Federal Bank is undergoing a transformation under the leadership of KVS Manian, with the ambitious goal of breaking into the ranks of India's top five private sector banks.
Largely known for its conservative approach, the bank is now focusing on expansion beyond its Kerala stronghold, driving profitable growth, strengthening its deposit franchise, and focusing on digital innovations to compete with its larger peers.
In his first interaction with the analyst and investor community on the occasion of Federal Bank's annual investors day, KVS Manian, the bank's new Managing Director (MD) and CEO --- he was former joint managing director, Kotak Mahindra Bank--- said his goal was to elevate Federal Bank to the No 5 spot from its current ranking of No 9 position in three years. This would be accomplished through inorganic and organic means.
The pockets of interest to Federal Bank from a scalability perspective include wholesale banking, mid-market corporate lending, commercial vehicles, loan against property (LAP), and affordable housing finance.
Segments such as microfinance and affordable housing have been of interest to the bank in the past from an acquisition standpoint, though deals have not materialised till now.
Perhaps, this time around things may work out given KVS Manian's heft in the investment banking space. Which is maybe the reason why analysts at Axis Capital and HDFC Securities said, that while the bank is well-positioned to narrow the gap with larger peers, execution will hold key.
With a loan book of Rs 2.2 trillion (Rs 2.2 lakh crore) and a deposit base of Rs 2.7 trillion (Rs 2.7 lakh crore, the shift from a mid-sized player to a more competitive force is visible by its granular deposit base and underwriting capabilities, said analysts at HDFC Securities.
The strategic emphasis now lies in leveraging its balance sheet strengths for profitability, setting the stage for strong growth through FY27, analysts said.
Federal Bank has long had a strong base in non-resident (NR) deposits and small and medium-sized enterprise (SME) banking, but its relatively weak CASA (Current Account Savings Account) ratio and limited brand recognition beyond Kerala has hindered its ability to scale meaningfully.
Historically, Federal Bank has maintained a conservative approach, with a significant portion of its business concentrated in Kerala. As of June 30, 2024, approximately 65 percent of the bank's total deposits originated from Kerala, with Maharashtra contributing 9.02 percent, followed by Tamil Nadu, according to CARE Ratings.
Additionally, around 64 percent of the bank's advances were concentrated in Kerala as of the same date.
Despite its efforts, it has not managed to emerge as a dominant force in the broader Indian banking sector.
Under the strategic vision of Manian, who played a key role in Kotak Mahindra Bank’s expansion, Federal Bank is certainly charting a new course -- ‘Project Breakthrough’ -- which focuses on 12 key areas including improving net interest margins, enhancing the product portfolio, boosting fee income, refining the branch banking strategy, and optimising costs.
Scaling deposits and CASA growth
The management has set a target to increase its CASA mix to 36 percent by FY28 (from an estimated 30 percent in FY25), with a particular emphasis on raising CA balances by 400 basis points, ultimately reducing the overall cost of funds.
In contrast, larger private sector banks such as HDFC Bank and Kotak Mahindra Bank maintain CASA ratios above 40 percent. The management has shifted its strategy towards enhancing its zero-cost Current Account (CA) mix, which currently stands at 6 percent, which is significantly lower than the 12 to 15 percent maintained by larger peers.
Analysts at Axis Securities say this remains a key metric to watch, given that their current projections factor in a CASA increase of approximately only 175 basis points, reaching 31.7 percent by March 2027. The target set out by Manian is at least 500 bps higher than this number.
Federal Bank said it also aims to enhance its wholesale banking and capital markets capabilities while broadening its non-resident deposit base beyond Kerala and the GCC region. To achieve this, the bank plans to expand its presence by opening 400-450 new branches by FY28, with a focus on high-growth states like Karnataka, Tamil Nadu, Maharashtra, and Gujarat.
“Our forecasts build in a cumulative addition of 320 branches over FY25-27,” said the analyst report from HDFC Securities.
Shifting asset mix towards higher yields
The bank has outlined a strategy to boost yields by focusing on scaling its secured, medium-yielding assets.
By shifting its asset mix, the bank aims to reduce its share of low-yielding assets from 64 percent in FY25 to 58 percent in FY28, while increasing the proportion of medium- and high-yielding loans.
Key areas for expansion include Loan Against Property (LAP), commercial vehicles (CV), construction equipment (CE), and auto loans, particularly for used vehicles, alongside a push into mid-market corporate business.
Based on Q2 FY25 disclosures from various banks, Federal Bank has demonstrated stronger pricing power in its HL, LAP, PL portfolios compared to its larger competitors.
However, analysts noted that the bank’s floor pricing is lower than its peers, suggesting the use of a loss-leader pricing strategy in these categories.
