on-Y grew 33%. Domestic savings has gone reasonably well at about — at our market kind of growth rate at 11%. What traditionally used to be a materially big part of our portfolio NR savings is seeing degrowth in some sense. We also quickly and constantly keep checking to see how the NR performance is.

Remittances have moved up materially. Our share has gone up substantially. So there is a pivot from NR savings to NR term or NR business money going into consumption and/or investment and/or setting up a new business and/or paying off loans. So there’s some structural change happening and we have organized ourselves to make sure that we get more prominent in the domestic business. We’ve seen good footprint expansion, and our fintech partnerships, particularly on deposits are beginning to give us some domestic savings increase.

So on balance, Q2 has been good. We have seen progress on all accounts. There are challenges in terms of growth in deposits at a price. We have organized ourselves for that. And at the beginning of financial year, we did say that H2, we will see a bit of pickup in margins. We had also said that our dip in NIMs will be faster than the other, which it did. I do believe we’ve topped out our NIMs and the increase can happen here, too.

So, having said that, I must quickly add that the rate of growth of expectation in terms of NIM expansion will be more moderate. I don’t believe some of our numbers that we visualized to get to 3.25% full year, maybe a touch — and this is using the old compute. We have recomputed at present both the old and new formula. Our new formula assumes net earning assets, so you will see our NIMs showing as 3.22%, but in the spirit of full transparency, we have showed its equivalent in both formats so that nobody needs to worry whether the bank is trying to outsmart and trying to show different formats. No, we are representing both formats. But here on, we will present with net earning assets, which seems to be consistent with market practice.

So this expansion, from here on, we do believe will be inching up, but the level of inching up, I’m not yet able to digest or commit, probably because cost of deposits is yet to defer[Phonetic] down. Though Q2 versus Q1, the rate of increase was consistent, it was not much higher. Fees and advances has moved up from 7 basis points in Q1 to 14 basis points in Q2. So that trend line is quite encouraging.

So let me just pause here with the following messages: growth 18%, 20%, quite possible; credit quality holding well; ROA and ROE expansion on track. We believe we will — we’ve been growing quite smartly on our net profit and traction has been strong, and we believe that will consistently hold. And the pivot in some of our higher yield businesses is working well. Deposits continues to be a higher cost item and we are organized for that.

So let me just pause here, and team and I will be able to answer questions or clarify anything that’s required. Thank you very much. Hello?

Operator

Shall we begin with the question-and-answer session?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Please.

Questions and Answers:

Operator

Thank you very much. We will now begin with the question-and-answer session. [Operator Instructions] The first question is from the line of Gaurav Kochar from Mirae Asset. Please go ahead.

Gaurav Kochar — Mirae Asset — Analyst

Yeah. Hi, good afternoon, team. Congrats on the quarter. I have three questions. Firstly, on margins, I think Shyam sir alluded to the movement in margins here, too. I just wanted some sense on the cost of funds repricing. In this quarter, we have seen around 20 basis points kind of repricing. So is it done fully now? Or there is still some repricing on the cost of fund side, which is yet to come in the third quarter?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Venkat, do you want to go?

Operator

Mr. Venkat is not yet connected. We are trying to connect him.

Shyam Srinivasan — Managing Director and Chief Executive Officer

Okay. Fine. Okay. I think the rate of growth of deposit cost is trend — beginning to moderate, but I think, Gaurav, it will be a little more contingent on how the environment is shaping up. It has certainly not yet cooled off. So to that extent, we have to be ready for one or two quarters of more higher cost of deposits, because the bulk of — as you would have noticed, this quarter we grew our deposits Y-on-Y 23%. And 97% is core deposits of that, and a large part is in term. Term grew 33% Y-on-Y.

So there is money, but it’s at a cost. And we are — given everything that we are facing in the market, we believe we should tank up when the money is available. Of course, we are finding alternate ways to ensure that the blended cost of funds is in control. I — That’s why I cautioned saying that the increase in NIM that was visualized cannot fully play through. But certainly, it will start improving. The trend line has reversed for us. In Q2, it improved, and we think it will improve in Q3 and Q4, too.

Gaurav Kochar — Mirae Asset — Analyst

Sure, sure. And just on the yield on advance bit, you pointed out that the higher interest-bearing assets are sort of seeing improved traction. And as a result of that, the yields have improved 14 basis points. So we’ll be taking a further — a step further. Let’s say, the mix improves by 100 basis points, what is the delta we get on the margins?

