The Federal Bank Limited (FEDERALBNK) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to the Q3 FY '25 Earnings Conference Call of The Federal Bank Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Souvik Roy, Head of Investor Relations of the Federal Bank Limited. Thank you, and over to you, sir.

Thank you, and good morning, everyone. Thank you for joining us on this early call today. We truly appreciate your flexibility in accommodating this one-off schedule change, and we are hopeful to return to our regular time lines moving forward. Most of you know, we have scheduled our Analyst Meet on the 21st of February at Trident BKC, which was announced on the exchanges a while ago. Given the limited seating capacity, we encourage you to register at the earliest. Registration will certainly close by 30th of January, and confirmations will follow in early February. At the Analyst Meet, we will discuss our strategic road map in greater details. But for today, let's focus on the quarter that went by and the progress that we've made. This quarter is particularly noteworthy as it marks the full first quarter under the leadership of our new MD and CEO, Mr. KVS Manian. And joining in today, as always, is our senior leadership team who are here to address your questions, provide deeper insights into the numbers and key developments. With that, I'm pleased to hand over the call to Mr. Manian. Over to you, sir.

Thank you, Souvik. Good morning, everyone. Thank you for taking time to join us today. This moment is particularly special for me as it marks my first opportunity to address you after my completing the initial quarter as MD and CEO of Federal Bank. I will begin by expressing my heartfelt gratitude for the warm welcome I have received and the incredible support from this remarkable team. The last 3 months of 2024 have been quite a learning curve, perhaps more accurately a listening curve. This period has been a journey of exploration, understanding and most importantly, listening to a process that I called my Listening Tours, where I traveled extensively across all zones meeting with over 2,000 Federals. When I visited each of the 9 zones and the -- with the sole intention of listening, I gained some deep understanding of how our bank operates. I heard the aspirations, ambitions and apprehensions and also witnessed the fierce pride that the team has as Federals. I have endeavored to make these exchanges a 2-way process to exchange ideas, challenge norms and forge a new way of thinking within the bank, one of being astute, agile and alert, what I call the AAA culture. From these interactions and others, we have formulated a detailed strategic plan, which reflects the collective aspirations of our people. This plan is not just about scaling, it's about scaling with purpose, with responsibility and with quality. It's about building a future where every aspect of what we do, whether it's the quality of our franchise, earnings, people or our service is held to the highest standards. When I presented the strategy to the Board, I did emphasize our aspiration to gain more relevant scale beyond Kerala. As we look ahead, we need some breakthrough effort to make this happen. Our priorities are clear. This quarter, we made some pivotal decisions that I would call a strategic reorientation without disruptions. These changes are essential for creating a solid foundation on which we can build Federal to the next level. While reorientation is never an easy task, I'm proud that my team has embraced these adjustments with remarkable clarity and purpose. The transition process to these new changes is smooth, focused and largely free of disruption. As we recalibrate our strategy, we are firmly grounded in a philosophy of granular growth, growth that strengthens the very foundation of the bank. It is abundantly clear to us that high-value, deposit-driven asset growth is not our path forward. While such growth may appear impressive in the short term, it is inherently risky and unsustainable. Our reorientation on the liability side of our balance sheet has been a critical pillar of our overall approach in this quarter. We have implemented several changes aimed at improving the quality of our liability base, and I'm pleased to report that we are seeing clear and tangible signs of progress. One of the most significant changes have been shifting our internal focus to average CASA as a key metric. This shift is both operational and cultural, aligning our internal scorecards with a more meaningful and sustainable measure of performance. Externally, we have ensured that our reporting reflects this strategic shift as well. Implemented 2 months ago, the impact is already evident, while our EOP CASA shows a decline, primarily due to a drop in wholesale business current accounts, our average CASA metrics is still a much more compelling story, SA averages grew by over 2.5% quarter-on-quarter and CA averages grew by 1% overall. Average CASA grew by 2.3% this quarter. This shift to average metrics ensures that we focus on quality, stability and sustainability in our deposit base rather than short-term end-of-period fluctuations. Moving beyond EOP metrics, we are seeing a bandwidth of our teams to concentrate on more meaningful activities and aligning our efforts with a strategy that genuinely supports the growth and funding of the balance sheet. We Federals are now better aligned with their philosophy that prioritizes long-term value creation over short-term optics. While our total deposits have marginally dropped from INR 2,66,553 crores to INR 2,64,829 crores, it is important to unpack the context behind this reduction. Much of this change is attributable to the strategic changes that I just spoke about. However, if you look deeper into the numbers, there are many points that become discernible. Firstly, the end-of-period CASA decline, particularly CA accounts, account for nearly INR 1,100 crores of reduction. Additionally, wholesale term deposits, specifically those above INR 3 crores, have decreased from INR 37,821 crores to INR 33,848 crores, representing a drop of nearly INR 4,000 crores. The concentration from our top 20 depositors has decreased by over 33%, aligning with our broader goal of reducing risk by diversifying our deposit base. Deposits from LCR unfriendly sectors, such as financial sector, have dropped significantly