The Federal Bank Ltd shared its strategic plan for the next three financial years to FY28 at its analysts’ meeting on Friday. This provided an opportunity to understand the thought process of KVS Manian, former Kotak Mahindra Bank executive with 25 years of banking experience, who took over as Federal Bank’s managing director and CEO in September.
Manian has a new mantra: make Federal Bank the favourite of investors and customers. Note that this management transition was significant as the bank had Shyam Srinivasan in the role for 14 years. Under his leadership, the bank increased its total assets at a CAGR of 15% to ₹3.2 trillion in FY24.
The current CEO aims to beat its immediate three competitors by FY28, placing it among the top best banks eventually. However, the management clarified that the goal is not in terms of the overall size of the bank.
Also, it is a relative target in terms of parameters such as net interest margin (NIM) and return on assets, essentially meaning that it might not be an absolute improvement in financial ratios. If the NIM drops for the entire sector due to rate cuts by the Reserve Bank of India, it will affect Federal Bank too.
The NIM expansion strategy is likely to be driven more by the liabilities side as the bank is well placed compared with rivals in terms of yield on advances. The bank’s interest expense as a percentage of average earning assets is now relatively high at 5.6% for 9MFY25. The plan is to bring this down.
Though the bank has a good CASA (current and savings accounts) ratio of about 30% of the total deposits for FY25 (estimated), it lags in the current account business at 6%, which is targeted at 10% by FY28. However, given that the current growth rate of CASA in the sector has been sluggish at 6% in 9MFY25, the task is challenging.
Branch expansion
The plan to increase current accounts is well laid out. Future branch expansion will be carried out in states with a high GDP and a focus on small and medium enterprises. Also, the management pointed out that in certain areas such as Mumbai, its presence is low, with only 19 branches compared with more than 100 branches each for the top four private sector banks.
Though the metro cities are very competitive, they also remain the biggest markets for deposits. During meetings with branch managers, the CEO repeatedly emphasised that even they must keep an eye on the profitability of the branch.
On fee income growth, it appears that Manian is slightly more aggressive than his predecessor. He highlighted the need for change as the bank is currently conservative in terms of various business partnerships such as the credit card and the wealth management business, wherein its share of costs is low, but the upside is also low.
Top private sector banks and the State Bank of India have a presence in insurance, mutual funds and stock broking, which make them truly universal banks. While Federal could also become a universal bank through the organic or inorganic route, scaling up those businesses is not a cakewalk.
A case in point is the struggle of Kotak General Insurance to scale up where the majority stake has been sold out even after the solid backing of Kotak Mahindra Bank.
The current CEO has meticulously planned the strategy, but the execution on the ground will be the key to success. Even as the Street will keenly watch the progress, Federal’s current valuation is undemanding. It trades at 11x price-to-earnings multiple and 1.3x price-to-book value, based on Bloomberg consensus estimates for FY25.