On one of the slides, you’ve disclosed that on a Y-on-Y basis, there has been a 300 basis point improvement in the yield on assets or interest income coming from that asset. So I just wanted some context, for every 100 basis point kind of improvement in mix, what is the delta on margins?

Shyam Srinivasan — Managing Director and Chief Executive Officer

We should see similar kind of traction, the higher yield businesses, as they grow. But here, again, I’m cautious saying these are businesses that also have higher risk associated. So we have been quite watchful about it. But yes, so for the increase in NIM and the increase in yield on advances, we saw sequentially 7 basis point improvement. So we think that kind of momentum going into the FY 20 — I mean, the second half also will sustain.

Gaurav Kochar — Mirae Asset — Analyst

Got it. Got it. Thanks. On the opex — my second question is on the other opex bit. There was a sequential jump of around INR100 crores. I see that you’ve added around 23 branches in this quarter, but just wanted to get some sense, what was this INR100 crores incremental about? Was it largely because of branch expansion or some of it was one-off? Just wanted some color on this.

Shyam Srinivasan — Managing Director and Chief Executive Officer

No, there is no one-off in any [Indecipherable]. It is sequentially many things that have — volume increase is a material part. The branch expansion is only one element. All of the full year branch expansion code will play — I mean, the cost will play through. It’s a mix of all the businesses that are growing. And there is a volume-related expense. There is the marketing and spend increase that increased about INR15-odd crores. Even the festive season, we had some very aggressive field-related events. So it’s a blend of a few things. I don’t think there is any one-off expense sitting there.

Venkatraman Venkateswaran — Group President and Chief Financial Officer

Yeah. I can comment here, Shyam. Gaurav, this is Venkat. This is largely volume-related increases in the opex which you have seen. There are no one-offs in that. And like Shyam said, some element of marketing. Branch-related cost is not a significant sum in this increase.

Gaurav Kochar — Mirae Asset — Analyst

Okay. Got it. So fair to assume this run rate would continue in 3Q, 4Q, something more than this given the volumes, if it grows beyond what we did in 2Q?

Venkatraman Venkateswaran — Group President and Chief Financial Officer

Given the same growth in credits and NII, we should continue to see similar increase in variable cost.

Gaurav Kochar — Mirae Asset — Analyst

Got it. And on the fee income bit, I mean, the last question that I have on this — we did about INR660 crores in the second quarter. Given the third-party related fee and even generally, the volume-related fee is much better in second half. Is it fair to assume that our fee income — because if I look at last four quarters before this, we did about INR540 crores of fee income. This quarter, it has jumped to INR660 crores. So just wanted to ensure that in the next two quarters also, can we expect a similar INR660 crores kind of a run rate or more given that second half is typically better?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Gaurav, I’d say there are no one-offs in this. The lender to banker strategy is playing through. Most of our corporates and retails customers are concentrating, are giving us a larger share of their business. So we are seeing — that’s why if you see Slide number 19 in the deck, it’s quite explanatory in terms of its diversity and granularity and that should sustain.

Gaurav Kochar — Mirae Asset — Analyst

Sure. And just on this, the cost to income in this quarter was 52.5%. Earlier, I remember, I mean, you have guided that every year probably 100 basis point kind of improvement. Let’s say, on a full year basis, this year, can we see similar sort of what we did in FY ’23, at least on the cost to income side, given that we’ve seen some inch up in cost this quarter?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Yeah. There is some inching up of costs that have happened. The volume-related cost has gone up. Second is some of the businesses that we do with our partners requires us to take — the accounting requirement is some of the expenses, service charges come as a cost, and the interest income — I mean, the income comes. So to that extent, these are relatively higher cost to income businesses, but higher ROA.

So we’ve made that conscious call saying for a couple of quarters or for a period of time, we may carry some extra cost because these come at about 65%, 70% cost to income, but are ROA accretive. So we’ve made that call and it’s visible. You will see our ROA expanding, interest income expending, but unfortunately, the cost also does. So until that normalizes, we may not — we’re struggling to pull back to the 50%, but that’s what we are working towards.

So back half, we are — some of these expenses is still tracking to the 50%, but yes, on a blended number, the 52% number that you see is a little higher than our original assumption.

Gaurav Kochar — Mirae Asset — Analyst

Sure. Very helpful. Thanks. Thanks a lot, Shyam. Thanks.

Shyam Srinivasan — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Mahrukh Adajania from Nuvama. Please go ahead.

