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Federal Bank Ltd
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Ladies and gentlemen, good day, and welcome to the Federal Bank Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Anand Chugh, Head, Investor Relations, Federal Bank. Thank you, and over to you, sir.
Thanks, Albert. Good afternoon, everyone. I am sure you would all have got a chance to look through the results. It's been a couple of hours since the numbers were released and I think I'll -- without taking much of your time, I'll hand it over to Mr. Shyam Srinivasan for his opening remarks, and then we'll open the lines for question and answer.
Thanks, Anand, and good afternoon, everybody. And first call of the finance calendar year, so best wishes for 2020 to everybody. Before I begin, I also want to formally introduce and announce Shalini Warrier, who takes over as -- joins the board as an executive director. So she is also on the call alongside Ashutosh, Sumit, Harsh and the other senior team members are on the call. So I just have introductory few lines on the quarter and the overall environment. And of course -- then all of us will be happy to answer questions. No secret, the market continues to be challenging. And in fairly tightened sort of extenuating circumstances, I believe we've done well. At the beginning of the quarter, our focus was to ensure that the -- barring the 2 names that we had identified as potential challenges, the 2 large corporates, we want to ensure you the credit quality continues to be robust and strong. It should reflect the efforts of many quarters of the bank. And I'm pleased to see and state that our overall slippages, ex these 2 accounts, are at a multi-quarter low and holding well. Growth, both retail and corporate, are sort of bias. It was to ensure that we get to a 50-50 model. We are nudging close to it. It's 51-49. And like I've said in our investor deck, we believe that our sort of calibrated focus on retail is working well, and retail traction on most products, though secured, is continuing well. We're gaining share. And corporate, when I say corporate, they are just largely the INR 5 crore and above exposure. So it includes commercial banking and the wholesale banking or the corporate banking. We believe it has cooled off, partly by our choice, partly by some significant impairments. And in our case, this quarter, in particular, we saw some -- both repayments as also one large restructured account setting itself and a write-off. So a combination did see a slower growth. But on balance, the full year credit growth as to Y-on-Y is about 13%.Deposits is our strongest part of the bank's suite, continues to perform well. And we believe that, that momentum should hold and is getting granular, as it has always been, and is getting diversified as we would like it to be. On the portfolio quality, like I mentioned, other than the known names that we had signaled or identified, our traded provision in Q2 as standard asset provisions, they slipped, and we've made the necessary credit provision, shifted the standard asset provision to credit provision this quarter? Our overall stressed asset book, as you would see, has come down to an all-time low at about 1.59%. And the overall SME book continues to be quite encouraging across the spectrum. And our large ticket exposures that show -- on the horizon, there are none that are of any significant size that we're particularly alarmed about. One of the largest restructured accounts that we had on our portfolio is Air India, which is fully settled. So to that extent, even that is out of our portfolio. So the headline commentary as we enter Q4 and calendar '20, we are very watchful of the credit environment. We're gaining share, which we will continue to do. Our portfolio quality, we're quite confident is holding up well and we believe it will continue to do so. We haven't seen a formation of any new large credit areas of stress. We are not in any of the accounts that the market is talking about, be it telecom or any of those areas. We are not -- we have no exposures to any of them. So unless there are collateral outcomes that start hurting the industry at a significant level, we should be well positioned to honor our own aspirations of growth and profitability and, more importantly, ensuring that we are delivering on the commitments of all our capital ratios and the returns that we've set out to do. So with that as a sort of opening commentary, I'm happy for us to take questions. Mindful that a large number of people have gathered, the only request would be try and keep the questions fairly one-off, at best, 2 to a group, and then we can sort of come back, circle back later. So Albert, you may open it for Q&A.
[Operator Instructions] The first question is from the line of Krishnan from SBICAP Securities.
So one of the things about the franchise strengthening itself is how it reflects in the pricing power. So we just wanted some qualitative commentary for the last couple of quarters that pricing power is not reflecting in how your NII has grown compared to how deep loan growth has been. So just some -- there's a couple of things that I just wanted maybe we'll hear some commentary on. Number one, how much of this is a reflection of where we are in this macro environment and the credit facilities we are making? Or is it a function of the franchise itself not being able to exercise pricing power? So that's part one. And part two, how long before we get to that position where you believe Federal Bank will be able to exercise the pricing?
