![Shyam Srinivasan, Federal Bank-1200](https://img.etimg.com/thumb/msid-106914918,width-210,height-158,imgsize-26696,resizemode-75/shyam-srinivasan-federal-bank-1200.jpg)
The big picture here is that Federal Bank continues its growth momentum. It is growing at a run rate which is higher than the industry average and the CASA numbers, I would not say enviable, but they are rock solid.
Shyam Srinivasan: Yes, the first thing and the key point for Q3 you may have observed is that for the first time ever, the bank hit the four-digit quarterly profit number. We crossed Rs 1,000 crore of net profit in Q3. Sequentially, it has been RS 854 crore first quarter, Rs 954 crore Q2 and in Q3, it was record Rs 1,007 crore. This came on the back of a fairly strong FY23 and FY24 looks like on course on all the key metrics the bank has been seeking to work on.
It is a tight market for all players. We have held out quite well and I do believe this momentum of ROA and ROE expansion should continue as we look into either the last quarter of this financial year and/or the next financial year. The bank is fluid enough to readjust to market realities. On balance, we are on course to deliver what we set out to do a few years ago, sequentially improve our ROA and annual improvement of about 10 basis points every year. We are on course for that.
We always look at the aggregate book and with Federal Bank we have never discussed this point. So, let us take this opportunity to understand the growth in Federal Bank, how much is coming from your hometown Kerala, how much is coming from south and how much is coming from new areas because for me that is the real parameter of growth that you are no longer an old private south based franchise. You got your wings which are now spreading.
Shyam Srinivasan: I do want to believe we shed that tag of an old generation bank a long while back. But that said, we have a very marked presence for the reasons we were founded in Kerala. Our deposit franchise is rich here. Our credit book over the last many years and in particular the more recent years has been substantially growing across the country, very diversified.
We have 1414 branches, out of which 820 branches are spread across different parts of the country. About 590 are in Kerala. About 75-80% of our business comes from all across India other than our home market. This tag of old or regional has been long shed and I hope that is visible in all our outcomes. We set out to be the most admired bank many years ago and I do want to believe that that momentum is sort of relentlessly progressing.
We bring in about 20 odd percent of the India remittances that come into India. Initially, it was just the Middle East and Kerala. Now it is non-Middle East non-Kerala, Middle East non-Kerala all quadrants working in favour and we think we are getting a good traction on that. So, on balance, the bank is now as widespread, as prominent as we would like it to be across many geographies. Yes, in Maharashtra, Tamil Nadu, Karnataka, parts of Gujarat and parts of north India, we have much higher presence compared to the past and that is showing through in the numbers.
When I spoke to the SBI chairman, he gave us a very simple thumb rule that at his size, his growth would be nominal GDP plus 2%. If we have to use the same thumb rule to understand your growth rate for FY25, can I say that it will be nominal GDP plus 5- 6% at least?
Shyam Srinivasan: We could safely say that. Barring the Covid period and even if you take that into a calculation, the CAGR for Federal has been well north of 15-16% across the eight-year period. To back COVID out, it is probably 18 odd percent. And if you look at the industry, it has grown in the 12-13%. So, we are at, what, 500 basis points to 600 basis points higher than the industry growth which in some sense is the number that you are also pointing out to be and I do think that momentum is there. If you take the last six quarters, it has been 18% plus.
So, let us look at a 20% hurdle. If you grow at 20%, which means Rule of 72 (which means you divide the growth rate with the number of 72 and that means every three, three-and-a-half years you will double). Is that a very reasonable assumption that every three to three-and-a-half years bare minimum Federal Bank would double?
Shyam Srinivasan: Yes, you sort of hit the nail in, Rule of 72. We keep saying if we grow at 18 odd percent, every four years the book should double. And if you cut back over the last, say, today as we exited December 23 the overall book of the bank is about Rs 4.4 lakh crore and we were under Rs 2.5 lakh crore, exactly about 39-40 months back, so that should be extrapolated. Yes, there will be seasonality. There is caution to banks having advice to be more thoughtful about credit expansion when the weather is sort of rough in some parts, so anything to expect 16% to 20% growth through this period is very possible.
If I say four, that is a reasonable assumption. If I say three, is that being an optimistic assumption?
Shyam Srinivasan: I would only track one line and that is that certainly we would like it to be three and a little above. But I think given the caution that is being exercised all across we ought to be a little thoughtful because I think the markets are getting tougher in the deposit space through that period. But if you take a longer horizon, three, three-and-a-half, four years, we are very much on course. But I will add quickly, the priority is to make sure that this is all sort of really profitable growth and that is what makes us very happy.
If you take the last four years or any slice of time, I think when we were at a 0.7% ROA, we had said we will double it in a five-year period. I am delighted that as we speak today, we are bang on that. And at 1.4% ROA, we start competing with amongst the top five-six banks in terms of sustainable and on the margin, our rate of growth has been more credible than many others.
You stop at 1.5%; is that the maximum efficiency you can squeeze or could 1.5% eventually head towards 2%?