Mahrukh Adajania — Nuvama — Analyst

Yeah. Hello, sir. Sir, my first question is on credit costs. So you’ve done a good job and credit costs are really low this quarter. Where do they normalize, as in we were — I mean, last quarter, it was around 39 basis points, now it’s much lower. So where does it normalize? And how long do they stay so low given that high-yield businesses are also increasing?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Mahrukh, this is a question that I wish I had an answer very easy, because we certainly don’t want to reverse the kind of improvement, right? That said, at 13 basis points, it’s particularly low. We had said at the beginning of the year somewhere 35 basis points, 40 basis points full year credit cost. First half, as you noticed, blended is in the 20s. 20 basis points second half may be a little more challenging, but somewhere late 20s, early 30s is better than where we had originally visualized the year to start. I’m happy that, that trajectory will continue.

We’ve had no corporate banking losses for long periods of time. I hope that it sustains like that, but there can always be some challenges in the market. Second, on unsecured and granular credit, we are tracking well. Our SMA book is at its lowest in many quarters, SMA-0, 1, and 2. And we believe that even through this period of growth in unsecured and higher-margin businesses, it should not fall off. We are not doing new to bank aggressively on unsecured. We are doing existing to bank and prequalified data basis. So for the next two, three quarters, this trend line will continue and should be in the zone of 25 basis points, 30 basis points.

Mahrukh Adajania — Nuvama — Analyst

Okay, sir. Makes sense. And sir, why has the recovery income dropped off so sharply this quarter?

Shyam Srinivasan — Managing Director and Chief Executive Officer

No, some parts of it is very — if you have one good recovery, it plays out. So you can’t quite model that. It’s depending on when some charge-off happened and when the opportunity comes, but would not put too much attention to whether it’s high or low, because these tend to be sometimes opportunistic.

Mahrukh Adajania — Nuvama — Analyst

Sir, I just have one final question, which is that — sorry, you just mentioned that you would still end the year with 3.25% margin, which is kind of 3 basis points above the current level, correct?

Shyam Srinivasan — Managing Director and Chief Executive Officer

In the case of current formula of our compute of 3.22%, we are working to that 3.25%, Mahrukh.

Mahrukh Adajania — Nuvama — Analyst

Okay, okay. Thank you, sir. Thanks.

Operator

Thank you. The next question is from the line of Nitin Aggarwal from Motilal Oswal. Please go ahead.

Nitin Aggarwal — Motilal Oswal — Analyst

Yeah. Hi. Good afternoon, everyone. So, congrats on good results. Sir, a couple of questions. First is on the fee income side, if you can talk about what is this para banking really including? And there has been a strong growth that we have seen this quarter on a sequential basis. So what has driven that? Even on a Y-o-Y basis, the growth is very strong. How do you really see this?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Yeah. I think para banking is basically our insurance, investments, wealth management, largely these three businesses, are all tracking well. Basically, higher penetration, good distribution, and some level of product improvement and focus. And that’s been the focus and will continue to be.

Nitin Aggarwal — Motilal Oswal — Analyst

Okay. And secondly, on margins, while there has been like similar rise in cost of deposits between the first quarter and now the second quarter, how do you compare this outstanding now, portfolio deposit cost to the incremental costs, so as to like have a view as to how the can trends — the margin can trend in the coming quarters? How much is the gap rippling [Phonetic] now?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Sorry, you have to repeat the question. It didn’t come through well.

Nitin Aggarwal — Motilal Oswal — Analyst

So actually, I want to understand as to how much of the incremental cost of deposits now vis-a-vis the outstanding cost of deposits, because CASA mix has been under pressure and may likely remain so. So given that over the past two quarters, the rise in cost of deposit has been pretty uniform. So how much is the gap between the incremental cost of deposit to the outstanding deposit cost?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Like I have mentioned earlier in the call, I do believe that the cost of deposits favorably in the last of the story, it remains quite elevated for the industry and could remain so if the new originations of deposits are also going to be at the higher price. So somewhere in the 18 basis point, 20 basis point increase in the cost of deposits we should factor for and work our other lines to ensure the margin expansion happens and the ROA expansion happens, which is what we’re doing.

Some of the pivoted businesses recovery, upgradation improving during more high businesses, repricing existing assets, and a combination of that, and of course pursuing card growth more aggressively in the context of our pricing line of credit and becoming a larger lender to bigger banks and bigger customers, we are able to get some CA [Phonetic] also. But the blended costs come through that.

Nitin Aggarwal — Motilal Oswal — Analyst

Right. And sir, on the asset quality side, we have seen a very strong recoveries and upgrades and things are going really strong. So what has really driven this in this quarter, the recovery number? Any one-off there?

