Kerala-based Federal Bank reported a remarkable quarterly result and the highest ever standalone net profit of Rs 1,243.89 crore for FY19. Provisions and contingencies for the quarter stood at Rs 178 crore, a steep fall from Rs 371 crore a year ago. Shyam Srinivasan, MD & CEO, Federal Bank, talks to Rajesh Ravi about the bank’s performance and future plans. Edited excerpts:
What is your outlook on the last year’s performance and future growth of the bank?
FY19 turned out to be a good year with sequentially each quarter better than the previous, and of course Q4 turned out to be the best quarter. But it was something that we were building the bank for. So the last few years have been about stabilising the platform, getting the momentum going, and we think that momentum is in place and therefore now we have to figure out the next wave of incremental growth opportunities.
We are gaining share and by that momentum hopefully we should start doubling our business every 3.5-4 years or even earlier. We are about Rs 2,45,000 crore overall business at March end and if we continue to perform as well as we are doing and we don’t have any skips, even if it is a conservative estimate, in 3.5 years time our overall business would be Rs 5,00,000 crore.That makes us clearly in the league of the better banks in the country.
The challenges are also there like stress in corporate loans, problems with NBFCs and concerns over NRI deposits. Going forward where do you see growth coming from ?
I want to believe we have an opportunity to grow and we should keep growing. Our belief is that our share is still low and even if everything is flat the bank can grow. On every incremental business flow we are doing 2-2.5 %, but on the stock we are doing 1 %.In new business we are dominant and our share is growing.
Now where do we grow varies time to time. Because even in extremely tight situations, there are opportunities that exist, particularly if other competitors have some challenges, it opens up a chance for you. If our business model is intact and we are focused and don’t have too much of the internal challenges, you can gain share. Over the last 10 years I’ve been making sure the bank has presence pan-India meaningfully. That’s why I said prominence to dominance and presence to prominence. The environment continues to be quite challenging for everybody. We are well capitalised,relatively our problems are less and we should deliver good growth.
There are reports of the bank looking more at the risk adjusted margins and not the NIM. Will that translate into lower NIMs in the future ?
We are about 317 bps and we are looking somewhere between 320-325 bps if we are lucky . But I don’t want to look at NIM as the only measure. I look at NIM adjusted for credit cost as a better measure. Now what happens is if you try to expand NIM tremendously, you need to take higher risk products. And also in a time when the overall market for deposits is still a tough one.
NIM is a function of not just margin on lending , It is a function of your cost of borrowing too. If the bank’s deposit cost are high, that also compresses NIM. So I believe NIM has to be an outcome managed by many things— one is how do you keep your cost of borrowing low, second, how do you keep expanding your higher yield products. Third, how do you protect risk. Which is why I said risk adjusted margin if it is closer to 275 -280 bps is even better than high NIM and credit cost higher. So my philosophy is risk adjusted margin should be delivered at 275 -280 with a cost income ratio less than 50 % .
What is your exposure in the NBFC segment?
Relatively we are in the best of the NBFCs and we don’t have too much of an issue. We have factored all that and we have given a credit guidance of roughly 55-60 bps of credit cost in F 20.As of now they are doing OK.
What are your plans on the commercial vehicle segment and unsecured retail credit?
These are good businesses but take at least four to five years to build. It would take me three years to gain scale .We have started the process, and if we do a CV and commercial equipment business of Rs 5,000 crore in the next three years, we would do well. Unsecured retail credit is largely focused on my homegrown customers. So that has grown by 100% but the base was small. Here again, this business can be about Rs 5,000 crore business over the next three years. In last financial year this business grew to Rs 850 crore from Rs 303 crore.
What is your take on branch expansion and inorganic growth?
We are not looking at mass expansion and planning 40- 50 branches a year in select clusters and deepen our presence. Regarding mergers and acquisitions, we’re growing at 20 % plus and why should I get distracted? Having said that, if something good and not expensive is available, the board is not opposed to looking at it.