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Federal Bank Ltd
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Ladies and gentlemen, good day, and welcome to the Federal Bank Q2 FY '20 Earning Conference Call. [Operator Instructions]Please note that this conference is being recorded.I would now like to hand the conference over to Mr. Anand Chugh, Head of Investor Relations, Federal Bank. Thank you, and over to you, Mr. Anand Chugh.
Hi. Thank you so much. Good afternoon, everyone. Thanks for joining on the call. I have with me the entire management team out here. So I would -- without much ado, I'll hand it over to Mr. Shyam Srinivasan for the opening remarks.
Thank you, Anand. Good afternoon, everybody. This is to give you an update on the quarter that went by and, of course, take questions and clarify anything that everybody would like to ask.Firstly, just some headline points. I have 7, 8 points to share as most themes and what we thought were areas that we wanted to emphasize. First is, the underlying progress on areas that we had identified remains solid. The verticalization, portfolio quality, book mix, granularity, market share gains are all visible. Book mix is now closely -- getting close to the 50-50 between Wholesale and Retail that we desired to have.What is noteworthy in Q2 was the strong deposit growth. We had closer to INR 7,000 crores of growth in deposits, an all-time high for us in a particular quarter, except the demonetization quarter. And that on a portfolio, yes, we did have challenges of not being able to deploy all of it, but deposits per se, these were not priced at higher rates, so we are quite pleased with the kind of deposit momentum that we've seen. Also visible in our debit card spend going up closer to INR 800 crores, INR 900 crores a month now. We think we'll touch INR 10,000 crores this financial year.Our external benchmark-linked pricings have gone live, both on assets and on liabilities. Effective September 1, we even did EBM-linked repo for savings book. The slippages, while noticeably higher this quarter, was from the pre-identified pool which we had guided at the beginning of the financial year. And we haven't seen any formation of any big challenges coming up in the last 6 months and likely to hold here on too. And our stressed asset book continues to be below 2% at about 1.72%. And the progress on our -- strong progress on fee income and other income is visible, and we think that's something that has very good capabilities and should strengthen from here on.The recovery upgrade, particularly in the Retail, SME book continues to be strong. This quarter in particular, we had about INR 223 crores of recovery upgrade and most of this is all from the noncorporate portfolios. And like I pointed out, the slippages are from the pre-identified pools.So our beginning of the year sort of inputs around what would be the likely ROA, ROE focus we have for the full year. I think we are holding onto it and, if anything, it gets slightly better given the benefit we've had from the recent income tax dispensation. So on balance, the quarter, while net profit was, of course, at an all-time high, it was aided by -- in part by the tax benefit. The ratios on interest income, NIM and cost income did see the changes and lower than expected, and we would be happy to share what they are. The quarter also saw us take additional employee costs. As you know, the wage negotiations are underway, and the discussions are the -- we have been budgeting for 10% wage negotiation. There is a talk that it may be 12%. So we've budgeted for -- I mean we've taken an additional hit of about INR 23 crores for the last 27 months, as also the pensioning impact had gone up by INR 14 crores because of the yields fall. So this too distorted the cost number by about INR 42 crores. And we had one-time gain of IDBI Federal last quarter, the dividend payout of INR 20 crores that doesn't exist in this quarter.So the operating profit at INR 719 crores, in some sense, versus the INR 784 crores of the last quarter did see some reductions explained by these developments. Underlying credit growth in the large business of Retail, Business Banking, agri, gold were all north of 25%, Corporate and Commercial Banking closer to 10%. The deposit growth, I pointed out, for the quarter was running at about 20%. Income and fee income grew -- fee income growth was quite significant. Both fee income, as also the recovery-related other income both grew quite well, north of 20%. So broadly, those are headline numbers.Like Anand mentioned, we have the entire senior team with us. Happy to take questions. So operator, you may open it up for question and answers.
[Operator Instructions]We take the first question from the line of Jehan Bhadha from Nirmal Bang.
Sir, last quarter, we had discussed that there were a few accounts in the stressed book. So any of those accounts have slipped? I guess you have discussed 2 HFCs and IL&FS.
Yes. We, not only last quarter, at the beginning of the year, I had pointed out there are 2 HFCs, 1 IL&FS and 1 dollar loan to one of the larger groups. The 2 HFCs are still standard, but we've made a significant provision. You would notice our standard asset provisions have gone up materially. The IL&FS account is fully performing, fully serviced and is likely to be sold and taken out this quarter. The other account, which is a dollar loan of $25 million, is the one that has slipped this quarter. It has a coverage of about 2x, and we believe in the coming quarters it should be solvable. But we've made a significant provision for that, and it has become NPA.
Okay. And sir, so in the coming quarters, will these 2 HFC accounts -- I mean so how will the things shape up?
At this juncture, hard to call, but the news flow on that are not very encouraging. So we have started preparing for it, and we believe that the substandard provisions have been made for this quarter and likely to make similar provisions in the remaining quarter to ensure that we exit the year for these accounts well provided. And if things turn out positive, it's good news. Otherwise, we won't be surprised by developments.
Right. Right. Sir, also, the total slippages for the bank were at INR 540 crores, which were slightly on the higher side from the past run rate which we have been doing. So going ahead, what should be the run rate that we should look at?
I would -- I mean, yes, INR 540 crores included about INR 190 crores of slippage on Corporate, out of which 1 account was INR 180 crores. So we had said that we have 4 accounts totaling to about INR 700 crores at the beginning of the year. And I can't quite say which quarter they will fall. Our belief is, in the full financial year, one of them is resolved, the other 3 are in these 2 HFCs and this particular account. Our overall guidance on slippages number for the full year and product costs we're still holding onto because half the year is over, we haven't seen any new developments that are worrying.
Right. Right. Okay. Sir, second question on NIMs. They have come off about 14 basis points sequentially. So any reason?