Venkatraman Venkateswaran — Group President and Chief Financial Officer

No, Nitin. I mentioned in the earlier response also, there are no — in this quarter, there’s no one-off of any nature. In fact, this quarter, relatively recovery was lower than the previous quarter. Upgrades were higher.

Nitin Aggarwal — Motilal Oswal — Analyst

Okay. And lastly, on the internal rating of the corporate book, there is a very sharp increase, almost 500 basis points. What has really driven this? How do you see the trend there?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Harsh or Ashutosh, do you want to point out on that? Harsh, Ashutosh, Souvik?

Ashutosh Khajuria — Executive Director

Can you please come again?

Nitin Aggarwal — Motilal Oswal — Analyst

Am I audible?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Please go ahead.

Operator

You’re audible, sir.

Shyam Srinivasan — Managing Director and Chief Executive Officer

Go ahead, Ashutosh. Go ahead.

Ashutosh Khajuria — Executive Director

Yeah. There has been a clear focus on the A category — BBB+ and A category customers, which is what is shown over here, which you’ve seen a 5% uptick. So a very clear target is — because AAA and AA customers, we don’t get the yield. So there’s a clear focus on the A-rated category of customers, which is where you have seen the increase, and also an uptick in the yield resulting because of that part.

Nitin Aggarwal — Motilal Oswal — Analyst

All right.

Ashutosh Khajuria — Executive Director

Yeah. That’s right.

Nitin Aggarwal — Motilal Oswal — Analyst

Got it. Thank you so much. Wish you all the best.

Operator

Thank you. The next question is from the line of Kunal Shah from Citigroup. Please go ahead.

Kunal Shah — Citigroup — Analyst

Yeah, thanks for taking the question. So firstly, any impact of ICRR we saw this quarter? Or it was hardly maybe not even 1 basis point or so?

Shyam Srinivasan — Managing Director and Chief Executive Officer

No. The impact of ICRR was offset — the benefit of increase with capital was offset by ICRR, roughly about — both ways, about 3 basis points or 4 basis points.

Kunal Shah — Citigroup — Analyst

Okay. So 3 bps to 4 bps on ICRR, offset by?

Shyam Srinivasan — Managing Director and Chief Executive Officer

The capital increase, we had the QIPs that came in the quarter.

Kunal Shah — Citigroup — Analyst

Yeah. Okay. So 3 basis points, 4 basis points getting offset.

Shyam Srinivasan — Managing Director and Chief Executive Officer

Yeah.

Kunal Shah — Citigroup — Analyst

Okay. And secondly, just in terms of the overall cost of assets. So maybe I think you highlighted that there is no one-off as such and more marketing related. But overall, where should cost to assets settle when we guide for, say, ROA, ROE expansion as well? Because maybe margins not too much of improvement, credit cost would also normalize. So would there be any triggers for ROA, ROE expansion here on?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Kunal, I long said that we’ll get to 1.4% ROA in FY ’25. Thankfully, we are well on course much earlier. I think the — and that gives us some latitude to allow for some of these spends in expansion in branches. We are upfronting some of our branch expansion. This year, we may end up doing 100 branches or more in the full year or a little more actually. So to that extent, we are taking the luxury of spending a little more to ensure franchise expansion happens. So I would think the cost of assets, where we are today, can’t be very much — there will be some improvement, but not material.

Kunal Shah — Citigroup — Analyst

Okay. Okay. So it should stay largely here, maybe somewhere around these levels?

Shyam Srinivasan — Managing Director and Chief Executive Officer

I think it’s — we’re working to bring it to — earlier, we thought 48% CI. Given some of the ROA expansion coming through higher cost to income on our fintech partnerships, we are allowing us that little latitude.

Kunal Shah — Citigroup — Analyst

Okay. Okay. Yeah. Thanks. Thanks.

Operator

Thank you. The next question is from the line of Saurabh Kumar from JPMorgan. Please go ahead.

Saurabh Kumar — JPMorgan — Analyst

Hi, sir. Sir, just two questions. One is, what would be your LCR this quarter?

Shyam Srinivasan — Managing Director and Chief Executive Officer

What is the LCR?

Saurabh Kumar — JPMorgan — Analyst

LCR for the quarter.

Shyam Srinivasan — Managing Director and Chief Executive Officer

Did you say LCR, Saurabh?

Saurabh Kumar — JPMorgan — Analyst

Yeah. Yeah.