Thanks, Krishnan. I think our response to that is that we have been more biased to the secured and the higher-rated, whether it's a corporate or the individual. So we're making this conscious trade-off between price versus quality. Ideal would be to get right on both. We believe in the businesses that we are operating. Through the mix of businesses, we will be able to see the margin expansion. In this quarter versus the last, we saw the yield expansion on a blended basis of about 5 basis points. But the 3.05 would have been the NIM, unfortunately, for us -- not, unfortunately, actually, the slippage being higher on these 2 accounts and having to take 5 months interest reversal in one account and 6-month interest reversal in the other or 5-month interest reversal in those accounts meant roughly about INR 20 crores of interest income falling apart. To that extent, that's about 4, 5 basis points. So to that extent, the pricing expansion didn't see through in this quarter? But we are -- even at the beginning of the year or through the year, we've been guiding for a margin of about 3.1%, given our business mix. That saw come down because of the impact in Q3 on Q2 on account of the TBILL fall being more precipitous. We think we haven't lost that power because certainly as TBILL rates start hardening and the repricing that we have done, we do believe that in Q4, we will see this come back, considering the slippages are moderate. So business mix, if you see our retail expansion is quite strong. Corporate, like I pointed out, is more muted. Yes, corporates -- the kind of corporates we pursue are not giving us high yields. But I think the story will be more visible as we go into FY '21 when, hopefully, we will be amongst the best credit cost providers in the country. So the net expansion will see through as these things work in favor. Yes. On timing-wise, maybe we haven't seen the full benefit. But on -- I think in the segments we operate, we are able to get business without going totally below the -- below our sort of threshold points. Krishnan?
Sir, do you have any further questions?
Maybe we can go ahead. They can come back.
The next question is from the line of Prakhar Agarwal from Edelweiss Securities.
Yes. Kunal over here. So firstly, in terms of the overall slippage outside of the corporate, when we look at it in terms of the agri, retail and all compared to what a few of the other peers are seeing on the agri side, we have seen a significant improvement. So can you help us maybe to understand what is really leading to like -- even in absolute term, it's one of the lowest slippage this quarter?
I think there's no -- there's nothing unique. Our portfolio in agri is really weighted to gold. So it's agri gold, gold which is part of the agri. And it goes back to, I think, many quarters of the bank's effort of being more sensitive on the kind of risk and kind of segments we pursue. And large part of it -- I mean almost all the book is secured. So in our mind, this is when we factor and give guidance at the beginning of the calendar year, financial year, it's tracking quite along that. We haven't seen any significant gain or threat to that outcome. So it's a momentum. Our portfolio and our SMA book reflects this confidence that this should be a trend line.
And on retail -- retail and business banking has retail like INR 100-odd crores, that's significantly lower even on this kind of a base wherein it has grown. So maybe even if I have to look at it in terms of maybe the vintage, maybe -- I think is it more because of the growth which is there? And if I have to look at it maybe on the back book, maybe 2 years back once we would have originated, is it behaving in a similar form, what we are seeing in terms of the slippage run rate?
Yes. Our momentum on the origination, if you go back, say, last 3 years, retail growth picked up in 2016 and 2017, have all been secured and salaried, which came out as we grew our corporate, because that was our strategy when we started doing corporates. We wanted to make sure that the corporates would give us access to their employees and get relationship. So the retail pickup is in that space. Second, our collection capability has improved quite materially over the last 2 years, and that's an area we will keep giving more attention. So we're doing a mix of collection capability, the book profile, the underwriting, conscious calls around what kind of business you want to write. We believe that this is something that we should be able to sustain. Yes, there will always be a INR 10 crores here up or INR 10 crores down, but it's in that band. It's not a much higher number.
Sure. And in terms of the BBB and below exposure or maybe just below BBB, which is almost 12%, 13-odd percent. Given this kind of an environment, are we seeing any further stress? No doubt, over the last few quarters, you've highlighted the stress pool, and that's more or less done, which is clearly highlighted in terms of no more than INR 100 crores repaid. But what about the other pool, which is there of, say, almost like 12%, 13% of the corporate advances, are we seeing any kind of a deterioration out there?
So answer is no. But why not [indiscernible] -- yes. Yes, go ahead.
If you see corporate advances, 88% is BBB and above: 77%, A and above; 11% is BBB. Now you're adding this remaining 8% or so others, remaining 8% as below BBB. It's not below BBB. The breakup of others is given separately through internal rating. In that you have FB1 (sic) [ FBR1 ], FB2 (sic) [ FBR2 ] and FB3 (sic) [ FBR3 ] all put together. I mean these are corporate ones. But because these have not been rated, they are coming under others. So it's not 12%, which is under risk.
Okay. And just in terms of this FB1 and FB2, in fact, there is like almost 17-odd percent funded from FB1 to FB2, so anything to read into this, maybe in terms of the internal rating as well? Say, earlier, it was 27% last quarter. Now it is 10-odd percent. So anything substantial? Maybe this is like 1 or 2 accounts which is leading to this.