Yes. The NIM fall is explained by the following 3 specific things. One is, I did mention we grew INR 7,000 crores of deposits. Credit was about 3,500 -- INR 3,800 crores. So there is a cost of carry of about 1% on the INR 3,000 crores of excess deposits, which is about 30 -- the impact is about INR 30 crores -- sorry, INR 8 crores for the quarter, roughly about INR 30 crores for the full year. That's about 4 basis points. We saw higher slippages and that had an impact of another 4 basis points. And a large part of the TBILL link. External benchmark that we were using for 2 years on the credit side was TBILL link. Unfortunately, this quarter, the TBILL fall was quite significant, almost 60, 65 basis points. That has had another, what, 4 basis points. So combined effect of these 3 for the quarter saw about 10-odd basis point impact, which is why the NIM has come down by almost 14 bps.
We take the next question from the line of Dhaval Gada from DSP Mutual Fund.
Just a couple of questions. First, just following up on the previous question on margins. I mean could you just explain -- I mean I was hearing Ashutosh on TV that there's some liability repricing benefit that we'll start seeing from next quarter and, therefore, margin should restore back to the 3.15% to 3.2% guidance. Just could you explain what's the thought process around it?
Sure. I think the floating rate deposits effectively was only 1 month effect in this quarter. Effective this quarter, you will see the full book floating on deposit, I mean, the large part of the savings book. And as a consequence of that, the mismatch should come down quite materially. A large part of the TBILL book, which is booked, has been -- they matured in -- the repricing was in Q2. So that's getting reset. So both these effects sort of nullify the one-time impact of Q2. The one strength or weakness was that it's TBILL-linked, so we grew good credit. But TBILL fall was much higher than even the repo rate fall. So as a result, we saw the impact of 60-odd basis points. I think 1 year TBILL has fallen 200 basis point plus.
And the reset happens annually, most of the TBILL?
Yes, annually, and a bulk of it in Q2 this year.
Understood. Okay. So that impact will stay for 1 year or so. I mean the repricing benefit, if any, on those portfolios will come 1 year later. The immediate benefit will come from the funding side, which gets repriced. Is that correct?
Yes. Yes.
Okay. Understood. The second question is on the portfolio quality. So just if you would refresh the exposures to IL&FS, Dewan, Reliance Home and Indiabulls. And what is -- you mentioned that we've significantly added provisioning. So if you could just quantify the amount of standard asset provisioning that you've created on these exposures, that would be very helpful.
The standard asset provision line, you'll see INR 62 crores this quarter. It's for these accounts that you've mentioned just now. One of them is not -- at least at this juncture not in any provision category, 2 of them in the housing finance, and IL&FS, yes. Indiabulls, we are not commenting. Right now, it looks okay. They've paid down another INR 100 crores in the last quarter.
So cumulative standard asset provisioning on these exposures would be how much cumulatively?
INR 72 crores.
INR 72 crores.
INR 72 crores. Okay. And just on exposure to these -- the 2 HFCs and IL&FS, net outstanding on 30th September would be how much?
INR 275 crores plus how much is [indiscernible]?
INR 201 crores is remaining.
So INR 475 crores.
INR 475 crores.
And Indiabulls, our exposure is still INR 300 crore plus?
Yes.
No, below INR 300 crores.
I remember, sir, you mentioned earlier INR 320 crores or INR 350 crores earlier. That INR 100 crores has been paid it, is it?
No, it's INR 300 crores.
INR 300 crores. Okay. Okay. And lastly, MSME dispensation that we would have availed during the quarter would be?
No. A few crores. Nothing major.
Nothing major...
We have not taken anything major.
Next question is from the line of Jai Mundhra from B&K Securities.
Sir, first thing, I wanted to understand we have put on the exchanges that the RBI has only allowed 1 year extension to prove your disc -- current term. So can you please throw some light as to what do you think could be the reason for such a development? And has there been any reason given by RBI? And what is your thought process around it?
Yes. The letter is saying 1 year. It also says subject to bank's performance. So we think there should be no issues beyond that and, therefore, we'll wait to see. We have made guestimates because in the last 1 year, I'm told there has been no other private sector NB coming up for renewal and apparently there is none coming up for the next 1 year. So we will see. But beyond that, I have no incremental data to offer other than the letter of RBI, which says 1 year renewal subject to bank's performance. So we hope if we continue to perform, there should be no issues.
Yes. But, sir, I mean, versus other private banks, on a reported basis, we are still doing much better, right, in terms of divergence, in terms of headline asset quality and in terms of profitability as well. So what do you think could be the reason for such a negative comment from RBI?
We are again making an estimation because last year, we had a INR 5 crore penalty from RBI for certain KYC and other aspects. So it is likely from that direction. But I can't say with any authority that's it, but that could be well the reason.
Sure, sir. And do you intend to sort of do some succession planning? Or would you still wait for the year-end and then -- based on your dialogue with RBI because I believe RBI will not be interested in dialogue. I mean you can still go after 1 year and say that this has been the bank's performance. But do you think you need to do sort of a management succession also?
Yes. Good question. I think the Board has discussed this on a couple of occasions. Board believes that between now and March, we will continue to watch performance. And if there are signals that we need action, Board will initiate action. No, I don't see anything happening in the next 3 to 4 months, but certainly yes at an appropriate time. General view of the Board is 6 months prior to any action. My last approval was sent to the RBI 4 months prior to that, discussed 6 months prior.
Sure. Sure. And then on asset quality, sir, so now we have given a very good disclosure. I believe this is much better than what we had given in the earlier quarters. Now we have separated large corporate and within that BB, within that below BBB and Others. And this Others is, sir, corporate only, right? This is the breakup of corporate? And I believe this is your internal rating, right? Because external is not available. Is that the correct understanding?
Yes. For us, it's everything. It's not only corporate. It is corporate plus other portfolios, right, Anand?
Yes. So there are 2 slides there, one is for corporate assets. In that -- within that, what you see is Others means what is not rated by external agencies. And the other slide which you're talking of, which is rating distribution, other assets, that is for the rest of the book other than the corporate assets.
Okay. So this is for the rest of the book other than corporate?
That's it. Includes everything.
Includes Retail as well, is it?
Definitely.
Within corporate, the Others is there, but some could be government corporations and all that for which the rating is not there. It's more like an unrated [indiscernible].
