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Federal Bank Ltd
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Good day, ladies and gentlemen, and a very warm welcome to the Federal Bank Q2 FY '19 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Rajanarayanan N, Head Investor Relations at Federal Bank. Thank you, and over to you, sir.
Thanks, Ali. Good afternoon, everybody, and welcome to the Q2 earnings call of Federal Bank. With me are Shyam Srinivasan, MD and CEO of Federal Bank; Ashutosh Khajuria, Executive Director; Ganesh Sankaran, Executive Director; and other executives.Over to you, Shyam.
Thanks, and good afternoon, everybody. Thanks for dialing into our Q2 call. The -- let me just go straight into the highlights of the quarter. I do hope you've had a chance to see our investor deck, so I am extracting the key takeaways from that. One, we believe we've had a strong operating momentum and strong operating quarter, reflected through growth, reflected through strong operating profit numbers, which have been at an all-time high of INR 698 crores.The quarter did see some natural calamity in crucial market of our home market. We believe we've dealt with it quite well, both in terms of the human and emotional aspect, as also the comeback by the bank. There have been implications for people in the state, but the bank has handled it quite well.So a strong operating momentum. Our focus on developing a granular liability franchise remains intact. Market share gain is quite pronounced both in credit and in deposits.A few milestones along the way. We crossed our INR 100,000 crores of business outside of our home market. We crossed INR 100,000 crores of credit outstandings this quarter, and taking our market share up to 1.12%.Organic credit growth has been good. We've been diversifying our portfolio across the different segments, be it Corporate, Retail, SME, agri. And we believe that the vertical architecture that we put in place is now beginning to reflect in performance, both in terms of credit growth, liability growth as also fee income, and that's something that we will be strengthening too as we go into Q3 and beyond.We had recruited some senior people in specific areas and that's beginning to show traction. So in effect, operating performance is strong. Credit quality, the provisions for credit were at INR 152 crores. The overall slippages for the quarter was at INR 477 crores, and it did have some impact of the Kerala floods, which we had guided for when we did an interim call at the beginning of -- in the middle of August immediately after the flood.Otherwise, our commitments and our focus, which was at the beginning of the financial year, was that we would have overall slippages in the financial year. At that point in time, we had guided for about INR 1,300 crores. Then, we said the Kerala impact could be about INR 50 crores -- INR 150 crores. So we think the full year financial sort of slippage number will be in the INR 1,450 to INR 1,500 crores, and credit cost will remain INR 65 crores to INR 70 crores, which is the guidance given then and even now.So growth, strong. Credit performance, quite along expected lines. Strengthening the balance sheet is the core thrust area. Getting our strategic partners in specific areas where we've commissioned activity is beginning to play out quite well. We got the regulatory approval for the True North investment this quarter. We formally completed our investment in Equirus as well and they're now an associate of ours.So momentum, credit quality, architecture of the business are quite playing out the snip. We believe that the momentum of the bank, as we go into Q3/4, should reflect this whole underlying strength that we have built. And we are turning out to be an attractive employer for people who want to make impact and we are encouraging good talent to come in and work for us.I would like to not dwell on these specifics. I am sure there are going to be questions that are going to come in. We have the entire senior team with me, so let me just open it up for questions and through that explain the quarter and, importantly, the period ahead.So operator, if you can turn it out for questions, please?
[Operator Instructions] The first question is from the line of Prakhar Agarwal from Edelweiss Securities.
Yes. Sir, Kunal over here from Edelweiss. So firstly, with respect to this entire impact of Kerala floods, so how much would that be in Q2? And how do we see it going forward in Q3? Is there anything which is left out to be recognized? And the related question is with respect to the -- when we look at it in terms of the guidance for the slippage, which we had given last time, so in the first half itself, we are already through INR 950-odd crores. So how do we maybe reevaluate the guidance of the overall slippage as well as the credit cost?
Thanks. Kunal, at the beginning of this call I said that we are holding onto our credit cost forecast of about 65 to 70 basis points, Q1 was 71, Q2 was 64. We believe 65 to 70 basis points is our target for FY '19. We had also said at the beginning of the financial year that the overall slippages we expect is about INR 1,300 crores. And because of the Kerala floods, we said we would probably be about INR 50 crores extra per quarter. So that means about INR 150 crores. So INR 1,450 crores is the expected slippages for the financial year. We think that's very much in the pipeline for delivery. In specific to this quarter, the slippage is INR 477 crores, out of which the Kerala part was about INR 220-odd crores and Corporate was about INR 120 crores. And we think in Q3 and Q4, the slippage in Kerala will be in that zone, plus/minus, and the impact of the slippages has been addressed. We've also had the opportunity using the SLBC dispensation to restructure accounts that are in select PIN codes in select segments. So wherever the account is not in the select segment or PIN code and if they're stressed, we've made it NPA. And wherever the dispensation is available, we have done. The restructure standard this quarter in Kerala is about INR 35 crores and that number in Q3 can be about INR 70-odd crores because the expiry date of the dispensation is November 30. So between Q2 and Q3, the standard restructure advances in Kerala will be roughly INR 100 crores.
