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Federal Bank Ltd
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Ladies and gentlemen, good day, and welcome to Federal Bank Q4 FY '18 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Rajanarayanan N, Investor Relations head at Federal Bank. Thank you, and over to you, sir.
Thank you, Hari. Good evening everybody, and welcome to the Q4 earnings call of Federal Bank. With me are Shyam Srinivasan, MD & CEO; Ashutosh Khajuria, ED & CFO; Ganesh Sankaran, Executive Director; Sumit Kakkar, our Chief Credit Officer; and other executives.Over to Shyam Srinivasan, MD & CEO.
Good afternoon and thank you for joining on the call. We are gathered to have a conversation around our Q4 outcomes. Let me begin by both pointing out that the underlying operating performance continues to be stronger and momentum is strong. However, Q4 has been significantly impacted by certain stressed asset recognition decisions we made, impacted largely by a recent regulatory circular.So let me just speak some of the highlights on both the growth, as also the addressing of the stress. And as always, we will take the questions and clarify it. As a housekeeping point, our investor deck and the release is already available on the website and I'm hoping that all of you have access to the same.In terms of headlines, the credit growth has been quite strong, 26% Y-on-Y. Sequentially, all businesses continued to grow well, north of 5%. Operating profit was the highest for the quarter at INR 589 crores. This despite having had to take significant impact on revenues on account of the reversal of interest income, and impact of gratuity increase that came as a regulatory change at the end of March 2018.Overall, business growth crossed sort of an internal milestone number of INR 2 trillion. Deposits continues to grow at 15% and the deposit portfolio of the bank is at INR 110,000 crores and market share gains are visible and it's pan India. CASA did -- is 33.25% and Y-on-Y 17% growth. Profit numbers for the quarter obviously very significantly dented at INR 145 crores net profit; operating profit at INR 589 crores, as I mentioned. Interest income was INR 933 crores.I'm mindful that these are numbers that are materially lower than what the expectations where. But let me just address the key and most crucial aspect of the significant impairment. This quarter saw an all-time high in terms of slippages at INR 872 crores. I'm sure many are curious to know what it is, and we will spend some time talking about it both in the Q&A, as also my own introduction to these numbers. We have outlined that in the deck, so you'll have a chance to look at it and understand the granularity of that.Now for long, the bank has maintained a stance that our numbers are what it is. We don't try to smooth out or pad-up numbers. I'm often faulted for not being predictable, but I think we are predictable from a point of view of our numbers are reflective of what we are.And in the call in January when we did our Q3 call, I had guided that our slippages for the quarter will be between INR 350 crores and INR 400 crores. If you back out the one-off impact of INR 492 crores, which we took on account of the accelerated NPA recognition on account of the revised framework, the slippage was INR 380 crores. So it's bang on the expectations that we had set out.And the INR 492 crores was largely an outcome of the February 12 circular and this pertains to 4 accounts that came from power and roadways. And these are significantly large accounts which, I must say, on 31st March were -- with the record of recoveries, were in favor of treating the account as standard, but we took a very deep view of the circular and said, "one day or other this is going to become an NPA, if you apply the filter of financial difficulty inherent weakness in the account." So the standard restructured portfolio, you may have noticed, has come down from INR 1,425 crores to INR 792 crores, which means INR 633 crores of the standard restructured book has become NPA or has been upgraded in certain instances.So out of that INR 633 crores, INR 487 crores are pertaining to these 4 particular accounts. So in summary, the operating performance continues to be strong. All growth vectors are tracking well. We are investing into the franchise. We have recruited very senior people to strengthen the senior team into specific areas which are going to be focus for FY '19, be it treasury, be it government business, be it unsecured, be it an experiment to do commercial vehicle business; are 4 new initiatives in addition to strengthening our core operating performance.In terms of the portfolio, I think we are a lot less stressed out now in terms of the stressed book. You may have noticed, our overall stress has come down to 2.28%, the lowest in the last 12 quarters. This is the book which you add up net NPA, plus SR book, plus the restructured book, the total has come down to something like INR 2,800 crores, which is 2.28% of our overall average assets.So in short, momentum is strong, it's strengthening the team. We've had a very material impact on account of the stress recognition, largely influenced by our recent circular and we have made the provisions for that. Consequent to that provisioning, the impact is about INR 153 crores of extra provision on account of these 4 accounts and a consequent interest [ income ] reversal of INR 31 crores.So we have tried to state the numbers as it may have been, if we had not recognized these. That's only on hypothetical situation, it had to be recognized. So we have taken it, but on balance, I think the portfolio is a lot less stressed, and we look into FY '19 with a lot more confidence and hope to make sure that FY '19 is strong.So on that note, so let me open the call for questions. As always, our entire Senior Team is here. We'll be happy to clarify any area that anybody would like us to do.
[Operator Instructions] The first question is from the line of Amit Premchandani from UTI Mutual Fund.
Sir, what is the reason behind not downgrading this INR 792 crores of standard restructured accounts which has been left?
Yes. This INR 792 crores are accounts that one is a sovereign airline account, which we believe may not become an NPA. It will get addressed in some fashion. Outside of that, it's a large bunch of granular cases, anything -- the only other account above INR 50 crores is 1 roadway at INR 75 crore, which at this point in time is meeting all criteria of performance, and we'll have to see how that plays out. Apart from that, the whole INR 792 crores minus almost INR 375 crores of this, the balance INR 350 crores is many small accounts between INR 1 crore to INR 40 crores.
So the February circular is not applicable for them and hence they have not yet been factored, right?
Yes.
But the inherent weakness argument still holds true for them?
They are -- if you apply the filter of performance, they are reasonably okay.
Moving forward, do we -- shall we expect that these INR 350-crore-odd accounts may also slip because of inherent weakness or shall we expect that they will continue to be standard as they have been...
The experience has been non-big ticket which is infra broadly broken as roads, steel, power, the recovery from restructured are typically -- I mean fall from restructured are typically within 18% and 20% in the normal businesses that have been restructured. We believe that is what it will be in the course of FY '19 and hence -- consequently, we have built out our credit expectations for FY '19.