Got it. Okay. Understood. And, sir, lastly, have we signed any ICA, sir, for standard? Or are -- is there any ICA pipeline that you intend to sign apart from these 2 HFC names that you mentioned?
No.
Is there any ICA that you think is a near-term view?
As of now, nothing on the anvil. Just some point to an earlier question Sumit just pointed out and [indiscernible] what is lying in the escrow is more than INR 500 crores.
[indiscernible] bank is releasing those monies as and when they are due. Any additional information is that it was 0 DPD.
We take the next question from the line of Darpin Shah from HDFC Bank.
Yes. Just to reconfirm, our exposure to IL&FS is INR 190 crores and Reliance Home is around INR 275 crores, correct?
Reliance Home Finance is INR 99 crores. Usually, we never disclose client-by-client. Since the conversation has meandered to it, I will. INR 99 crores and DHFL is INR 175 crores.
INR 175 crores. Okay. And sir, just to reconfirm, there is no any further addition to the stressed assets after certain wrong credits which have happened in 2Q.
Whatever we have said 6 months back, 3 months back and today are consistent. We haven't seen any new formation.
Okay. And sir, these are the total exposures, not only the funded ones.
Full exposure to those clients.
Next question is from the line of Kunal Shah from Edelweiss.
Yes. So firstly, in terms of the guidance, you said that ROA and ROE maybe we are broadly maintaining. But eventually, if you look at it in terms of credit growth earlier, we were anticipating 18% to 20% margins to end at 3.2%. And also, we were planning to inch up the PCR. In fact, this quarter it has come off. And the credit cost also, 55 to 60-odd basis points, while in the first half itself, we had seen 40-odd basis points on a half year and maybe more than 80 on an annual basis. So is there -- is it like more comforting because when you look at the credit cost and everything, in fact, that's more than 80, 85 basis points. So I think we are missing on most of the guidance parameters across it. So what gives you the confidence in terms of the maybe moving towards ROA and ROE? And finally, maybe there are like few exposures which are yet to be recognized, which will come in Q3 and that will require the additional provisioning as well as some interest reversals.
Two. Firstly, while the questions are good, I think the credit cost for the first 2 quarters is 62 basis points. So I don't know where you got the 80 basis points number. You can...
No, sir. Overall, when we look at the provisioning. So maybe you are excluding the standard ones.
Okay. So if you add the standard asset provisioning, it's 62 basis points. Yes. Yes. Okay. When we had guided, that was 55 to 60 without that. So we should just -- like-to-like, but yes, with that back, that's only a matter of timing. Should these accounts fall, the standard assets will become 0, right? So we have only advance provided and there is 15% provision. So theoretically, there should be no more provision. We could even increase the provision, right? So from a credit cost guidance, our guidance for the beginning of the year, midpoint of the year and, hopefully, end of the year are consistently around the same. We had said 55 to 60. We may be at 60 to 62. So we don't see anything changing at this juncture on that count.Therefore, our ROA, ROE, we don't see anything changing. The credit guidance, yes, when we make credit guidance, there are certain economic environment criteria that you keep in mind. We wouldn't like to be -- just because we've committed something and do wrong business. So we are quite happy to do this 30%, 20%, 10%. 30% growth in Retail, 20% growth in Business Banking and agri and 10% in corporate/commercial. If opportunity opens up, we will pick more. Even our disbursal in corporate is quite good. This quarter, the disbursal was closer to INR 6,000 crores. The repayment deleveraging of corporates, we saw INR 4,500 crores of payments, out of which INR 1,000-odd crores were payments we wanted as in those relationships didn't make much sense for us at this juncture. The rest is customers deleveraging or finding cheaper sources of funds or moving out or just making sure their balance sheet is debt-free.Credit growth guidance, yes, we had pointed 18% to 20%. But at this juncture, having half year at 15%, we may pick up, but I'm not going to, just because we said something, do the wrong thing.
Okay. And overall, in terms of this BBB, maybe less than BBB and the other assets, if you can just highlight maybe the sectoral -- maybe sectors wherein it would be concentrated because -- and how much is the overlap in terms of what is already there in the restructured NPL and, say, in the highlighted watch list?
There's no overlap.
So there is no overlap. This is over and above this entire 13-odd percent which is there that will be over and above. But few of these accounts would already be there like DHFL and all that would have got categorized.
So what -- these are standard assets. There is absolutely...
This is purely standard. Okay.
Whatever the standard is coming into this particular chart. And as to your question on sectoral distribution, I don't have a specific distribution chart, but I think in none of the sectors we are overly exposed. There is another slide on Page 28, which will give you a sectoral bifurcation of top 10 sectors of the bank.
Yes. So here again, maybe HFCs and NBFCs, I think, definitely as a proportion, it's slightly inching up, maybe moving towards now 14.7-odd percent plus real estate of almost another 3.3%.
Real estate is mainly LRDs.
Okay. It's mainly LRDs.
It is only LRDs.
Okay. And lastly, in terms of the...
And HFC and all, you have some AAA1s and all that, which result in this higher percentage, the top-notch -- top 3 of the country and all.
Yes. Yes. So last time, we highlighted in terms of 98% and 97% being there in A and above. But maybe that we are seeing downgrades happening in many of this NBFC segment.
Yes. Every -- Kunal, you are right, that is the environment we are living in. But at this juncture, they look good.
Okay. And lastly, in terms of the nonfund-based exposure towards either the NPLs or maybe the restructure as well as maybe this -- I think in the watch list, we are highlighting the total exposure. But anything linked in terms of the existing NPL pool?
No. Nothing.
See, wherever -- you can see it for the past 10, 12 quarters, when you see the movement of NPA, their additional NPA on account of existing accounts having higher one is due to NFB. And you'll find for us, NFB exposure itself is so low that it doesn't materially change the number much.
I think if the question is in specific, these so-called worry accounts, are there nonfund lines or other exposure, answer is, no.
Okay. Yes. And just one last question in terms of the branches. So this time, we had again seen -- we have again seen like good growth coming outside of Kerala. And in terms of the branches, maybe we are still there. So any -- maybe in terms of when we look towards adding more branches...