Okay. Sir, this quarter, you highlighted the impact of Kerala out of INR 477 crores was...
Total Kerala was INR 220 crores. The impact of the floods would have been about INR 40 crores to INR 50 crores. It was the number we had -- we talked out with you.
The next question is the line from of Renish Bhuva from ICICI Securities.
My question is on the loan processing fee, which is -- which had a pretty sharp jump on Q2 basis, INR 53 crores versus the full INR 30 crores, INR 35 crores per quarter for the last 3 to 4 quarters. So what explains this sharp jump in the loan processing fee, sir?
There is nothing unusual. I think it's to do with our penetration rate more in the middle market and those kinds of clients in the weaker polities who are more amenable to fees. And there is probably a little more energy and focus on the system on fees. So I think that explains why the...
And renewal fees.
And renewal fees, you know. So...
It's just that looking at different fee lines a little more closely, bringing more intensity pursuing the right kind of clients who are amenable for fees and the expansion of the wholesale bankbook into different geographies.
Right. So is it fair to assume this kind of a run rate in processing fee going forward. Of course, it will be in line with the overall development, but is this the...
Assuming the clients are willing to pay, I think, and it remains a market practice, we should...
I think the short point here is for long, we've been talking about our other income being extremely reliant on treasury-related income. There was one where we saw all the aspects of it coming together, whether it's new processing fees for gold, for our renewals, for our Corporate business, and we've also seen good traction on FX, we've also seen good traction on retail income.
Okay. So broadly you're saying all these numbers are sustainable, given our current scenario?
Correct. Yes. That's what we are working towards and our guidance remains intact on that front.
Okay, okay. And, sir, secondly on the other OpEx part, again, that number has been grown by almost 12% on Q2 basis despite we are not adding any branches or any significant ATMs. So again, why this sharp jump on Q2 basis on the other OpEx part, so is this...
Yes, this quarter saw some increase because of Kerala flood related, so we had to give support to the state. So the flood-related undimensioned aspect beyond credit is a life cost. We waived off fee income of almost INR 10 crores with 10 -- almost INR 7 crores to INR 7.5 crores for various contribution, restoration of lives, in helping employees who have had challenges. So culmination of that is almost INR 18 crores of operating profit impact, thus the credit-related impact.
Okay. So out of -- sorry, can you please explain this number again? I mean, out of INR 18 crores, how much is the OpEx part and how much is the...
About INR 8 crores.
INR 8 crores is the OpEx part?
Yes, yes, yes. Sorry, I wanted to point out, which is not a fancy thing, but we did pay the penalty of INR 5 crores also.
The next question is from the line of [ Nanda Kumar ], individual investor.
Respected MD and to few of the champs, I mean, kudos to you and your team for the good performance in Q2 FY '19. I hope that this momentum will sustain in the quarters to come. I have 2 questions, sir. What is Federal Bank's total investment in Fedbank Financial Services, Fedfina? What is our total investment? And what is the valuation by True North? And what is the price at which they will subscribe 26% stake? I understand there was a press note saying that they will, at a later date, increase their stake to 45%. At -- any agreement would come, at what price they will increase stake to 45%? Then, I have one more question about Equirus. What was the valuation of Equirus and what percentage of stake did Federal Bank buy in entire funds? And what are the other future plans for enhancing our stake in Equirus? And in these 2 cases, actually, both in the case of True North's investment in Fedfina and our investment in Equirus, what is the benefit in this case to Federal Bank from these 2 investments?
Thank you, sir. Firstly, on the Fedfina investment, we have received the regulatory approval. The valuation, we are waiting for the last step in the process, which is -- will be completed by November 7 or 8, at which time the True North's money will come in, at which point we will be able to share the valuation, but we are happy that the valuation is at the top end of the market valuation, which was done thankfully well before the sort of meltdown in the NBFCs happened. The reason we've got a partner like True North is not for us to make -- monetize the value, it is for getting strategic investment in the company, which is doing well. That book is about INR 1,500 crores and growing. We needed to infuse capital. We had the choice of reinfusing directly or getting a strategic partner, so we have brought in a strategic partner. We are not doing any sale of this. The ability for it to go to 45% is over time based on milestones. At this juncture, we are happy with 26%, and we'll see how the relationship matures. It could be years before we get to the 45%. So vis-à-vis too much, we will be able to share the moment with regulatory all the steps are completed, which I think will be over by November 8 or 9. But at this point in time, it will be, in short, our Diwali release, so to say. In specific to your question on Equirus, Equirus is a unvested entity. The -- this quarter, we have had to make a -- we made the investment, so we, in fact, provided for it because the regulatory requirements require us to make a provision of mark-to-market on an unvested entity. So we have done that. The investment made is about INR 20 crores.
Okay. And for what percentage of the stake in the company?
19.9% is what is allowed. And beyond that, it needs regulatory approval. When it happens, we will take it up to 26%, and if things mature, even higher. But at this juncture, it's 19.9%. We're not allowed to do more than that.
