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Federal Bank Ltd
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Ladies and gentlemen, good day, and welcome to the Q4 FY '23 Earnings Conference Call of The Federal Bank Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Souvik Roy, Head, Investor Relations. Thank you, and over to you, sir.
Thank you, Ryan, and good evening, everyone. On behalf of Federal Bank, I welcome you all to our Q4 earnings conference call. I hope you all had the opportunity to go through the investor deck, which is available on the exchanges and also on our website.
The last year's performance has ensured that we are on a strong footing and ready to leap forward to the next level of our growth journey. Coming to the quarter that went by, happy to share that we are on track and in line with the guidance that we have given in the previous quarters.
A quick snapshot of Q4. We have recorded the highest ever quarterly net profit. We have seen broad-based asset growth. Our asset quality remains stable. The progress made on our strategic priorities is noteworthy, and also, I'm glad to mention that we have seen the best recovery numbers ever. And all of this has resulted in robust improvements in our key return ratios, which are at multi-quarter high.
I have the entire top management here on the call with me, and without much ado, I would request [ our ] MD to take it over from here. Over to you, sir.
Thanks, Souvik. Good evening, everybody.
Like Souvik pointed out, we are encouraged with the performance of Q4 and the financial year, right. Nothing is ever a straight line. There are good stuff and there are areas that we need to work and improve upon, and certainly, that is the focus of the bank. Those of you who had the chance to attend our session in late February or gone through our deck, we had talked about the things that have gone well, the things that are in focus of the bank and how do we continuously focus on improving our turn outcomes. Happy that what we had mentioned in February '20 as the likely exit rate for February -- in March '23, we have come in better on that. And we did mention that in the following period, which is '24, FY '24 and FY '23 -- FY '25, we're looking to improve on this performance. I am encouraged that the [ 1.28 ] full year, the exit rate of about [ 1.45 ] ROA, we are on course to improving and ensuring that the full year ROA for FY '24 is along guided lines.
Not to miss the point. I did get a few calls after the result, and there were some concerns expressed around has the NIM plateaued out? Why has it fallen as much as it did? And we can try and talk about it, and I will address that and mention both the yield on advances, how did it grow and the cost of deposits, how did it grow? And therefore, the deposit pricing increase fully in the book or other residuals? I think there is some residual, but a large part of it is being repriced. Different banks may have different deposit profile and different timing. We believe, for Federal Bank, Q1 saw the brunt of it and -- sorry, Q4 saw the brunt of it. And therefore, we did see the cost of deposits go up by about 55 basis points where the yield on advances went up about about 36-odd basis points. That's the difference that we saw, which did have an impact on the margin sequentially.
We exited last financial year at [ 320 ]. We exited this financial year at [ 331 ] and the average for the year was [ 331 ] NIMs, which is along the expected or guided line, and I believe with a focus on the businesses that we are giving more [ flip ] to and the mix of business and the repricing opportunities. I've been talking about NIMs for FY '24 being in the region of about [ 330 ] to [ 335 ] and the ROA of the business being around [ 1.3 ] to [ 1.35 ], both of which are very much within our batting range, and we think we have the the capability and the machinery to make sure that happens. And importantly, for long periods of time, our credit quality has been, I would say, exemplar. And these in credit costs have been, in Q4, particularly flashing at about 19 basis points. But full year credit cost about 40 basis points is in the range that we've been guiding for, between 40 and 50 basis points. Thankfully, it's at the lower end of the range.
So this combination of fairly balanced credit quality and credit -- the cost of credit being best-in-class, the NIMs being because we write better quality business, NIMs are not going to be flat. It's exaggeratedly high. But the risk-adjusted margin being around this number, [ 3 ], is what we are working on, working towards. And improvement in fee income, fee improvement and efficiency are all helping us grow our return ratios quite significantly.
So in fact, I thought I'd just begin the call by just talking about an area that most people sort of queued in or asked us. I didn't want to go around the [ bank ] and not talk about it, so I just thought I'd just upfront this point around our business model, which I think is important for everybody to understand. We don't take exaggerated risk within our risk framework. We ensure that the business mix is appropriate.
Within Retail and Wholesale, we've said [ 55 ], [ 45 ]. Within Retail, we have given accent now in the more recent past to businesses like credit card, personal loan, commercial vehicles and micro finance. And on the Corporate side, between Corporate and Commercial Banking, we are seeing good progress. And if you've seen our numbers, you've noticed the fee income from our corporate relationships have been growing at about quite significantly 35-odd percent kind of growth rate. So we're able to get the client relationship -- at a client level, we're getting a larger share of the client wallet.