This quarter, we added 4 branches in Q2. We think we'll add 8 branches in Q3 and about 10 branches to 12 branches in Q4.
[Operator Instructions] Next question is from the line of Renish Bhuva from ICICI Securities.
Congrats on great set of numbers. Sir, just to follow up on the rating distribution. So on Page #13, I think, as Anand has mentioned that we have given the rating distribution for the other sites that is ex corporate. So in that rating profile, our FB4, which is an internal rating, consists almost 32% of the pool. So how should we look at this portfolio? I mean what indication this rating gives as FB4?
Up to A or BBB+, you can take it equivalent if you want to map it because we have a 10-point scale. Yes. So that's what we are saying. I mean FB1, 2, 3, 4 is -- probably if mapped with external rating would be BBB+ and above.
BBB+ and above. Okay. Okay. And this is including everything, right? I mean SME, Retail and everything, every other sites?
Except the ones that are below, which is gold and...
Except which are not required to be internally rated also, like gold loans and all. Gold loans, staff loans.
Sumit has a point to add.
These are all very well collateralized exposures. The SME exposure is very well collateralized. And they've been with the bank for years, probably even decades.
.Okay, okay, okay. Sir, secondly, just on the -- again on the asset deal side, which, actually, fell by sharp 20 basis points. Of course, you have highlighted about 4 basis point due to the TBILL's fall and other 4 basis point due to the interest reversal. But [indiscernible] faster than the overall loan book [indiscernible]. So why is it still not reflecting on the asset deal side? And since we are not growing corporate book at a rate where real estate is growing. So...
So I think in 1 quarter, it won't show, Renish. You will have to see that over the next 2 quarters. And that's why we are still saying the exit rates will be still 3.15% NIM.
.All right. So I mean -- so trend wise, you are saying that it should reflect in...
We've modeled it...
Actually, the one thing that failed our model was a sharp drop in TBILL rate because fall was almost 65 to 70 basis points. And to be honest, it was not something that we visualized. When we saw it coming, we changed our external benchmark-linked deposits earlier than the market. That's why we did it September 1. And that gave us some cover in September, full quarter this quarter, both into deposits and assets in float and, therefore, we think we'll neutralize this impact. Like we also said, the book is getting repriced and reset. And we stopped the TBILL-linked pricing about 7 months back.
The repricing has happened in quarter 1, quarter 2. The total impact had been maximum in Q2. But Q1 to Q2, TBILL fall was only 20 basis points. But in this quarter, it is 65. Total is 85 from March. If you see -- from March. And rate cut -- I mean TBILL fall has been much more than the rate cut. Rate cut had been 135 basis points in a year, whereas TBILL fall had been 210 basis points September to September.
.Right. And sir, just to reconfirm that you are saying that we have already stopped the TBILL-linked portfolios, is it?
Yes. We...
New loans.
New loans we stopped 7 months back.
.Okay. Okay. And sir, just last question. If you can just give me the provisioning breakup for this quarter in terms of NPA, standard asset and investment provision.
Investment provision, INR 12 crores; standard assets, INR 62 crores; NPA provision, INR 175 crores. I may be off by 1 crore here and there, but I think...
Correct, correct, correct. INR 175 crores, INR 62 crores and INR 12 crores. Right.
Next question is from the line of Kaushik Poddar from Kolkata Bangalore Capital Markets.
Yes. Shyam, I think in the interview with Business Standard, you have talked about or you have proposition that the ROA of various banks would converge towards 1.6%. I mean the better ones will come down and banks like you will go up to 1.6%. Can you elaborate on that thought?
Sure. That is, of course -- you have to grant me my perspective of...
Yes. Your way of looking at things. Yes.
There are 2 factors. One is, with Ind-AS coming in, your revenue recognition will change materially. And banks that have a high nonfund business and have grown credit and have built upfront fees, they have a different -- they have had the luxury of higher income and a lower denominator. So to that extent, the ROA looks a little more generous. In our case, the NFB business, as you know, is a very small part, and we don't upfront fee interest income, but -- fee income. What others do is less of my commentary. What I'm only saying is that over time, Ind-AS doesn't allow that luxury. So you will see that the ROAs for the best -- there will always be an exception and some banks may just disprove my theory. But generally, it's already evident, some banks are beginning to see that the premium they were commanding is beginning to come down. In our case, I think people have realized that ours is a more true, unwrinkled, real business. We'll command the premium we deserve.
Yes. What you're saying is that fee income, they are -- I mean they are putting it in the initial years itself. So that's why their returns are higher, is it?
Ind-AS requires you to amortize it. So it's not upfronted. And when you have an asset, the denominator is only the funded line and not the nonfunded. So you have a higher revenue and a relatively lower denominator. To that extent, ROA is slightly exaggerated.
Okay. Now 1.1% for you, say, from 1% last year to 1.6% is quite a distance.
What I meant, over a time. I'm not talking of a short period. Our commitment...
What is the time you are thinking?
So we are saying our 1.1% will exit at 1.12% this year, 1.25% next year, 1.35% the following year. This is what we have line of sight right now. Yes, we are helped slightly by the tax -- income tax benefits. So we will get maybe a little earlier, but that's what we have line of sight to.
Next question is from the line of Saket Kapoor from Kapoor and Company.
Sir, firstly, sir, I missed your earlier commentary part. So if you have to explain about the lower tax expenses for this quarter, how will you explain it, sir?
So for lower tax expenses because...
Yes, yes, lower tax expenses of INR 53.34 crores...
Because we have opted for that -- I mean, announcement for -- corporate taxation that has been announced by the Finance Minister. And we were at that bracket of about 34.9%, nearly 35%. So from there, we have come down to 25%, almost nearly 10% of reduction. But what we have done is we have used that entire benefit whatever has accrued or rather more than that for higher provisioning, whether it is in the form of standard asset provisioning or whether it is required over and above IRAC norms in the NPL book. So on both sides, we have strengthened the book with higher provisioning. There was a question on this thing that PCR, why it has not improved and all that and all because there had been a usage of provision as well, some write-off also has been done to the extent of INR 130 crores. So this is one reason. And yes, of course, on taxation, beyond that, there's nothing more to add.