Sir, since you mentioned road and there is a road account of INR 75 crore, this may also be under pressure next year. Is that a fair assumption to make?
Yes, that is a fair assumption to make.
And sir, net-offs from whatever has happened on the slippages front impacting margins, what is the steady state margin that you are looking at going forward and what are the steady-state margin this quarter?
This quarter, reported margin is 3.11%. If you put back only for the INR 31 crores, which is the additional NII impact on account of these 4 accounts, which will typically go to 3.22% to 3.23%.
And next year we expect flattish trend...
3.25% is what we think we have been guiding for.
And then, you have been guiding for investment to improve the fee income and increase the share of wallet for customer. But although the balance sheet growth is restricted, the fee income is still lagging. What's the reason behind the fee income engine not yet firing?
Yes, I mentioned at the top of the call that we've brought in some senior people to focus on that. So now that the credit book is building out quite nicely, we are confident that going into FY '19, those also will start playing through.
And that should be largely through distribution, ForEx...
Yes, it's a mix of various things, distribution, treasury, both retail and cross-sell into existing client base.
Are you now kind of -- your non-fund exposure to fund exposure is pretty slow. Are we likely to see a trend of significantly higher non-fund exposure?
I think that one we have clarified and it's our belief that non-fund fund is no longer as applicable as it was in the past. I think the overall client exposure is what we are focused on and as a consequence of that, the opportunities to do treasury, investment banking products, which we have now build capability and domain expertise. As you know, we have signed up with Equirus for a partnership and that's beginning to see traction. Treasury, I mentioned, we've got some senior people who are senior people look at the government business, and the retail focus is sort of in specific pockets we are putting in work around that. So I think all this should add up. Just as a matter of -- I see a lot of people lining up. So it may be appropriate to take other calls, and then come back around in case we miss some of your questions.
The next question is from the line of Ravi Singh from AMBIT Capital.
Sir, this traditional slippages due to new RBI framework, so that has had some impact on the SMA Book also, this INR 113 crores. So what is the links here between the RBI framework and additional slippages from the SMA Book?
No, that doesn't fall from the SMA book. That is not from the restructured book. That is the -- sir, your question is the accelerated provisioning?
Yes, all of [ 492 ] crores.
The same filter, inherent weakness, financial difficulty of the account [ flow through ].
Okay. It helps.
And the road sector.
Okay. And then what is the side of SMA book, if you put together?
It is half of what we began FY '18 and trending in that direction. But like I mentioned, the overall stressed portfolios has come down, specific to SMA, we wouldn't want to bring out that.
And sir, broadly the share of corporate loans in our total loan book has increased from 33% to 34% around 2, 3 years ago to 43% now. But on the deposit side, current accounts are still at 5%, 5.5% of overall deposits. So do you think, I mean, at some stage those new corporate relationships at the mid-corporate -- I mean, the sweet spot which the bank has chosen should start yielding in some cross-sell opportunity, better current accounts productivity or do you think that is going to be some structural constraint?
No, I think answer is, yes. If you take our FY '18 and divide it into 2 parts, you will see that the rate of growth in current account is beginning to reflect some of our strategies and that is largely driven by better relation to the corporate and getting more of their business. We think that run rate will step up when we go into FY '19.
The next question is from the line of Renish Bhuva from ICICI Securities.
Sir, just wanted to get a sense on this incremental slippages of INR 492 crore because of this new RBI circular. Sir, what kind of provisioning we have as on March '18? And what sort of new additional provisioning we might have to take in FY '19?
The INR 492 crores is split into 4 accounts, and our overall coverage ratio ex write-off is about 45%. So we have maintained the same provision coverage for this also put in.
Okay. Is there any RBI guidelines which would require us to...
No. In the RBI guidelines, as we recall, one is recognition; second is date of recognition would make it D1, D2, D3. In one of their records, it's already D2.
Okay. So there is no separate guidelines about the rest of this [indiscernible].
No, no, no.
Okay, okay. And sir, so -- and for rest of the standard [indiscernible] which is INR 790-odd-crores, what is the blended provision coverage we have on that book?
Okay. Our overall coverage ratio ex write-off is 44%, so it applies to everything.
Okay. And sir, last question on the cost side, so we have been investing pretty heavily on technology, et cetera from last 2 years. So when should we see our cost to normalize...
I know I go back to the same data point to explain many things, but unfortunate for us, the cost to income that is showing as 52% for this quarter, our guidance [ already ] be close to 50%. This INR 31 crores you add back, we will be 50%. Our cost to income -- cost growth is low-teens. Unfortunately, the income was impacted. I know it's sounding like an excuse, but that's a fact. We haven't blown our costs. We have to get more efficiency, and the consequence -- and just, I think I've missed mentioning it, which is probably a question that many may have, you're growing corporate, but there are slippages. But we are happy to report all the slippages that we are facing is bookings of 2009, '10, '11 when we grew infrastructure very significantly. And that's something that we are taking the hits on, but that's the business.
Sir, I can understand cost to income ratio [indiscernible]. There are 2 moving parts, revenue plus cost. But even if we look at the absolute number growth, so other expense has grown by almost 25% in '17; and '18, it will also close to [indiscernible].
Yes, I think I'll mention 2 things, which you're all aware of. One is the gratuity impact that has happened, and the other is the wage revision impact. These are 2 realities we have to contend with, and we have to get efficiencies from that, which is what we are focused on. We haven't added branches or we are not adding people at random. So those are the efficiency measures in our hand. We think as we get our income profile right, that cost/income will start reflecting the outcome.
The next question is from the line of Rakesh Jhunjhunwala from Rare Enterprises.
Sir, my first question, what kind of a credit cost are you looking forward for next year?
We think, Rakesh, FY '19, our credit cost will be about 65 to 70 basis points.
And second is, in your [indiscernible], margins have gone up by -- your core lending book has gone up by 26%, but your pre-closing profit has not gone up by 26%?