Another area that often is asked about is the nature of your business has been the strength of Federal Bank has been a good deposit franchise and a retail deposit franchise. Happy even through FY '23, which is arguably one of the toughest years for deposit acquisition, we saw reasonable growth. There were areas that in a term, we had to make sure that we are not out priced, but we are competitively priced. And we saw retail term growing about 14% and overall deposit growing about 17%.
We also continuously checked to see how our market share is in terms of domestic savings and NR savings. Our share of NR deposits has increased from about 6.5% to 6.8% across the country. Our share of domestic overall savings has been hovering between 0.94% to 0.97%, or sometimes around 1%. So we are, without paying a much higher rate, continuing to hold share.
Our next focus is gaining share in domestic savings which, through the branch expansions that we've had, through our fintech partnerships that we have, beginning to see traction. Last year, last financial year, we opened 75 branches, which thankfully are holding out well and maturing quickly. This financial year, we are looking at about 100 branches. Our fintech relationships, which is about 1.5 years old, is graduating into -- the accounts that we have booked are graduating into Tier 2, so we are seeing balanced build.
So on balance, FY '24, I just want to point out our focus continues to be not exaggerated risk, credit quality being in and around the guided range of about 40 basis points to 50 basis points, more like 40, will be around [ 335 ] or so. And our commitment or our focus is to make sure that the ROA expansion is well on course and on track. We believe the foundation of the bank is in a good place, credit quality is holding quite well, and we've addressed some of the issues that needs to be addressed from a point of view of ensuring deposit growth remains a priority for the bank.
So let me just pause here and open it for questions. Like Souvik mentioned, the entire senior team [ is here on the call ]. We'll be happy to take questions and clarify. Thank you very much.
[Operator Instructions] Our first question comes from the line of Mahrukh Adajania from Nuvama.
So you already guide us on margins. But if you go by our guidance, then we are talking about some margin expansion from 4Q levels. So how do you -- I mean, what will really drive that? Our new share of new businesses, our new products would. But does that take into account the possible deposit competition which could happen? Because now, everyone will [ chase ] deposit, everyone has used excess liquidity. So how does it pan out on margin?
And my second question is even on cost to income. Where do you see that settling?
And the third is on loan growth. Is the guidance of high teens still -- do you still maintain the guidance of high teens?
Yes. And there's a lot of questions. Let me try.
Yes, we mentioned that we are looking at the credit growth in that zone. It looks possible at this juncture, even this financial year has begun reasonably encouraging as well. So we are not yet altering our outlook on that count. We are poised for that kind of growth.
The mix of business, I think you pointed out, there is a fair degree of traction in all these new businesses, and we believe that should give us some kind of [ fill up ]. I think this was a question that was asked of us even when we made our presentation in end of February, and we did talk about what kind of mix and how that should help.
And in terms of deposit pricing, it's our belief that probably the peak of the pricing is already factored in. Now, it's only the play-through of whatever you've already priced in. It's unlikely there may be a material increase in rates at this point in time. And we've factored in all this in terms of cost-to-income ratio, we are in the -- around [ 49 ] or so. I -- we did talk about it, and we said we believe that each year, we should see some progress on that count. This year, even if you take out the one-off expense that we had to carry in the last quarter of last year, last year's full year cost income was around [ 52 ], [ 53 ]. We've come down to about [ 49 ], and we believe we will see another 100 basis point improvement in FY '24.
Our next question comes from the line of [ Dipan Shu ] from [ Redi ] Capital.
I wanted to understand on the credit deposit ratio. So in the last quarter, we have grown our deposits but we were controlled on our credit output. So how do we say this? So this is the first question.
Yes, go ahead. What is the second question?
And second thing, on [ link ] to that, sir, our capital adequacy ratio is around, I said, 13%. So is it something that we are trying to be a little bit conservative on our [ advanced ] growth?
No. I think our CD ratio between 81% and 83%, it hovers around. It's just in Q4, we decided to be a little more focused on generating deposits and we saw that come through. But we have not let go or not intending to let go of credit growth opportunities. It is in -- the full year credit growth is at about 20%. Last quarter, we saw a higher rate of growth in deposits over credit, but that was conscious with wherever were good credit, we picked it up. Where our pricing was less than attractive, we decided not to pick that up.
Our outlook for FY '24, I already said. If that happens, the credit ratio will be around 82% to 84%
Okay. And sir, any linkage with that capital adequacy ratio? So are we looking to raise any funds in FY '24 or are we comfortable on that count?
I mentioned when we did our call in the January results, so we have a shareholder approval. We are considering options but we have not narrowed down to anything as yet. But there is a likelihood of a capital raise at an appropriate time, but we don't have any finite date or time as yet.
Our last question on our credit quality. So how comfortable are we on the credit quality on the retail side? So with the new fintech partnerships and all, and we are trying to increase more from the guys who are at a higher rate. So how confident we are and what kind of rating mechanism we follow? Any color on that?