The INR 53 crores this quarter is because of the Q1 we had made an excess provision.
Yes. In Q1, we had bonus [indiscernible] for this quarter.
Yes.
So we should look at the entire 6 months.
It is an exception because it has some carryforward of Q1 also. There will be -- taxation was 35%. I mean provisioning was done on the basis of 35%. And now because from the beginning of the year itself, it would be 25%. So that benefit has been taken in Q2.
Okay. So now we'll go to the 25%, that is what you are thinking.
Yes. The new applicable rate will be 25%, 24-point-something.
24-point. And sir, how would you explain this interest on bank balances with RBI going up significantly quarter-on-quarter as well as year-on-year?
Well, balances with RBI has no meaning in the sense because this is as on a particular date, whereas CRR is maintained on a fortnightly basis. So you may have on a particular date, which is falling on the balance sheet date, you would be having 110% of the required CRR. You also may have 90% because it's permitted to dip as low as 90%. So balances with RBI is nothing but your CRR maintenance so that can fluctuate depending upon these opportunities in the market to play within the fortnight and very rarely does this happen that the reporting Friday would fall on the quarter 8, then you will have the exact picture available.
So this interest income of INR 38 crores is on the higher side, sir, if we take the quarter number, year-on-year number, every comparison, these are up. So how will you explain this, sir?
[indiscernible] RBI balance as well. RBI balance, you don't do anything. It's a interbank lending because it's clubbed with RBI and other. So it's -- because the banks' liquidity was -- as Shyam has already mentioned that we had INR 7,000-plus crores of growth -- deposit growth, so almost all seem high in any quarter as against that loan outgo had been INR 3,800 crores, INR 3,900 crores only, so there was higher liquidity available with the bank, which bank lent in treasury instruments. That's what you were seeing carrying cost of 1%.
Got it, sir. Sir, on the expense and I've a query, sir, the employee costs as well as the other operating expenses have gone up. So for a year as a whole, what percentage should be looked into it for the employee cost as well as these other operating expenses?
I think you missed the earlier part of this...
Yes, sir. Yes, sir. Very sorry. Looking for this.
Yes. It's already been discussed. This is INR 43 crores additional employee cost is on account of 2 things. One is because of falling yield. The provisioning for superannuation pension and gratuity had been higher than Q1. On the other hand, the IBA -- because most of our employees are governed by this bipartite industry level settlement. And there, we were providing for 10% of this thing. Now because the IBA is intending to offer 12%, so we thought as the prudent measure, and you have this tax benefit also, so why not provide more for all 23 months? It has started from 1st November 2017 since the bipartite is due. So for 23 months, this amount has come out to be INR 27 crores. So that 28 -- INR 27 crores, INR 28 crores plus additional superannuation, this thing, actuarial funding. Total INR 43 crores excess is there over previous quarter. So I think that explains the employee cost escalation. This has put an impact on the CI, cost income ratio as well.
Okay. Sir, last question on -- from the MD again, sir. Sir, how are you now looking -- what is the state of economy as per the -- now you're understanding going forward? And how are yields going to behave because these tax cuts coming up, the import and export data also not pointing toward great number, GST collection is down, major sectors in doldrums. So how -- what is the state of economy and how are the yields going to shape up, sir, going forward, your take on the same, sir?
Our view on this is a little more, I would say, personalized to Federal Bank. Our belief is the external environment, we must be mindful of, but where we are in our journey and market share opportunity continues to be, now we should be focused on share gain as long as the quality is good. So I would say what will happen to the external environment matters. But beyond a point, ours is a share gain game. Will yields fall? Will yields go up? I think there are so many imponderables that seem to be tweaking that. We just had to be very dynamically alert to dealing with it. But the near term, we believe that the interest rates may not go up, it may remain this or some another 25 basis point so cut is expected over the next 2 MPCs, but it's not -- in short, we are aligning our play more to be believing that we have share gains to work on, and that's what we are focused on.
But inherently, are you confident that the economy should -- I mean this downturn should plateau out or are we making too much out of it?
On this conversation on a 1:1, I will keep everybody waiting. We believe that the things will improve, I mean that's our general belief.
Okay, sir. You've also pointed about toward external benchmark-linked pricing impact, sir. Sir, how are NIMs shaped up on account of this? Sir, have you factored -- you must have factored this also in your guidance for NIMs.
Q4, we'll come back to between 3.10% and 3.15%.
3.15%.
3.15%.
[Operator Instructions] Next question is from the line of Mona Khetan from Reliance Securities.
I have a question on the retail distribution that you've provided on Slide 12. So if I look at distribution for Q1 in this slide versus what you provided in the previous presentation for Q1, it increased from 73% to 76% for A and above category. So has there been any change in the way you are reporting this number because there have been a couple of changes below BBB and below 5% here versus 16% in the previous PPP for Q1 in particular, so...
Yes. Sure. The 2 slides are not comparable because the slide which we had presented last quarter was for wholesale banking, which includes commercial banking as well. What we have done this time is that bifurcated into 2 slides, one is for corporate assets alone and second is for rest of the environments, which includes everything including commercial banking.
Okay. So this -- there are 2 tables on this slide. The first slide has this others in 8%. This is not linked to the second table of internal rating of others, right?
First slide is only for corporate assets. In fact, first part of the table you have others, which is 8%. In the table below that, we have given bifurcation of that 8%.
Okay. So it is that 8%. So the others in the second table is again not related to the other segments. It relates to corporates only.
No, no, no. The second -- see one is, if you are talking of Slide 12.
Then it is corporate.
Then it is only corporate. Slide 13 has everything other than corporate.There are some corporates, which may not have the external rating like government corporations and all that. That's why that others is internally rated. It's not having the external rating.
Okay. And this distribution includes any standard assets?
It's only standard assets.
Only standard assets.
It's only standard assets.
Got it. And secondly, the corporate slippages -- slippage that you've had of INR 180 crores, which sector could this be coming from?
