See FY18 loan growth at 18-20%; NIMs steady at 3.25%: Federal Bank

Talking about monetary policy, he said there is likelihood of a repo rate cut going ahead.

Below is the verbatim transcript of the interview.

Latha: First up on the policy itself. The bond markets have greeted it with about a 10 basis point fall in yields. What is the sense you are getting, another one marginal cost of funds based lending rate (MCLR) cut is still there?

A: Before the MCLR cut, the cost of funds have to come down. So I think the signals are quite I would say ending towards a rate cut in the August policy. The tone as all of us have observed, indicates that they have a dovish stance and therefore there is a likelihood of a repo rate cut and a consequence of that you will see the flow through the MCLR also. MCLR is very formal, so, it is almost inevitable that if there is a rate cut, it will pass through.

Latha: The story of the last six months is that banks have not lent, but the bond markets have lent in a big way. So, instead of giving the same company money by subscribing to their bonds, would you not take a cut in your margins and go ahead and lend a little lower, at least for deserving companies, you don’t see that happening?

A: You can’t make a generic statement. Through the period you mentioned, we grew north of 25 percent. So, clearly we did something like what you mentioned.

Latha: Not the sector, the sector is at 5 percent.

A: That is what I said, there are therefore banks and each bank has a very different strategy and I think the situation in each bank varies. Thankfully you pointed out right at the front that our slippages have been lower. So, I think the banks distractions are different and therefore the ability to do business at the time we are in, we are a little more advantaged. So the fact that we did actually both, we did lend through the credit system as also we subscribed to some of those bonds and we were able to blend and the customers actually it looking at a blended cost of funds being lower or attractive.

Latha: My short point is that have you seen the best of margins? Would you start experiencing some pressure? In FY18, will margins be as good as your last quarter?

A: I have always maintained margins is never just unidimensional. There are a lot of contra entries that come into the margin. If you have higher slippages, therefore, higher credit reversals of interest income, your margins start changing, the product mix. But on balance if the cost of funds are low, we are able to get good credit momentum, deployment is more even paced as opposed to back ended, our margins will be in the zone that we have been indicating and we have thankfully held out to that. For us, the margins last quarter were a little flattering, it was at 3.42. We believe that 3.25 or so should be the steady state margins for FY18.

Sonia: You spoke about momentum as far as loan growth, credit growth is concerned. That is something that the street has really liked. For you guys loan growth has been steady at 20 percent across all segments, whether it is retail, small medium enterprises (SME) or even corporate loans. Going ahead, where do you see the fastest growth momentum come in from, between these three pockets?

A: It will remain in the same zone, equally weighted. We are steadfastly focusing on equal weightages across the three segments of the portfolio. We have not overweighted on one or the other. Yes, in a quarter, you may say some dialling up based on opportunities, but if you take a 12 month view, we would like to be one-third, one-third, one-third and therefore, it means growth around 18-20 percent in each of them. Like you pointed out, last year it was so. We expect this year to be similar.

As we have always maintained, our share of market is relatively small, growing closer to one percent now. Therefore, the opportunity for us, we have got our act right, it continues to be quite rich. So I am quite convinced that this one-third, one-third, one-third, plus minus a few basis points will continue.

Sonia: So is there adequate room for 20 percent growth even outside Kerala?

A: 80 percent of my business is outside Kerala. We are headquartered in Kerala, but we are a pan-India bank in every form and therefore there is equal opportunity. There are 97 percent of India\'s businesses outside Kerala.

Latha: So you feel confident of 25 percent credit growth in the current year?

A: I did not say 25, I said 18-20 percent.

Latha: No, I am asking you.

A: Yes, the endeavour is so, but there are many factors that have to play through, but 18-20 percent is very possible for us. Last year there was some effect of one-off transaction so the base is a little more elevated. As a consequence the 25 percent on that, it will be a great outcome, but I would at this juncture, talk of an 18-20 percent which is more in the vicinity and possible organically.

Latha: How will these small tweaks for home loans play out? I am not just referring to Federal Bank, I mean between housing finance companies banks, do you think there could be a competitive rate cutting at all?

A: I think yes, particularly for the higher ticket, the Rs 75 lakh and above, traditionally, the focus has been in the Rs 25-60 lakh, so I think there is a good move in the – therefore the urban metro kind of transactions will also now be probably priced more attractively. So I do expect not just in one week or one month, but certainly in the course of FY18, you will see some pick up on that front also. It is very sentimental led. If things start shaping up better, I would think the pick up on that also would be higher. And it is fairly rate sensitive.

Sonia: Any capital raising plans that you have over the next 12 months?

A: Yes, we have taken an enabling resolution. In fact the shareholder approvals are expected any time now. We are looking to raise. Instrument and timing is all being worked out, but yes, we are very much for the first time in seven years, looking to raise money.

Latha: Would not look for any inorganic opportunities, non-banking finance companies (NBFC), microfinance institutions (MFI), other small banks?

A: I would not say no, but there is nothing on the horizon or we do not have anything that we are working with. If something comes up, meaningful, we will. But as we speak, it is richly organic, the raise of money is to fund growth and as you know, we are looking at good growth in the period ahead mimicking our more recent past. So yes, if there is something that comes up our way, we are not close to it, but frankly, there is nothing at the table.

Latha: Since you have raised liabilities for so long in your bank, do you really see deposit rates falling or even for that matter, banks cutting savings deposit rates? Let us assume there is a rate cut in August, do you think banks have reached the end of the tether in terms of deposit cuts or there can be some?

A: There are two parts to this. There is a certain degree of competitive element in this. If one bank were to go and drop to 3.75 or 3.5 on the savings and if they are the only one, there will be issues around this. Unfortunately, the Indian banking market is largely driven by 1-2 very giant players who set the tone on pricing and then everybody is converging around it. So it will be dishonest for me to say that we will lead or 'x' can lead.

I think the top 2-3 banks set the tone for many of these things whether credit pricing or deposit pricing. Yes, if there is a sharp cut in rates and if the convergence between term deposit rates and savings rates are getting narrower, there is a case for it. Now whether it happens, I would say it is a largely competitive stance.