Yes, partly impacted -- unfortunately, I go back to the same data point, partly impacted by the reversal and partly impacted by the incremental cost on account of gratuity and wage revision. But that said, the new business credit quality is infinitely better, but there is a compression on the margin on that portfolio. And that's why I said we are venturing into 4 new lines of business, which we have not done for what we think are prudent reasons. Now that we believe our platform is stronger, we have...
Which businesses for you?
Yes, there are 4 lines of business which we have invested -- we've recruited very senior people. Two have joined. Two are due to join in the coming months. So one is in terms of retail unsecured, so we will have a kind of a phased entry into personal loans and linked products [ and likewise ] on commercial vehicles. And on the corporate side, we've invested into [ equipment ], we have recruited a senior person as Treasury Sales Head, and also we've recruited a senior person to look at the government business. So these are the 4 new streams of business which are revenue accretive but not based...
You are not recruiting anybody to sell aggressively your other retail products.
We have a full team already and in the city of -- sorry, just in Mumbai, in a month, we do INR 300 crores of home loans, which is up from INR 20 crores to INR 40 crores a month.
No, no. What about mutual funds and health insurance and in the life insurance and credit cards. So that is where the bank is really making the money [indiscernible].
Absolutely, which is what I mentioned are the new areas that we are venturing into, and the full-fledged team is going into place for that.
And have you taken a decision about the insurance business?
It's in the very last stages. The 2 final bidders are -- there's a negotiation going on in the best pricing. So in the course of FY '19 by July-August, the whole process will be consummated.
[indiscernible] have you taken any decision that you will be [indiscernible] to sell?
Yes, but it's a board final call. We are waiting for the last price to arrive, and then we will take that last decision.
So this person will decide whether we will buy or not, whether we [indiscernible] or not. Am I right? I don't understand the process here. If [indiscernible], you'll tell me whether you are selling or not.
There are 2 parts to it. One is the bidders have made their final -- what they think is their final bid. Negotiation is under way. One of the foreign partner has the right as per the agreement to make a counteroffer, and then only the final decision will be done. So that...
No, that I understand, [ Srinivas ], but if you bid for -- a person who bids will say, "What percentage should I bid for?" You will inform him, [ no ] when are you selling or not?
They're bidding for 100%.
They are bidding for 100%. Then obviously, they're bidding for [indiscernible] also, and thus the deal can be conditional when selling. [indiscernible]
We will announce it day after.
You'll announce it day after you have decided those things.
Yes, it's done. We are signing the agreement day after.
That is Equirus or the NBFC?
NBFC. Equirus is already announced. We're waiting for [ regulation ]...
And the bid of [indiscernible] 100%. It is -- obviously, you would have said that we will sell.
That is a...
[indiscernible] you bank is, every quarter some of the new -- some quarter have education loan. Some quarter [indiscernible].
Thank you. We are a real business, Rakesh.
[Operator Instructions] The next question is from the line of [ Gaurang Ved ] from [ Ved Capital Advisors ].
Sir, at the beginning of FY 2017, you said that the perfect storm for the bank was behind, and we embark on the new journey of consistent and predictable growth. So we have banged on FY '17, post which you said at the beginning of last year, this is FY '18, that the way forward from here on will be to get back to some of the exit ratios of FY '15 in terms of ROA, ROE. So can you please throw some color where we are in this journey of consistent and predictable growth? And what will be the indicative sustainable ROA for our bank on a medium-term basis?
Thanks. I recall last year, you complimented us. Today, you're being nice and polite in telling us we missed it. That is the truth. But I can only say that the miss is because of a more recent development. Underlying performance continues to be strong. We were gunning for delivering close to 1% exit ROA. If you reset the numbers, we will be at 0.96% this quarter, but that's easy to say. The reality is at 0.48% for the exit quarter. So we are certainly gunning for 1% plus or 1% in FY '19. Internal targets are higher. We are confident of delivering that. I have to just caveat it, saying no more [ googlies ] come from anywhere. But yes, 1% run rate is what we're pushing for, for FY '19. But I'd guide more -- over a 2-year period, we will come closer to 1.1%.
And all the best for the future endeavors, and we as the shareholder would also will not settle for less going forward, sir.
Thank you for your support. Thank you.
The next question is from the line of Abhishek Agrawal from Edelweiss Securities.
Sir, Kunal over here. Yes. So firstly, in terms of the SR, sir, has there been any write-down in the portfolio? What we are seeing in terms of the decline?
Our SR book has include -- I mean, we opened the year at INR 870 crores. We are at INR 725 crores, and we increased our provision from INR 95 crores to INR 180 crores.
Okay. So that provision has been in this particular quarter?
Yes, this quarter. We added INR 85 crores this quarter.
Okay. So INR 85 crores, we have added on SR. And apart from that, what will be the overall provisioning breakup?
For the quarter?
Yes.
Credit provision, INR 263 crores. Other provisions, INR 123 crores.
Okay, so credit is INR 263 crores. Okay. And lastly, apart from this standard restructured, sir, are we done with all the RBI differentiation schemes? Or there is something which is there in 5/25 as well.
All that is there in the INR 792 crores includes the 5/25, SDR and S4A.
Okay. So SDR would have been largely recognized.
SDR would have been largely recognized.
So what's -- we would have [indiscernible], S4A and 5/25.
Roughly, that will be about INR 170 crores, INR 180 crores.
The next question is from the line of [ Sandeep Baid ] from [ Quest Investments ].
On the liability side, the CASA has remained in the early 30s range for quite a few quarters. Just wanted to know your aspirations on that, where will you want to see it in the next 2, 3 years.
We've moved from -- I mean, I'm taking the liberty of talking a little longer term from being 24% to 33.25% in 6 years. This is roughly about 1.5% growth per annum. We think this year, we'll target for 34.5% in FY '19. 34% plus, we're targeting to deliver in FY '19.
Sir, over the next 3, 4 years, do you think 40% kind of number is achievable for us?