It's a company that has interests in entertainment, rail, retail...
Finance.
Finance.
Housing.
Housing.
Okay. Okay. So is it part of the ADAG Group?
What have you...
I think we shouldn't get there. So yes, you can make your own assessment.
[indiscernible]
[indiscernible] collateralized, we have highly valued shares, which should take this money back or maybe over a little period of time, it could be soon. We can't put a time line good, but it could be soon as well.
The general insurance says...
We take the next question from the line of Sohail Halai from Antique Stockbroking.
Yes. Sir, back to asset quality, but this time more about the granular loans. So what we are looking at somewhat like in terms of retail as well, the slippages run rate that we used to have, has actually rising. So it's coming at around INR 140 crores, INR 120 crores and similarly on SME as well from INR 120 crores to around INR 140 crores, INR 150 crores. Specifically, in retail, we have a large proportion of housing book. So where is this stress actually flowing from? And if you could also help with the net numbers of both these numbers, that is less upgrades and recoveries.
The slippage numbers...
Actually, it has fallen from Q1.
Yes. No, you're saying general trend. Yes, I think the INR 120 crores, INR 130 crores, INR 140 crores trends, I think there will be some quarters where we see INR 80 crores to INR 100 crores. But that will be the run rate. Typically, quarter end -- year-end tends to be the best quarter in this. That said, the denominator has grown, while the slippage number across the denominator for multi-year has been consistently improving. So I would say ratio slippage is improving and will continue to. Recovery upgrade this quarter was INR 223 crores, and a bulk of the recovery upgrade is always from the retail and SME books. Rarely do we get bulk upgrades in the corporate, unless there is a onetime kind of deal. So you could characterize if you take multi-quarter retail, SME, agri roughly about INR 300-plus crores in the zone, INR 300 crores, INR 320 crores.
That would be recovery.
So roughly about INR 180 crores to INR 200 crores will be the recovery upgrade.
Sorry, sir, but given the loan mix of 50% being in the housing, isn't there 2% slippages slightly on the higher side that you are running at?
That slips and comes, but there are some NRI accounts where 1 lot they will come and clear everything and all. So it slips and recovers, slips and comes back, like that.
Okay. So sir, it would be helpful if you could actually provide net slippages number as well for retail like gross minus upgrades and recoveries.
We can share that.
Yes, we can share that. We have that.
And sir, similarly, in terms of SMEs, are you actually looking at any stress? So...
You see the inline for, let's say, 5, 6 quarters, if anything, this is one of the better quarters.
Yes, but are we looking at availing any dispense?
We're not seeing any significant -- that we've not used any dispensation if that's the question. No? We're not seeing any significant steps differently from what we saw 4, 6, 8 months back. And there is a lot of talk about, it will deteriorate. We're watching very closely. But we are quite encouraged with all that we've seen, and we forecast for Q3 and Q4, it looks our trend lines will be there or little better.SME book is, like I said last quarter, at the same or lower levels.
Sure. And sir, in terms of net SR, so one thing that we are noticing is on a gradual decline every quarter-on-quarter basis. So is it because of recoveries or basically continuous provisions, if you could just...
Both, both, both.
Provisions on the SR book, securitization receipt book because there the NAV is given by the asset reconstruction companies every quarter. So if there is any deterioration in values, it gets reflected.
But answer is both. It's recoveries and provisioning.
There is a better recovery in this quarter in that book, recovery in the restructured assets.
And sir, finally, basically, in terms of this linking of the loans, you said we are no longer disbursing loan, which are linked to T-bills. So now is it everything repo-linked?
Yes.
And sir, this T-bills will also shift to repo-linked lending rates, right? Or how does that work?
Sorry, I lost the question.
So this T-bills-linked loans, they will convert into repo-linked lending rate, right?
No. Actually, the direction is that, that unless it is asked by the customer, it would continue to be at the existing benchmarks. It could be your MCLR, it could be your T-bill, whatever it is. But newer loans are to be mandatorily given that external benchmark-linked rates, and we have chosen repo rate as an external benchmark for retail loans.
Okay. And sir, in terms of corporate, they will continue to be linked to this...
Fresh loans will be linked to repo. The existing ones will continue remain to the benchmark they have been linked to. So we will continue to disburse either MCLR link or repo link as the case may be.
Sir, you could just help us what is the T-bill and or probably repo link loans are the proportion for corporate as well as housing right now?
All external benchmark linked together are about 20% of the book. All -- I mean retail, INR 17,000 crores, I think the total book is INR 17,000 crores, external...
Okay. Okay. And -- but to be fair, a large part of it would be from the corporate, right?
The home loans will be about INR 4,000 crores. INR 10,000 crores, INR 12,000 will be corporate.
Next question is from the line of Pranav Tendolkar from Rare Enterprises.
Sir, other income is trending quite good, but still third-party distribution is at INR 24 crores quarterly run rate, so how big this can become? And how many branches are actually actively selling all the products available? Can you just elaborate little bit more on this?
Sure. The run rate is improving, as you observed, and it will continue to. All branches are -- level of efficiency varies from branch to branch and the client profile. Our Network-I branches have higher penetration because of the client engagement. Network-II penetration is improving. We are seeing bigger pickup on wealth management in our [indiscernible]. So we're seeing that movement growing. But this line will continue to improve. Each quarter is almost improving 20%.
Right. So Q-o-Q 20%.
Yes, that's the kind of run rate. If you see, this year probably has -- full year -- just life insurance number will be up 45% full year.
Last year, same quarter was INR 25 crores, now it is INR 35 crores. So INR 10 crores over INR 25 crores, so that's...
45%.
45%.
Yes. Sir, also credit card portfolio, is there anything specifically you are doing to increase this like tie ups with some NBFCs or anything else...
That I mentioned on the credit card, we don't have active our own offering. We have a co-branded offering. What we are doing is we are substituting that very aggressive debit card strategy, both in usage and offers and EMI biz. That's how you see our debit card spends are now beginning, getting closer to INR 1,000 crores a month. And that run rate will continue. And we see a big opportunity there. That said, credit cards, we are looking up -- we may have a more aggressive plan, but we are a little nervous about doing anything very big on unsecure.