Yes. You're right, actually, Kunal, in terms of one account has actually moved away from FB1 because it got its rating done. So it has moved from FB1 to AAA, and that is why it is not coming here. Similarly, one AA-rated account now has lost its rating because rating process is going on. So once the moment it gets its rating back, we will -- it will come back on -- into the other categories. So that is why there is a movement, but it is because of 1 or 2 large accounts moving here and there. It has got nothing in terms of deterioration of the overall pool. I would repeat that 8% others may not be taken as below BBB because that is unrated one. And as a result, it does a breakup.
[indiscernible] so that the more [indiscernible]. You have [indiscernible]?
Yes. I'm done. Yes.
The next question is from the line of Amit Rane from Quantum Securities.
Sir, can you explain the movement of standard restructured assets that have come down from INR 612 crore to INR 463 crore, the reason for the same?
I mentioned that Air India was one account which is north of INR 200 crores is fully settled. So that's come down.
Okay. And sir, out of the standard restructured, how much is through MSME under the RBI special scheme?
Less than 10 crores.
The next question is from the line of [ Watsel Manek from Lab Consultants ].
Sir, can you please give the breakup of the corporate slippage, from which sector we have come?
There are 2 large MBS EBITDA housing finance.
HFCs.
Okay. And there's nothing from the south-based coffee or something?
We have no exposures to any of them.
We don't have exposure to them.
The next question is from the line of Aakash Dattani from HDFC Securities.
My first question is what is the quantum of additional provisions made on the 2 or 3 large corporate accounts that slipped this quarter.
The provisions we held in standard asset provisions last quarter for these 2 have been shifted to credit provisions, plus the 10% for one of them, which looks more doubtful. So one account is 25%.
Okay. And the other one?
15%.
Okay. And my next question is on your outlook for group.
We believe that the credit growth we had originally visualized for full year to be between 18% and 20%. We think it'll be between 16% and 17% this financial year, given that the first 9 months are roughly about 13%. I mentioned in an earlier call that the 13% should be seen in the context of INR 200 crore repayment by Air India and INR 300 crore charge-off on -- a technical write-off. So that's INR 500 crores. If you put that back another 12%, it would've been about 15%. Full year growth, we believe 16% to 17% is possible.
The next question is from the line of Nitin Aggarwal from Motilal Oswal.
Two questions. So firstly, like what are our thoughts on improving the provision coverage? While the credit cost is behaving as per expectations, that coverage ratio has come down from like 50%, 51% to now 46%.And secondly, the lower provision charge that we have seen this quarter on the debit card loyalty points is quite a large number. So what was the earlier number that you were building in earlier? And if you can give some color on this, like what to expect on this. Is this fully done? Or do you see something, say, again, coming up on -- in terms of higher provisions next quarter? So any more color on this?
If you are looking at the provision coverage ratio, you see the provision coverage, including technically written off accounts, then it has improved over the last quarter. There is an increase of about 25 -- 24, 25 basis points. Because it's first provided 100% and then written off, naturally, [indiscernible] provision has gone to that. It's never to that extent in GNP. The risk also has come down, so over a period of time because if you are comparing it with previous quarter, it was not 51% or so, I think somewhere that number because it was 48 -- around 48%, 47 point something. And now it is 46%.
No. [indiscernible] actually, [indiscernible] of 50 and then FY '19 then.
Yes. I think the blended, including technically write-off, is about 67% right now. Our target internally is to take it to 70% over the next few quarters, which we will work on. But we balance out across, and we are ensuring that we're providing where we are seeing more stress. So at this juncture, given our portfolio quality and our collection quality, we don't believe we are in any stress. But that said, we will keep working on it. But beyond that, there's no data point to offer.On the debit card reward points, what's the question you asked?
Yes. Also just to...
Yes. Actually, if you noticed, we have just done the actuarial calculations, which we have issued once a year. We've done it every quarter, and we felt it was an excess provision. So we [indiscernible].
So nothing of the others so -- going to [indiscernible] now?
That is unlikely. I mean that's unlikely.
Now it is going to be a quarterly exercise because that is what was suggested by your [indiscernible].
The next question is from the line of Abhishek Murarka from India Infoline.
So the question really revolves around the operating profitability. Now if I look at the operating profits to average assets, the number for the last couple of quarters is around 175 basis points. Whereas before that, it would hover around 195 to 200 basis points. So there's really a 25 basis point kind of gap. 4, 5 or 7 basis points of that you explained basically because of the NIM and interest reversal impact on the NIM. But going forward, to be able to do a sustainable 1% plus ROA, this number really needs to get back to 2%, the operating profit to average assets. So how are you going to climb back or claw back rather the 25 basis points which you seem to have lost either because of pricing or because of fee in the last couple of quarters?