Shyam Srinivasan — Managing Director and Chief Executive Officer

For the quarter, only 121. 121 or 124, I’m not sure.

Saurabh Kumar — JPMorgan — Analyst

Okay. Okay. And the second is, sir, just NRI — NRE deposits not growing, I mean, do higher rates globally impact this growth? Or will that not be sensitive to this NRE, to this…

Shyam Srinivasan — Managing Director and Chief Executive Officer

So I think there are two parts to it, Saurabh. When you met us, we did explain. So we are — in the NR, there is FCNR, there is NRO, and there is NRE. The remittances-led businesses, which is our NR bread and butter business, remittances are growing very strongly and our share is increasing even more visibly. However, the FCNR, we are not a big player, though we are slowly putting our foot in to try and grow that. We have not seen any dips in the NR remittances, in fact, it’s growing.

They are not converting into deposits, either because — see, it’s growing into deposits certainly. [Indecipherable] Because the rate differential between term and savings is quite high, people are moving into term, or they are using it for consumption, paying off loans, starting businesses, committing to expenses that they had held back during the COVID period. Now whether this is a sustainable change, we have to see, but I think six quarters is a good period to understand that something structurally has changed. And we are watching this.

Having said that, our first and biggest feed is remittance share going up, which it is for us. The second and third part, which is the NRO and the FCNR, has not been our biggest strength. We are working through. May be Shalini can also give some numbers in terms of deposit share, NR, where we are gaining share. Shalini may be you want to add, please?

Shalini Warrier — Executive Director

Sure. Thanks for that. So as Shyam mentioned, this is sliced into three parts, which is NRE, FCNR and NRO. Our focus has entirely been, for very long, on NRE. And there, we seen significant market share growth, roughly about 8.32% March of last year, 8.45% this year.

FCNR, and that is, Saurabh, kind of addresses your question also. A lot of the customers who tend to put in FCNR are the ones who are now retaining their money abroad. And some of them are obviously using that as leverage to kind of get FCNR deposits in country. We don’t play too much in that space of FCNR. So on FCNR, we’ve actually seen a reduction in market share.

NRO is not something we’ve been kind of working on for a very long time, because our bread, butter, jam has always been NRE. So the short point is, FCNR and NRO is where some of the growth is coming, which we have not been playing in. Going forward into the next few months, we will be playing a large part of the market in those areas also. We will work — we will be working on those, but the bread, butter, jam really is NRE term — NRE, both term and savings. We find a lot of the movement is actually happening from savings into term, and that’s because the differential in interest rates is high between the two of them.

Venkatraman Venkateswaran — Group President and Chief Financial Officer

Just to add, I think the FCNR segment of NRI deposits competes with the global rates and all. Because there you have, I mean, no exchange-related so-called gain or risk. So therefore, even I think with interest rates going up overseas and actually the impact on FCNR is there, unless you are ready to pay that type of cost or make it — because this is a fixed rate, it’s not floating. On the date of contracting, for next one to three years, it’s going to remain at that level. So I think even banks are not probably pursuing that much of FCNR deposit growth.

On the other hand, on the NRE term and NRE savings bank’s interest differential, which used to be around 200 basis points, now is about 400 basis points. So as a result of that, I think part of NRE savings is moving towards NRE TD. And also from — while remittances are increasing and all, they are getting initially passed in NRE FC for our clients, and then they are being used probably even for physical assets and consumption.

Saurabh Kumar — JPMorgan — Analyst

Okay. So FCNR will not — like in the current rate environment, I don’t think — I mean, your on-book domestic TD will be cheaper than FCNR. Will that be a fair comment?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Yeah. Corporate and do it domestically does not make sense…

Venkatraman Venkateswaran — Group President and Chief Financial Officer

On a fully hedged basis, yes.

Saurabh Kumar — JPMorgan — Analyst

Okay. Got it. Thank you, sir.

Operator

Thank you.

Shyam Srinivasan — Managing Director and Chief Executive Officer

Yes. I’ve said this three times already. Just to reinforce the same message. Deposits are available at a price, and we have to make a call at what price and how much you want. We saw significant growth this quarter on deposits and we’ll see. We grew from 33% this year — this quarter sequentially — Y-on-Y, sorry. Yeah. Next question, please.

Operator

Thank you. The next question is from the line of Pranav from HDFC Bank. Please go ahead. Pranav from HDFC, you may go ahead with your question.

Shyam Srinivasan — Managing Director and Chief Executive Officer

Pranav must be busy reporting his own numbers. His bank numbers are just on the screen.