Correct, correct. Sir, also one last question from my side. In employee expenses, which are INR 440 crores, you suggested that INR 27 crores was adjustment because of increasing salary of 23 months, IBA increase, that is around INR 27 crores. And the rest is because of the sensitivity to gratuity from interest rate decline.
Another INR 14 crores. INR 40 crores this quarter was higher because of that.
Correct, correct. So basically this INR 27 crore expenditure will be roughly INR 1.1 crore or INR 1.2 crore per month. So that will contribute to INR 12 crore base increase in the employee expense. Is that correct?
Yes. As and when the IBA -- when this negotiation...
Yes, but in the run rate either 2, that we will have to add INR 1 crore a month.
Yes. Correct, correct. But so basically, next quarter, this will dip employee expense and then it will start rising from then.
It will dip because right now, it is for 23 months, and it will be there only for 3 months, October, November, December. So against INR 27 crores, you will have only INR 3 crores, INR 3.5 crores.
And if these work in favor, you will see that INR 14 crore drop-off.
Yes. If yields go up, the way, I mean, inflation numbers have come, I don't know, I mean, because...
It's the moving one.
Jury is still out. Right.
Sorry, Pranav. Yes.
Next question is from the line of [ Hari Krishnan ] from SBICAP Securities.
This is Krishnan here. I had 2 queries, specifically. Number one, just in terms of rebalancing your portfolio towards SME and within that business banking as is commercial, which is the sweet spot where you can exercise pricing power, given now a lot of SME loans may also have to be externally benchmarked? That's part 1. Part 2, with deposits also getting linked to a floating rate, especially SAA, that's been like a factory for you, especially in your home state. Plus now you have Kerala Cooperative Bank coming. Just wanted to understand how that dynamics may play out.
See on the last part, the Kerala Cooperative Bank coming up, first of all, it is a while away. And by the time they get their act right, we'll be good 12, 18 months. But set that apart, your question was on...
Where is the pricing power?
Where the pricing power on the...
The growth rate being [indiscernible]
The best pricing power will be in Business Banking. And we are certainly trying to get the maximum out of that.
Gold loans.
Gold loan continues to be an opportunity and we are certainly doing well. You might have seen the gold loan book after a long time. It crossed INR 8,200 crores now. It's an all-time high. And that will continue to grow. But I think this pricing power, I know I may sound not so -- what I would like good MDs to say, is a little myth. If you are able to get such pricing, then the customer is not living in the cave and competition is all sleeping. There will be some, but I don't believe it's an endless pit where we can keep squeezing out so much. So yes, we are a bit smart about it, but I don't believe that the opportunity will be unexploited segment, which only Federal or any one bank will have. And particularly, because you are pursuing very good credits, we don't think we'll get that opportunity. Then opportunity that we're exploring is like an MFI opportunity, which we are pursuing, but the segment has a richer-yield option.
All right. So just on this issue around pricing power on the deposit side, now given that it is SAA, that's getting externally benchmarked as well, it's so far been an extremely good source of float for you, especially in your home state. Do you believe there is something at risk there if you were to be externally benchmarked? Or what part of your SAA portfolio gets externally benchmarked?
Thankfully.
This quarter, you see our resident savings has grown 21%, run rate. And non-Kerala is growing at, like, 26%. We think that...
So you don't see at risk -- so you don't see a risk?
It's not that you sound careless about it, but the risk is not any different from it is for the best banks.
Great. So just one last question. On the asset side, when yields begin to move the other way, do you believe banks in general will have the pricing power as freely as they are supposed to be under pressure to transmit rates right now in the down cycle? Do you believe you will have absolute freedom to price yourself on the other side?
In parts of the market.
These are -- I mean, certainly and to be honest, we are not a market maker, right? So we are -- in some sense, we have to be participating alongside the best banks. What we think we can do is be there right in front of a client and ask for the business ahead of many other places, which is what we are doing and getting share. But when we get enormous pricing power, one way or the other, I'd be honest, it's not an easy game. We are not chasing riskier segments. That is principle. So to that extent, we have made the trade-off upfront.By now, you would have figured out that unsecured and higher risk is something that we're desperately trying to stay away from.
Next question is from the line of Rahul Gupta from Morgan Stanley.
This is Sumeet here. A couple of questions. So one is on savings deposit growth. What was that number for this quarter?
Savings?
Deposits -- stock of savings deposits for this quarter?
INR 36,557 crores.
INR 36,557 crores. Okay. And Fedfina, any color on the loan mix over there? What are the various segments, and how much is what?
Retail book is now inching up to INR 2,600 crores or INR 2,700 crores.
INR 2,600 crores, yes.
INR 2,600 crores. Mix is gold. Gold is about INR 650 crores. Small ticket lap, lap, small portion is constructions.
That is reducing. Construction...
Signing off with a small part of it, INR 200 crores is construction.
Okay. And the growth over there is all organic, right? When I see these things...
Absolutely, organic. Yes, they did a great job. They are good team, good model and they are leveraging the Federal Bank name to get good funding. They're doing well. They're quite happy with all that's happening there.
And what's the GNPA ratio in that book?
It's very low because right now, 0.8% something like that.
0.7% or 0.8%. Less than 1%.
Next question is from the line of [ Abhijeet Dorak ] from Sundaram Mutual Fund.
First question is, I wanted to understand whether there are any portfolio buyers from any NBFC or any [indiscernible] you have bought, especially from this DHFL?
None at all. None at all.
No outstanding as well?
None at all.
Okay. And what is the aspirational PCR you have for near term?
We want to exit without technical write-off at 50% PCR.
That's sufficient is it, for the underlying asset quality, 50%.
With technical write-off, we'll be inching up to 70%.
Just a correction on Fedfina side, GNPA 1.5% for this quarter, 1.5%, not 0.8%. Anything else?
No, nothing else.
Ashutosh, for a wider audience, was presenting the GNPA of Fedfina is 1.5%, net NPA is below 0.7%.
