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Federal Bank Ltd
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Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of The Federal Bank Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anand Chugh, Head, Investor Relations. Thank you and over to you, sir.
Thank you so much. Good afternoon, everyone. Hope you would have seen the numbers and you would have seen that this quarter has been a pretty solid quarter for the bank. Before I kind of hand it over to Shyam for his opening remarks, I would like to kind of bring to your attention some accounting change that has been brought in because of -- in compliance of RBI circular dated 30th August 2021. Couple of changes which are important for all of us to note. One is that recovery from written-off assets, which earlier used to be accounted under Other Income, now has to be netted off against the provision line, provision for NPL. Also, any provision or depreciation for standard investments, which was earlier accounted under Provision and Contingency, is now netted off against Other Income. So these are 2 changes. And wherever one -- number one, there is no P&L impact on the bottom line, impact of any of these provisions. But there is -- -some line items have moved from A to B and B to A. And second is I just wanted to kind of ensure that all of us are on the same page. We have kind of brought in some adjustments in the past numbers so as to give you a comparison of our quarterly numbers on a like-to-like basis. So I'm sure all of you would have taken note of that. And with these opening remarks, I'll possibly request Shyam to kind of give his commentary on the quarter gone by, and then probably we'll proceed to Q&A. Over to you, Shyam.
Thank you, Anand, and good afternoon, everybody. Like Anand mentioned, we do think that we had a good quarter given all the challenges in the environment. We are seeing good traction on the many initiatives the bank has been putting in for long periods of time, and we've literally tried to build the bank brick by brick. And it's good to see some of them coming to its rightful place, most important being the asset quality of the bank. In particular, this quarter was a great tribute to the efforts of the bank. We did see slippages, very modest, but recovery/upgrades way above even slippages. Considering that we did have slightly greater slippages in the last quarter, we saw them come back quite well. So as a consequence, credit costs for the quarter was flatteringly remarkable with literally no credit costs for the quarter. We should be very happy if we were to repeat it all the time or all over again. Interest income grew well at -- NII was at about INR 1,479 crore, an all-time high. Noteworthy was a very strong traction on fee income. Non-treasury core fee income grew very smartly. And CASA continues to be our sort of strong bed, and we saw that go up to 36.18% (sic) [ 36.16% ] this quarter. And our liability franchise continues to be one of the most coveted, I would say, with a large part of it being absolutely granular in retail. To the quarter that went by, we do see the credit pick up in many areas, and most of them are seeing traction as we go into the second half of this financial year. Many areas of retail have started seeing good momentum. Happy for us that Business Banking and Commercial Banking have also started seeing growth, and we saw, annualized for the quarter, roughly 12%, 13% growth, which is a good sign. And that's not by diluting credit standards but by increasing our coverage penetration and sort of competitiveness of our offerings. So in short, the quarter did see good progress on many counts. The numbers are there for you to see. You did see 50% growth over last year same quarter net profit and sequentially 25%. But I think those are less relevant from a long-term point of view. Our commitment to get to that sort of minimal requirement of 1% ROA and keep heading north from there is well on course. This quarter was 0.92%, and we believe that, as mentioned earlier, the financial year '21/'22, we will see exit at that 1%-plus ROA and then keep moving alongside -- along that line. As I pointed out in our earlier interactions, we believe that 1.2%, 1.25% over the new -- next 2 financial years is what we will seek to do. And there are lots of initiatives that we've put in place to make sure that those come alive. There is one challenge which is visible for everybody, is the non -- the people-related expenses have shot up not because we've hired more or paid ourselves more, but this has a longstanding bearing on the pension costs and the recent announcement by government and the IBA negotiation for family pension and the increase in annuity costs, the DA going up. These have unfortunately skewed the pitch. But I've decided that there's no point being either defensive about it or worrying too much about what we can't control. We will just work through other lines and ensure that our desired outcome of 1%-plus ROA is well on course and not get distracted by these, which seem to now be something that we have to contend with. That said, there are lots of initiatives. We probably -- many of you would have seen an internship program we've launched, which is the first of its kind. And we believe over the next 2 years that will give us both sales momentum and keep our front-end origination employee costs much lower because a salesperson who comes in through this program gets interned and also can do a sales job. So we think that's one of the initiatives we have taken to cover off some of these costs, which is a longer-term problem, in addition to our great and well-run FedServ proposition, which is helping us take away a lot of the costs. The last part and important point which you may have all observed, we have a fetish and a feverish pitch on digital and fintech. I have personally spent disproportionate time, and Shalini as an Executive Director probably is spending a large part of her time on getting this going. We've created exclusive teams that are focused on this. At this point in time, there's a cost element to it, but we are willing to take that cost because we believe that in the long run, this is going to be a Federal Bank completely differentiating from many other banks. Six years back, I said our strategy is digital at the fore, human at this core -- human at the core and Branch Light Distribution Heavy. We haven't added branches. We've added RMs. We've put in a digital stack. That stack is helping us cover the -- rather, the fintech players covered us as their partner bank. You may have seen we've got very good partnerships. The last 3, 4 months, we've seen about 3, 4 lakh accounts being opened. These will graduate. It's not going to be an instant win where they will all start building balances and become the huge portfolios. But we believe that done well, this is going to be a game changer for Federal Bank in terms of being the purely one bank which has a hybrid model of digital and conventional banking practices coexisting. My words may seem like a flight center statement now, but I think we have the conviction that this, over a period of time, will be something that Federal Bank will be truly differentiated. If you pull any of the partners in the market, they clearly believe that our model is something that they respect a lot, our engagement model, and the technology capabilities. And this is something that we are investing into. So my headline opening messages, performance has been pretty reassuring. We believe that our promise to be that 1%-plus ROA bank in well on course. We are not taking our eyes off all the deliverables. The efforts have been quite determined. The growth in NIM -- in NII and, consequently, NIM is visible. Core fee income is tracking well. Generally, business momentum is beginning to pick up. Credit quality in Q2 was remarkable. We did -- sorry, I forgot to mention we did restructure about INR 1,000-odd crores of assets, which we will come to, and I'm sure there'll be question and answers around that. And we have made sufficient provisions for that, also anticipating what kind of slippages may happen over the next 2 to 3 years on that book and buildup. And I said about 5 quarters back that our PCR will never come below 65%. And we are confident that whatever happens, that number will be honored. And we are tracking quite well to make sure that not just this quarter but in periods ahead, those numbers will be contained. So with that, let me just hand it over to the operator. You may open up for questions. Thank you very much.