40% looks on the higher side. We are talking of internally somewhere around 37% to 38%, but all our growth is at the CASA, which is at savings at our card rates of 3.5%.
Secondly, if you can give some more color on our bond book and the AFS book and HFT book, given the volatility in the [ yields ].
I'll just start with this that we have not availed of the dispensation given by Reserve Bank of India to spread your AFS losses over 4 quarters, partly because our duration book was well under control and there was not much of an MTM loss which would have impacted. In fact, by not availing of this dispensation, for next 3 quarters, we have just saved INR 11 crores. So that speaks of what the duration of the book is and what type of investment losses could be there in AFS book.
So would you say that given the current yields, you're comfortable on the long term?
Yes, but if it would move [ longer ], then I think there would be a challenge. But we are maintaining a very low duration.
The next question is from the line of Nilanjan Karfa from Jefferies.
Actually, I joined a little late and around the time we're talking about [ googlies ] and hopefully no [ googlies ] coming along for the next year or so. But there's a point to mention, I think these are disappointments, right? And I think if I look at the very long-term performance since 2010 onwards and there was lot of hope back then and obviously we suffered. And now again, there was a lot of hope of improvement, but things are not improving. So it basically points to weak capabilities of [ better ] handling issues which are obviously not under our control. So what are we doing in adding up more capabilities? These capabilities could be in terms of people, could be in business, which is margin accretive. Could you talk about that a bit?
Sure. I think your question is, are we smarter than the problem? And…
I mean, that's what we have to be, right?
No, no. I'm not arguing against it, I'm only defining the question that you -- for all our understanding.
Yes.
And as somebody who is watching it, you're right in asking this. Firstly, I think the underlying performance, I repeat, at the risk of sounding a little arrogant is materially moving up, given the impact that we take and maybe there are certainly better banks, and that's why they're rated better. We are what we are. We don't try to smooth numbers. We don't try to make sure that something is done. There was never been a regulatory divergence with us.
Right.
And in this quarter, the decision we took was that potentially it could be divergence at a later date. So there are governance characteristics of Federal Bank. I don't want to give no weightage for that. That said, the outcomes are not what we would like it to be. I mentioned that in the call and on many occasions, we have been strengthening our senior capabilities, both in terms of new seniors as also business verticals that we’re getting into, as also the structure of the organization. We believe that in the last 2 years, on many counts, we've seen material movement. The choice of carried portfolio legacy was one of hope that we will clear and we will sort it out rather than take a hit, we never had the luxury of taking that. But we had to do it and we have done that. In some way, what we have done is quite [ seminal ], and we believe from here, the much will be more positive. But only performance will give us that outcome, but we are a confidence senior team. The Board is fully aware of every step of it. We believe we are doing the right thing. And like, if you'd heard the call which Rakesh was talking about, there are some investment opportunities that are maturing, which gives us some buffer to do what we want to do.
Right, right. And sorry, I'm probably asking you to repeat because I was not in there in the call. Did you say we added senior management or some business [indiscernible]?
There are some of the key areas of the bank that we believe are potential opportunities, we've brought people with industry experience for 20 plus years in those areas, be it treasury, be it government business, be it retail unsecured, be it commercial vehicle business, we're getting in senior talent fusing along with some home-grown talent. So we believe the senior architecture -- the architecture and the senior team is now more market facing and stronger.
Right. Just a second question, I think I just heard that there was a provision made on the SRs. So what this because of a downgrade of the SR portfolio?
Yes, there was one account which was shipyard, which saw a downgrade, we took the hit.
The next question is from the line of Harshad Borawake from Mirae Asset Management.
I have 2 questions. One is, what could be a normalized slippage ratio in each segment retail, agri, SME and corporate. And the second question is, you mentioned credit cost of 65 basis points to 70 basis points for FY '19. So is this a normalized credit cost which you expect or should we expect further reduction in FY '20?
Our guidance at this junction is for FY '19. We believe these new growth that we put in over the recent years are of the quality we can be happy with. Consequently, if you get 65 basis points to 70 basis points, it should see improvement in FY '20. But let me just deliver FY '19 confidently, and we'll have a better outlook. While we are not specifically giving you segmental slippages, we believe in FY '19, the overall full-year slippages should be within INR 1,100 crores to INR 1,200 crores.
The next question is from the line of [ Madhu Chandadev ] from MCE Research.
My question is, you have guided to this 65 to 70 basis points of credit cost in FY '19 and you also mentioned that -- we have seen in the past that there has been some hit downgrade in the SR book. So have you factored in any incremental provision on your outstanding SR book or is this guidance excluding this any adverse outcome on the SR book?
Normally, the SR provisions for a year tend to be between INR 75 crores and INR 80 crores, that is factored into this.
But nothing beyond that, right?
SR book has come down, as you would have noticed in one quarter from INR 870 crore to INR 540 crore. INR 725 crore minus the [indiscernible] provision, INR 180 crores.
So net of provision, it is INR 545 crores.
Okay. So if you could just -- I just want to reconcile this number. So what is the total provision covered on the outstanding SR book?
INR 540 crores up on...
On INR 752 crores of SR book value, INR 180 crores of provision is maintained, 25% -- it is 25%.
25%, and you have factored in INR 75 crore to INR 80 crore of provision in that guidance, on account of SR book?
Yes. And we have sold some SRs also in secondary market, about INR 135 crores worth between quarter 3 and quarter 4.
The next question is from the line of Manish Shukla from Citigroup.
Of the FY '18 slippage number of just under INR 2,000 crores, how much would have been the SME book which is about INR 385 crores in the fourth quarter?
How much of the slippage in the year would have been SME book, is that the question?
Yes.
This quarter, SME book slippage is INR 272 crore plus INR 113 crores.
Yes, INR 385 crores, what was that number for the full year is what I'm trying to get?
It's not in top of my mind, but I would think it will be about INR 600 crores for the remaining 3 quarters.
So total of a INR 900 crore number?
Close to INR 1,000 crores will be the number.
Okay, fair point. When you talk about 1% ROA for '19, is that the exit or the full year?