Next question is from the line of Aditya Jain from Citigroup.
On the wholesale fees, the growth was fairly healthy, Q-o-Q and Y-o-Y. So could you give some color on what is driving this. Is it prominently ForEx or any other products? And how sustainable is the performance there?
On the credit growth or on the fee income growth?
Wholesale fees.
Wholesale fees? FX has done well, sustainable, so as -- what is other [indiscernible]...
Third-party.
Third-party has done well. Our Fedfina -- what is that, your [indiscernible] solutions are working well.
Processing, processing fees.
Processing fees. A bunch of stuff, it's not any one large lumpy thing. The combination of things that you will see.
And then recovery in return of assets has been good, quite good.
And to confirm, the standard provision, which have been made on this trade, which is the exposures, so INR 72 crores is this stock-off provisions on the INR 275 crore exposure, Is that right?
No. 60 -- INR 72 crores...
Traditional [indiscernible].
So INR 475 crores.
You think INR 72 crores is on INR 475 crores?
Yes.
Okay. So in -- all right. Okay. And will that be evenly distributed across the HFCs and [indiscernible]?
I think we made 15 percentage.
15 percentage.
Got it. Okay. And then that what would be the current rating of NBFC and HFC exposures? How much of that would be rated A and above.
Of the current NBFC, HFC exposure? Outside of these 2, everything is A plus, no?
A plus.
A and above.
Yes.
Yes.
Got it. And on your comment on the disbursement growth in corporate, which was high, in terms of percentage year-over-year, could you tell us how much it was? It would help to give a sense on the growth.
I think the disbursement per se this quarter, as I said, is about INR 6,000 crores. The peak would have been INR 7,000 crores. So we haven't seen any dramatic fall in disbursement. We have seen strong repayments. Will -- once what we want -- in some cases, good guys are paying down to deleverage.
Any particular sectors from where these -- from where you saw the larger repayments or was it more broad-based?
Broad-based?
Across.
Across.
Next question is from the line of [ Himanshu Taneja ] from Motilal Oswal Securities.
Sir, I initially missed some parts. So can you give us a breakup of the NIM moderation of 14 basis points? How much is from that T-bills moderation? And how much is from the...?
Broadly, we explained that the T-bills stroke higher slippages, stroke carry cost of higher deposits, all is roughly 4,4,4 each, about 12 basis points.
Okay. Sure. And sir, secondly -- and then initially you have mentioned that there are total 4 stressed accounts of INR 700 crores. Of these, 3 stressed account are 2 HFC, 1 IL&FS includes around 4.75. What is the status of the fourth account? I...
That is the one that slipped this quarter.
That is the one which has slipped, the large one, INR 190 crores.
INR 190 crores. And this is from which account or sector?
It's into a large group, which interests in financial services, insurance, entertainment and bunch of stuff.
Earlier mutual funds.
Operator, I think we should now look at maybe 3 more calls. We have another...
Sure, sir. We'll do that. Next question is from the line of [ Pawan Durani ] from [ Citrus Advisors ].
Congratulations on the results. Sir, if you could just elaborate a little bit more on the strategy towards how you're positioning yourself and your pricing capability vis-à-vis competition. And the second question is, what portion of your book is T-bill-linked?
Okay. Let me answer the second one first. The T-bill-linked, like as Krishna has pointed out, roughly about INR 17,000 crores and INR 4,000 crores retail remaining as corporate. The strategy for long or at least, definitely for the more recent quarter, we have been very clear that: one, more granular, more diversified book, diversified across product and geography, which is what we are working on; two, make sure that the deposit franchise is granular and keep our core strength of deposits in place, which is visible; three, areas that we have not traditionally done well, was around the other income, fee income, which we have given much more focus and growth; four, there are 3 new businesses that we want to sort of get our act together and build on it as a base. One is what we traditionally did well, golds, dialed that up further, which is visible; 2 other businesses, which we get our feet wet, one is the retail unsecured; 2 is the commercial vehicle business, both of which we are very slowly building. We are putting teams in place. We don't budget for much in FY '20, but it can be a meaningful contribution in '21, '22.
Next question is from the line of Manish Porwal (sic) [ Manisha Porwal ] from Taurus Mutual Fund.
He's not there online. Let's...
They will come back or we can -- they can ask us off-line. Go ahead with next one.
Sure. Next question is from Hemali Dhame from Dolat Capital.
Sir, just 2 quick questions. One, I wanted the amount of interest reversals in the quarter. And the second one is, when does the 6 months for the Reliance Home Finance ICA that we have signed end?
Interest reversals?
Interest reversal is 45. The ICA for home finance, Jan 2020.
And a specific day, if you could give that?
I won't have it through the telephone.
Next question is from the line of Madhuchanda Dey from MC Research.
He's gone off the line.
Well, we just lost the line. Next question is from the line of Gaurav Agrawal from Bowhead Investment.
Sir, in your SME, you have cited giving this breakup into 2 heads, one is BuB and one is CoB, Business Banking and Commercial Banking. How are these 2 different?
Up to INR 5 crores, it's BuB; between INR 5 crores and INR 25 crores, Commercial Banking.
Also, I think the distillation is very different. BuB is branch-led. Commercial banking is RM-led.
Got it. And sir, these -- how do we do the sourcing for these loans? Is it majorly DSA-led? Or is it majorly branch-led?
No. I just mentioned...
Not branch-led, it's RM-led.
Branch-led and RM-led.
No, but the RM sources it or it comes through DSA, direct sourcing?
The RM sources it. If you tell me somebody else is sourcing, please call me and tell me.
Okay. Okay. And sir, can you share the SMA2 number?
We don't specifically share, but yes, I told you that it's better than last quarter, and SMA book in general is north of 2%, the overall SMA book.
Okay. Okay. And sir, finally, what is that overall exposure to NBFCs and HFCs together?
14% of our total.
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Anand Chugh for closing comments.
Thank you so much, everyone, for joining on the call. Have a good day.
Thank you very much. Ladies and gentlemen, on behalf of Federal Bank, this concludes this conference. Thank you all for joining us. You may disconnect your lines now.