And sir, what benefit to the NBFCs with the tie up with Equirus?
So they are an investment banking boutique firm and high-net-worth wealth management team, for both of which our RMs are working closely with them. We are able to get an -- in fact, we've already got 3 mandates on IPS. And the team is also working very closely with our clients on getting in the -- it's an area of business we don't have direct skills, so we're getting domain experts.
The next question is from the line of [ Sagar Shah ] from KSA Securities.
Yes. My first question, sir, in regarding something like I wanted to know, as I've seen your commercial and Corporate portfolio, in the commercial portfolio, 12% of your lending is to real estate business, actually, and 6% of your Corporate is in -- again, is in real estate business. So basically wanted to know why something like that percentage is compared to other industry design, as compared -- and do we exactly actually lend to the various projects in urban areas?
Largely these are lease rental discounting, rent securitization, and these are done in specific geographies for about 7-year tenor with the lessees being of high repute and sufficient caveats and covenants to make sure that the bank's interests are well covered.
So we are not -- basically not lending to any other, something like certain projects or project financing?
We don't do any of that.
Okay. You are into more to lease rental discounting?
Only into that.
Okay. And so my second question, sir, is regarding to as what percentage of our total loan book has been linked to the new NCLR?
Well, it's about 80% to 83%.
83%? 83% of the loan book has been linked to the higher NCLR, you're saying?
Not higher.
Higher, no.
It is from base returns.
It is an NCLR.
Okay. Okay. Because I think I -- as I learn that your cost of deposits, I think, have has -- would have gone up unlike other banks actually. So have we -- are we able to pass on the extra cost to our customers or even previous customers?
No. At the time of renewal, we are able to. In certain instances, based on the agreement, we are doing it. My apologies, one second, let me just clarify. Base rate book is...
Nonbase rate book is 90%.
Nonbase rate book is 90%, out of which NCLR, direct NCLR is 50%. The base rate is 10%, nonbase rate is 90%, NCLR is 50%.
Okay. Nonbase rate is 90%?
Yes.
Okay, okay, okay. So how much is it floating and how much is it fixed, sir, of the total number?
Floating is a small component -- fixed is a small component.
Fixed is a small component?
Yes.
The next question is from the line of Rakesh Kumar from Elara Capital.
Yes. Sir, firstly, the capital consumption rate in this quarter appears to be quite high, so credit risk rate growth is pretty high. So can we -- can you elaborate on that issue?
Normally in a quarter, it's about 35 basis points to 40 basis points. This quarter has seen a higher capital consumption. We have seen a significant pickup in assets and the capital consumption on that has increased. We don't have any specific observation on that, other than the fact that our trend line is about 35, 40 basis points per quarter of capital consumption.
Half yearly profit is not added and this is also...
Yes. That is another observation. Half yearly profit number has not been added, so to that extent...
And what is expected to be the profit?
When we add the half yearly profit, CRAR will go up.
No. Just I am looking at the gross advances growth and your credit risk rate. I'm not looking at other, the total risk rate or maybe the Tier 1 capital. I'm just looking at these 2 absolute numbers.
Yes. So like I said, there is no unique explanation other than the fact that our trend line will be about 35, 40 basis points.
The next question is from the line of Amit Rane from Quantum Securities.
Sir, I would like to know how much is our exposure to NBFC sector as a whole of the total INR 1 lakh crores of lendings that we had, how much you have lent to NBFCs?
Between 10% to 12% of our total assets is NBFCs largely in the top rated -- all of them are in the top rated, with the top 4 names INR 3,000 crores.
Top 4 names, INR 3,000 crores, okay. And sir, what are the average yields on this?
In line with market.
There is -- in line with market, but roughly from the average of the book, it's the -- there, if you see, our Page 25 of our investor deck has got the NBFC total.
I will check that, sir. Sir, in going forward, what's your view on this 10% to 12% underwrite we are having today? So when we are down the line, where do you see this exposure in the light of the current developments?
So, one, we are not looking to rush in and take new exposure. We are reviewing the entire portfolio. Where we are confident and comfortable with the company, we are willing to give some exposure. Otherwise, we are turning down upon renewal or writing-in fees where required.
Okay. And sir, on the net value of security receipts is around INR 411 crores, what's the gross value of these?
INR 630 crores.
INR 630 crores, okay. And sir, our exposure to IL&FS?
Nothing. No direct exposure to IL&FS. We have 3 projects -- completed projects where annuity has been coming in for many quarters. Those are still standardized and are doing well. There is no direct exposure to IL&FS.
Okay. And sir, on the lending guidance for the year as a whole?
Last 2 quarters and for many quarters, we have been tracking within 22 or 25. We think there is enough potential for us to keep that momentum going. We may choose to dial up, dial down in certain quarters depending on what our other priority is. But confidence of growth, ability to grow, opportunity to grow remains, and we believe 25% is doable.
The next question is from the line of Jai Mundhra from B&K Securities.
Most of my questions have been answered, just a bit of clarification. So after this quarter and the fee structuring window of -- flood restructuring window ends, what was the amount you said this Kerala restructuring would look like?