Shyam Srinivasan: I often say that let us get to 1.5% and we will tell you why. The endless arbitrage that some players will have to be in the two spaces is slowly getting to be squeezed out. I think 1.8% would be the top of class and 1.5-1.6% will be the next breed. We seek to be in that 1.5-1.6% shortly and then work our way up to the 1.8%. But in that zone, the trajectory is important. We are closer to 1.4-1.39% this quarter and on course to keeping that going.
Shyam Srinivasan: I think your assessment on all the direction vectors are perfectly bang on. We are renowned for our quality of portfolio. And I am happy through this period also, our book is holding out quite well. Our gross and net have been sequentially improving year-on-year improving. And our credit costs are enviably low. It is at about 30 basis points. We seek to keep that as our sort of benchmark number at 30, 35 basis points, we would probably be amongst the best in terms of credit costs. So if our trajectory in the high teens credit growth, credit costs at about 30 basis points through the cycle, I believe 1.5% ROA is something that is on course. And with that, I think some more initiatives or higher margin businesses that we are launching should take us to the next wave.
I was talking to one of your peer bankers and he said, you know, CASA is the new gold, oil or Bitcoin, whatever you want to call, but that is the importance of a good liability franchise. Don't you think it will be a struggle to maintain NIMs around 3%?
Shyam Srinivasan: Around 3% would not be a problem. It is in the high mid sort of 3.25 to 3.30 and a little more is where the near term challenge is. But as you notice, our book is getting pivoted to some of the higher yield businesses. And we have not had a large share of that. I do think over the next two years, given the momentum we are seeing in these businesses, the higher yield businesses will start getting a higher share of our overall business. We have a sort of risk capital framework within which is what we are playing. I think around where we are right now, 3.2, 3.25 in a steady state is possible. Yes, there will be some periods where interest rates start trending down so some books get readjusted, re-corrected. But I think through the cycle, 3.25 is where we think we can. I would not go as low as 3.0 in the near term.
Can I say that for the next three years, as of now, there is no fog in the windscreen. There is no fog on the windscreen when it comes to Federal Bank's three year target.
Shyam Srinivasan: I think our wipers are good to drive through fog without accidents.
You would be completing almost 15 years in September, you built a franchise, which is built to last. And I am sure as the CEO, you are thinking what is next for Federal Bank. I am sure the plan is already in place. Markets are curious to know what is next for Federal Bank. You have been the face, change agent there. What's next?
Shyam Srinivasan: I think we have been candid when the regulators advised us to execute our succession plan, the board put out the message. There is a process underway. And well before the deadline, we will share the names with the regulator for them to approve and sort of appoint. But I added only a few minutes back and gladly you picked it up. We are built to last. I think we have had for about a year plus been mentioning we have a very strong succession internally.
For choice, the board will look from outside as well. And we bat quite deep. We have a good team across the spectrum. And through the last four, five years, one of the wise things we have done is we have created a senior management team, which is spread across different geographies and not sort of polarized in one location, whether it is Mumbai, Kochi, wherever. We have Mumbai, Kochi, Delhi, Chennai, all our seniors are peppered across these places. We represent the geographies. We are present quite nicely. So I think depth in the senior team, unarguably, their board continuity is very strong. And I genuinely want to believe we have built something that is transcending individuals and across time. So my conviction is that, you know, FY25, FY26 would be even better. Yes, I have had the opportunity to be around for a long while, but I am sure it will be only better.
Well, you have given this launch pad, and I think that is incredible. I have had the pleasure of tracking your journey at Standard Chartered and with Federal Bank. So it is quite incredible the way you have cemented a lot of processes into place. You are open to an external candidate also, now that leads to speculation, but also excitement, speculation for shareholders and excitement for press.
Shyam Srinivasan: Well, the process is on. All I can say is that the board is running a very elaborate search process. It is just commissioning. Like I always said, there are two very prominent individuals in the team who are exceptional calibre, but the board for choice will look around. Hopefully in the next two months or so, there will be a good slate to choose from.
You are confirming to us that there is a probability and a possibility and you are open to the fact that there could be an external candidate?
Shyam Srinivasan: All I can say is that the board is very much in the process of identifying the most suitable for the job. I also add that we have very capable internal. So, you know, I think the, as I say, the best man or woman will get the job. The good thing is the job is attractive enough for very, very talented internal, external to want it. We could not say that a few years back.
You look at Federal Bank 1000 crore and if you assume that is the new normal, then we are looking at perhaps Federal Bank becoming one of the most profitable bank outside Nifty 50. So in my assessment, if I say that Federal Bank is on course to perhaps become the most profitable bank outside Nifty 50, I think I would be correct. What do you think?
Shyam Srinivasan: I wish you will be right. And I wish we enter the Nifty 50.
One final point, post Covid, it was about survival. Banks had to survive. Then it was revival. CASA started coming back. Ratios started improving. Can I say that now it is the time of flourishing for the Federal Bank? Next three years, we would see more earning beats and we will see more surprises.
Shyam Srinivasan: I will just add to your survival revival. There is a word called thrival. It will be that.
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