[Operator Instructions]
So I mentioned the entire senior team is there. I don't know if Anand mentioned it. So they will be able to answer pointed questions in specific areas.
The first question is from the line of Renish Bhuva from ICICI Securities.
Yes. Congrats on a great set of numbers. So sir, just first question on the margin side, so -- which is currently at 3.2%. Now in context with the lowest ever cost of funds and, broadly, loan mix is also at a desired level, so how do you see margin sort of peering over next couple of years? And also, if, let's say, interest rate cycle has to reverse maybe within 6, 9 months, then how we are positioned to sort of get the benefit? Or is there any [ insight ] Into margins?
I think between business -- I've always said, Renish, between business mix, the growth in our low-cost deposits and the reversal of interest income because of lower or higher slippages, the combined mix, the margin looks good or bad. And we've always guided at 3.20% 3.25% is where we will be. We are at about 3.20% now. And I think the business mix and hopefully a -- more modest slippages in passage of time will cover up for whatever interest rate costs that may go up in periods of time. But probably, if you look at our ALM profile, we may be amongst the best players when the interest rate cycle turns up. So I'm not -- and we are a largely retail franchise, right? So I'm not that alarmed by interest rate increase by itself. I also think sanity will come in the pricing structure for our credits. Because at this point in time, it's kind of -- sort of at some point, it almost sometimes sounds insane. I see some kind of order will come in the market in the quarters ahead.
Got it. So, I mean, just a follow-up on this. So let's say whatever new products we have launched over, let's say, last 3 to 6 months maybe in terms of [indiscernible], credit card or -- over next 6 months, we're going to scale the CV book. So, I mean, directionally, the margin should settle at 3.5%, 3.4%? Or do you see -- or let's say do you expect that this is too early to comment on it?
I have never commented on -- that far ahead that higher number. I've always said 3.20%, 3.25%. So we will work on it. We can only give you the mix of the business, the kind of credit quality and almost derivate -- we can derive the number. But at this point in time, my sight is 3.25%, max 3.30%. But I'm not commenting beyond that.
Got it. Okay, sir. Fair enough, sir. Sir, next question is on the other operating OpEx. I mean...
Renish, you may get blamed by others for hugging the show. So be careful.
Yes, yes, yes.
Yes, go ahead. Yes, go ahead.
Yes. So other OpEx went up by 20% sequentially to now, in absolute terms, almost INR 1,350 crores. To be precise, INR 48.7 crores versus, let's say, INR 35 crores to INR 40 crores 4 quarters back. And since we have not added any branches, I'm assuming these incremental INR 10, INR 15 crores is largely towards building the technology platform and all those things. So going ahead, do you see this OpEx stable at current level? Or we still have to invest more maybe over next couple of quarters? I mean how one should read this OpEx line item?
The OpEx line in part -- for example, the increase this quarter, a significant part of the increase is a variable one, which is linked to, say, the outsourcing cost, which we pay to our DSAs; in fact, what has been our acquiring business cost; what we pay for rupee for our golds loans. So to that extent, this is a variable. If volume comes, business comes, this cost comes. So I'm not too worried about that. The part that is unfortunately not -- I mean, I know it's quite silly for an MD to say that, but I'm not in great control of is the pensioning and the annuity costs, which we are working [ alternatives ] (23:18). I don't have a direct control over that. We are, in fact, working with the government to remove that Rule 89, which allows us to self-insure, so to say. I don't have to buy annuity. But those are a little long shot. Our OpEx by itself, not people, is not something that we are nervous about. It's very much in control. We don't have any extravagant expenses. All our expenses are volume related.
[Operator Instructions] The next question is from the line of Mona Khetan from Dolat Capital.
Congratulations on a good set of numbers. I have 2 questions. Firstly, on the Business Banking and Commercial Banking book, we have seen a very good growth on a sequential basis, 7 to 8 percentage. So what are the incremental news in this segment? And any commentary around the demand scenario and the customer acquisition strategy will help. And the question is around your remittance market share, which has increased to over 20% from 17.5% 1 or 2 years back. So what is helping this rise? Some color around that.
Thanks, Mona. I think -- glad you pointed out the remittance because in my opening remarks, I missed mentioning it. Yes, this quarter was -- it comes with a 1-month lag. So actually, the August 10 number, if I recall right. Somebody, would that be right? Is the August 10 number right, our share? Or is it in September?
The June end, yes. One-quarter lag.