I don't think we've lost. It's just that the rate of growth has slowed, and I don't believe that it is any structural problem. It's just a situation that we are in. And I'd rather believe that these are -- as long as we're doing the right things, it'll come back. In terms of when we started pricing off linked to TBILL, at that time, we were amongst the pioneers to do that. TBILL followed much higher than the repo cut, and we started feeling the pain on account of that. But it's only a matter of time where the -- either we reprice, which we are doing, or the TBILLs themselves start hardening. So I don't believe it's a structural fall. So in every area, we've never said that there are any silver bullets and it'll quickly come back. We have a structural -- one issue that we provide for pension, and that's an element of cost, which, unfortunately, will continue in the portfolio for the next 2 to 3 years. It will be around 3 years. And therefore, to that extent, that's heavily not -- that's not linked to performance, it's linked to where the yields are. And as a consequence of that, that 7%, 8% of our costs, we don't have great direct control over. So the rest of the costs have to work harder to be very efficient. So to get back that 20 basis points of [indiscernible], the 20 basis points that we talked about, a little bit of everything, the portfolio shift from being -- from the current mix to a more -- weighted to retail, within retail weighted to some of the higher-margin opportunities, which is happening. You will see rate of growth, and these are quite exceptional. Then the reduction in slippages, which we are working towards. And I think the combination of that, plus some more elevated credit growth in the coming quarters, we do believe getting to 190 around that is very much in the cards. And our commitment of delivering 1.12 as ROA at the exit of FY '20 and an improvement from there on is something that we are aware of and working on.
The next question is from the line of Hemali Dhame from Dolat Capital.
Sir, the quick 2 questions. One is what is the quantum of the lumpy slippages in corporate? And what would be the status for ILFS exposure?
The quantum of the lumpy slippages in corporate, as you see, is about INR 320-odd crores. These 2 accounts are the primary ones and something other, the smaller account. So a combination of this. IL&FS exposure are standard. The 2, [ risk score ] and ITNL, are out. I mean Air India, we have made the provision. I mean as an NPA, technically, the amount is lying in the S2 accounts. When the issue gets solved, it'll come back to us. But those are much smaller accounts. The other account is standard.
Okay. And can we have the quantum of the standard accounts in the ILFS?
192.
192.
The next question is from the line of Jai Mundhra from B&K Securities.
Congratulations on the good set of numbers. Sir, I have one question. If you can sort of give some broad breakup of this 4% of below BBB booking, your corporate book, which is roughly around INR 2,000 crores, sectoral breakup or whichever way you want to do it.
You got anything? Don't think there'll be any names on that. We can -- I don't know if there's any specific data that we can provide. Sumit, anything?
This is a well collateralized book. This previously used to be commercial banking customers, which graduated into larger set of customers. And they've been with the bank for long, dealing with this customer is very long, and there's barely any stress in the book.
Sure. Any sectoral data? Or would it be very widespread?
Very, very, very distributed.
Very distributed. Very distributed. You can see they'll be more around INR 25 crore, INR 30 crore exposures, more in the characteristic of an SME, but now graduated is our definition of CIB exposure, more than INR 25 crores.
Sure, sir. And CIB includes your commercial as well, right? So this -- the denominator is around 60,000, right?
No. No. No. Here, it is pure corporate advances is what we are doing.
Above INR 25 crores is commercial. It's not a core commercial, now graduated to corporate. That's what Sumit was saying. So once the limit crosses INR 25 crores, it becomes part of corporate.
The next question is from the line of Kaushik Poddar from KB Markets.
Sir, have you already provided for all pilot testing? Just clarify the things.
The 2 accounts that our NPA have provided. The third account, the standard, no provision.
It's a 0 [indiscernible], third one.
It's a standard asset.
Not really standard. As of December 31, 0 [indiscernible]. We continue to reduce our exposure there.
Okay. And I guess you had promised something like 1.1% ROA at the end of this year, as you exit this year and probably 1.25% next year. The same goal remains in focus?
Yes, sir. As of now, all commitments mentioned are being addressed and worked on. So we believe exit rate should hold.
And that 1.25 as the exit rate for the next year, that also stands, right?
Yes, sir.
The next question is from the line of Jayesh Gandhi from Harshad Gandhi Securities.
Just a clarification. The 2 large HFC accounts would slip this quarter, you said first account has provided 25% and another one has provided, 15%, is it?
Yes, I did. Yes.
And what would be the future roadmap here? I mean is there any chance for upgradation? Or it will be provided gradually?
One of them, which is in the public domain, DHFL, which is now a regulatory appointed process is underway. The next 6 months will bring about some sense of what's going to happen.
And in that case, it's been provided 25%, that account?