Operator

As there seems to be no response from the line of Pranav, we’ll move to the next question. And the next question is from Rakesh Kumar from B&K Securities. Please go ahead.

Rakesh Kumar — B&K Securities — Analyst

Yeah. Hi, sir. Thank you. Sir, on the MSME loan, like we have seen some reduction, some volatilities there on the sequential basis. So around INR2,000 crores like business banking plus commercial banking number. So could you tell us what is the reason for this — like this decrease from INR33,000 crores to around INR31,000 crores number? Especially in the commercial banking, I think this dip has happened. So, any reason for the same, sir?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Sorry, I have to take up the slide. Where in the slide are you referring to?

Rakesh Kumar — B&K Securities — Analyst

Sir, this is Slide number 14. We have seen MSME business banking plus commercial banking growth of 16%, INR31,000 crore number, and similar number in the Q1 results, INR33,463 crores. So business banking has grown this quarter also.

Shalini Warrier — Executive Director

Which slide are you referring to?

Rakesh Kumar — B&K Securities — Analyst

This is, ma’am…

Harsh Dugar — Executive Director

I think I got it. Harsh here. I think what he’s referring to is on Slide number 14 regarding the MSME growth being at 19%. Business banking has grown over 18%, 19% and commercial banking at 21%. The remaining portions are the non-MSME piece. What you see is the MSME piece. CB — commercial banking and business banking is also a very small portion, which is non-MSME also.

Rakesh Kumar — B&K Securities — Analyst

No, no. So firstly, this entire MSME book, which has come down to INR31,447 crores. So what is the reason, firstly — so which part within that has come down? And why it has — like is there any — what is the reason behind it, basically?

Harsh Dugar — Executive Director

I’m not getting it. The MSME piece has grown by 19%.

Rakesh Kumar — B&K Securities — Analyst

No, Q-on-Q sir…

Souvik Roy — Assistant Executive Vice President and Head – Investor Relations

I think there’s some confusion, Rakesh. If you look at our presentation, on Page 14, we have mentioned MSME book at INR35,616 crores, there’s no reduction. Exactly. There’s a 19% growth.

Venkatraman Venkateswaran — Group President and Chief Financial Officer

Sorry, Souvik, just one point here. Just referring at our website, we may have to update that slide in the website. It’s showing a different number.

Souvik Roy — Assistant Executive Vice President and Head – Investor Relations

That’s already updated, sir.

Venkatraman Venkateswaran — Group President and Chief Financial Officer

Okay. Maybe he is referring to that before the updation.

Souvik Roy — Assistant Executive Vice President and Head – Investor Relations

Okay, sir.

Rakesh Kumar — B&K Securities — Analyst

Okay. So there’s a change in the slide. Okay. Okay. So number, you have changed.

Shyam Srinivasan — Managing Director and Chief Executive Officer

INR35,616 crores, Rakesh.

Rakesh Kumar — B&K Securities — Analyst

Okay. Okay. And sir, in this credit risk weight density, like so we see, like, there is some increase there on the risk — like especially the market risk also, market risk number is slightly on the higher side. So is this because of the investment book growth?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Your voice is not coming through. You have to repeat the question.

Rakesh Kumar — B&K Securities — Analyst

Sir, this market risk number which has gone up slightly, so is it because of investment book growth or there is any other reason also to this investment book growth in the market risk weight number?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Damodaran, are you there?

Damodaran C — Chief Risk Officer

Hello? Sir, am I audible?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Yes.

Damodaran C — Chief Risk Officer

Yeah. This is due to growth in investments. We have certain growth in investments in NSLR book, bonds and debentures.

Rakesh Kumar — B&K Securities — Analyst

Okay. Okay. Okay, sir. Maybe I will take it offline. Thank you. Okay, thank you. Thank you, sir. Thank you.

Operator

Thank you. The next question is from the line of Madhuchanda Dey from MC Pro. Please go ahead.

Madhuchanda Dey — MC Pro — Analyst

Hi. Congratulations on very good set of numbers. I have a couple of questions. To an earlier participant, you mentioned that you do not expect a meaningful reduction in the cost to income ratio. And you also mentioned that you’re targeting an ROA of 1.4% by the end of FY ’25. Is my understanding correct, first of all, on this ROA?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Yeah. We had — if you remember, when we started FY ’24, we had said, over two financial years, we’ll get to 1.4% ROA. Happily, we’re trending much earlier. And certainly, we’ll now seek to do even better. Yes, I did say that number of 1.4%, that’s what we had said at the beginning of the financial year. Thankfully, the traction is good and we’ll hopefully keep this momentum going.