Oh, sorry, 1-quarter lag. So we have literally become a fist of India's remittances, which is -- it's been a focus for the bank now for many years. And from about 6% share, now at close to 20% share over the last 7, 8 years is something that we are greatly proud of. It is, like I said at the top of the call, brick by brick. We have field presence. We have technology capability. We have very good partnerships, good offerings and speed to market. And every time some competitor blinks, we are there to take that share. So I think we've had -- it's a focus of the bank, and we believe that we will do everything to protect that. I'm happy that the 17% has become 20%. We have some internal ambitious targets. But yes, the 20% would be our -- sort of what we will try to preserve. On your part on growth in Business Banking and Commercial Banking, we've often said -- always said that these are incremental growth opportunities for the bank. It's an area that we are quite strong at. And after we verticalize more sharply, there are RMs covering each of these businesses. And the -- and branches are helping our business banking flourish, and the RMs are focusing on the Commercial Banking. So there's sharp line of sight. I think opportunity exists. As India comes back and growth comes back, we will see a bigger share of our pickup on that. Yields are not -- I mean, I'm not saying that yields are disproportionately higher. They're certainly much better than corporate banking. And it's more granular. So we are more excited about this business. The Commercial Banking is somewhere in the 9-plus, and the -- sorry, yes, mid-8% to 9.5%, and business banking is a touch higher, 9.5% to 10%, 10.5%.
The next question is from the line of Gaurav Kochar from Mirae Asset.
Sir, my first question is with regards to the liquidity on the balance sheet. If I add the cash and call money, it's roughly 10.6% of assets. It used to be 5%, 6% earlier. And I also see, at the same time, borrowings up 15% sequentially despite we did a capital raise allocation through IFC that was around INR 9.2 billion. So any rationale on the borrowing which was done in the quarter? And what was the, I mean, cost of that borrowing?
Ashutosh, you want to take that? Or Venkat and Ashutosh?
Yes, I'll take that. I think these are the treasury operations basically. So you will see borrowings. You will see the deployment. And that is to capture the arbitrage in money market. It's -- so there is nothing -- liquidity-wise, you can see our LCR that reflects about the level of HQLAs vis-a-vis our, I mean, immediate payments, immediate obligations. So LCR has been consistently above 200%. So there's nothing on the liquidity side, and it's partly because of the granularity of liabilities. So don't look at one item in isolation. You have rightly picked up both from both sides. So it's basically because of the arbitrage operation. There is no long-term borrowing in the balance sheet other than the past 3 finances, which are depleting.
Okay. So during...
So around 70, 80.
Yes. Yes, [indiscernible], yes.
Sure, sure. Is it fair to assume the spread you are earning here is, I mean, much lower than what business prints and hence it's a drag on margins, on the reported margins then?
It's not drag.
[indiscernible]...
Basically, you always have an interbank margin spread. Interbank spreads are not going to be same as your business spreads.
Your spreads, yes.
Right. Right. That's what I'm coming to. Once this -- maybe there's an arbitrage right now. But going ahead, once the liquidity eases, can that translate into margins, the -- at least the optical margins to improve -- which -- right now, in the 3.20% margins that you've disclosed, there will be a lag because of this. But once they get normalized and the borrowings and both the liquidity ease off from the balance sheet, can we assume this translate into an uptick on optical margins, the 3.2% becoming higher?
See, the total impact of this is not much when you see it on a particular date on the level of assets and all. It's an ongoing thing, and capturing the arbitrage is the smartness of the treasury guys to look at -- spot those arbitrages and capitalize on them. As long as these arbitrages are available, treasury operations would be there. But you can't draw a trend line on the basis of that.
Okay. Understood. Understood. Maybe it's a maybe quarter end phenomenon. That's why this looks a little bit -- sure, sure. I got your point. And my next question is with regards to the employee expenses. In the current quarter, we saw INR 5.7 billion. I know it's hard to guess future, but is this sort of a run rate -- steady-state run rate of INR 5.7 billion going to remain at least for the next 2 quarters? Or is there any one-off element in this quarter? Or this is fully what we will see in the next subsequent quarters?
I did mention, and I think Shyam has already, I mean, touched something on that. See, these will depend on your pension liabilities, and your pension liabilities are being actually passed on to LIC or some such. I mean in our case, it's mandatory to buy annuities. You buy it from LIC or any other annuity sellers like HDFC or SBI and so on and so forth. So these are some of those institutions from who we are mandatorily required to buy annuities to pay these pensions. That's what Rule 89 Shyam was referring to. So we can't manage ourselves our, I mean, pension requirements or so. So when annuities are to be bought, these are all function of where the yields are moving. So if interest rate cycle moves -- goes up and all, our liabilities here would reduce because then you will have to pay lesser for your annuity. I hope you understand.
Right.
So...
Yes.
If you're paying -- for every INR 1 per month today, if we are paying INR 160, which was INR 135 about 2, 2.5 years back -- so once again, if the interest rates move up, that would go down. You will have to pay lesser amount for buying every INR 1 pension per month.
Yes. The summary is we expect this INR 5.7 billion, INR 5.75 billion to be holding for Q3, Q4.
Sure, sure. Understood. And just last question. On the fee income side, I think we saw very good traction this quarter. And I saw card fee is around INR 75 crores. How much of this would be credit cards? I know we started the product late in the quarter.
Credit card is too small. It just started. This is debit. We are now a leading debit player in terms of spend, and that's debit led.
Sure, sure. And in terms of the tie-ups that you've done with fintechs, what kind of fee income run rate can we assume going ahead? I mean this kind of momentum, can we assume this will replicate in the coming quarters, business momentum can [ stay put ]?
Core fee income momentum, we are seeking to keep this and keep improving not just by the fintech partnerships. Our organic business model is that. So fintech-related outcomes, I'm -- for this financial year is [ parking ]. Everything we are saying is an FY '23 outcome.
The next question is from the line of Abhishek Murarka from HSBC.
Congratulations for the quarter. And so...
Sorry to interrupt you, Mr. Murarka. Your voice is breaking up. Closer, Mr. Murarka.
Hello, is this better?
It's better.
Just slightly better.