[indiscernible]
We are not specifically saying, but it's either 15% or 25% [indiscernible]. And the other account, which is the Reliance, I think, there, the process is underway. So we will know better by end of this quarter what's the next step on that.
The next question is from the line of Srijan Sinha from Future Generali. The line from Mr. Srijan has dropped. We take the next question from the line of [ Pavan Kumar from Rataria Capital ].
On cost income ratio, what should be the steady-state run rate of that? And in this particular quarter, we have seen a higher cost-to-income ratio even in the last quarter. But what are the existing order rate at which we are expected to stabilize?
I think we -- sequentially, you've seen some improvement. But we had set out at the beginning of the year to exit at 50 or slightly below in FY '20. Unfortunately, that's how looks to all of us given the income growth has been slower than expectation given various market events. We believe that in Q4, we will see another 100 basis points improvement, getting closer to 50 as an exit rate. And the full year will be about 51.
Okay. And longer term, what are the recent number coming?
I mean longer term, we are pushing very hard to get it below the 49, 49 and 48. But I have to be honest, the yield movements and some wage-related conversations that are going on at an industry level, there is some overhang of cost which we have to work through. Our cost structure, unfortunately, one element of it is something that we don't have a direct grip on given the situation, but we are trying to make sure the rest of it is working as hard as possible to ensure -- like for example, the digital transaction is now 80%. You've seen it in our deck. So the traction on all those counts, the FedServ initiative of the bank, which is centralizing the entire thing into our ops company as well the level of robotics that we're bringing in, the artificial intelligence-related stuff that is reducing processing costs are working well to compensate some of these issues.
Oh, okay. And sir on this [indiscernible] account [indiscernible]. Is this some kind of SPV or some kind of only 1 [indiscernible]?
All 3 are SPV completed projects and earning accounts. The 2 accounts which are classified as NPL also are getting their regular payments coming from either [indiscernible] tools or [indiscernible]. The distribution of that is held back by the lead banks in the other 2 accounts, Union Bank and [indiscernible] Bank, respectively because of some NCLT orders. While SBI has been successful in vacating it through Supreme Court as a state, the other 2 banks have not yet succeeded in that.
Okay, okay. And on the right track provisions which would be further available, do we have any exposure to [indiscernible] far often to the [indiscernible] to this?
No, we have [indiscernible].
It is pulled off.
We have no -- none of them.
The next question is from the line of [ Rahul Gaurav from CSB Mutual Fund ].
Just a couple of questions. First, could you give the weighted average portfolio yield for corporate, commercial, business banking and retail and agri as well?
Rahul, if you can just get to me, I'll probably give it to you later.
Okay. The second one was around current account deposit mobilization. So just some color -- I mean, the trajectory seems to have come off in the last few quarters. And overall, also on savings, that trajectory seems to have sort of come off. Just some color around overall CASA rate.
I think it's very reflective of the environment. Our rates are not the most [indiscernible] percent. And I stressed on a few calls here why CASA is the right thing to pursue. We must look at the blended cost of funds and cost of deposits. We are at about 5.83 and we've been trending down for many quarters now. Our term rates are -- the savings rate of many others is our term rate. So you've seen term growing quite well. And to that extent, CASA is a function of how the market is, the money supply and the overall cash flow in the system. The existing card growth has been muted. We've seen growth this quarter a little slower than the previous quarter. But nothing that is out of pattern and different from the best in class.
Understood. And just lastly, on margins, this sort of medium term, I mean, I think our aspiration is about 3.15% to 3.20%. We are around 3% right now. Given that the mix is already shifting towards retail and within that unsecured share is gradually increasing, what will drive this gap of 15, 20 basis points in your view, given that on corporate, my assumption is that our pricing, I mean, would be extremely fine, and we've not seen much benefit come through. So just -- I mean, qualitatively, if you can or maybe even with numbers, what will drive this 15, 20 basis points gap?
Well, I think I would break that into 2 questions, get to 3.10% and then talk about the 15 and 20. The 3.10% as like I mentioned at the beginning of the call, is a function of all the little things that we are doing to get the [indiscernible] back, and therefore, the number to 3 10. One is certainly lower slippages. Two is the mix of the book changing. And three is the growth in the blended cost of funds being -- improving every quarter. So this 3 -- like, for example, our savings rate is now linked to repo. So every time we reprice the asset, the deposit too gets repriced, so the blended combination of this. As we scale our volumes on some of these businesses, which does require a little more friendly economic environment, we are not that courageous to go out and put unsecured assets and pay down somebody has its own stand I'm very clear on. So we're being quite cautious on the kind of unsecured ticket exposures we are doing. And in a little more longer run, as in year calendar '21, we believe the new businesses that we are seeing, which is the credit card model that we're pursuing, the commercial vehicle and the other businesses that we are now getting into will start gaining scale. But then I have to say is at least 12 months out. Money account is the development that we are doing and the mix of businesses and the reduced slippages should give us the -- come back to 3.10%, 3.12%.