Between Q2 and Q3, about INR 100 crores will be the restructured amount from Kerala. I want to point out here that this is the carved out portion that is eligible for restructuring that is being restructured during the dispensation.
Right, sir. And as of now, this is INR 30 crores?
INR 32 crores or INR 35 crores...
INR 35 crores.
INR 35 crores for Q2, and we expect that number to be about INR 70 crores for Q3.
Sure, sir. And sir, can I have the break up of provisioning for this quarter into the loan loss provision and credit-related provision -- investment related?
INR 152 crores of loan loss, INR 32 crores of standard asset and INR 105 crores of investment and credit-related provision.
Sure, sir. And lastly, sir, because this quarter had seen sharp improvement in the cost to income ratio, your thoughts on FY '19 basis, that would be very helpful.
We had guided at the beginning of the year that our exit rate will be around this line. And we think we're trending along those lines.
The next question is from the line of Krishnan ASV from SBICAP Securities.
Just wanted to understand a little bit more, Shyam, on the Reserve Bank restructuring on the penalty that had come through and was reported earlier this month?
Sure. This pertains to the RBS of March '17, which the report was concluded in October or November of '17, reviewed and closed with RBI in January of '18. As you know that we've never had divergences and we are still happy that, that never has occurred even through this process. However, their enforcement department looks at all the RBS reports completed, and they showcased the bank on these 4 points and -- sorry, they showcased on 7 points we explained, and with these 4 points they saw a one-off instances that had, had issues in March -- prior period of March '17. And the regulatory requirements required them to levy the penalty. And we have -- despite explanations, we have levied it and we've gone ahead and completed it and moved on.
And does this have any lingering implications for the 2018 supervision cycle report, Shyam?
ASV, it's very difficult to answer. We believe not, but it's for us to be on guard and ensure that we don't do anything silly. We think not. The early signals are very positive, but we live in a very dynamic environment, so we knew that. We are prepared for everything. Nothing is happening and nothing that's leaving a scar at this juncture. Sorry, yes, go ahead.
Yes, I mean, I just wanted to also understand, I mean, there was 1 of the 4 issues raised in the RBI's directive was around submission of information to the central repository. I just want to understand does that in anyway impinge on the kind of systems that you have in place, anything to do with what has not been captured or going below the radar?
No. I think the -- one of the observations was the data in submission was inadequate. It is unfortunate that in the 5th year of RBS, through the first 4 years they accepted it; 5th year, they believe that we were inadequate. So we have taken a set of steps to make sure that, that doesn't happen. We have a full-fledged data validation team. As you know that the submission to RBI is online. They pick up over 520-odd data points directly system to system. And there's little room for interpretation. We did have areas where we had understood it one way, they had expected it another way. We have since fixed it.
Just one other question on what this environment has meant for remittances and Federal Bank global capabilities on the remittances front? I mean how do you see that having progressed far? And what else is being done to probably tighten that even further?
We enjoy a good market share in the entire remittance business pan-India, and in particular to the floods that come into Kerala, we are a very dominant player. For a range of reasons: one, we have presence; second, we have a great set of people doing a wonderful engagement with the exchange houses; third, is the technology support that we offer. And you may recall last year, we even commissioned a blockchain experiment, and we've just announced the tie up with Corda, it is going live by end of this financial -- calendar year. Again, it's a scalable blockchain-based technology solution. So we are involving technology, our presence and the relationship we have with the very wide range of Middle East basics and others. And we are also widely going into other geographies. So across the 4 quadrants, Kerala and Middle East, Middle East non-Kerala, non-Kerala world, rest of world, all combinations we are working on.
The next question is from the line of Anirvan Sarkar from Principal Asset Management.
Just one question. Wondering if you have done any portfolio purchases during the quarter? And if yes, what would be the quantum for the same?
No, we've not had any purchase.
The next question is from the line of Girish Raj from Quest Investment.
So of the investment provision, there was something related to Equirus. What was the quantum and what exactly was the reason for it?
The investment provisions, like you pointed out, had 3 set of -- just to clarify, 3 separate segments in it, one is the market-related for the second bonds, but short-term reserves. Then the 2 strategic investments we made were: One is in Equirus and the other is in CCIL for about INR 30 crores, and the rest is for strengthening our SR provision. This INR 30 crores provides -- pertains to Equirus and CCIL based on -- these are unlisted entities, and the regulatory requirement requires us to do a mark-to-market and the value provision of about INR 30 crores. It's a onetime provision for this quarter.
So investment is INR 20 crore and against that INR 30 crore is a provision...
No. Two, we have got CCIL and Equirus.
We have mentioned CCIL also.
Okay. And sir, regarding -- one question related to fee income, total core fee income would have been INR 260 crores, which is INR 54 crores increase compared to last quarter. So this INR 260 crore is the -- I mean, on a run rate basis, is it sustainable? How should we look at it?
Yes. I think that's what we are working on because all of these events are fairly granular.
Nothing is one-off.
Okay. And finally, NIM and ROA guidance, sir, if you may?
