Dreaming Bigger Now, to be the First Choice Bank
How well each organization is going to perform in the post-Covid world may feel like a mystery, but to a large extent will be determined by how well they were running in the pre-Covid era. Coming to the banking sector, the performance metrics may seem to be all in hard numbers, but in reality is much more, having to do with prudent policies and relationships with each and every customer. This is an area where Shyam Srinivasan led Federal Bank is likely to show much resilience in the coming quarters and years. The 89 year old bank has seen and survived too many economic and political upheavals, including World War II, Indian Independence, Indo-Pak wars, Indo-China war, Bank Nationalization, Gulf War, Economic Liberalization, Dotcom Burst, Kargil War and Global Economic Crisis - to be fazed by the current pandemic, the lingering effects of the lockdown and the current standoff with China. Even during the last decade, which was one of the toughest for the Indian banking system, Federal Bank swam against the current to emerge as a bank of relevance across India, from being a regional bank focused on Kerala. Even during the current crisis, which is truly unprecedented in modern human history, Federal Bank is staying focused on growing those strengths which are relevant now in this crisis. For instance, on the deposits front, it is doing extremely well thanks to its leadership in overseas remittances and the spike in inflows due to the temporary return of NRIs and the strong rupee. And on the credit side, it is a leading player in the gold loans business, which is witnessing robust growth in this current crisis as the product of choice of both lenders and creditors. At the same time, its extreme prudence or conservative stance in risky products like personal loans, even during boom periods, is now helping the bank in its maintaining its asset quality. At no point in time has Federal Bank crossed a Gross NPA level of 3%, which is admirable in a country where the banking system NPAs have crossed 10%. The bank is a leader in digital initiatives and technology adoption and now excels in areas like digital origination and has implemented EMI products on Amazon’s e-commerce platform. Seasonal Magazine recently caught up with Shyam Srinivasan for a freewheeling video interview, where he talked about the bank’s various strategies as well his suggestions for reviving the economy. The bank which progressed much on his last year’s strategies of ‘Presence to Prominence’ in key geographies and ‘Prominence to Dominance’ in its home market of Kerala, has added a new vision this year, to emerge as the ‘First Choice’ bank for customers by doing every service in a distinguished way. On the economic front, this veteran banker strongly feels that the banks are flush with funds now and if there is a demand stimulus to excite the private sector and consumers, growth will come back in India.
Federal Bank could wind up FY’20 on a good note. Despite the marked economic slowdown in the country during the past few quarters and despite the gathering Covid clouds during much of February and March, the bank’s Q4 saw operating profits surging from low single digits during Q3 & Q2, to a healthy 27%. This shows that the bank’s long-term strategies have been working out well.
The performance was well rounded with both Net Interest Income (NII) and Other Income rising impressively. NII grew 10.90% to Rs. 1216.01 crore from Rs. 1096.53 crore in the corresponding quarter last year. The Kerala headquartered bank also made some smart moves on the Other Income front including the timely share sale in Yes Bank shares, that helped Other Income to surge 72.72% to Rs. 711.11 crore in the three months of Q4 from Rs. 411.72 crore a year ago.
The traditional private sector lender’s strategies in combating asset quality issues too are working out well. The fourth quarter saw asset quality improvement with Gross Non-performing Assets (GNPAs), falling to 2.84% from 2.99% in the December quarter and 2.92% in Q4 of last fiscal. Post-provision, the Net NPA (NNPA) ratio was at 1.31% against 1.63% in Q3 and 1.48% in the corresponding YoY quarter.
Despite being a traditional private sector lender, Federal Bank has to its credit one of the most extensive and up-to-date technology deployments, especially in retail banking. This has continued to help the bank perform well on the deposits front, where it clocked a robust 13% rise. This is impressive as the 89 year old bank is not competing head-on with newer and smaller banks on the deposit rates front, but rather leveraging the trust factor, long-term relationships and the conveniences it can offer through better technology deployment.
Even with such overall good performance, the bank saw a 21% dip in net profit during the quarter. Federal bank reported a net profit of Rs. 301.23 crore for the fourth quarter compared to Rs. 381.51 crore in the corresponding year-ago period. This was mainly due to surging provisions.