The next question is from the line of Amaan Elahi from Haitong Securities.
This is [indiscernible]. Just a couple of questions. One, on the cost growth, you mentioned that there were certain wage hike provisions which were taken. If you can just let us know what kind of provisions are already taken. And what is the expectation based on the negotiation scale now?
We -- in Q2, if you recall, we had -- up until then, we have provided 10%. In Q2, we provided another 2% with retrospective effect. As we speak, the wage negotiations are underway. The union demands are much higher, but the negotiating process is underway. I would think another 2% increase may come through in the coming quarters, but we don't know when. So that's something that we have to factor for.
Got it. And the second question is that the branch expansion has been very muted in the last few years. And knowing that some of these branches have been aged and in the newer geographies, you have gotten traction. Would you like to revisit and then open more branches going forward?
We think we've added now this year, while it's showing only as 4 branches, we've added 10 branches as of now and exit by -- I think it's in the deck, we'll exit about 25 increased branches in this calendar year -- this financial year and 14 for next financial year. But our belief is we should not see branches in isolation, it should be the number of RMs that we've put out and the various suite-on-suite and digital and BC model, we believe growth for us when we can see. Branches are a nice fixture and serves us some confidence giving. So we are choosing specific geographies, but that will not form a large part of our incremental strategy.
And one last question. On the capital side, would you like to comment whether -- what are your thoughts, the current capital adequacy, maybe a future capital raise?
We believe we are well capitalized. All of it is Tier 1. Our CRAR is close to 13.5%. At current cost and speed, for the next 4 to 6 -- or 4 to 5 quarters, we may not require. So depending on outcome, performance and our outlook for the following, we think end of this year, early '20 -- early '21 is when we would look for the next intervention.
The next question is from the line of [ Anikit Abhyankar ] from [ RR Jakani ] Stockbrokers.
Yes. The MOU is signed with no [ specificity ]. That is under Page 19.
Yes.
So in June quarter, in the earnings call, you told that you will then adjust the financial book of end user and not to the dealer. So any color on this?
I think we have done.
We've done both now.
We have done dealer financing, end-user financing. This financing only aids us in higher degree of conversion for the retail piece, and hence, the critical piece. We have [indiscernible].
Okay. And the second question is in the June quarter, you were saying that the state government is pushing for the long run [ moratorium ] but the regulators are not keen. So what is the update on it?
This is over.
Thankfully, that has played through. We don't have any significant issues right now.
Our next question is from the line of Ashi Anand from Allegro Capital.
Just wanted to understand, given the slowdown in the economy, what's the kind of outlook that we have on the SME space in terms of asset quality? And any specific sectoral trends or areas of potential weakness, so things that we should watch within that?
Thankfully, our portfolio, like I mentioned, and like our view is, it's holding out well. We've been, I think, this speaks to the fact that for many, many quarters, we've been more conservative in all that we have done, and I do believe that's a wise thing. Our portfolio looks okay. There is no significant elevated stress anywhere at this point in time, other than the normal run rate, which is improving. We don't have any one bucket which we have anything. I mean, we have no particular bucket. We think within every bucket there are opportunities, there are stresses, which is we're very watchful of what we're picking. As we speak, we are not signaling any significant challenge.
The next question is from the line of Gaurav Kochar from Mirae Asset.
Sir, the NPA recoveries, does it include the account that slipped last quarter, the entertainment account?
No, no, no. That account is yet to be addressed in outlook.
Any update or any status?
That's under very involved discussion. I do believe it will take a couple of quarters for it to get resolved. We just know that the asset is well secured. So we have to work through a lot of formalities to materialize the gains. So I'm saying it could take 2 quarters. We're working on many things, but there's nothing concrete that I can offer us.
Sure. What is the PCR on that account, sir?
We provided 25% of that account.
25%. And given that you provided 25% and 15% in the large -- 2 large accounts this quarter, where do you expect this, where do you expect to take this in, say, coming 3, 4 quarters? Are you comfortable?
It depends on whether these accounts are, is there a resolution in sight? What is the potential haircut? And whether they are frauds or otherwise. So all of that we have to work through. And I'm saying that between Q4 and Q1 of next year, we'll have greater clarity. But we are prepared to make the necessary provisions as being fit.
All right. All right. Is the -- are the annual supervision over?
Yes, sir.
So any word from RBI on your tenure?
We have written. The board has again written to RBI.
All right. All right. And any update on the stake sale of the life insurance?