Madhuchanda Dey — MC Pro — Analyst

Yeah. So my question is, given that the credit costs are extremely benign, can’t get better from here, and your net interest margin is also going to kind of stabilize the high yield getting offset by high cost of deposits. So the only driver — meaningful driver could be cost to income ratio. So given that you are saying that it’s likely to be sticky, are we to expect a more gradual or virtually very little growth — very little increase in the ROA going forward?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Yeah. I would think the improvement that you have seen, we should sustain them. There is opportunity to increase our fee as a share of assets by another 10-odd basis points over the coming quarters. And as we do that, by that window, we do believe cost of deposits will start trending down, which, again, is in expansion. The repivoting of some of our businesses will again aid in expansion.

These three elements, higher share of fee as a share of assets, deposit costs trending down or flattening out over the periods ahead, and cost of — and the higher margin, higher yield businesses picking up scale, all are opportunities for expansion. And I’m sure over a two-year period that we’re working through, we will see even more efficiencies kick in. And the only reason we allow for a higher cost to income is only because it’s ROA accretive. We are not raising businesses that are ROA decretive or on that same margin, not incremental, we won’t do the higher cost to income.

So the blend is — ultimately, the ROA expansion is the driver, and we’re working through that. So at this point in time, our guidance, which is, we are not altering the guidance, 1.4%, and looking up. Certainly, we’ll try to improve that in FY ’25, but yeah, that’s the trend line. So there are levers available, but yes, there is one single lever. We have a few basis points across all parameters. And that’s how we’ve become from 0.78% to 1.35% very steadily and consistently over five years.

Madhuchanda Dey — MC Pro — Analyst

Okay. Got it. So is it — I mean, I’m not asking you for a guidance, but is it reasonable to assume that from FY ’24 level, given all the factors that you outlined, 10 basis points kind of an increase in ROA is possible?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Which is what we are working through, Madhu.

Madhuchanda Dey — MC Pro — Analyst

Okay. Thank you. Thank you…

Shyam Srinivasan — Managing Director and Chief Executive Officer

There is no…

Madhuchanda Dey — MC Pro — Analyst

I’ve got your — I’ve got the answer. Thank you very much and all the best. Thank you.

Shyam Srinivasan — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Kaushik Poddar from KB Capital Markets. Please go ahead.

Kaushik Poddar — KB Capital Markets — Analyst

See, your operating expenses in the first half, both the quarters combined, has gone up nearly 25%. And even your cost to income ratio is at a high of 52.6% or 52.5%. So that seems quite high. So what’s the road ahead?

Shyam Srinivasan — Managing Director and Chief Executive Officer

That’s what we were explaining also. I am allowing for that higher cost to income because these businesses are ROA accretive. So we have to sustain the higher cost to income because these are some of these partner-led businesses, which is like credit cards and personal loans and gold and microfinance. That’s how the ROA expansion is also happening.

If they were not happening and ROA was not expanding, we won’t be doing that. We would be going back to our 50%-odd, because some of these service charges that are hitting the expense line, there is a corresponding revenue. So the cost to income is in the 60s or mid — almost 70s. So back that out, our core structure is performing on course, and we are spending on certain initiatives like brand and branch expansion, both of which are good for the periods ahead. But having said that, getting to the 50% and improving in a year’s time is what we were pushing.

Kaushik Poddar — KB Capital Markets — Analyst

You’ll be able to check 50 — I mean, the cost to income of 50%.

Shyam Srinivasan — Managing Director and Chief Executive Officer

Yes. So we were trending closer to 49%, but some of these developments and how accounting needs to be done for partner-led business is requiring us to take the cost to income higher. But the only trade-off we are making is these are distinctly and definitely and compellingly ROA accretive.

Kaushik Poddar — KB Capital Markets — Analyst

No, including this incremental cost for this newer initiative, so this 50% will be at the firm level, at the bank level, or you are…

Shyam Srinivasan — Managing Director and Chief Executive Officer

Yes, yes, at the bank level. Yes. Going into FY ’25.

Kaushik Poddar — KB Capital Markets — Analyst

Okay. And this people — I think I remember you mentioning something about the older employee pension coming off or something sometime later.

Shyam Srinivasan — Managing Director and Chief Executive Officer

Yeah, that’s started trending down quite substantially. By FY ’25, a large part of it will start falling off, because the majority of the recruitments — I mean, all recruitments after 2010 have been on the new scheme. So to that extent, the retirement age of most of the people prior to that is beginning to taper off. The last employee of that type will retire in 2037, but the bulk will retire — have retired, retiring.