I don't know what the question is, but I think our multiyear track record speaks to the fact that we are quite both disciplined and conservative on the overall underwriting across product streams. We don't intend growth coming through like flexing or letting go of credit standards. Credit standards on top of that growth, and we believe that's possible.
Our next question comes from the line of Renish Bhuva from ICICI.
And congrats on a great set of numbers.
Sir, just 2 questions. One is on the retail deposit share which has been actually steadily coming down from almost 92% in March '22 to 85% in [ March ] '23. And especially in second half, our CD ratio is also coming down, which essentially means that we are sort of maintaining the highly-liquid balance sheet. So just not able to understand then why we are increasing the [ reported ] share and any which ways our CD ratio is coming down?
I think, Renish, the first point that it is 85%, these are point in time. These are certainly not the trend. I wouldn't make a trend of it. It could quickly set back to 90%. I don't believe these are -- and like I said, we were ensuring that we had a good deposit pipeline in the quarter that went by, and we were -- we did not shy away from taking those deposits, but that doesn't suggest that it needs to be the trend line. We are keen to make sure that our deposit growth is able to match up to our credit expansion. And with the combination of that in mind between term savings, current account, we will ensure that we meet the dilemma of ensuring CD ratios, ensuring mix between deposits and continues to be retail in nature.
I would not read much, at least not as yet. We haven't seen any reason to view it differently. [ Haven't ] gone out and bought deposits. Even the term deposits that we have are clients' individual deposits.
It is a fact that the NR customers have moved a large part of their savings to term. Whenever the rate differential is significant, that was bound to happen. And it's not unique to Federal Bank, I think it's a market phenomenon. We will be foolish to let go of balances to somebody else.
Got it.
So sir, just a follow-up on that. So maybe it is right to assume that though the retail reporting definition says anything less than [indiscernible] retail, but maybe the large part of NRI would have been individual, but maybe having a ticket size of more than INR 2 crores, and hence, that ratio is looking like this? Is that a fair --
It's a fair assumption. It's a fair assumption.
Got it.
And sir, secondly, again, on the margin side. So incrementally, we are seeing that the high-yielding books, like CVC, MFI, [ PL ], et cetera, will grow at a faster [ click ], plus the strategic focus on gaining market share on the staff side. So why not we are yet aiming for higher means than [ 3.3 ], which is currently standing at?
It's not that we are not aiming at, Renish, we're certainly aiming at a higher number. But when we speak to the market and give our guidance, we have to be honest about it and believe that those are the bare minimum we should deliver.
We think at this juncture, given the prior pricing play out of deposits in one more quarter and the -- we don't want to take disproportionate risk in growing any of these new businesses and then have a problem a year or 2 down. The blend looks like. And I constantly remind ourselves that we are not looking at NIM in isolation. We look at NIM adjusted for credit cost. I still argue that a long period of time, a franchise should look at risk-adjusted NIM, risk-adjusted margin. You are all seasoned analysts. Please look at our bank versus many others, and you'll find that we are not [ discover ] [indiscernible].
No. Absolutely, sir.
And just a clarification. So in your opening remarks, you did mention that a large part of our deposit base is already repriced. So would you like to quantify, I mean, what percentage of deposit has already repriced at a revised steady rate?
I would think about 80% is repriced.
Our next question comes from the line of Simranjeet Singh from Master Trust.
Sir, first of all, congrats for the great set of numbers to you and to your all Federal team. Sir, I have next couple of questions.
Sir, first of all, can you brief something about the slippage part in the quarter 4 where we are seeing that the slippage have [indiscernible] fourth quarter?
Sorry, did you say -- what do you want the commentary on?
Sir, slippage part. On slippage part. Slippage in quarter 4. Slippage.
Yes. So you want the numbers or -- sorry, I didn't get the question.
No. Numbers are with me. How you see the trend going forward in terms of slippages? Because this quarter, in Q4, we have seen that it has increased quarter-on-quarter. So how you see it in the upcoming quarters, slippages, if you can give some guidance or something, comment on that?
Sure.
I think the sequential or long period average has been between [ 350 ] and [ 400 ]. This quarter is a tad higher. That's because of some actions we took on the Retail -- on the Agri portfolio in certain products. But Retail has trended down and Commercial Banking has come down and some part of minor uptick in Business Banking, so it's not out of range. We think our guidance, if I remember right, when we began the financial year, I said it will be around INR 1,800 crores, and thankfully, it came in at about INR 1,600 crores, full year slippages. And equally, recovery upgrade did even better.
So this trend line should and continue. We're at about a 1% slippage bank, which probably is some of the best in the market.
Great.
And sir, my second question is on the Gold Loan front. How are you -- means, what is your maximum cap in terms of loans you are looking at this point of time? Because gold is already at the all-time high. So how are you seeing the gold demand in your bank at this present juncture?