NIM, we said we will trend -- we are 3.14, but we will push it to now 3, 4 basis points, and I had initially said 3.2, which seemed ambitious at that stage. We're nudging closer to that. And ROA, we want to exit at 1% for financial year '19.
The next question is from the line of Pranav Gupta from Aditya Birla Sun Life Insurance.
Yes, I have two questions. Firstly, the SME capital seemed to spike, still tolerable, but anything specific account related in that respect?
Yes. I had mentioned that the Kerala-related slippages in this whole noncorporate INR 350 crores was INR 220 crores or so. They were from accounts in Kerala because of the floods. And we did have 1 account where we took 100% provision for a fraud account of INR 25 crores in the non-Kerala.
Okay, so majorly it's due to the flood-related issues?
I wouldn't say only flood. Normal run rate for SME is -- has been about INR 120 crores to INR 150 crores. That increase is partly because of flood and a one-off one account.
Okay. And my second question is, so you believe that you should have at least about INR 50 crores of additional slippages due to the flood you had in this quarter and additional you will have in the next quarter. What I understand is that you had about INR 1,500 crores of exposure in the heavily affected areas in the flood and what that would have led to is that the collaterals that you have, values of those depreciated due to the damages that might have been caused. So don't you feel that the INR 50 crore amount is slightly lower [ acknowledged ].
No, I think, firstly, the INR 50 crore is nothing to do with the damaged areas.
Okay.
The INR 50 crores is the accounts that didn't meet the damage area, which is why they got NPA, otherwise they would have been dispensation.
Right.
Okay? So that is the general economy and the impact on Kerala as a state. In the damaged area, I said we have carved out and restructured INR 35 crores this quarter and another INR 70-odd crores in Q3, and we have about INR 100 crores. That pertains to about INR 500 crores of assets, which has the stress, which is a 2- to 3-year repayments is there for them to sort it out.
The next question is from the line of M.B. Mahesh from Kotak Securities.
Just a couple of questions, one, again, on the flood spot. We -- can you just tell us what is the entire -- what has been the entire program for the entire state? And what has been the overall restructuring that the entire system has taken? And these 3 PIn -- the few PIN codes which were affected by the crisis, what was the system-level exposure there for the quarter?
On system level, I only make -- I'd only make meaningful guesses, Mahesh. On the system level, the 12 districts were declared as what is impacted. Our belief is that the outstandings of that must be something like INR 15,000 crores, INR 16,000 crores. Okay?
Okay. And of this INR 15,000 crores, INR 16,000 crores, your exposure is about INR 500 crores, is it?
Our...
Which was impacted?
No. Outstandings in that area, ours is INR 1,500 crores. What we think in that may be under stress is about INR 500 crores over 2 quarters.
Okay. And when you're putting this number in the restructured loan book, you only put the carved out amount, you don't put the full amount.
Yes, yes, yes. We will put only the carved out amount, it's very different. That is what has been restructured. It doesn't carve out as a special loan.
The rest of the loan continues.
Okay. And in some of the other districts, things are back to normal and the performance of the portfolio is at what it was prior to the event?
More or less, yes. By now we have seen few things that will take down excess slippage.
Perfect, okay, okay. I'm sorry and the other question was on the IL&FS exposure just running through it. You said it's negligible. Can you probably quantify...
No, I didn't say...
A range to this number?
I said, it is not -- no impact on us. We have 3 exposures to projects that are completed, which are running, annuities coming in. We have INR 200 crores of the total exposure, and we have no impact as you visualize.
Okay, perfect. Sorry...
In present year report you may not have seen it. The number that you guys have put out doesn't seem to be right.
Which is true. I don't know how it reached out to the media in the first place. Apologies for that.
I'd like for us to be more responsible about it.
Sorry for it. And just one last question. Just to Ganesh on this question is that have you seen pricing power improving in the Corporate sites?
Yes. I think we are able to price in line with the best players in the market, I think. So to answer your third point, I believe yes. And in fact, I think in some cases we are able to get a relationship premium, I would like to believe, because we are penetrating the right kind of plans in the right markets with our insight, so we are getting. And in fact on the Corporate book, I think incremental yields marginally for us have gone up, it may be nominal given the segment is extremely rate sensitive, but I think the numbers suggest that there has been a yield pickup for us.
The next question is from the line of Renish Bhuva from ICICI Securities.
Sir, coming back to our -- this pricing of the book. So in one of the comment you mentioned that our loan-based book is 90%, of which 50% is insider linked. So rest is what, are T-bills and those money market linked?
Yes, external benchmark related is about 20%.
Is 20%?
Yes.
Okay. And so do we believe -- and also going forward, I'd say, in FY '20 and not in FY '19, what sort of margin expansion would we see in our book?
Renish, these end up in the realm of speculation. We are working on diversifying the books which will give us the ability to command higher margins because the cost of money seems to be a very moving dynamic part, which nobody is able to establish. If you notice one thing that didn't get picked up is our focus on the granular deposits and in the current account, we have seen marked growth in our current account, which is a point I had mentioned in 2 calls, 2 or 3 of the earlier calls. Sequentially, our current account is growing. From second half of last financial year, you would have noticed a marked growth. This quarter was a sequential 6% and Y-on-Y 30% growth in current accounts.