Provisions rose by more than three times to Rs. 567.50 crore, compared to Rs. 177.76 crore in the year-ago quarter. In the December quarter, the bank had set aside Rs. 160.86 crore in provisions. Like in most banks, the rise in provisions was led by pandemic concerns and Federal Bank made a Covid specific provision of Rs. 93 crore.
Post the moratorium of loans announced by the government, 35% of Federal Bank’s loan book is now under moratorium. While this is slightly higher than some of its peer banks, it reflects the kind of long-term relationships the bank has with its customers, and which it will continue to pursue.
While the trend in banking business has been to beef up provisions at the drop of a hat, Federal Bank has so far steered clear of this, applying provisions judiciously. Due to this, the bank’s Provision Coverage Ratio (PCR) may seem lower at 53.39% , compared to larger and aggressive new generation banks, but then Federal Bank has never been in the business of extending risky loans for pushing growth.
This is a distinction the bank will continue to adhere to according to MD & CEO Shyam Srinivasan, who confirms that the bank will never resort to any outrageous lending in the post-Covid scenario too.
The bank is on a reasonably strong wicket on the capital front. Its Capital Adequacy Ratio (CAR) stands at 14.35% which is comfortable enough to avoid any capital raising this year. Federal Bank’s focus this year will be on preserving capital and growing its deposits franchise further.
The bank has some unique strengths on the deposits front. Federal Bank is a leader in the country on the inbound remittances business with 15% market share. This is a significant business as India itself is number one in inbound remittances from worldwide, thanks to its huge expatriate population, which still cares for extended families back home.
While the remittance business is facing headwinds due to the pandemic, lockdown, salary cuts and job losses worldwide, Federal Bank is continuing to bet big on this business, as its long experience has taught the bank that this business always rebounds after crises like wars and economic setbacks.
With this insight in mind, during the lockdown itself, Federal Bank had tied up with US based world leader in remittances, MoneyGram, for cross-border direct-to-account transfers, thereby improving customer convenience. The appreciation of rupee vis-à-vis dollar and other major currencies also bodes well for this business.
On the loans front too, the bank has an ace up its sleeve. It is a leader in the gold loan business in the banking sector, unlike many of its peers who are only discovering or beefing up this business now. Federal Bank’s headquarters and significant footprint in Kerala is also helpful for this business, as Kerala has been a traditional stronghold of the gold loan business.
Federal Bank expects strong growth in gold loans this year, and unlike most other loans, its full secured nature due to pledged gold at an adequate margin of safety ensures that it won’t contribute to NPAs in the future. The rising gold prices also ensures that this business can also grow due to higher loans to existing customers, apart from wider customer acquisition. And unlike in earlier days, gold loans have been maturing from just for personal needs to being for small business needs.
The bank is also open to extending credit to select corporates and MSMEs, after due diligence. It is now in the process of tailoring specific cross-sell programmes to existing customers who have established track records. While it feels that the credit guarantee scheme is a good way to support MSME clients, it will also apply regular credit judgment before offering such credit.
In these tumultuous times, Federal Bank can also have leadership continuance if it so desires. Even with RBI's new proposal to limit tenure of bank CEOs, professional & non-promoter bank CEOs like Shyam Srinivasan, who has completed a decade, can still have longer tenures if needed. RBI move is to build a robust culture of sound governance and professional management.
Seasonal Magazine in conversation with Shyam Srinivasan, MD & CEO, of Federal Bank Ltd.
Can we start by asking about your bank's moratorium and where it stands now?
Roughly about 35%. That's what we had said when we finished our results. Yes, it is still at the same level. About 34-35% of the book is in moratorium.
Do you think it is a wee bit more than peer banks maybe?
See the moratorium book heavily depends on what your overall portfolio is like. If you have, let's say, a very heavy gold loan business, then the moratorium - our gold loan moratorium is less than 3%. But the business banking is 79%. So you see a spectrum. So I think 30% is more or less the industry average, it won't be very different. And second, in moratorium, those banks that have given opt-in, versus those who have given an opt-out, experience is different. For business banking, we get an opt out, which means everybody gets it. If you don't want you can opt out. So the moratorium will be higher. For some businesses, we give opt in where it is less than 18%. So it's sort of wide range. 35% looks probably standard and banks would all be in the 30s percentile. Some are 38%, but broadly that's what it is. But the real picture will emerge only in September. After the moratorium period is over, that is, in September which is now the new 'March'. Because September is when you will do what you would have done in March. March is the month of moratorium. So you'd have to see how things are in September.