At this juncture, we'll have to see how Q1 shapes up, but we believe full year exit rate -- the exit rate will be 1% for sure. Full-year we'll get -- average will be closer to that number.
Okay, and does this factor in any stakes in from -- gains from subsidiaries?
The 2 subsidies that we have; one is a sale when we complete it. The other is the investment coming into the company. So there is no monetary P&L coming into the bank. In short, if and when we do it, will be at delta over this.
And any thoughts if you would want to make provisions around it or would it flow through P&L...
We will strengthen our balance sheet, that's the principal focus item on that.
The next question is from the line of Rakesh Jhunjhunwala from RARE Enterprises.
I know you have the INR 65 crore, INR 70 crore credit cost, because you have INR 2,800 loss in sales and INR 1550 in net increase, you say you'll recognize INR 1,000 to 1,100 crore next year?
INR 1,100 crores, to INR 1,200 crores, yes.
And so your gross NPAs you have gone around INR 4,000 crores
INR 1,100 crores to INR 1,200 crores, you mistook, Rakesh, that will be the slippages.
Because these will be recognized as NPA?
Recoveries roughly in a quarter, if you have seen INR 222 crores in Q3 and INR 239 crores in Q4.
Fresh slippages will be much lower then, maybe around INR 500 crores, INR 600 crores.
No, fresh slippages will be INR 1,100 crores to INR 1,200 crores, then we have a net of the recoveries and upgrades per quarter.
Right, so therefore [indiscernible] so that means the gross NPA should not be more than INR 3,000 crore, INR 3,100 crore?
The increase should not be more than INR 400 crores.
Right, so that is INR 3,200 crores and you're really holing up revenue of INR 1250 crores, so that means INR 8600 crores should be there, that will ensure coverage over 60%?
Right.
Second thing I have is that in your SME book, of you recognized NPAs, how much is the secured book?
Our SME book is largely secured, Rakesh, because we don't do unsecured lending in SME.
But then certainly we have recoveries, because the securities are send -- security real estate or other security, [ RB ] not enforcing them, why are you not recovering them?
We are -- recovery, as you have seen, has gone up sequentially every quarter and that's where the large part of the recoveries come from. Corporate recovery tend to be a very choppy and almost -- and particularly our older cases were not -- Federal Bank was not the lead or even an important lender. We were part of a large [indiscernible] so the recoveries on corporates is usually very low. Almost all recoveries are retail and SME and mid-market clients.
Right, then how much, [indiscernible] INR 113 crores of interest income this year, because of this fresh provisions?
Yes.
These are [ INR 113 crores ] in the quarter, apart from the provisions?
Sorry, repeat the question.
I mean your lost interest income [indiscernible] recognition of NPAs?
Correct.
How much was that?
INR 31 crores except, because of these 4 accounts also in quarter 4.
All right, but here you have [indiscernible] profit after tax INR 119 cores, in your Slide #3 of your presentation, account of expedited recognition, I think you said you said net interest income INR 933 crores, improved INR 31 crores and then 3.1, 10 basis points, profit after tax INR 145 crores to INR 119 crores, what is INR 119 crores?
That is the impact of the provisions that we had to do exclusively for these accounts that we took as a hit.
This is the interest provision?
No. This is the credit -- loan loss provisions.
Loan loss provision and INR 31,000 crore is the losing of interest?
It was a reversal in interest on account of these 4 accounts.
So that was INR 150 crores?
INR 150 crores, yes, pretax impact of INR 150 crores.
And plus you will have – plus your book of INR 600 crores, INR 700 crores still [ let know ] which is restructured? So maybe you're talking of slippages, your complete slippages on that book also?
When we say the slippages of the quarter of INR 872 crores, it includes that which slipped from the restructured book, which was about INR 632 crores...
Next year you're estimating INR 1,100 crores to INR 1,200 crores for slippages, you are also including this slippages which will come from the restructured book. That is plus recognition of restructured book plus fresh increase?
Equal to INR 1,100 crores.
[indiscernible] recoveries of INR 500 crores net. Okay.
The next question is from the line of Harish Kapoor from IIFL.
Sir, just want to understand -- what was the impact of RB divergence for this quarter, if you could just quantify?
Our divergence for the full year was low, way below the disclosure. The impact was about INR 40 crores for slippages this quarter.
And just want to get an update on the education loan portfolio, so you've see upgradation this quarter, so have some of that got recovered or how is that?
No, nothing has been recovered from that.
That scheme is still on.
And what was the addition there, quarter-to-quarter?
INR 11 crores of the education loan increased this quarter.
The next question is from the line of Rakesh Kumar from Elara Capital.
Sorry I joined a little bit late in the call. So just to start with -- just to have few questions. So, on the [ trajectory ] we are yet to provide INR 54 crore, correct?
Yes, so we have taken the differentiation on account of that INR 72 crore, which we'll be in this quarter.
So INR 54 crore we will provide in FY '19, right?
Three quarters in FY '19.
And second question is, we have outstanding net of provisions SR of INR 540 crores. So probably INR 270 crore provision like if we take kind of 50% recovery, then around INR 270 crores we may have to make in the next 1 year or 2 years' time?
We think in 3 years' time because our annual is about INR 85 crores.
INR 70 crores to INR 80 crores per year.
And this INR 185 crore provision what we have made total on SR, so those SRs would be how old? Like, 2 years old, 3 years old?
This INR 185 crores is not made in this quarter alone, INR 95 crores we were already holding -- the additional amount.
Our SR book total vintage from the first SR till now is 4 years, the peak SR was in FY '17. FY '18 we did one transaction in the beginning of FY '18 and that we have sold off already, so it doesn't -- it is not residing in the book.
Okay. And on this -- because of the rise in the [ basic L ], we could not write back anything on the terminal benefits obligations?
Not in this quarter.
The next question is from the line of Manish Shukla from Citigroup.
The fact that a large part of the corporate fee [ required ] is 5, 6-year on the vintage what is your assessment of eventual LGDs in that book?