While this strategy is effective in B2B segments, where demand elasticity and opportunities to capture business from highly-rated clients exist, its value in B2C lending is limited.
The bank has also planned to introduce new products such as micro-LAP, tractor finance, and affordable housing loans, but has decided to hold off on unsecured lending until market conditions improve.
Analysts, such as those from Motilal Oswal, cautioned that while focusing on secured assets aligns with the bank’s strong underwriting standards and healthy provisioning buffer, expanding into multiple new product areas too quickly may be counterproductive.
Yields are expected to stabilize by FY27, with a gradual increase of around 10 basis points from FY25 to FY27, according to analysts.
Fee income and digital transformation
The bank has been trailing its larger peers in terms of core fee income growth. To address this, it plans to scale its fee income by enhancing its wealth management services, capitalising on forex and trading income from its non-resident (NR) customer base, expanding cash management services, and increasing cross-selling of wealth and insurance products.
Additionally, the bank aims to increase its in-house sourcing of credit cards from the current 30 percent to 45 percent by FY28 and diversify its personal loan sourcing through fintech partnerships, growing from 40 percent to 50 percent by FY28.
Analysts at Axis Securities forecast that the bank's fee income growth will be gradual, with an expected increase of 5 basis points in fee income to average assets from FY25-27.
The bank is also focusing on increasing its share of current accounts, specifically targeting high-transaction sectors like capital markets and digital businesses. Additionally, it plans to leverage its strong NR deposit base, which accounts for about 7 percent of the market, by offering tailored investment products and wealth management services for non-resident Indians.
In addition to deposit growth, Federal Bank is reshaping its lending portfolio to improve profitability. Historically, the bank has maintained a conservative approach, resulting in lower net interest margins (NIMs) compared to its larger peers. The new strategy focuses on higher-yielding lending segments such as used commercial vehicle (CV) financing, equipment financing, affordable housing, and mid-corporate banking, with the aim of supporting NIM expansion in the medium term.
Digital transformation is another key component of Federal Bank's strategy. The bank is investing significantly in digital initiatives to boost customer acquisition and improve operational efficiency. It is revamping its mobile banking app to provide a seamless digital experience, increasing the share of digital credit sourcing, and partnering with fintech firms to drive innovation in payment solutions and lending.
Furthermore, the bank is optimising its cost structure through its subsidiary, FedServ, which is expected to streamline operations and enhance cost efficiency. Through these efforts, Federal Bank aims to align its cost-to-income ratio with top-tier private sector banks, which typically hover around 42 percent.
Despite the confidence expressed by its leadership, much will depend on navagating the challenges in executing its transformation strategy.
Execution remains key
Competing for low-cost deposits in metro and Tier-1 markets could be difficult, especially against larger, well-established players, said analysts at Motilal Oswal Financial Services.
Market perception remains another obstacle; although Federal Bank has strong recognition in Kerala and among non-resident (NR) customers, it still needs to solidify its position as a national banking leader, these analysts added.
Federal Bank has long been a dominant player in the NR customer segment, especially in Non-Resident External (NRE) deposits, which are critical to its business. While the bank holds a solid 19 percent market share in inward remittances, it only has a 9.4 percent share in the NRE deposit market.
This reflects the bank's challenges with retaining deposits and converting remittances into long-term savings. A significant factor is the decline in the GCC region’s contribution to total inward remittances, dropping from 50 percent in FY17 to just 18 percent in 2023.
Historically, the GCC has been the primary remittance corridor for Kerala, Federal Bank’s home state. As a result, Kerala’s share of total inward remittances has nearly halved, from about 20 percent to 10 percent.
Nonetheless, the bank has consistently maintained superior asset quality compared to many mid-tier peers, with a gross non-performing asset (GNPA) ratio well below industry averages and that works to its advantage.
Its earnings are projected to grow at a compound annual growth rate (CAGR) of 19 percent between FY25 and FY27. Return on assets (RoA) is expected to rise to 1.3 percent, and return on equity (RoE) could reach 14.6 percent by FY27.
These metrics, according to analysts, suggest that the bank is on a steady upward trajectory, even if the road ahead is challenging.
If the bank can meet its CASA growth targets, scale its high-yield lending business, and sustain its digital transformation, it has a strong chance of breaking into the top tier of Indian private-sector banking, analysts noted.
In other words, the plan seems to seek the acknowledgement as a pan-India bank from all stakeholders at large, seeds of which were sown by Manian's predecessor, Shyam Srinivasan, who helmed the CEO's hat for 14 years.
Manian's job may be to give wings to Srinivasan's aspirations. Or one could even say, Manian is shouldering the tall task of creating a mid-2020s version of Kotak Mahindra Bank, and much will depend on how he navigates through the complexities involved.
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