We would have a little more clarity in February.
The next question is from the line of Darpin Shah from HDFC Securities.
Sir, how much of our book is now linked to these TBILLs, external rate deposit rates?
3,700 for retail. And there is something in [indiscernible]
About 14,000, so 10% of our book. 9% to 10% of our book.
Okay. And in retail, have you seen any buyouts during the quarter?
No, we did not have any.
Okay. So what is having a higher growth in auto? The entire industry is seeing a slowdown.
We are taking share in markets. And I think it's time the market realize that we are not a very peripheral player in certain businesses. We are a very striking material player, gaining share and -- without compromising credit standards.
Okay. Again, this is largely to do with cars? Or it includes [ series ] too with everything?
Auto, auto, 4-wheeler and passenger vehicles.
The next question is from the line of Pranav Gupta from Birla Sun Life.
All my questions have been answered. Thank you.
The next question is from the line of Navin Shetty, an investor.
Sir, I just wanted to understand, when would we see the loan growth bouncing back? Like 13% for the size of ours has been a little bit of tepid. So when do we see that bouncing back in terms of the loan growth?
I think we would not take the aggregate numbers in businesses that we are confident and we are happy to accelerate. We are in the 25. The overall loan growth getting to the 20 would take some external environment also being more constructive. So I -- like I mentioned, we think the exit will be around 16%. Next year, if things start looking favorable, we will get back to our 18, 20. But at this juncture, I'm not signaling anything. We want to see at least some data in the market that suggests we should be taking more risk.
The next question is from the line of Gaurav Jani from Centrum Broking.
Just 3 quick questions from mine. One is, last quarter, you had actually suggested the NIM contraction. I think partially or 1/3 was due to the TBILL linking and softening. So on a normalized basis, I mean, after we account for the interest sources, has the yield improved?
I mentioned when we started the call, yes, it has improved 4 to 5 basis points. It would have been 3.05 if that -- these 2 accounts had not been for 5 months I have to take the interest to it.
Perfect. So secondly, on the telecom exposure, last quarter, we had an exposure of 1.78% of the corporate book, which is about INR 860, INR 870-odd crore. So where is this, this quarter? And what is the non-fund base in telecom? And an outlook would be appreciated on the telecom exposure.
We'll share it to the -- not the names that are considered to be problem names, they are in the best player in the market. And the exposure has not changed, right?
Now what has happened is I think there is a classification issue last time what the exposure, which was on bill discounting, which was covered under LC was also shown as exposure to the sector which has been corrected now. And now it is being shown as exposure to the banks.
Oh, so we don't have any nonfund-based?
No, no, no. So it is about the exposure, which wasn't build discounting under LC which is an LC. So now typically, the exposure shifts from the company to the bank, the bank which has issued the LC. So now we are accounting it or showing it under exposure to the banks, not on to the sector or a company as a whole. So that is why the telecom is not appearing in that top 10 sectors of the bank.
Okay, okay. But no -- so my question was, what is the non-fund base, if that is material? Or is this...?
Very insignificant amount.
Perfect. And lastly, the capital adequacy, the Tier 1, would it include the profits? And if not, then what is the Tier 1 included in the profits?
Without the profits.
Without the profits.
If you add back the profits, it'll be closer to 15%.
No, no. 14%
14%?
14%.
Around 15%. You have to take the dividend growth.
The next question is from the line of Bhavik Shah from B&K Securities.
So your SMA-2 book would be?
Between SMA-1 and 2, it's about 2.5%. Between 2.2% to 2.5%.
The next question is from the line of Saket Kapoor from Kapoor Company.
Yes. Congratulations on the highest profit ever, quarterly profit. Sir, firstly, sir, you guided for an ROA for 1.12% when we exit the financial year. And our mix should be in the vicinity of 3.15%?
The exit may be closer to 3.10%.
And for the next year, sir, what are we contemplating?
We will give our sort of guidance when we begin FY '21. We'll have a better look at how things are and what the economy is shaping up and how much credit exposure. And our board conversations will be over by March.
Okay. And then looking at the gross NPA and the net NPA, what should be the likely picture when we exit the current financial year? It is 2.97% and 1.63% for the 9 months.
Look at the overall credit costs, we are right now closer to 70 basis points blended. We have said we'll be between 60 and 65. So in that zone, then you can work your ratios. You know the credit costs, you know this coverage ratio. So the credit overall numbers will be in the zone, maybe with some improvements from where we are.
And sir, how are you seeing that the government securities, the bond market playing there? There is a likelihood talk of more clearer picture of fiscal deficit coming up in this budget. That means to say that the off balance sheet items should also be included. If something of that short comes up and we come up with an ugly picture of [ 4.8 or 4.6] as a fiscal deficit, how do you think the bond market adjusts itself? So what's your take on it? And how are we positioned to take that into account?