You have already mentioned about another dimension which is the gold loan business. You have been very bullish on gold loan business now,
I remain very, very positive. It is doing well. And I think it will continue to do well for the foreseeable future. Both because there's a demand as gold prices are high. It's less cumbersome, it's easier for the bank and the customer. And I think slowly customers have understood that banks are good gold loan lenders now as for about four years earlier it was slow. I think it's coming back so we are quite happy with gold.
Can customers avail gold loans from you? Can they walk into the bank and become a customer?
Once they avail, they become customers. There is no limitation on that. I mean certainly we will try to cross sell other products but pure gold is fine as long as the gold is bonafide and it's not stolen gold. We're happy to do.
Where would you peg the growth approximately this quarter and this year on the gold loan business growth? Is it because there are not many other avenues apart from gold loans?
Last financial year, our YoY gold loan business grew 29%. I'm hoping it'll grow higher this year. As I said, it's a win win for both customer and us. We have innovated quite a bit on gold product, in the service and in the distribution. We have our digi-gold, which we had a few years ago. But we have revamped and launched it. So instead of keeping your gold in your own locker, keep it in the bank's locker. And you get an overdraft on it. So you only pay when you draw money, otherwise you don't pay. So it's a win win. We are seeing great success with the product.
What about on the personal loan front before COVID-19?
We were not very big on unsecured personal loans. We normally don't do new to bank. We do existing customers based on track record. For almost 18 months, we were doing it digitally. So if you had an account with us, based on your account behavior, we would offer a credit line which you can click on your phone and take the money. But now we are much more tighter on that. Because generally we don't do unsecured credit in a very big way. Our philosophy over many years has been to be more conservative, which is why our NPAs never cross 3%. Even when India's NPAs hovered around 10% mark, Federal Bank has never crossed 3%. Net NPAs never crossed 1.3% or 1.5% maximum. So we've been conservative and I'm happy to be conservative, which is the right thing for a bank.
How is the co-branding of credit cards going on now?
It's okay, but it's not a big part of our business. But in the course of this financial year, maybe by end of March next year, we will certainly have our own card launch. So, yes we are working on that.
What about Provision Coverage Ratio and where does the bank stand on that? Is it lower than other comparable peer banks?
Our coverage ratio including technically the "written-off" is 73%. Without technical, it is 54%. Last quarter we raised our coverage ratio by 800 basis points and we provided extra by 250 crores in Q4. You may have noticed, we provided access because we had some one time gains on investments in treasury and I put the entire money into provision. Otherwise our profits should have been another 200 crores higher. We didn't want to do that. Compared to peer banks, 70% is quite comparable. You must understand that provision cover is created to ensure that when, God forbid, there is a loss you have already provided so that it doesn't incrementally affect your book. Now each bank has a different product mix. If you're a very high unsecured portfolio or your security levels are low, you need very high coverage. When you have a high security, you need a lower coverage. In Federal Bank, we've been doing this reporting for two years based on Indian accounting standards or the new accounting standard - IFRS. Our loss given default, which means when you have a loss or an NPA, the maximum loss on that account if it's an unsecured one, it is hundred percent. Let's say you have a house of one crore and the loan is say 80 lakhs. Even the for-sale value of the security instead of one crore is 60 lakhs, you recover 60 and your loss is only 20 lakhs. So loss given default is only 20 lakhs. Our loss given default on the whole portfolio has never crossed 38%. When I have coverage ratio of 53%, I have much higher coverage than the losses I would ever incur. With all due respect, the media doesn't understand anything too much. They'll simply take one number and report. Provision cover is to make sure in the event of a loss you are covered right?When our provision coverage is 53 or 73%, depending on which number you pick, and the loss given default is 38%, you have excess coverage. I actually can release 15%. This quarter, we took it from 46 to 53% because we expected that in the COVID world, losses can go up & your security value may come down. So the house with just one crore may suddenly become 80 lakhs or 70 lakhs. That is why I said provide more so it gives us the cushion. At 53% loss cover, we are okay.
There was also a specific COVID-related provision of 93 crores. Do you think it is sufficient as of now?