So am I -- you're saying what share of gold will be our overall -- as part of our overall business? Is that the question?
Yes. You know my first question is, what will be the percentage going forward? And second, how you see the gold asset quality going forward? Gold asset quality, I mean in terms of the gross [ NPs ].
Gold as -- unless there is a fraud or any wrong factor, gold as a business continues to be attractive, and we will continue to grow that. The rate of growth depends on, I think, both the opportunity and the timing. If the other businesses are growing rapidly, gold usually tends to grow slower. We believe between 20%, 25% growth in FY '24 is very possible in gold, and we will do. And as a percentage of gold as a percent of overall portfolio, today it's about [ 1.9% ], so it's about 10%, 11% of our overall outstanding. We have an internal cap that it would never cross 15%, but we are a distance away from that, so you could believe that we will grow about 20-odd percent in gold. Portfolio will be okay.
Yes, there are some practices that needs to be corrected, but gold as a category continues to be profitable and growing, and continues to be an opportunity to grow.
Sir, and my last question is that -- sir, and my last question is, is there any acquisition target Federal Bank is looking for in the upcoming time?
Certainly, if there was one, I would not be just casually speaking in a call like this. I have to go through a process.
But suffice to say, we are organically focused. If there's anything that's useful, relevant, accretive and at an affordable price, we will consider. All four of this makes it a very rare opportunity that something will show up, but if it does, we will consider an appropriate [ tenant ]. But right now, nothing.
Yes?
Our next question comes from the line of Pranav from Rare.
Sir, just have one query. In terms of CD, ratio has actually reduced. But if we consider C plus I, that is credit plus investment, to deposits plus borrowing, that ratio is almost constant. So that should not have actually suppressed the NIM so much. So that is one part.
So congruous to that part, can you just elaborate how much percent of advances are yet to reprice? And how much percent of deposits are yet to reprice and by what amount? So that we can have a stable outlook for NIM for next coming quarters.
For now, I think the answer to the question goes back to where I had guided. We are we think [ 330 ], [ 335 ] is the outlook that we are visualizing at this point in time. Certainly, in the quarters ahead, we will look at revisiting that guidance.
But at this point in time, suffice to say that taking into consideration all the points you've pointed out, which are valid points, we think we are poised for a margin range of [ 330 ] to [ 335 ].
So this is just because of the mismatch between the timing, right?
Yes, largely, yes.
Okay, okay. So that is one question.
Second is in terms of employee expenses. Can we assume now this is a stable base? Or are there any one-offs in this current quarter, INR 597 crores of employee expense?
One-off in this quarter, nothing. I think the last year, last quarter, I had the upfronting of the entire family pension. That was not there this year. So to that extent, yes. If pension requirements go up because yields fall, that can change. But at this point in time, this is the run rate.
Venkat, would I be right?
Yes, Shyam. That's right. There are no one-offs in this quarter's number.
Our next question comes from the line of M.B. Mahesh from Kotak Securities.
Just 2 questions from my side.
If you could just kind of quantify what is the current cost of term deposits that you have current to date as well as the savings deposits?
Current cost of?
Term deposits.
You mean the cost deposits or cost of term deposits?
Cost of [ term ]. Because if I look at your website, you currently have, let's say, the 1-year book is at about 6.8% to 7%. I'm just trying to see where is the term deposit rate in your book as well?
Venkat or [ Davinder ], would you have it on top of your head?
The blended would be currently for deposits around [ 6.2% ].
I think it's [ about ] term.
I'm talking about term.
Okay.
So you have cost of deposits, which you reported is [ 5.1% ]. You have -- if you work backwards, it can't be at this number, right, or [indiscernible].
Mahesh, can you come again?
[ 5.1% ] you said is the cost of deposit.
Overall [indiscernible].
So yes, for your CASA ratio that you have, just trying to work backwards as to what would be the implied term deposit book interest rate that you're carrying today? Just trying to work through this statement that you made that we are closer to the peak of cost of deposit declining. Just trying to understand when we compare it with the headline rate that you report as to whether we are there or not? Just trying to reconcile these numbers.
Maybe you should pick that with Venkat and he'll probably offline give you the detail.
Okay.
Again, on the other side, when you look at the yields, deals are up about, let's say, about a little over 120 basis points since the start of this rate cycle. Your repo book is more -- is approximately about a little over 15%. This by itself should have created 120 basis points delta favorable. But if I look at the other parts of the book, which also would have repriced during the course of the last 9 months, where is it that we are missing here in terms of numbers?
Anybody wants to do? Ashutosh or Venkat, do you have anything that you can offer or we should give that as a clarification later?
Okay, let me just rephrase it then. How much of room is still available for the yields to move up in your portfolio given the current interest rates? .
No, I don't -- Okay, sure.