And to some extent, the swing with these, Kaushik, every time there is a deal movement up, you will see a higher cost eventually. And that’s partly playing too in this quarter also. We are fully funded on our pension. So we don’t have any lag on that. To that extent, it has some impact. But having said that, the incremental requirement for pensioning in the period ahead will start moderating.

Kaushik Poddar — KB Capital Markets — Analyst

Okay. So this 50%, you’re talking last quarter of this financial year, right, cost to income?

Shyam Srinivasan — Managing Director and Chief Executive Officer

We are working towards that. If not last, it’s first quarter of FY ’25.

Kaushik Poddar — KB Capital Markets — Analyst

Okay. Okay. Thanks. Thanks.

Venkatraman Venkateswaran — Group President and Chief Financial Officer

More towards FY ’25, yeah.

Kaushik Poddar — KB Capital Markets — Analyst

More towards FY ’25. Okay. FY ’25 as a whole, right, that’s what you are speaking of?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Yes, yes.

Kaushik Poddar — KB Capital Markets — Analyst

Okay. Okay. Fine. Okay.

Operator

Thank you. The next question is from the line of Jai Mundhra from ICICI Securities. Please go ahead.

Jai Mundhra — ICICI Securities — Analyst

Yeah. Hi, good afternoon, and thanks for the opportunity, sir. I have three questions. First is, if you can give the loan mix by benchmark, I mean, repo, EBLR, fixed rate book?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Venkat, do you want to go?

Venkatraman Venkateswaran — Group President and Chief Financial Officer

Yeah, yeah. 51% on the EBLR. 26% is about — about 26% is fixed. And if I reflect, 13% is NPLR, which are the big ones. And then we have FX link of 3%, staff 1.5%, and IBPT 1.85%.

Jai Mundhra — ICICI Securities — Analyst

Sure. And sir, in this quarter, so the yields on advances have actually changed the trajectory. Earlier, they were moderating for the last three quarters. But this quarter, there has been a rise at around 14 basis points. Apart from newer loans, which are high yielding, are you also seeing benefits on either fixed rate book or NCLR or T-bills linked repo? Or that benefit is not that much and the benefit is coming from high-yielding book?

Shyam Srinivasan — Managing Director and Chief Executive Officer

So high-yielding book is only one element here. There are elements that are across the sector, renegotiations, backing up existing assets, negotiating better price requirements from customers. So I think it’s a combination.

Jai Mundhra — ICICI Securities — Analyst

Right. Okay. And lastly, sir, on your deposit, right, so you mentioned that deposits are available at a certain rate. So when you intend to grow at 18%, 20% on loans, do you see a scenario where the retail card rates on deposit may have to be increased? Or you think that is an unlikely scenario in the near term?

Shyam Srinivasan — Managing Director and Chief Executive Officer

Our philosophy on deposits, we won’t lead the price increase. We are tending to be competitive. We benchmark against five, six banks which we compete with. And we won’t be off, because I can’t have my feel disadvantaged in growth of deposits. As long as we are competitive, we will keep growing. And I will give pricing appropriately.

Jai Mundhra — ICICI Securities — Analyst

Right. Understood, sir. Yeah, thank you so much.

Operator

Thank you very much. We’ll have to take that as the last question. I would now like to hand the conference back to Mr. Souvik Roy for closing comments.

Souvik Roy — Assistant Executive Vice President and Head – Investor Relations

Thank you. And I want to extend my gratitude to all of you for joining us today, and your interest in the bank. And your, of course, insightful questions are greatly appreciated. So before we close, answer to Rakesh’s query, INR35,616 crores, and what we have reported as MSME plus CoB INR31,447 crores, the difference of INR169 crore has been reclassified, which is why it is not a part of BuB or CoB anymore. So which is why you see a 16% Y-o-Y growth, but happy to connect after the call and explain further.

And as we discussed throughout this call, the momentum is strong, and we are committed to further improving our performance. And we firmly believe that the future holds better and great opportunities for us. If you have additional questions or need further clarifications — any further clarification, please don’t hesitate to reach out to us and we’ll certainly answer you. And thanks again for your time and attention. We look forward to our continued journey from here on. Thank you so much. Have a great day.

Shyam Srinivasan — Managing Director and Chief Executive Officer

Thank you.

Shalini Warrier — Executive Director

Thank you. Bye.

Operator

[Operator Closing Remarks]