Sure. So a couple of questions. The first one is you said that you're looking at a 1.25% ROA 2 years down the line. And currently, you're at 0.9%. And you're also saying that your NIM target is at 3.25%. You're probably there. Your credit costs are among the [ lowest historically ]. So where does that come from?
I think we've said that our business mix, our credit costs are -- there is optimum opportunity to make another 5 basis points everywhere. So it's not going to be one little thing, and there's no one silver bullet. It's a little bit of everything done consistently. And we think that if you model that with 1.2%, 1.25%, it's possible given the mix of business that is shifting. Credit card is just picking up. Commercial vehicle business is just picking up. You saw a pickup in Business Banking and Commercial Banking. Gold loan was muted this quarter. So these are 5 businesses which are higher-margin business. PL has been muted. These are 6 businesses which are high business margins. And credit cost for this quarter was a little muted. Credit cost on a generic basis has been 65, 70 basis points. I'd like to improve that by 10 basis points. 70, 75 basis points, improvement by 10 basis points.
Perfect. And that [indiscernible], these new businesses, let's say, and -- that you're doing through [ VC ] [indiscernible]...
Abhishek, your voice is -- just stop.
Okay.
Maybe you're too close to your microphone probably.
I'm on the phone. So...
I believe it's the network situation as well, and [indiscernible].
Yes. [indiscernible]. Yes, go ahead. Yes, go ahead, please.
Okay. Yes, sure. I hope this is better. So in this context, what I wanted to know is the new businesses you are doing, which is credit cards or -- and -- through DCs, what kind of scale do you see in these businesses in a couple of years? Just broadly, what is an aspirational target?
What kind of spread did you say?
Scale. What, again, like scale?
I mean we are not certainly going to become India's largest [indiscernible] bank or anything like that. We are -- as I mentioned earlier, we're looking at just initially an existing-to-bank customer profile and then build it into the new-to-bank. So if in a 2-year period we are getting close to, say, 12, 15 lakh cards, we've done well. And then the dynamics kick in for us. Likewise, commercial vehicles, we've just crossed INR 1,000 crores. We will build it to about INR 5,000 crore, INR 6,000 crores in 2 years' time. Commercial Banking, Business Banking put together is about INR 26,000 crores. We think that has potential to go up to INR 45,000 crores.
Okay. And any target [indiscernible]?
Pardon me?
[indiscernible]?
Oh, we are pursuing -- organically, inorganically, we have none on hand. I've always said if there's something, we will be very happy to look at it. But unfortunately, nothing on hand. Just -- no, but we won't -- we have not taken eyes off -- there will be something that will come up in the next few quarters if we search hard. I did say in the last call we want to see how the environment is playing out. I think that it's just getting some stability. So we'll watch for another quarter.
Sure. And the second question, connected in this, well, digital personal loans. Last quarter you've being coming off. First quarter, I understand. But second quarter also, there's a sequential drop. So can you explain why that book is contracting? And what's the outlook there?
No, it's conscious -- in the current -- prevailing credit environment, if you offer easy-to-take credit, you may end up becoming a problem. So we're just watching for it. As we go into Q3, we'll see pickup on that.
Okay. And in that book, is there any cutoff? I mean what would be the cutoff, let's say, customer profile in terms of, let's say, CIBIL Score or something like that?
I think it's not just one. We create our own score, including CIBIL Score. We look at past performance record on the -- it's a largely cross-sell to existing liability base. So we have an internal score based on how we model the client profile. And based on experience, we keep experimenting at various price points. But we take the -- before delivering the credit, we scrub the bureau.
Okay. Okay. And if you don't mind, can I just squeeze in one more question?
I'm okay. The others will complain.
Sure. All right. Sorry, just one very quick one. So just these fintech tie-ups, what is the run rate of SA accounts or the throughput of SA accounts this quarter?
I said we've done about 3 lakh accounts with both the fintech partners this quarter? Right, Shalini? We've done 3 lakhs?
Yes, Shyam. Yes.
Running at about -- hey, this is a little filter as we do -- it's like a tap. We disallow and allow at different points in time depending on volume. But we are -- I did say in the last call, right, we think, in a normal day, we do about 3,000, 3,500 accounts normally. Now we are running at 7,500 accounts a day.
[Operator Instructions] The next question is from the line of Ajit Kumar from AMBIT Capital.
So a couple of questions from my side. First, what would be your SMA -- total SMA book now? I believe last -- or last quarter it was 4.6.
The SMA-1 and -2 is now close to 2%. And SMA-0 is about 1.8%, 2%. Roughly about -- it is shy of 4%.
Okay. Okay. So roughly 50, 60 basis point improvement on Q-on-Q basis?
A little better. I think last count, I saw 60, 70 basis point improvement.
Okay. Okay. And sir, second is on restructuring. So just wanted to reconcile the numbers given in presentation and in result as part of notes to account. So as per presentation, the total restructuring is INR 3,563 crores with COVID-specific restructuring being INR 3,423 crores. Now as per notes to account, Point #12 Format B Table, I believe that is the format in which you report to RBI. The total restructuring done is roughly INR 2,700 crores. So where is the disconnect actually of this? There is a gap of INR 700 crores. Is that a disconnect you can explain?
Yes. [indiscernible] or [indiscernible] or Babu?
One -- Babu here. Can I take this one, Shyam?
Yes, please. Please.
Yes. Just for information, in the disclosure format, restructuring is not included. [indiscernible]. That is why this treatment.
Yes.
Okay. Okay, okay. And sir, just one last question. If you could talk about your partnership with OneCard as far as your credit card book is concerned. Any qualitative comment on what is the purpose of this partnership?
Shalini, do you want to give your input?