So I think there are 2 parts. In MCLR, there is a room in MCLR-linked loans because that grows with the lag and it's more to do with the proportion of the stock for a particular bucket and all. So the competition of MCLR is like that.
So on repo side, the repricing has been happening at the same time when the -- I mean, the repo rate hike was happening, except in those cases where the reset period is monthly or quarterly or annual. So where -- like in case of [indiscernible], I mean a majority of these are [ T ] plus 1 itself. But in some cases where the reset would be for a longer frequency, that would be remaining but that should not be material.
MCLR main loans, definitely, there is a room to grow unless the repo rate itself goes up further, assuming that that's the pivot, that's the maximum and all that. Then I think it would only be the spread on which, I mean, the yield would go.
I can just add a bit over here.
50% of our loans are repo linked, which have been completely repriced. [ 13% ] to [ 14% ] are MCLR based, which I would feel half of it would have got repriced and half of it still to be getting repriced. Some are fixed rate loans, both shorter tenure and longer tenor. Those also will get repriced. So about 15% of our portfolio in advances, I think, still has scope for improvement and repricing.
Our next question comes from the line of Anand Dama from Emkay Global.
So first, we have seen some decline in the Gold Loan portfolio, so that basically is primarily with the issue that we had with the rupee earlier on? Or is there something else?
No, I think you're partly right. It's not an issue. It's just the digital lending criteria required them to readjust. They did pick up, but unfortunately, there were more work to do. So to that extent, that slowdown, but the organic branch-led is continuing to grow. But some of that gold being a short-tenure product did run off.
Okay. Okay. So next quarter onwards, we should see a quarter-on-quarter growth?
We expect growth back again also because it's growing off a smaller base, a lower base.
Sure, sir.
Sir, secondly, if you look at the risk-weighted assets growth, that seems to be far higher than somewhere about 20-or-odd percent versus the loan growth. So is it primarily because of the growth that we have seen in the PL microfinance book and so on? Or is there anything else in terms of risk weight adjustment that we have done?
I think it's the latter. You may all be aware that a regulatory requirement for clients who are unrated to carry a higher risk weight. If there's an unrated asset, they are not declared. So we looked at our portfolio. If the client had not given their ratings, then it would be a higher risk weight. So that's a onetime activity and should not be of any significant impact.
Basically, just to align with the regulatory requirement, we have classified some of those rated accounts also as unrated because our amount is not reflected there in that rate. So because of that, some part has had to be classified and the process is on to get our amounts included in the rating process.
Sure. That's very helpful.
I hope you understood that explanation. That's important, Anand.
Yes, yes.
And sir, lastly, if you can help with the LCR ratio that we have for the current?
Around [ 120 ]. [ 120 ] --
How much was that last quarter?
Around the same, [ 124 ] or [ 125 ]. [indiscernible], are you there? Around that number?
Yes. Roughly [ 124 ], [ 125 ].
Sure.
And sir, we have done any working on the ECL provisions? And is there any shortfall or like we already carry excess provisions over there?
Yes, we have worked on it. But at this stage, we don't disclose in terms of the workings at all. We have done the calculations and we are confident of meeting once the regulations come in play.
Okay. We don't have to do any additional provision, right, or we have comfortably placed.
We will come back when we have a better data on that, a better timing for that. I don't know if you can appropriately talk about it now. .
Yes. No -- no issues.
Our next question comes from the line of Kunal Shah from Citigroup.
Yes.
So firstly, on Wholesale, I missed the comment, but there was a significant increase in the Wholesale portfolio on a quarter-on-quarter basis. So -- and maybe to what cost are we raising and how much was that impact in this particular quarter in cost of deposits? And given that it would be towards the end of March, do we see maybe a further impact in Q1 of relatively higher deposit cost because they will have a full quarter impact?
Did we -- Ashutosh, which was that one? Ashutosh?
Sorry, please come again?
Sales deposits.
Sales deposits when we see there is a significant price on a quarter-on-quarter basis. If we just look at the [ utility ] numbers Q1 from the [indiscernible].
So it's basically a series [indiscernible] situation for short term. 3 months, 2 months series.
Okay. So we will not see that full impact coming through in Q1 as well and keeping the deposit cost elevated?
It will mature. I mean, April also, part of it has already matured. I mean April itself -- I mean, part of that book has already matured. May also, it would be matured, so it's a widened spread. So I think if you compare the CD issuance number March '22 versus March '23, there was an increase and which is showing a higher percentage of Wholesale.
Yes, yes. And even on a quarter-on-quarter, I would say, yes.
Yes, I think that would not be material. CD rates are greatly cooled down. It has already come down by about 30, 40 basis points.
Our next question comes from the line of [ Jao ]
Just have quick follow-up questions on the margins.