Right. So basically, just wanted to understand whether, I mean, internally, do you have any strategy of above or below a certain risk price, we'll not do lending or we'll not do business. Is there any -- some benchmarks we have set?
The answer is, yes. The answer is, yes.
We have a lot of this, but we don't know how to put ourselves with the position and opportunity we want to, yes, let's put it like that.
The next question is from the line of Roshan Chutkey from ICICI Prudential Asset Management.
So you said 20% is external benchmark-based book, do you mean other -- is that 20% fixed rate book for us?
Yes.
Okay. And just on this SME book, so is there any improvement in SME tax as we have been building a franchise now?
Yes. We are almost every quarter seeing a progress as we get better in our underwriting, as we've put in a most seasoned and senior team, and we have set metrics to monitor that. I think it's moving. We are -- we have anecdotal cases of doing it in 2 to 3 days for very good cases. And -- so we are comparable with the best.
So barring this one-off slippage as in fraud account in SME, otherwise, you don't see any stress building up in SME portfolio.
Nothing, nothing material. This fraud account unfortunately is a -- in the top 3 banks as you see jointly affected.
Okay. And on the INR 500 crores stress book that you have in Kerala -- due to the Kerala floods, why carve out only INR 100 crores as in with -- across 2 quarters?
No. I think I'll explain in case anybody has missed it. The carving out as per the SLBC mandate as per the RBI-approved in a scenario of natural calamity is as follows. The window of restructuring is based on the judgment by the SLBC on how bad is the situation and what is the customer relief required. IRAC norms are not violated. It is just what part of the book the client will face, just that can be carved out and booked as a separate loan, which you can get at payment holiday. So when the SLBC convened, they took April '18 as the start point and gave 1 year of interest and principal or whatever the demand as the pool that can be restructured. So out of the INR 200 crores this quarter that were in the stressed pool, which have completed by 30th September their relative work that needs to be done, that is, of course, was the due for this period and that got carved out. The rest, the customer has to pay as normal starting April '19.
The next question is from the line of Harshit Toshniwal from Jefferies.
A couple of questions on -- stemming from the previous question. You said that your exposure to that 12 affected district was around INR 1,500 crores. You now -- when I simply look at that particular exposure, you say that you have slippages in the quarter because of the Kerala flood was around INR 40 crores to INR 50 crores and their carve out to the restructured was around INR 30 crores. So basically, rest of the portfolio is something which is still standard and you expect around INR 1,400 crore of that 12 district is something which you expect to continue as usual?
Let me explain. Kerala Federal Bank outstandings when it's like noncorporate is about INR 23,000 crores. I'm just giving you the universe. In the districts and in the most affected PIN codes, our outstanding is about INR 1,600 crores. That is one data point.
Right.
A normal quarter, before this floods, roughly are prepared in Kerala between Retail, SME, agri, education, is about INR 150 crores to INR 160 crores. Good quarter INR 120 crores, INR 130 crores, bad quarter INR 160 crores, INR 170 crores. Then we dimensioned the impact of Kerala floods, and we did a call on August 20 to share with our investors, that should be roughly INR 40 crores, INR 50 crores, as a incremental impact 20%, 25%. That has nothing to do with the PIN codes. That is the place that doesn't get the dispensation. If you get the dispensation, that loan will not be in NPA.
Right. So if I -- that INR 40 crores to INR 50 crores you said would be mostly from that INR 1,600 crores of the 12 district?
No, no, no. That's not what I'm saying. That INR 40 crores to INR 50 crores is from the universe of INR 20,000-odd crores, right. The INR 1,600 crores is a subset of our INR 20,000 crores outstandings in Kerala.
Right. But might slippages -- you mentioned because also -- if I exclude that pool itself, but in totally, my restructured assets are INR 30 crores because of the flood and my NPL recognition on slippages has been around INR 50 crores -- INR 40 crore to INR 50 crores in the quarter. Apart from this, this would either be slippage or restructured, but the rest of the entire portfolio is working as usual, in the normal way.
Yes, certainly.
Okay, okay. And you expect that this INR 30 crores could be another INR 70 crores, but in the slippages, you don't expect this -- you believe that INR 40 crores, INR 50 crores could also be a bit higher number going forward, something which you realize later on.
No, let me just clarify. The slippage number for Q3 and Q4 may be similar to our total Kerala slippage for Q2. In addition, like we did about INR 30 crores of standard restructure in this -- standard restructure in Q2, that number may be INR 70 crores in Q3 because the window for restructuring ends on 30th November.
The next question is from the line of Darpin Shah from HDFC Securities.
So I just want to reconfirm. You are guiding for INR 1,450 crore slippage for the full year, and we have already done INR 950-odd crores in the first half, which means around INR 250 crores for the next 2 quarters?
Yes.