Sure. Thanks for that question. So this is actually a continuation of our entire journey on partnerships with fintechs. So as we have on the gold loan side, on the microfinance side, on the savings bank account side, as we've launched our credit cards, we've looked at partners who can work with us to acquire credit cards from the market. And that's how our partnership with FPL is structured. It's a partnership where the entire acquisition and servicing is done by the partner. Obviously, the booking is done by us. The credit criteria are determined in conjunction with us, and they go through a filtering process and they come on book. So it's a part of that overall strategy to expand our presence in the market through fintech partners. It's about a month now and a good rate of 200 to 300 cards per day. We're going to scale that up now as we create the confidence on the technology capabilities and the interfaces that happen. So that's really -- it actually can't be seen in isolation of everything else that we're doing on fintechs.
The next question is from the line of [ Manish Porwal ] from [ Fiducia Capital ]. The next question is from the line of Nitin Aggarwal from Motilal Oswal Securities.
Congrats for the -- for a good quarter. Two questions. Like -- one is on the OpEx. Like have you fully reflected all the changes on the OpEx in this quarter? Or -- and what's in the run rate in the coming quarters? And related to it, with the change in accounting treatment, and just given the sharp rise in cost-income ratio, what number should we now be looking at on the cost-income ratio line? Because there is one metric which you didn't quite focus and you didn't give any guidance. So what is the revised sort of like guidance on this?
Yes, I think we believe -- of course, I'd like to keep one more quarter to understand this better. But I think now getting to 52, 53 will be our first milestone by end of this financial year, closer to 52. And then as income picks up, hopefully, next financial year, trend to 50. But at this point in time, I'll guide to 52.
Okay. And so everything is now, sir, reflecting in OpEx like the increase because of the pension -- rise in pension contribution?
You would have seen -- now you would have -- listen, the -- what -- the INR 177 crores is the pension -- family pension impact which will amortize over 5 years, and that's the view -- possibly we will do it much earlier. But over 5 years. So the incremental impact per month is about -- per quarter is about INR 25 crores to INR 30 crores.
Okay, okay. Sure. And...
There is a disclosure, Note #13.
Sure. And...
Is it my line that is calling the disburbance? Or where is the disturbance? It's terrible.
Yes, sir, it's coming from your line. [Technical Difficulty]Ladies and gentlemen, thank you for patiently waiting. We have the management back in the conference. And sir, we have Mr. Nitin Aggarwal on the question queue.
Yes. Sorry, Nitin. We had to -- I guess you were talking about OpEx. I did mention I think Venkat was clarifying further.
Yes, yes. I understand that, sir. And sir, second question is on -- to the margins. So what will make us more constructive on margins? Like we have been talking about 3.15% to 3.2% range. But if I look at like our CASA has grown around 500 to 600 basis points in last 18 months. It is growing at a faster rate already and likely to expand further. So what will make us like report a higher margin from here?
Nitin, I know I'm not going to be popular saying this, but I think chasing margin in itself is never a good strategy. A mix of business, credit quality have to be factored in. So I would say, when I guide for 3.20%, 3.25% 3.30%, we have factored that in. I mean we don't have a path to say I can get to 3.40%, 3.50% without taking disproportionally high risk, which, at this juncture, we don't have the appetite to achieve.
Oh, sure. And lastly, on to the restructured portfolio. Like any sense that you can share as to what proportion of the restructured book is like going to turn into bad loans? Or -- and what proportion of it is under moratorium right now? Because last quarter, you did talk about that the collection efficiency in the restructuring book is as good as the standard portfolio. So how that...
I don't think that has changed. We have -- I think in our disclosures, we've made, right, -- 75% of the book is LTV and 73% is 100% secured, collateralized. So I think the quality of the book -- because it's largely retail, home loan, loan against property book that we have restructured. We're quite very pretty comfortable that it's not going to be a runaway problem. And over a 2-, 3-year period, maybe 20%, 25% of the book was cleared, and -- which will then be our commitment to the 65% PCR [ default ], which we started building a provision cover over that. And we are now almost like a INR 440 or INR 450 crores provision already built on that book and in the coming 2 quarters also we will build. So we'll exit the year in such a way that in the 2 financings years ahead, even if we see 20%, 25% slippage in this book, we can still hold our 65% coverage.
The next question is from the line of [indiscernible] from IDFC AMC.
Just wanted to understand like on the fintech that you have built. Are they actually showing some fee income traction to us? And where does this fee income like sit or like -- on Slide7, we have a breakup of fee income [ manual ]. So where does all the fee income that you get from fintechs will sit?
Sure. Fintech fee income is not separately reported. That will come under our debit fee income...
So now your...
Whatever our debit fee income. But fintech build at this juncture, we are monitoring the account performance on a 3 MOB basis, how balances are built if you were to originate through a normal digital channel versus this. We're tracking almost just the way a normal digital account will behave.
Right. And so we do have tie-up with ICICI Securities for that -- for a trading account, 3-in-1 trading account. So what -- how is the traction there? And what kind of revenue is that tie-up generating for you?
While we don't declare individual partnerships, you can see that generally, our fee income traction is positive driven by a range of activities, one of which is a partnership with ICICI Securities.
Right. So sir, in this ICICI Securities or like any of the tie-ups, we do keep -- we do get a -- or we do keep a float in the account and you do earn income on that, right?
Float income will be ours. Where the deposit [ exists ], the float income will be ours.
The next question is from the line of Bhavik Dave from an Indian Mutual Fund.