So I think you have already answered the question because if that is the case that market already is talking of these, some of these so-called [indiscernible] fiscal deficit numbers not taken on the balance sheet by the government. But typically it knows about the number and all that. It's not a hidden factor and all that, something which market already knows, it's already built in the pricing. So it may not have -- it would simply be welcoming or appreciating the transparency part of it.
Okay. And what is our outlook, sir, on these things, on the [indiscernible]?
Yes, growth is lower. I mean once the -- I think yields are shooting up because then the question comes, how sticky is the retail inflation number that has come out recently. It's mainly driven by vegetable prices and all. Core inflation still is around 3% or so. Core CPI. Core CPI. I think in such a scenario and inflation, core inflation is below 4%, and you have a low growth around, say, 5% or so official numbers, then I think you do not see yields to just shoot up and all.
This will remain in this bank, sir?
Yes sure.
And sir, the last point on how should one look into this income on investment and other income part planning out for the next quarter. What factors will play into it?
No, I think the -- a more structurally improving things like loan processing, Exchange Commission and where it is a merchant FX, we are seeing the growth, and that will continue, 18%, 20%. Where it's linked to trading gain which is heavily linked to the market where you have yields, that may have some volatility. But the structural part of the bank, fee income trend lines are north of 18% to 20%.
Okay, sir. If you look at your quarter 4 performance last year, it was the -- it was, I think, to the highest operating profit, if I'm not mistaken. We were speaking about the highest operating profit this quarter. But the last year, March quarter number was INR 771 crore.
We never mentioned this is the highest operating profit, which is highest net focus. The guidance there I think is the [indiscernible]. We think [indiscernible] available.
Did you say -- come again?
I didn't say either highest operating or highest net, somebody else in the call said. Our take there is the numbers are there for us to see. It's the highest net profit ever. Operating profit, we have a distance to cover, which is what we're working on.
Okay. But quarter 4 looks better than what quarter we had been, what we had exited quarter 3?
Normally, it has been [indiscernible]
Traditionally, it is.
Yes.
Traditionally it is, yes. Okay. [indiscernible] you were talking about something 2% or more that we expect for the overall year or for the maybe next quarter?
Sorry?
The wage hike of 2% which you were telling, that will be only for the next quarter impact or the full year impact?
All right.
In behalf of provisions.
It will be full year, but that is still in discussion, so early to tell. But yes, it will be for the full period.
For the full year, that means that around 2,800 something or 2% of that, last year number if we take the annual number?
Yes. Yes.
So we have one question in queue. We take the last question from the line of Krishnan ASV from SBICAP Securities.
Yes, it's 2 things, Shyam. Number one, is there any risk Federal Bank can walk away from the wage negotiations? Is that something that can happen? Is that something that the board can pick up? Number one. Number two. On fee income, there seems to be a secular trend on credit cards. Has there been some change in what you have in how this arrangement has been structured with SBI Cards? And secondly, third-party distribution. So those 2 elements of fee income have been kind of behaving very differently. One is seeing the secular uptrend, the other has been a lot more volatile. Just wanted to understand how you're looking at this.
No, I think when you see cards, actually, it's not credit card, it's debit card income. Credit card is a small amount. Our spend on debit cards have been growing at a very scorching pace, and we are earning the much -- fees on that count. And we believe that is sustainable. And today, we have a fairly competitive offerings on our debit. Credit card is in calendar '20, towards the back end of it, we will launch. On your first question on wage negotiation, I don't believe that will happen in a near-term question. That's something that's got other implications and ramifications, so we have to work through it. But at this point in time, we don't have any -- anything that is constructive to offer at this point in time to you.
So you don't believe that the franchise is being ready to run some the study -- I mean, it is a function of the employee force as well. But I just wanted to understand, is there any way to minimize or mitigate this impact at all? This seems to be cropping up every once in a while.
No, I think the issue here is not about run some or otherwise. The process of negotiating is at an aggregate level. The quantum is one. Second is the -- for us, the challenge is not the quantum on this, the challenge is on the pensioning aspect. So the real question that you're asking is can pensioning be avoided? That, I have said, the people who joined us after April 2010 are not part of it. So only by 2023, that workforce will fully come off. So the real issue is to deal with that combination.
Okay. And third-party indices that you made from third party, is there any element of cyclicality there?
Well, typically Q4 is the best and Q3 is a little muted. And that resonates.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Anand Chugh for closing comments.
Thank you, everyone, for being with us on the call, and we'll catch up again soon. Thank you.
Thank you very much, sir. Ladies and gentlemen, on behalf of Federal Bank, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.