First of all, do you mind sharing what's our exit margin for our fourth quarter, i.e., what's the margin for month of March?
For the month of March, I don't know if I would have that ready made. But the full quarter is [ 331 ]. Can't be very different in March. I mean, in fact, March may have been a slightly higher month also. It's got 31 days.
Right. I mean, just adjusting for this, is it higher or lower than the average quarterly margin?
March would be higher, [ Joe ]. So I would think you should -- the blended number is a better number for your calculation to that. I'm guessing you want to do that for your extrapolation on what is the exit rate. I think [ 331 ] is the number you should pick.
Okay, sir.
And then on deposits, what's the average maturity of our fixed deposits than the average?
Large part is in 12-month bucket.
Right.
And also on the -- on our guidance of margin FY '24 to be 335 basis points. How much of mix impact uplift to margins are we assuming?
How much of?
How much of increase in margin due to mix are we assuming in that forecast?
No, the [ 330 ], [ 335 ] is quite reflective of where we are, right, at the exit rate, and -- that's the bank.
Yes. I mean, we are increasing in on those higher yielding --
Play through, right? There is a play through because like Ashutosh and others pointed out, some deposit cost accretion happens, so some new business that goes at a higher margin. So the blended outcome will be [ 330 ], [ 335 ].
Yes. So I just want to understand how much -- how many basis points roughly increase in margins are we assuming in FY '24 is due to the improvement in mix towards higher yield products?
No. You could do that, take the businesses that are relatively higher yielding and they are growing at about -- some of them are growing at well north of 30%, 40%, so that should give some kind of indication. Businesses, credit card, personal loans, commercial vehicles, microfinance, and to some extent, gold. And these businesses are growing at, barring gold, [indiscernible] are growing at well north of 40% albeit on a small base.
Our next question comes from the line of Nitin Aggarwal from Motilal Oswal.
So interesting to see that profits for 4 quarters of FY '23 have INR 600 crores, INR 700 crores, INR 800 crores and INR 900 crores. I hope this number sustains.
I have 3 questions. Like first, while you indicated that deposit repricing was higher in 4Q and you are guiding for slightly higher margins now for FY '24, can first half margins be lower versus second half as the positive repricing will continue and benefit from improving mix of high-yielding loans will take time to play out? So that's question one.
And second is on the restructured book, wherein we still have 1.6% of restructured loans. So if I compare this to like most of the large private banks, the restructured book has been fairly dissolved and most of them are like fairly below 1% now. So how do you see the dissolution of this restructured book going forward?
And the third question is on core fee income which has grown on a Y-o-Y basis, but still broadly the same for the past 3 quarters now. So how do you see the trend here?
Yes. Let me take the fee income please first, and we'll come back to all your questions.
I think the number you mentioned about INR 540-odd crores, but do see the mix on that. I think processing fees is broadly consistent. It's linked to volume, and it's trending quite well. The fee related to the third-party products and others have moved quite -- even sequentially moved quite well.
The one that is a little moving back and forth is the profit on FX, which tends to be choppy only because it depends on the environment. In Q4, it was lower, Q3, Q4, Q2 was higher. We believe that should come back. So the fee income piece, what is import exchange commission, brokerage, other fee income, we have seen good progress and that should continue. So the overall fee income, nontreasury related is tracking well. FX continues to be opportunistic. Sometimes the environment is not conducive, so we believe that should continue to grow.
The other 2 questions, remind me the order? Sorry, I skipped the second question in the order?
Yes. One on the restructured book, how do you see the resolution of that? And third on the margins. Can first half margins be lower than the second half?
Yes. Your assumption would be probably right. I do think it will be consistently the same. The blended number is what we are talking of about, [ 330 ], [ 335 ]. It could have a slightly more softer start and then catch up. So yes, that could be a fair assumption.
On restructured, [ Raj ], Ashutosh, do you want to give that clarity on that?
I think there are 2 ways of -- I mean, having the restructured book measured [indiscernible]. One is when you have restructured as per new terms and conditions and once the moratorium is over, and you have 3 installments or 4 -- 6 installments coming in time or so, you take it out of restructured book and treat it is like any other [indiscernible] asset.
The other way, I mean, the tax continues as a restructured book and you have a longer time period given to that to really assess. So those which have -- either it gets reduced by repayment. But if you have a housing like the composition of [indiscernible], these are the loans for, say, 15, 20 years or so. Now there, the repayment would be gradual and all that. But we have not removed any of the accounts from restructured book as long as it is standard and meeting its -- I mean, the new terms and conditions. So that's the basic difference.
If you have a short-term restructured for 2, 3 -- 2 years or 3 years, by now, part of it would be -- a chunk of it would have been repaid, and therefore, it would have come down in some of the banks or so. Or they would have taken it out on account of satisfactory performance as per the revised terms and condition. So I know the composition is the one wherein, I mean, we have not removed any account from that book as well -- I mean, even if it is meeting its so-called new or revised terms and conditions.