See, COVID provision has to be seen along with credit provision. Both are the same. Just that COVID provision is not in the coverage ratio but treated as a standard provision. When, God forbid, an account becomes NPA, then you will take the COVID provision and put it in standard credit provision. The COVID provison is only an excess extra-provision created as a buffer. The requirement is only 31 crores. RBI mandate was 31% and we have provided three times this mandate. So, it is not an issue.
What has been the impact on remittance business?
Remittances are doing extremely well. Whenever Middle East has any challenges, for instance if people are relocating, they will bring the money in. And we are the best bank for that. Secondly, rupee is at 76. Again, people will send money. So at this point in time remittance is in very good shape. We'll see how the next six months go. We don't know what the situation will be in September or October. How the Middle East is going to be? How, you know, whether job losses are going to happen at big time? Now the good news is oil has become slightly stronger. So they may not be having as many job losses as it was visualized. I've seen that from the time of Kuwait war, we've looked at this whole remittance stuff and that this would drastically affect Kerala. In the last 10 years, I've seen it very closely. There will be some trouble. It was said that around six lakh people will come back but I think three lakh have come back or will come back. Suddenly around two lakh will go back. Maybe not go to the Middle East but places like UK or anywhere people will find livelihoods. But one lakh people coming back is something we can live with. We need to worry about what damage COVID would cause in the next one year. If we can deal with that damage, everything else can be solved. That is the unknown or the wild card.
This would also be translating into deposit growth?
Yeah, it will. In fact, we're sitting on excess liquidity. We are growing higher than the market but there's no market growth because demand has to come here. We'll take some time - another three, four or five months. See, everything has come back to about 75% of the original level if you look at all across the country. A number of RTGS transactions, NEFT transaction, Fast Track transactions, whatever you look, everything is between 65 to 75%. By September-October, it may come to 85%. Maybe by end of the year, it will come to 95-100%. But you are expecting 120% because you want it to grow. So, I think if by 2021, we'll be lucky if business volumes improve. See, one quarter is totally gone. First quarter was virtually no growth for anybody. Next quarter will be like 2-3% growth. So, the full year if you grow at 8-10%, you've done brilliantly.
You have been telling about some cross selling opportunities & how to tap the cross selling opportunities. Can you tell us some specific examples?
The whole personal loan book, which is almost 2000 crores, we did it only by digital origination on existing customers. So say you are a customer of Federal Bank - let us say a liability customer for two years. Based on your average balance, based on your usage, we do a lot of data mining. And we make a pre-approved offer to you and say here is a credit limit of 50,000 available. And you can click and take the money. Now we've launched this with Amazon and a few others. On EMI product, if you are a Federal Bank customer and you're shopping on Amazon, you put in your card number, it runs a back end engine and it immediately computes by saying whether we can give you an interest free EMI for 12 months. So if you buy 5000 rupees or 20,000 rupees on Amazon, instantly you can make it an EMI transaction. So you pay zero interest over 12 months. And this is all done by back-end analytics and therefore the cross sell is based on existing customer behavior with the bank. We are data mining and continuously making cross sell offers. Uusually if you're a card customer, you'll have a liability relationship, we give you an insurer and we'll give you the usual stuff. Basically, everything that is tried to increase penetration per customer.
You are now mulling a new fundraise of Rs. 12000 crore for equity component. Can you take us through the specifics of that?
In the forthcoming AGM, we're looking to seek shareholder approval for getting a resolution passed. Once we have that, in the course of the next 12 months, we can raise equity, if we need. Right now, we're not looking at any capital raise. It's an enabling resolution. But since the AGM is coming in July 16, we will hopefully get the resolution approved by shareholders. And once that resolution is there, we'll see how the market goes and where the capital requirement is. In our mind, at least till March 2021, we don't need new money. But the next AGM is usually next time this period ie; June-July. So we are trying to get an approval in place so that whenever the need arises, or the next month we will raise money. Normally in my last 10 years, we raised money only once. We are not a bank that goes to the market every three months or three years. We go once in like five-seven years depending on when we need. The last time we raised money was in 2017 July at about 116 rupees. Today the stock is on 56-57 rupees. So suddenly the stock has had its own share of waiting. Hopefully we will come back to at least 100 bucks in the next one year, which is when we should raise money. Even last year we had approval of 8000 crores and we took 300 crores from the market. This was raised about 12 months back.