Yes. I have 2 questions. One is similar to the first -- I mean, with the previous question. I want to understand -- if you could give us some clarity on what exactly these, in fact, tie-ups mean for us because there are so many of them, and we're trying to achieve a lot of things like the credit card fees, acquiring accounts. When you -- so just want to understand exactly how are we going to monetize them. And second question is related to other expenses that we have, around INR 900-odd crores that we did for the first half. How much would be due to these partnerships? Or how much of it is linked to business growth? So how much of it will be variable that as and when business picks up for us, that growth will grow with the kind of the business that grows? So I just want to understand the variability of the other expenses.
And your 2 questions are [indiscernible] our OpEx increase this quarter versus the previous like somebody pointed our INR 48 crores, INR 49 crores. Significant part because of the variable. And in the variable comes the new account sourcing, which includes the accounts that we source through our fintech partners. So sometimes, you'll see the fintech partners at 3 areas. One is the partnership where they acquire for us as like a VC. Hence, so there's a VC cost. The second is, we are a service provider for them, and then there's a certain degree of cost -- acquisition costs that we bear. So the fintech partnerships, as we see it, has -- if you are to open 1,000 branches and book another 3,000 accounts a day versus using our partnerships, using technology and getting to a new client base, which normally we may not be directly getting because the profile of customers don't use physical brick-and-mortar, they look for a cooler stuff, we're using a front end which is more cooler and contemporary. So our fintech partnership speaks to out theme of digital at the fore, human at the core, Branch Light Distribution Heavy. And that's why we are investing heavily into this in terms of partnerships focused by senior people, giving it time, attention, upgrading the back-end capability so that it is highly resilient and being able to give the quickest turnaround to those customers. How will it shape out? How will it play out? It takes a good year to understand that. Early signs are very positive.
Sure. And what we are trying to do is we're trying to get newer segment of customers via these fintech partnerships. I think we already have 8.5 million customers on the liability side or debit card side. The incremental customers are reasonably different in terms of the profile, meaning maybe 30 years and below, more millennial-type customers or [indiscernible]? Is that what we're trying to do with these partnerships? Because we already have a reasonably high base of customers to mine for our existing personal loans and credit cards, right, in some sense.
Absolutely, yes.
So the newer -- the [indiscernible] accounts that we source via these intakes are reasonably a younger set of customers. Is that a fair way to think about it?
Younger, I don't know if age is a criteria, but younger in their dispensation to life, you could say.
The next question is from the line of Mahesh, M.B. from Kotak Securities.
Shyam, just a couple of questions from my side. One, something was reasonably strong this quarter. Could you just kind of give us some color how is the second half of this financial year? And is there any blind spots to be worried on the corporate side from here on?
First question on what, the recovery was strong, did you say that, Mahesh?
Yes, yes, yes.
Yes. This quarter was strong largely because we did -- Q1 was muted given that first 45 days was relatively low. So we saw [indiscernible]. Usually, from a fresh slippage pool, recovery is usually stronger. So we saw that. We believe that this run rate -- not maybe the INR 400 crores, but good steady state would be somewhere in the INR 350 crores that we will certainly focus on. On the corporate, other blind spots, I mean, there will be some that will slip over periods of time. Nothing looks too alarming at this point in time. We don't have any single big ticket, which is in the INR 50 crores, INR 60 crores, INR 100 crores, which is a problem. But I'm not flagging any risk that should cause anything that -- we still think that INR 400-odd crores, which used to be a normal slippage in the quarter, that's the number we should focus on.
Okay. And all this [indiscernible] or the reason that doesn't have any major impact by much.
I don't want to be nasty, but I will be nasty. I don't think this question is appropriate to the bank.
No, no. Just as a clarification. That's...
It is not appropriate. You didn't ask me about [indiscernible] surplus. You didn't ask me about [indiscernible]. We have managed this portfolio for many years quite sensitively.
Sure, sure. Yes. Just one last question on -- again, on the OpEx side. I just wanted to understand with the larger parts of your businesses now moving to the subsidiaries, if you -- I think this kind of ballpark assumption, if you were to double the balance sheet on the retail side, do you think you're -- do you think you need to put in a fairly large number of employees to match that? Or do you think you are in a position right now where your existing employees can start contributing on the revenue side a lot more meaningfully as compared to where it was earlier because the OpEx will move to the subsidiaries?
I think our employee addition for many years has been very muted. If I look back 4 years, our net addition in employee is only about 600 people, while our business is probably more than double, so to say.
That doesn't change given...
Sorry.
I think the question that doesn't change even today, it's a fair assumption. Like there's still a lot of headroom available there.
Yes, yes. Productivity, digital, efficiency is very much -- yes.
The next question is from the line of Krishnan ASV from HDFC Securities.
Yes [indiscernible]
Technical Difficulty
Is this better?
Yes, it is.
Very good set of numbers. First, congrats on that. My first was just a repetition of what Mahesh asked around the recovery environment. So while this was a one-off and it kind of made up for the loss of half a quarter last quarter, just wanted to understand, in general, the recovery environment. Plus you had an exposure to Air India,moving from bigger hands to stronger heads. Does that make a difference to how you look at that particular exposure specifically?
Air India is fully paid off. We don't have any impact at all.
No, no. There is one government guaranteed, one small amount.
One guaranteed one. That is there, but that is...
Government guaranteed.
Yes. That is government guaranteed, so that is not an issue.
Very small.
In general, the recovery environment, do you think -- I mean, is something that helps you get to INR 300 crores, INR 350 crores.
It has improved, Krishnan. Environment has certainly improved. That shows in the recovery and upgrade.
The next question is from the line of Jai Mundhra from B&K Securities.
Sir, first question is on ECLGS, a, if you can quantify the outstanding numbers that we have. And secondly, once this loan -- when they -- I think this quarter, September -- or maybe July to September, they would have completed the first year of moratorium, are you seeing any -- if you can share your thoughts once these accounts have come out of moratorium, how are they behaving? Or how should one look at the stress from this portfolio? Yes. Yes, sir.