Just to add to that, Nitin, I think the performance on the restructured book, not just one, I think across all the 4 quarters of FY '24 -- '23 in the quarter, that the demand comes up. They've been consistently good and haven't shown any adverse behavior. So they're not -- the tag in itself doesn't mean that they are under any significant risk as evidenced by 4 quarters of performance post-COVID also.
Our next question comes from the line of Gaurav Jani from Prabhudas Lilladher.
Just some clarifications on the yield and cost dynamics. Now basis the numbers that you guys disclosed, total -- the cost of deposits have gone up by about 19 basis points over the last 3 quarters, right? Systemically, what we understand is cost of incremental deposits is -- cost of incremental CV has gone up by about 20 basis points. So is it a case that we have taken a lower increase in cost of CV versus the system? I mean, try to assume that. And going forward, do you see the run rate of increase in cost of deposits coming down?
Yes. I think I mentioned it earlier also, Gaurav, that we believe that most of the increases of deposits are in the price. I don't believe it should go up materially at this point in time. There may be some buckets, some tenures for a shorter period maybe, but not significantly.
Sure.
Secondly, on the yield side, there seems to be a bit of a negative surprise out here. So on the last part of the portfolio, which is corporate and housing, did we see some bit of competition coming there which is going to have taken a cut on yields or something on that stuff?
A bit of competition. I mean, if we pursue the better credits, which we do and quite uncompromisingly so, we have to be thoughtful about pricing. We may not have all the pricing power we want, so this reflects that. We haven't taken any undue risk, and then I go back to originally where the business model of the bank is. We will not be in the camp that takes disproportionate risk for growth.
Understood.
Can you repeat your clarification on the RWA versus loan growth? And a [ soft ] question to that is, how do we look at [ hence ] capital base if RWA growth would exceed loan growth in FY '24?
Ashutosh, do you want to reclarify that?
Yes.
Actually, there is a requirement -- regulatory requirement that if your loan amount is not included in the rating exercise specifically by name, then you cannot take it as a rated loan for your book. And therefore, it would go [ in ] unrated and would require 150% of risk weight and all, even if it is AAA or AA or A. So what is required is to go back to clients as well as to rating agency and say that, why my name is not there?
This process was done, it has been resolved in majority of the [ PFS ]. Still, some remaining cases where it is in process, work in progress. So on 31st March, we straightaway have taken it as an unrelated one, and therefore, higher credit risk-weighted assets are coming in. Disproportionally higher vis-a-vis the previous quarter because this phenomenon is a fourth quarter, so you see the difference between December and March. Loan has not -- loan book has not grown by that much as the CRW has grown.
Understood. [indiscernible]
So it will come back. What I'm saying is it will come back, so there would be a release of capital.
Understood. Understood.
Just a clarification on from Ashutosh, sir, on the higher treasury income please? I mean, the reason for that?
Higher treasury income?
Yes.
I don't think it is --
Higher. It is just on [ course ]. [indiscernible] was higher.
It's the -- I mean, this is something which is independent of the interest rate cycle. So whatever is coming through ForEx side, it's more of customer derivative transactions or ForEx-related sale to retail through our exchange bureaus and all other things.
As far as interest rate products are concerned, it's more or less the bare minimum which we earn in any quarter by [ recharge ]. It could be in one particular quarter. Last year, fourth quarter is not have been there. But whatever is appearing is without any benefit of interest rate cycle at a stable [ year ] basis.
Can I ask you one more question, please?
Yes, go ahead.
Just one sort of guidance.
On the fees, like the fees to assets have done fairly well in FY '23. Increased to about 75 basis points versus 60 in the previous year on a full-year basis. So what would explain this? That's one. Secondly, do we see this [indiscernible] coming through in FY '22 and '23?
Yes. I think if you track back many quarters, maybe many years, the conversation has been how is the Federal Bank capability to originate fee income and fee as a percentage of assets. And I think we've demonstrated for long periods of time, that's focused and it's beginning to reflect a full range of products, disciplined origination capability, cross-sell to existing customers. I think I mentioned the corporate. When we get good corporate credits, we are looking at the client wallet, so I think fee income on corporate has gone up 37%.
So I think that's a design, and there's a distribution capability for that design. The rates you are seeing growth should continue.
Our next question comes from the line of Saket Kapoor from Kapoor & Company.
First is a clarification, sir, on the [ treasury ] income part. It has not -- it has not been affected by the softening of the [indiscernible]. This is what you were trying to generate, and it's a core -- it is independent of that? Or it will come again on the same?
Yes, you're right. Your assumption is right.