Any plans for acquiring any microfinance companies or any diversification?
Right now nothing on the horizon, but we are open to making acquisitions if something good comes up. But at this juncture, we cannot rush to anything because we have to see how the credit portfolios or everybody behaves. So, we will be watchful at least three-four months to understand the credit portfolio. So, we have nothing on the cards but continuing to do our basics right. We will wait till September, see how the market shapes up & how the moratorium customers are behaving. Only then we will think about next steps. Because this is very unpredictable environment. So we're not doing anything at this juncture.
What is the status on the startup fund you had mooted?
I would say it has been very modest. The startup environment is facing a lot of changes and challenges. Either you make it very big with private equity support or you are not able to scale up and you're just folding up. The whole environment for startups is different from what it was three or four years back. So we are having fun but we have no major action going on. Along with two other funds, we have put in the money but that's not a core expertise of our bank. So we will let them do it but we are feeding into that.
You've been seeing how the economy has been shaping up over the last few quarters. Any suggestions or improvements required?
The main thing is that demand has to come back, right? There's a lot of liquidity. So that's not a problem. Banks have money and banks are willing to lend provided there is a demand. For the demand side, banks cannot do much. So it has to be a bunch of things like the government intervention, the private sector getting excited by the opportunity and beginning to invest. And to some extent, like you said, there is a fear also that people are nervous about what is going to happen in terms of health. So economic activity is not at full blast. But having said that, like I said, 70-75% has come back. Some of the bigger cities like Mumbai, Chennai are all still in very precaurious states. Meanwhile, Tamil Nadu has gone into very severe lockdown. While Mumbai & Delhi have opened up, unfortunately, they are facing extreme health issues and challenges today. Virtually, everybody we know has somebody who is faced with some challenge in Mumbai. To that extent, movement is still modest as people are quite watchful. So the full blast economic activity is at least six months away or till when one of these vaccines or medicines work. In that context, demand stimulus is the most important thing. But even if you give a lot of money, demand comes when people are feeling better. And you will not work to buy that extra shirt, pants, TV, fridge and car if you have little nervousness. Everybody's just buying essentials food and medicine. This is a psychological challenge more than financial challenge. So emotionally we have to be charged up. And that takes time. What will inspire people to spend more? Some confidence giving is required. The only good news in all this is if the stock market starts doing better. Psychologically, people will feel like okay thinking that the world has come back. For somebody holding a Reliance share, for him/her life is fine, right? In fact, it's doubled. The stock value has gone up twice. Unfortunately only when western India ie; Mumbai & Gujarat gets full blast, India will fire on all cylinders. Unfortunately that part of country still needs some more actual health related intervention. Demand generation happens in Maharashtra & Gujarat in a very big way. Having said that, I think rural India is doing better, farming and agri income will be better. So it won't be all bad news, but it will certainly not be what it should have been. You know, if we were expecting India to be, say, from 2.8 trillion to 3.2 trillion, it won't happen. It may become 2.5 trillion and then you have to work one more year because everything will get reset only by 18 months. And it goes back and then climbs back up. That's an unfortunate outcome of COVID-19 and I don't think anybody can escape it. So we just have to wear a wet towel around the stomach and sit quietly for a while (laughs).
What all are your new strategies for steering the bank in this tumultuous time?
Last year, we focused on two strategies, 'Presence to Prominence' in chosen geographies and 'Prominence to Dominance' in our home market. We have seen consistent gains and recorded a healthy increase in market share across key geographies and segments, and our visibility among the top quartile banks, both in terms of business and governance has amplified in the last financial year. While these twin strategies will continue, we have added a new one this year, to be the ‘First Choice’ bank. Our bank has always been respected as a thought leader in customer-centric approach backed by relevant innovation. While we continue to be deeply rooted in our fundamentals, we realize it is time to dream bigger. The last decade saw us emerge from a regional player to a bank of relevance across India, and now we are determined to build ourselves to a bank that is First Choice. It is not just being the best in customer service and having the right set of products and processes; but being able to distinguish ourselves in everything that we are and do, be it products, processes, design, people and value creation. We are mindful that being the First Choice is a tall task. This is a pursuit of excellence and there would be no finish line until we become the most admired bank, digitally enabled and serving the micro, small and medium establishments in the country.