Corporate LGDs continue to be iffy because the -- if I break them into sectors either it was the large airline that we took a hit of INR 88-crores-odd. We took NAFED which is a big hit of INR 200-crores-odd sometime back. We're getting roughly 0.40 to the dollar kind of recoveries on those kind of -- in fact less 0.30 to the dollar kind of deals on that. So I think corporate recoveries continue to be quite a challenge.
So basically, I mean if we were to think of it the other way over the next let's say 12 to 18 months or thereabouts, you wouldn't necessarily have to increase the power that you hold against this particular piece of the NBA; 45% coverage may not be adequate, assuming it's 45% and that book has...
The good news is the corporates that we have taken hits in the more recent years are those that are now sold to ARCs and which is now being under the NCLT, there is a very active effort to resuscitate them. We believe some of them, the steel accounts in particular maybe, no provision incrementally required. So on balance, we don't see it to be a massive problem, but yes there will be incremental provisions that will be required in the period ahead.
The next question is from the line of Jai Mundhra from B&K Securities.
Sir just on this legacy weak restructured/all other deferred stressed book of INR 792 crores, just wanted to understand, A: is there more kind of a weak legacy book apart from the INR 792 crores. And secondly what is the provisioning that we are holding on this INR 792 crores.
Overall provisioning I said is 45% non-technically written up, which includes a provisioning for the standard restructured accounts also. So, therefore, the question what is the…
On standard asset, we have these normal provisions [indiscernible] as required by RBI and for restructure, 5%.
That answers it right, did you hear Ashutosh?
No, no sir it was not audible.
On standard asset, we have 0.4% or 2% -- on restructured standard again as per RBI guideline minimum 5%.
Sure sir and there is no legacy weak kind of a…
When I say 5%, the provision amount that has been held apart from that, there is something called funded interest term loan. In normally restructured accounts, the interest is converted into a term loan. So that is also a type of provisioning. If you include that, then the percentage may go higher because it is in addition to that 5% provision.
Your second part of the question is, are there any other weak assets? Between stressed assets, if you add the SMA book between the standard restructured plus stressed assets, we think that is beginning to half each year. As the passing of time the big names that we mentioned has been taken, so in the end, it should be what is guided for, INR 1,100 crores to INR 1,200 crores per annum figure.
The next question is from the line of [ Asish Jain ], individual analyst.
Sir, I would like to know what was [indiscernible], is it 100% exit or a partial exit?
We are not exiting at all, we are bringing in an investor partner 26% initially with a right to go up to 45% over time.
So we can assume approximately around INR 500 crores of that 26%.
INR 500 crores for the 26%. So you are ascribing the value of the company at INR 2,000 crores. No that's a very high number. That number will be way lower.
[Operator Instructions] The next question is from the line of Amit Premchandani from UTI Mutual Fund.
Sir, just I didn't -- if I heard it correctly, you're guiding for a coverage of 60% by next year.
We didn't say that. We said credit cost will be between 65 basis points and 70 basis points. We are keen to take up our coverage when the one-off opportunity comes up in terms of sale realization that we make. We'll certainly look at strengthening our balance sheet through increasing our provision coverage.
But there is no guidance on per se...
Not as yet because we need to consummate the sale and understand the full details, but yes.
And sir, just a feedback on, I’m sorry to [ take ] this, but if you have taken this deep dive into restructure and declared almost 50% of them, it would have been better if you have taken everything at one go, because this sort of the remaining restructured assets from an investor point of view kind of unhealthy.
I appreciate it, but we have taken a view based on our experience and view on how these assets are performing.
The next question is from the line of Harshit Toshniwal from Jefferies.
This question is again on the coverage. So a couple of things you have said, but on the NPA we have a 45% coverage and on the standard restructured, you said that your coverage is 5% which is the requirement as per the RBI?
Plus FITL.
Plus FITL, so that is the entire coverage and how much would be, if I include the FITL also, then what would be the coverage on the standard restructured book, which you report as [ INR 792 crores ]?
You can say it will be about 15%.
15%, including the 5%. So there is 15% on the standard restructured and 45% on the NPA. That's it, that's the entire provision coverage you are having.
Correct, you're right.
The next question is from the line of [ Ayush Surana ] from Surana Investments.
Sir, of the fresh slippages in the corporate book, so how much of it has [ fallen ] from the standard assets, the restructured assets.
Sorry, I'm not clear. The restructured book slippages this quarter INR 492 crores, out of which INR 379 crores is from restructured book and from SME book INR 113 crores. This INR 604 crores was the corporate slippage.
So INR 604 crores, right?
Restructured book slippage was INR 379 crores plus INR 108 crores, plus the SME book was INR 113 crores. All of them are corporate. INR 604 crores if corporate, out of that restructured book is INR 487 crores.
INR 487 crores, right.
It's there in the text.
Next question is from the line of Ankur Shah from Quasar Capital Advisors.
Sir just one doubt, on your fourth slide you mentioned that the provision coverage ratio is 65% and I heard that somewhere in the call it is at 40%, so is that an error?
45% without technically written off, 65% with technically written off accounts.
And the second question is sir you mentioned about 4 new areas of investments. So like definitely in the long term, it will help in bumping up the revenue, but from -- let's say if I see from a business angle, don't you think it will definitely incur more incremental cost at least in the initial years. So my point is, related to the cost to income ratio. When we talk about a lower cost-to-income ratio in the next year, on what basis is it coming from because I see it as an investment, it will rather increase the cost-to-income ratio.
Partly distribution costs are not materially increasing because the distribution infrastructure is there. These are leaderships and product capability led, which is where we have invested into and they're relatively higher margin opportunities and lower capital consumption. So when all this count put together, we should see the benefits accruing faster than we thought.
Sir, on these businesses like when I think about commercial business, commercial vehicle business or investment related business; it does require a different distribution platform than the existing one, right, because we don't have one which is clearly seen in the growth in other income. So do we have all of it or...