Your assumption is right. Basically, some provision release has happened for the trading book and all. So with movement in that -- because the opportunity to see -- I'll just give you some comparison in a falling yield scenario or even if the yields are lower and all that, the profit on sale of investment, which basically is the profit on the interest rate products, is always in -- I mean, for our bank, is in 3 digits. It could be INR 200 crores, INR 300 crores, INR 400 crores. As against that, in this year, you would see it in the lower double digit. So that's what the difference is.
Otherwise, other than that, you have an HFT book, which is up to 90 days and all that. And the traders keep trading in that and make -- whenever the opportunities are there, they may come up. But the larger amount comes from the investment portfolio and the yields fall alone. So that opportunity has not been there for the last almost 1.5 years or so.
No. What we have seen currently is the softening of yield and just [indiscernible].
That would [ over ] -- probably if this continues, we'll see that in FY '24.
And if I would just add, bulk of the softening of the yield has happened in the last -- after March. Otherwise, through the last quarter, the wheels have been fairly range-bound. So as has been clarified, the income that you are seeing on the treasury side is essentially the HFC trading activity on various asset classes, and that is what is showing over here, plus a write-back of provisions owing to softening of deals relatively compared to the third quarter.
Okay. So this line item will move significantly if the softening remains the way it is today?
Yes.
Let me clarify, I think this is a trader's call. And when the fruit is ripened, left to the trading desk and all that. Now it will fall from 7.30% to 7%, is it the time to book the profit or wait for -- expecting that it would go to 6%, 7%?
Now this is something in which you cannot project or you cannot extrapolate or give a guidance on because that opportunity should be left to the trading [ base ]. So sometimes you find such opportunities coming in a particular quarter where you see, because of some measures, charge fall has happened. Trader moves the profit and buys again when it goes up a lot. So I think this is something which you cannot predict as to in 1 quarter, how much would be there.
Right, sir. Just to harp on it again, if it is a mark-to-market at least, even if we don't book the [indiscernible], it would be priced at -- yes.
But you can't get it into profit. If you have a positive mark-to-market as per current instructions, as per current Indian gap, you cannot take it to your profit book. You may [indiscernible] your book that it's a positive [indiscernible].
Correct.
So second point was when the Board decided on the dividend payout, what worked out for loading the dividend from last year level and the [indiscernible]?
[indiscernible] will respond to that, please.
Yes. I think if I'll respond to it, there was a question that was earlier asked about capital adequacy and capital raising. We considered, the Board considered multiple options. And instead if you're going to be in the market for raising capital this year, we should be more thoughtful about how we use our capital.
But having said that, we did that the reward for our shareholders should be there. We also consider the fact that in the last 12 months or last 4 to 18 months, Federal Bank stock has delivered the best returns amongst all stocks. We, I think, had 46%, 50% growth. So on balance, the Board consider 50% is an appropriate number.
Sir, I didn't get your point. I mean, [ stock ] performance, how -- how would the stock performance determine the dividend payout? The dividend payout is towards towards what the earnings has been. At [ INR 15 ] declared, and [indiscernible].
The shareholder looks at a combination of things. Dividend is one stream, and if they have, how does the stock perform in the past period. If the stock had not performed, there was a concern that the stock is not good -- is giving me returns, so it's a balancing act.
So we will be into the capital raising if the [indiscernible] is going ahead?
We are considering. I don't have any time line. I mentioned there is nothing that I can confirm at this point in time. The bank is considering. We think in the course of FY '24, we will, but I don't have any commitment as yet. We are working on it. .
Operator, I think it's coming up to 6 p.m. If there are no other questions, then we can [indiscernible] the Q&A maybe.
Yes.
I just wanted to mention one thing. Most of you know, probably all of you do know, Mr. Ashutosh Khajuria completed his term as the Executive Director of the bank at the end of April and has accepted to continue with us for 1 more year as a chief mentor and focusing on a certain bunch of areas of his expertise and helping the bank for another year. So to the market, we made the announcement at the end of April that he is retiring, but we've -- the Board has reappointed him to be with us for 1 more year. So I want to thank Ashutosh in this platform and also advise all of you that Ashutosh will be with us for another year, and share his expertise and guide us through for FY '24 as well.
So Ashutosh, thank you.
Thank you. Thank you very much.
If there are no other questions, we'll bring this to a close. Souvik, operator?
So thank you, sir, and thank you all again for your participation on a late Friday evening. We appreciate the ongoing support of our stakeholders like yourself, and we remain committed to delivering value to all of you. We look forward to updating you on our progress in the future. Best wishes for [indiscernible] and goodbye [indiscernible] with our next quarterly results. Thank you.
Thank you.
On behalf of the Federal Bank Limited, this concludes this conference. Thank you for joining us. You may now disconnect your lines. .
Thank you, Ryan. Bye-bye.
Bye.