So what if I see on your -- and between that you have INR 100 crores of Kerala impact. So even if I remove that, then our normal run rate is also on a higher side than on previously.
Darpin, while, I won't get into quarter-on-quarter, we, I think, are on holding onto our commitments made at the top of the year.
The next question is from the line of Dhaval Gada from DSP Mutual Fund.
Just one question related to incremental yields in the Corporate, Retail and SME segment that we are seeing.
Our yields have started picking up in Q2. In every segment, it was roughly 5, 6 basis points over the previous quarter. Combination, one, is the asset mix; second is the pricing power coming in; third is between yields and also getting full client relationship, we are beginning to see traction.
The next question is from the line of Jayesh Gandhi from Harshad Gandhi Securities.
There was some sale of ESOS by Mr. Shyam due to margin quality. Can you explain what was that event?
No. I have taken a loan to buy my shares, share price falling. I did not want to sell. I wanted to meet my commitment. So I had to sell some shares to [ AVAC ] or stay on the loan.
The next question is from the line of Kaushik Poddar from KB Capital.
Your total stress book at -- on 30th September is at 2.01%. So where do you see this figure? I think you had committed around 1.7% as on 31st March 2019. So do you stand on that number?
I think, yes, Kaushik, except that if it's not 31st March, it will be 1 quarter down because the -- about INR 150 crores of NPA got added because of Kerala. But that said, we are trending quite well.
Just on the slippage front, you are speaking to that INR 1,300 crore figure or INR 1,300 crore plus INR 150 crores because of this...
INR 1,300 crores plus INR 150 crores. INR 1,450 crores is our new guidance.
And you have already done around INR 950 crores or something, right, for the first 2 quarters?
Yes, yes.
So you are taking of INR 500 crores for the next 2 quarters?
Yes, yes, yes.
Okay, okay. And lastly, you have not opened branches for quite some time at the same level. And you are talking of, say, advance growth of around 20%, 25% or 22% plus and deposit growth of maybe 15%, 20%. Can you achieve that without increasing your branches?
This quarter, and we believe that is indicative of our plans.
Right.
Credit growth is 25%, deposit growth is 21%, and we think that run rate will continue.
So you are not planning any -- or opening of new branches?
No, not yet, but we are expanding our RM network quite materially. We are also looking at some VC arrangements, and we think we can expand through that.
The next question is from the line of Sohail Halai from Antique Stockbroking.
So just a clarification or basically understanding, in terms of this carve out portion, so example, if my overall borrowings was INR 100 and my interest and installment due were around INR 10, so this INR 10 is the carve out portion, right?
Absolutely right.
And sir, what would your entire amount that is actually impacted?
I said INR 37 crores or INR 35 crores, INR 214 crores is the back of that.
The next question is from the line of Hemant Patel from Alder Capital.
This is on Slide 25 where you have called out NBFCs is 19% and housing financial companies is 14%. Just wanted to understand the risk assessment that you're planning to do. Is it on the HFCs as well or is just on the NBFCs?
It's on all the names.
On all of them?
Yes, yes.
Okay. And even the -- in terms of the corrective action, in terms of lending and disbursements to these would also be on all the names?
Yes, absolutely.
The next question is from the line of Chinmay Desai from Anvil Shares and Stock Broking.
Sir, I just wanted to know you said something about, I missed that part, about the OpEx impact on -- of -- on the floods and....
No, one of the questions asked was some parts of the OpEx had gone up, not people. We said this quarter there were 2 distinct events: one was the penalty of INR 5 crores; and the 8 -- roughly about INR 8 crores is the cost of the various initiatives impact on account of the floods.
The next question is from the line of from Chetan Vadia from VKL Family Office.
My question is on Slide 18 where you are showing distributions in Kerala and outside Kerala. Now in the previous con call, you mentioned that at the end of Q2 you would be in a better position to give assessment of what little exposure is in Kerala flood scene. So now that we are in Q3 or in middle of, the growth in loan book in Kerala from hereon for the second half as well for FY '20, where do you see the growth rate to be? And the outside Kerala, what kind of guidance can you give?
No, I think these run rates on various segments that you are seeing is being not a point in time, that's how it has been for many quarters. In Kerala, in particular, for the last 3 to 4 quarters, we've been slowing down our SME and commercial banking clearly because of certain environmental issues. Retail continues to be good, and selectively, there are Corporate opportunity will grow. Non-Kerala, the opportunity is infinite.
Okay. And sir, finally towards the asset quality side, what kind of gains in numbers can you hope to end the year with?
I think 2 data points we have given sort of speaks to that. Roughly INR 1,415 crores -- INR 1,450 crores or so of slippages and credit costs of 65 to 70 basis points.
The next question is from the line of Ankur Shah from Quasar Capital.
So how have the new business initiatives panned out?
The new initiatives, if you are talking to has been in terms of the segments that we are looking to do whether it's retail unsecured, commercial...
Yes, right, right.