The commercial vehicle is a different story. I've mentioned that in FY '19 that's going to be more -- very specific geography, very specific full build-out of a business in one geography and then we will scale it up. Investments and treasury are leveraging the entire corporate RM infrastructure that we have, which is already fairly well-established over the last 2 years, and we believe that should see more gains immediately.
The next question is from the line of Sohail Halai from Systematix Shares.
Sir, I just wanted to check in terms of wholesale asset rating that we did, so the entire slippages for the restructured loan that was hitting in less than BBB?
All of them will be BBB and below.
BBB and below? So that means additionally there were no downgrades to BBB this quarter?
Almost none.
Okay. And sir, what is your outlook on this BBB because [ 9% ] of the book -- quoted book which is roughly around INR 3,500-crore-odd for us is still in BBB and below. So what are the [indiscernible] that you get in terms of slippages going from these rated assets?
Right now, it looks okay.
Okay, so you are not building in any slippages on this?
No.
That will -- whatever is there is in that INR 1,100 crore to INR 1,200 crore slippage that we are talking about.
The next question is from the line of S Parameswaran from JM Financial.
Yes sir, just as a small data question. I think I might have missed this. So the standard restructured has gone down by INR 633 crore, but the slippage is INR 487 crore. So what is the balance?
INR 20 crores is an upgrade and INR 118 crores is the FITL.
The next question is from the line of Manisha Porwal from Taurus Mutual Fund.
Sir, I believe you have given an outlook that say the growth, the credit growth would be around -- somewhere around 25%. So I just wanted to know our general assessment of the things around -- given that the overall credit growth has been very low, what are these areas where we see better opportunities coming from.
If you look at our last many quarters, 8 to 12 quarters, growth has been consistently strong on corporate and mid-market is coming through. More recent quarters, retail is moving very significantly and because we have enhanced our distribution, redirected our product capabilities and build out our network outside Kerala. So our growth rates of 25% and considering we have still 1% share of the market, we believe is a rich opportunity. Our distribution capabilities have increased materially, product offerings are strong and we have created enough infrastructure to deliver on that.
Okay. And a small -- are you understanding on, what has been the impact of 1 day reporting as per the Fed circular. How has it played out? Has it been a hassle -- bigger hassle for banks to support even genuine customer or how has it played out, your general remarks?
So I think it is -- at an industry level, certainly the -- and this is applicable to everybody, whether you’re a big ticket or a small ticket. And as a result of that, customers will struggle, but it’ll be less visible for a while because this will all be in SMA 0 for the industry. If the customer's cure their accounts, then they will -- it's a good disciplinarian tool. Otherwise those who are unable to cure, you will see the flow through in 3, 4 quarters on this. So in a longer term, I think it's a good discipline. Customers are also readjusting to this reality and we believe that very long, it is good. Near term, it will produce challenges for the industry. One of the reasons, we made the big decision to take the hits is to recognize these things.
Okay. Sir, once that you have recognized these accounts as NPA, I believe the funding to these accounts would stop. Is it or you may still continue to support them for genuine reasons?
How can you do that?
No incremental funding.
That may not happen, right?
No incremental funding on these accounts.
The next question is from the line of Jai Mundhra from B&K Securities.
Sir, just a clarification, on this rating pie chart that we show, do we include -- so this is for gross advances or this is for net advances?
Gross.
So this BBB and below would already include the corporate NPAs?
Sector-wise advance...
The results sector-wise or...
No, sir. The rating pie chart, so on Slide 12.
Sorry, one second, I'm looking at 28. Slide 12 is incremental. That doesn't include NPAs, it's incremental.
Okay. So this is on incremental basis, okay. And sir, can you provide the outstanding basis in this rating A and above, and BB, BBB and below BBB?
Not off the top of our head, but we can offer that information.
It will be similar. The distribution will be similar.
The distribution will be similar.
Proportion will be similar.
And it just getting better every quarter.
And sir, if you can bifurcated this INR 792 crores in bonds, S4A, 5/25?
Bond is outside this INR 792 crores, no?
But the last time, I believe INR 1,425 crores included bonds.
That's separate.
One second, no, INR 1,425 crores -- yes, of which, bond was INR 157 crores. So INR 792 crores, INR 131 crores is bonds.
Now out of the -- so INR 131 crores is included in INR 792 crores.
Yes, it is in the INR 792 crores.
Part of INR 792 crores and these are basically Tamil Nadu -- TANGEDCO, Tamil Nadu Generation and Distribution Company.
Sure. And any further bifurcation in terms of how much could be 5/25?
It was put together, I mentioned in some part of the call, it was about INR 150 crores; 5/25, S4A, all put together it was INR 150 crores.
Sure, sir. Sorry, I missed it.
From the INR 792 crore, INR 150 crores will be there.
All 5/25, SDR, CDR, S4A...
No, it's not CDR, CDR will not be there.
Yes, everything is part of this INR 792 crore.
CDR will not be there.
The next question is from the line of Ankur Shah from Quasar Capital Advisors.
So just one question on the corporate loan growth, since -- I've been seeing since the last, I think the whole year, we have grown quite aggressively. Sir, can you highlight where is this growth coming in from? Is it like market share gain because the PSU signs are not there in the market or working capital credit, so what is the profile of these loans? What will be the yield? Can you just throw some light on that?
We’re growing across all parts actually. We were growing in the main centers. We are growing in middle market. We are growing in deep geography. We are growing in large corporates. We are growing in emerging corporates. So it's a mix, and you're right, PSU is one thing, and secondly, I think, since we have the senior team, we have insight into the market, so we are leveraging that insight and bringing effectiveness to our client conversation.
And sir, like are these more short-term loan, working capital loan?
I think mostly working capital churn based, but for the good clients we do term. Term will not be the kind of infra kind of and we're not doing any infra power long term. The term could be a 3 year, 5 year kind of loans, but largely short term.
Okay. And in this incremental book, can we get an average ticket size?
Average ticket size would be in the region of about INR 40 crores to INR 50 crores.
I'm just kind of guessing based on...
