Expect 20-25% loan growth in FY18; asset quality to improve: Federal Bank

Talking on the new default disclosure rule by Sebi wherein all listed companies will need to disclose to the stock exchanges if they default even by a day on payments of loans from the banks, NBFCs or any other financial institutions, he said it is a material dictate and hopes it changes the behaviour of people who can pay and have found ways not to pay.

Below is the verbatim transcript of the interview.

Latha: One of the standout things from your quarter one numbers, in fact from your numbers for the past several quarters, is the improved loan growth. Q1, you gave us a loan growth of 30 percent. Is this the kind of run rate you can maintain?

A: Yes, I would spread it by the business verticals influenced by our recent, I would say media blitz on advertising. It has helped pick up our retail and business banking volumes quite considerably. So if you take the last quarter, there was this Q2 at the mid and large corporate. This quarter is even more even paced. Corporate continues to grow well. We are seeing good pick up in retail and business banking, so north of 20-25 percent growth, both year-on-year and sequentially 5 percent is quite possible. The run rate looks like it will happen.

Anuj: The last quarter, the market was a bit disappointed with your asset quality. And even a couple of other parameters. Was that a bit of a one-off or are there some issues here?

A: Immediately after the last quarter results when we spoke, I had pointed out two things. One is the accounts that we have been long guiding as the stressed account, in particular steel account in the east was hanging by a thread and it fell off in Q1. So back that out, the run rate has been very consistent and that improvement that we have seen for many quarters should continue here and here on. Thankfully for almost 4-5 years we stayed away from what I call the riskier, bigger tickets, longer tenure, we are not part of that. So having recognised all the historical large stressed accounts, we do not have much left in our portfolio to worry on that count.

Point in time, demonetisation benefit, dispensation given, pickup in retail, that is more not the magnitude that will change the direction of the bank. A few crores here and there, but outside of that, run rate looks quite good.

Surabhi: So, I suppose slippages should not be a cause of concern which was Q1. But then coming back to the point you just made, higher ad expenses and targeting the retail segment in a big way. What is the strategy there and what we can expect by way of deposit growth because low cost deposits obviously have been a great help for the bank.

A: Ours is a reasonably, equally weighted book. I do not wish to dramatically alter that mix between retail, small and medium enterprises (SME), corporate and one of our strengths has been that balanced book for many quarters, many years I would say. We would keep that, so therefore, all three businesses, I want the growth to pick up.

The retail particularly in the geographies that we are now more present versus the past, we wanted a fillip, we wanted the presence of the brand to be felt. That is giving us the lift that we have been seeking. So if we grow equally sequentially, 5-6 percent across the business verticals, all of them, my blended growth should be the same. So credit growth not so much of an issue to stay in that direction.

Deposit growth, as you know is driven by three things for us. One is the significant impact of how the non-resident (NR) volumes flows in. Kerala economy does have a linkage to NR. Second is by the presence that we have in the newer geographies. We are seeing good pickup in the resident deposits. That is giving us a good lift.

Third, but virtue of our very aggressive payroll campaigns, we are now on boarding a lot more regular salary credit kind of profile which is a shift from the past. We were more self-employed in character. So all these things will see the relatively lower cost deposit pickup.

Now I must point out, the difference between term and savings is not very significant in the market right now. So we must be watchful that generally the blended deposit costs will be sub six, closer to 5.5.

Latha: This is the day and age of insurance company subsidiaries bringing money to the parent. You have an IDBI Federal Insurance. It is not doing much but is there any money to be made over there, listing, selling out?

A: Three points. One I must point out, IDBI Federal has turned positive for now, three years. So it is a very well run and building scale is now I think company number 10. So they are doing a decent job. Second, there is a process well under way in terms of identifying what kind of value and how do the three partners want to look at the way forward. All options are open. We scale up, we scale down, we disinvest, we increase higher investment, bring it to partner, but the prelude to that stage is to ensure that there is a fair value of discovery going on. That process is underway. The best of investment bankers are on the job.

Latha: The market just wants to know if you will be buying. Very clearly, IDBI cannot scale up its stake over there. If anything, it has been asked to sell off its non-core business. So it will be a seller. So are you the buyer? Is there a third buyer?

A: That is what I said, the prelude to all this is understanding the best value for the company. So that process is underway. We can scale up, we can scale down, we can have a new arrangement, we can continue with the current arrangement, all options are open.

Latha: But a deal likely this year?

A: Timeline, I will not put, but I want to point out that it is a significant higher value than our original investment.

Surabhi: Just to go back to issues on debt resolution, what would be your exposure, if any at all to the total National Company Law Tribunal (NCLT) list, the one that RBI has drawn up and how would you rate the resolution process and the progress so far?

A: Thankfully for us, once that famous 50 or the original 12, are list is very small. And all of them, we have recognised, NPA'd, either sold to an asset reconstruction company (ARC) and/or written off. So the incremental impact between now and December is very marginal. It is in the course of normal business. So thankfully, staying away from these businesses for many years helped.

The second part of your question, mine therefore is only an inference, we are not an active part of any Insolvency and Bankruptcy Code (IBC) process as yet. So, what we pick up with the one or two cases where we are part of a process, it is clear that they are snowed under a significant volume. All the intentions are right. Now we have to make sure that some of them do materialise in the next six months.

The big banks do have the confidence, one or two of them will actually come through. So the jury is out, but there is intense effort, is what I can say from our side and from the other participating banks.

Latha: This SEBI rule kicks in on October first that even if you default by a day, you have to declare on the exchanges. How will that impact banks in general?

A: It is a very material regulatory, of course the onus is on the borrower to make that declaration happen and all of us are fondly hoping that just the embarrassment or the consequence of that declaration will be quite painful that people struggle to make sure that the guys who traditionally were capable but not willing would start changing behaviour. But like everything else, this will have its own settling in period, this will have its early teething issues, but we are all keenly watching for October 1.

Latha: Actually, your SMA II and SMA I list will be out over there. They all have to declare on October 1. So what are you expecting on October 1? Your whole SMA II list of the banking sector is out on the exchanges or are they paying? You still have about 10-12 days for them pay.

A: October 1, for three reasons, you will see nothing. October 1 is a holiday. Second is the quarter ends on September 30, so all people make the maximum efforts to make the payments and keep the accounts standard. The more important flow through will be in the week one and week two of October. And also, early part of October is flooded with holidays. So you will see the real impact in early October.

And to my mind, the guys who can but were traditionally holding off will make that real effort to pay to save the pain or the embarrassment or the market implication of a default. So we have to watch out, but I would think it is a very material dictate and I am seriously hoping it changes the behaviour of people who can pay and who found ways to not do.

Latha: Since we have spoken on length about gross non-performing asset (NPA), is 2.92 the peak? Does it go beyond three?

A: That number we left behind long back.

Latha: What is it now? 2.42 was the last number, what do you think will be the peak off?

A: it is too close to the end of the quarter to make a comment on the quarter, but on a full year basis we think it will be better than that number.