The second part is easier. First, the prepayment this quarter was bang on, so we didn't see any stress on that. If we can forecast that for the remaining quarters, we are a very happy team, but that is hard. But at this point in time, the [ GC ] portfolio is very small. Repayment requirements was good. Book restructure, if I remember -- INR 700 crores as shown. I can't recall at the top of my head. So it's [indiscernible] if you know?
Which one? Sorry.
[indiscernible] total restructuring, total DCL book. Around INR 2,700 crores is my recollection.
Yes, nearly INR 3,000 crores.
INR 3,000 crores.
Around -- if [indiscernible Shyam, but with the new announcement, there will be some more investment put aside there. So sir, the question is, so far, any way that this portfolio was in the moratorium? And maybe in the beginning -- I mean, in the later part of this quarter, you would have seen some accounts coming out of moratorium, enter this to...
Repayments were perfect.
Sir, Babu here.
[indiscernible]
Yes, yes. 17% of the book has come in demand bucket, and we did somewhere around 95% at the collection. Absolutely, there is no challenge, particularly with regard to the moratorium or restructured books of around the demand book.
I think if we can sum up, I think our recovery percentage is in the restructured book is quite similar to the general book.
Exactly right. Right. And second question is on restructuring, the nomenclature. So let us say you have restructured INR 2,000 crores of retail, if a customer have taken a prudential restructuring and he wants to repay on time, he can still do. But at what stage you would untag him from restructuring? Is there any clarity that -- by what milestones would you untag him from restructuring?
Babu?
Yes, sir. Restructuring is done for 24 months. That is the next month, and that is permitted. After this 24 months in second, we untag from the restructuring book, if it is not turning into LCA by the time.
Okay. So even he has perfectly standard, even if he has repaid some amount of it ahead of the schedule...
It will remain flat as restructured up to the end of this 24 months. That is the next month [indiscernible].
Let me add. I think in the past, there have been so many restructuring done under CDR, this, that and all. And if you see, we always present to our analysts and investors the slide on which we show the path of restructuring. So once an account is tracked as restructured, earlier, we used to continue it until it is fully repaid and all, and that's what you would have seen in graph. Used to be that amount used to be INR 3,200 crores and all. And gradually, that fall into INR 600, INR 700. This is a special restructuring that has happened under COVID. Two years is the moratorium period. We'll see -- we'll watch it after moratorium is over how long it is behaving properly because these are mainly housing loan accounts for 15 years, 20 years, 25 or so. So maybe after 2, 3 years of satisfactory performance post moratorium, we'll remove the tag and that we would share with you, I mean, through a slide and all. It's so much we have taken out of that book.
Even otherwise, sir, to remind the standard bucket.
Yes, Yes. It remains. I'm talking of removing that tag of restructuring. So I think for that, some trend should be there post moratorium. We'll watch it for a couple of years or so and then disclose it that this is what we are removing from the restructured book.
Understood, sir. And the last thing, sir, I missed your comments wherein you had said that you have done some estimates basis, some relapse from outstanding restructuring. And then you have laid some over and above IRAC provisions. So if you can elaborate, sir, if you have done any provisions on the expected restructuring or did I...
In a most conservative way, we are expecting that there would not be a slippage -- or maximum slippage could be 30% from this, which -- this is a sort of very conservative estimate. The number could be much lower later on. But assuming that it is 30%, 25% to 30% slips and all, on that, we need to have 65% PCR, which is what we have been maintaining for last so many quarters. So if we have to maintain 65% on that 30%, 25%, 30% of restructured work, then how much provision we need to hold?So on that, I think Shyam has shared, we already are holding INR 450-odd crores, and we will gradually build up because, post moratorium, then we would actually be knowing whether it is slipping or not. So for that, in advance, we are building up the provision, and that's what that management outlay. We already have additional provision made in this quarter itself.
Right. So INR 450 crores is the restructuring provision outstanding, right?
Yes. Babu, is the number same now?
Yes, yes, yes. That is outstanding provision for our [indiscernible].
The next question is from the line of [indiscernible] from Aviva Life Insurance.
So one quick question is on the restructuring, you're hoping [indiscernible] restructuring. And last quarter, I think the guidance for this quarter was INR 400-odd crores. So where has the incremental surprise for us come from? And second, if you could reiterate the slippage guidance for this year at FY '20 levels plus/minus 10%, which you alluded last quarter.
Yes. I think you picked up half of my statement. You will hit it up by restructuring comment last time about INR 400 crores, INR 500 crores, but you don't pick up the slippage part. The slippages are what I thought it would be. So on balance, the -- between the 2 slippages that we're restructuring this quarter is also roughly about INR 1,400 crores, INR 1,300 crores, not very widely off from what we had visualized. The good news is it didn't happen. Even better news is the customers who opted for restructuring are secured. And therefore, that's the blend that we see. Sorry, what was the other part of your question?
So your slippage guidance as what you mentioned last quarter, do you maintain that?
Full year slippages, we had tapped somewhere and equal to what it has been for the previous 2 years, which is roughly INR 1,800 crores to INR 2,000 crores. But [indiscernible] suggest it could be better, meaningfully better.
Sure. And my last question is if you can comment a little bit on the business environment, especially on the SMEs. And any sort of cautious industries or geographies you wish to highlight?
That's very geography sensitive or sort of sectors and do -- and it keeps varying. But we generally stay off hospitality, and those that are heavily contact sensitive, right, obviously. And that's why our slippages are well in control because for years, we've kept away from those segments. So that will continue. Business environment is certainly better than what it was, say, last financial year -- most of last financial year. Last quarter was good. And the quarter that went by for period starting, I think, July, August, August onwards, we've seen momentum. I am quite confident that second half, you will see much higher growth than first half.