Okay, and the yield?
Yield would be anywhere -- I mean, the average yield would be around 875. You will have outliers on either side. You will have yields which are as high as 10%. You will have yields lower than the average.
So the average is 875?
Yes.
The next question is from the line of Rahul Ranade from Goldman Sachs Asset Management.
So just one data point, can you give us the number for the recoveries and upgrades for the year?
For the quarter, it was 239, this quarter. Last quarter, it was 222, so second half was 561, first half was 170. [indiscernible] would have been about 300.
Full year is how much?
785.
785, full year.
785 for the full year. Okay, all right.
685.
685? Sorry, 685.
The next question is from the line of Harish Kapoor from IIFL.
Sir, most questions have answered. Just want to know one thing, so the run rate that we're talking about in terms of slippage, the INR 1,100 crores to INR 1,200 crores, so are we talking about other than the restructured books INR 350 crores and INR 75 crores that you mentioned granular account and one road or how is that?
We don't know full year slippage for FY '19 we believe will be between INR 1,100 crores and INR 1,200 crores, only that we are not giving a quarter-wise break-up because we don't know some of these whether it will get bulked up or what, but INR 1,100 crores to INR 1,200 crores is what we believe will be in FY '19, subject to no new equivalent of a February 12 circular reappearing.
So that said my question is basically, as you highlighted from the INR 792 crores that you have...
Yes, I heard your question, I'm saying this includes -- that include…
This includes any expectation from the restructured book and what -- any broad range that you could give from the restructured book slippage that the expectation could be, would be very helpful?
Ex Air India, I think we have a better sense and we believe Air India will not slip to an NPA.
So that is, if I'm not wrong, INR 250 crores or so, right?
Correct, INR 250 crores.
So basically the question is around recognition of this book and...
About INR 400 crores out of this INR 792 crores is what we are believing will be.
So will be the recognition next year is basically what you're saying?
In FY '19, 50%.
The next question is from the line of [ Lakith Punjabi ], individual investor.
Sir, I see from our advances that we have a blended growth of about 26%, but I don't see the same reflecting at loan processing fee income and other income, so why is that?
So you would have seen very significant growth in fee income on processing fees -- loan processing fees for the quarter 4 was INR 46 crores [indiscernible] INR 28 crores to INR 30 crores. The Exchange Commission and FX has moved up materially, so fee income on these counts have moved. The fee income on account of mutual fund distribution, wealth management, treasury product is where we are working harder on.
Sir, the loan processing fee Y-o-Y has grown only 11%?
Yes. If you look at the -- sequentially each quarter, it's moving up roughly about 10% sequentially every quarter, in the more recent quarters. The Y-o-Y 11% is because last year same quarter also we had good growth and that is reflecting in that. So it is now -- when you're growing at roughly about 25% credit growth that is denominator is also baked in. So we haven't grown at a higher pace than the last year last quarter. If you see last year fourth quarter, it's INR 41 crores, subsequently it came to INR 28 crores, INR 35 crores, INR 34 crores and INR 46 crores.
So my concern is, we are like going soft on the margins as well and -- so we are lending to corporate accounts as well and that's the other bit like I'm worried about, like we're not getting enough out of the clients in the processing fee front. Is that the reason or what is this about?
No, but loan processing fee is not only from corporate, it's from the entire spectrum of business. So please look at the 4 quarters of FY '18, you'll see that movement quite strong and it's better to look at a long-period average because INR 41 crores last year, last quarter, I can't recall off the top of my head whether there were are any one-off. Yes, more than 40% up sequentially if you add up the 4 quarters.
Right, from the first quarter we've shown a great growth, but...
I think that trajectory is what we will build on.
The next question is from the line of Harshit Toshniwal from Jefferies.
Sir, just one question, so as you had mentioned that the rating distribution in Slide 12 is on the -- based on [ fresh ] disbursal so it means that around 25% of our disbursal are 2 BBB and below even in corporate segment. Am I right in the assessment of this?
No, there may be nonrated, so it will come as BBB and below [indiscernible] nonrated.
In Slide 12, we can see that BBB and below...
Any booking anything below BBB.
I think in clarification, instrumentally we are booking nothing below BBB.
So this slide...
Yes, we heard your question, that clarification, I'll ask somebody to give it to you.
And just one more thing, whatever it is that loan book or the disbursal, does this include nonfunded or not, if you can clarify that also?
Sorry, repeat.
So whatever this is, either the total loan book distribution or the [ fresh ] disbursal distribution, but it includes nonfunded also? The distribution is for all the funded and nonfunded credit or it simply for funded credit?
So it will be largely funded. Our nonfunded book is quite negligible, it will not impact the ratios.
Okay. And if you can clarify whether it's for disbursal or the total asset book because I think that it cannot be for disbursal given the numbers?
Now we'll clarify, but I would think it will be for total asset book, but we'll clarify it.
We will take the last question from the line of M. B. Mahesh from Kotak Securities.
Just one question on the INR 1,100 crores of slippages, INR 1,100 crores, INR 1,200 crores of slippages, this year the retail, agri and SME itself has been doing a slippage run rate of roughly about INR 1,000 crores to INR 1,100 crores, but add INR 400 crores from the restructured loan book, that by itself [indiscernible]. Are you indicting that the other portfolio will be better and there will be no slippage from the normal corporate book. How should we read into this guidance?
I think the retail SME and agri that you are adding, there are a lot these one-off instances that we believe will not and our traditional run rate on retail has not been consistent across the 4 quarters because of an event. We believe INR 70 crores retail, INR 40 crores agri, about INR 100 crores SME is the run rate we should visualize and that's about INR 200 crores a quarter, INR 800 crores, INR 400 crores of corporate.
Thank you very much. That was the last question. I now hand the conference over to Mr. Rajanarayanan for closing comments.
Thank you all for joining the call. Thank you and good evening.
Thank you. Ladies and gentlemen, on behalf of Federal Bank, that concludes this conference call for today. Thank you for joining us and you may now disconnect your lines.