Commercial fee income. With the unsecured, you must have seen the growth has started picking up, albeit on a small base from INR 260 crores, has become INR 520 crores, so virtually double that book. And it's only to existing customers of the bank, bureau-based online, so it's an instant loan. The commercial vehicle is a very small piece. It's just in 1 geography. We are putting out a team, that may take another 3 to 4 months, but the traction is beginning to come in that geography, margins are about -- pricing we are getting about 10.5% to 11%. And fee income was there for you to see in terms of the FX and retail fee income growth.
So sir, do we have a credit card business? Or how is it? The personal loan is a direct...
We have a co-branded credit card, which has been there, but it's now we are giving it more light, and we are working with SBI to see what all we can do with it. But that's not something that will happen in Q3. It will take another 3 to 4 months for it to mature.
And sir, thus far the knowledge like how many credit cards have you issued to date?
25,000 or so. Very low, very small, very small.
Okay. Sir, like just from -- like I was seeing your customer base slide, it is approximately 8 million, 8.5 million customers. And obviously, looking at other banks and how they are trying to take a bite of this granular consumption or consumer financing. So do you think there is an easy possibility to scale up this business to at least 1 million customers, the existing ones?
Yes. I mean, we are certainly growing. If you notice, sequentially, every quarter, we're putting in that many customers. So our annual increase will take us to that number of...
Sir, no, I was just -- I was mentioning about the credit card.
On credit card...
Out of the 8 million customers that you have, is there a possibility for our -- with our distribution spends, which we have to...
Again, we are working on it, but I'm not putting a time line to it, but very much, yes. We have a very big customer who has joined only for that.
Due to time constraints, we will take the last 3 questions. The next question will be from the line of Sangam Iyer from Subhkam Ventures.
Yes, sir, so just a clarification first. The INR 500 crores of slippage that we're looking at for the second half, of that, around INR 200 crore per quarter is something that's purely from Kerala itself. That's what you have been guiding?
I mean, that could be an interpretation. But we are saying the full year number of INR 1,450 crores is what we are holding onto.
Okay, okay. And sir, regarding the OpEx outlook, do you feel that barring the INR 13-odd crores of one-off that were there in the quarter, the rest of outlook should be something that should be a progressive one going forward?
Yes.
Got it, okay. And sir, on the recoveries and upgrades, if you can give us some idea in terms of how the overall system is in terms of being favorable for more recoveries and upgrades going forward, so that give us a better understanding of how to move going forward?
Recovery, upgrades, which are bilateral in nature are trending okay, that which is in the legal process to NCLT and the negotiation. To be honest, that is a very elaborate process, and thankfully, we don't have so many of those cases. But they are not all -- except for 1 or 2, none of them have matured into a win as yet. But what is bilateral, what is something that we can negotiate based on our underlying asset and negotiate, I think that's moving okay.
So is there any provision coverage target that you would have in mind that you would want to exceed for the year?
Including technically written off, we would like it to be edging closer to the original number of 70%. I'm not saying by end of Q3 -- Q4, but we will push ourselves to that over the next 4 quarters
Okay, okay. Got it, got it. And the last question from my end. The -- for the 25% -- 22% to 25% growth outlook, is there a mix that you'd want to see and should help us in retaining the NIMs?
Yes. I think the first is between Retail and Corporate, we would like that, on the floor it should be 50-50. You would have seen even this quarter, our growth is about INR 7,000 crores, INR 6,800 crores, and it's almost 50-50. And within that Retail, 50, our retail business banking and agri, 50, the margin is weighting -- shifting towards the higher age bar.
The next question is from the line of Chetan Vadia from the VKL Family Office.
So there was some talk earlier regarding the stakes that are in the insurance business. So is there any update in terms of reason?
At this juncture, no. The company, as in the core insurance company is doing well. We remain invested, and we are also seeing benefits of it from our retail insurance distribution. IDBI, I think, the management changed and also ownership changed. We think in Q3, some clarity may emerge, and we may be able to revisit a process that commissioned in Q1.
Okay. And sir, for the stakes that we're purchasing it could go or -- my end is calling that are you planning to offer the full pledged capital market services and products through all the relevant customers like.
Already commissioned our RMs are co-calling with theirs. Ganesh sits on their board, so there is a very active engagement between the 2 companies.
Due to time constraints, we will take the last question from the line of Ashwani Agarwall from Baroda Pioneer Mutual Fund.
Maybe just a repeat question, would just want some clarity. When the loans are restructured, you wouldn't be booking their interest income on those -- on restructured amount, right?
On the carved out amount?
Yes.
Yes.
Okay. Sir, so have you factored that loss in income in your...
The quantum is small. The quantum is small.
Okay. And this flood happened after the -- in the midway of the Q2. So your effect of how much NPA would be there would be felt only after the 90 days past the dues, right?
Yes, that's why I guided for Q3 also.
Is there a possibility that the number overshoots the guidance which you have given?
We have made our estimates. We are, at this juncture, reasonably confident.
Thank you very much. I now hand the conference over to Mr. Rajanarayanan N for closing comments.
Thank you all for accepting our invitation and joining our call. Thank you, and good evening.
Thank you. Ladies and gentlemen, on behalf of Federal Bank, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.