The next question is from the line of [indiscernible] from Robo Capital.
Sir, just one question from my side. If you could give any guidance on credit cost and loan book.
I think loan book, we -- I just mentioned that Y-on-Y, we have grown 10%. We think now, business momentum picks up. And somewhere in the teens this financial year is possible. We're pushing for -- yes, somewhere in the teens. Whether it's mid-teens or high teens, we will see in the quarters ahead -- in the quarter, quarters ahead. Credit costs this year will be a kind of a mix shield because Q1 was high, Q2 was nil. So let me not comment on it. Suffice to say, our overall full year credit cost is somewhere in the 70 basis points, 80 basis points, which you should factor.
Okay, okay. And next year?
We'll give you guidance closer to the year.
The next question is from the line of [indiscernible].
Could you throw some light on the outlook for Fed fee now?
They're doing well. They are focused exclusively on small business -- small-ticket sized credits, flat loans, small business lending. And we're quite happy with the progress.
All right. So in terms of [indiscernible] could share whether they will also be growing aggressively.
They have been. I mean, through the pandemic, of course, we were all watchful. Their credit standards are good, and their book is now at INR 5,000-odd crores. And I think they are positioned for growing at maybe like 30% a year or more. They're doing well.
The next question is from the line of Nilanjan Karfa from Nomura.
I hope I'm audible. So just a question on the NRI deposits -- sorry, the remittances that you have done a phenomenal job, just checking. This is the amount which flows into our deposits. We are not actually originating it. Is that how you measure it?
This is money that flows through the pipe and comes through as remittances. Not all of it become my deposit. I would love it. Part of it becomes the end user, and beneficiary could take the money and take it away for end use, which is not to place in the bank. This is money that flows in through us. We have a pipe for that money to come in. As a part of our management, we try to keep a large part of it. We encourage the customer to bank with us.
Right, right. And therefore, in that context, I was just looking at that NRE deposit side. I think for many years now, I think it is the first time that Q1 we had a -- Q-o-Q had a decline in the September quarter. Anything -- does it point to anything about utilization of the -- or any sort of weakness in the environment or [indiscernible]?
No. Maybe Shalini can give you a better color. But generally, I wouldn't read much into it simply because that -- and that usually is when the volume comes and also [indiscernible]. So to that extent, movement of money may have been lower and also as the rupee [indiscernible]. Now we saw [indiscernible]
I was about to say that. Actually, it's a function of how the exchange rate behaves.
After the rupees became [indiscernible].
And last question on [indiscernible] volume have you given out, when should we start looking at a large bulk of restructuring to come through and [indiscernible]?
I think INR 3,500 crores over the next 8, 9 quarters is divided in different segments, with about INR 800 crores are due in repayments in the next year first quarter, right? Babu, is that the number, if I recall it right?
By September next year, roughly 80% of this book will come in demand book. By -- now this 17 percentage, as the most of this book may come towards the Q4 and Q1 and shortly to Q2. So by Q2, the demand book may be somewhere around 80% of the restructured book.
Okay. Great. Sorry, a final question, Shyam. When do we see the new investments that you are doing on the retail side to start showing up in the profitability number?
I think they are all showing up in its own little ways every quarter. You saw fee income pick up nicely. And every quarter, you'll see. I generally believe never a silver bullet, always a little bit better every time. So I'm not committing to -- and this much [indiscernible] the bank [indiscernible] not mine. And we live up to it, and I will stick to that. We won't promise something which we -- we don't have silver bullets. Others do have. We don't have.
One point [indiscernible] to myself, Q2 '23, 80% of the demand book is...
It's not that. That's what I said, it's '23.
Yes, '23.
The next question is from the line of [indiscernible] from Quantum Advisors.
We must bring this to a close after 2 questions, please.
Congrats on a good set of numbers. The first question is, in the previous call, you said that -- I mean, what percentage of the employees are on the defined pension plan, which you expect that they will retire by FY '22? And what are the kind of cost savings that you accrued to this bank as a result of that? And my second question is on -- I mean, there have been some reports that you plan to list for subsidiaries [indiscernible]. So could you give some more color on its [indiscernible] expected?
On the pension, we didn't say the last of the employees. The last of the employees will retire in 2040 or whatever. But a large number of the people who come -- were onboarded before April 1, 2010, majority is year '24, '25. And after that, it will taper down. So to that extent, our annual pension cost is roughly INR 400 crores incremental that we've been providing for the last, say, 4, 5 years. That should see some improvement of at least 30% of that in the period starting '24. On the second area, I have no comment. We also read some press articles that you said. So I really have no comments.
There are no plans if we see as of now [indiscernible]?
When something is required to be announced, we certainly will.
Okay. One more question that I would like to ask. Like last year, you had said that there have been some slippage on account of the exposure that you have to [indiscernible] exchange of 1.75 billion. So what is the color on that? I mean, what is the status right now? Have the slippages increased or there is some kind of [indiscernible]?
That's fully provided. We have not got any recoveries there yet. We are working through it. It's -- we have the security, but it's a very complex legal process that is underway. At this point in time, I have no incremental update other than the fact that the process to recover is underway. We are fully provided.
We'll take one last question from the line of [ Ankit Sharma ], an individual investor.
He might have signed off.
I see further questions from the participants. I now hand the conference over to Anand Chugh to close.
Thanks, everyone, and I wish you Happy Diwali, Happy Christmas and a happy New Year in advance.
Yes. Thank you very much.
Thank you.
On behalf of the Federal Bank, that concludes the conference. Thank you for joining us, and you may now disconnect your lines.