from INR 18,912 crores to INR 13,593 crores, a reduction of over INR 5,000 crores. Furthermore, the wholesale deposit plus CDs and IB, interbank term deposits, have fallen from being 19.5% of our total base to 18.2% of our base, reflecting a drop of approximately INR 4,000 crores as well. This is another step towards derisking our deposit base and aligning with our quality-first strategy. On liquidity and deposit-related metrics from this quarter, which reflects our deliberate focus on building a more stable and sustainable liability base, our LCR has seen remarkable improvement. Last quarter end, our LCR stood at 111% and at this quarter end, it stands at 133%. While I don't intend to maintain it at this level, the fact is it has moved from 111% to 133%. On the asset side, we have taken significant forward-looking measures this quarter as part of our broader reorientation strategy. We are navigating these times with measured prudence and strategic foresight, adopting a deliberate and calculated approach. This is not the moment to accelerate growth in unsecured lending. Instead, we are waiting for the credit cost environment to stabilize before expanding in that segment with the exception of credit card, I would say. While increasing high-yield unsecured loans like MFI and personal loans is not an immediate option, we are seeking other variables to enhance yields and optimize our portfolio's performance. Our approach to low-yield assets such as home loans reflects this strategy with the segment growing only 9% year-on-year and achieving 80% penetration for savings account with home loan customers. However, rate competitiveness in this segment remains a challenge. Our auto loan portfolio grew 25% year-on-year despite a slightly slower growth in this quarter due to a strategic pivot we made from a floating rate model to a fixed rate model, which I think is also important in the construction of our balance sheet. In one quarter, we transitioned to 80% of our new disbursement being fixed rate disbursement, causing short-term volume and revenue impact, but positioning us for medium-term NIM improvement. Yields in this segment have already shown a small uptick. Our medium and high-yield businesses have grown faster than the book average. Commercial Banking grew by 5.65% quarter-on-quarter and 24.5% year-on-year, reflecting healthy momentum. Business Banking grew at 13% year-on-year with record disbursements in December. Gold loans increased over 30% year-on-year, though we see some regulatory headwinds, which may slightly impact this growth in the near future. LAP grew 20% year-on-year with marginal improvements in pricing. The micro finance portfolio remains an area of cautious navigation for us, focusing on managing risks for the long-term sustainability. Our credit card business is growing rapidly, both in organic sourcing and ENR, albeit on a small base. In our Corporate and Institutional Banking portfolio, we have taken deliberate steps to ensure a prudent and balanced approach, particularly in our exposure to certain sensitive sectors, like NBFCs and power. By actively managing these exposures, we are reinforcing the strength and stability of our loan book. We are revamping our RAROC network -- RAROC framework ensuring that profitability and risk-adjusted return at the customer level remain central to our decision-making. We have also made strategic decisions to refrain from engaging in the direct assignment business as it does not align with our broader goals of building a sustainable and high-quality franchise. Despite all these shifts, I'm pleased to report that we have been able to maintain our NIM even though the cost of deposits has increased marginally. This reflects the success of our proactive margin management efforts, which are already yielding results. Some of the measures we have implemented to improve NIMs will take time to truly reflect fully, but they are designed to deliver a positive impact over the medium term. To sum up, our asset-side strategy is underpinned by balanced discipline and long-term view. We are methodically aligning our portfolio to ensure higher yield, responsible growth and a focus on quality. Each of these measures from optimizing low-yield products to pivoting business models and enhancing pricing brings us closer to a more profitable, sustainable and well-rounded franchise. While some transitions may create short-term headwinds, they are deliberate choices that will deliver significant benefits in the medium to long term. Our confidence in the resilience and potential of our asset book remains strong, and we are well-positioned to capture opportunities in the quarters to come. One of the key changes we have made in our approach to NPA provisioning for retail unsecured loans. We recognize the need to adopt a more robust provisioning framework, one that more closely reflects the reality of potential credit risk in terms of both quantum and timing. This shift is not just a technical adjustment. It is a strategic step to ensure that our foundations are solid as and when we scale this portfolio. By aligning our provisioning norms with the industry best practices, we are creating a framework that supports sustainable growth, while bringing our operating team closer to the realities of risk management. With this change, while our year-to-date annualized credit cost has increased to 41 basis points, our guidance for the year continues to be 40 to 45 basis points. You would have noticed that we have taken this accelerated provision even while the overall quality of the book has remained very stable. There has been a slight increase in fresh slippages, rising from INR 428 crores to INR 486 crores compared to the last quarter. This quarter, we have also written off INR 496 crores of assets, effectively reducing our net advances. This move is also part of our broader effort to maintain a clean and focused balance sheet, ensuring that we operate with a higher degree of transparency and efficiency. These steps represent a significant reorientation of our asset-side strategy. While there has been an immediate impact on profitability due to the provisioning changes, we are confident that this proactive approach will yield long-term benefits. Even more importantly, we have managed to execute all these changes without compromising on our employee connect and engagement. Our teams remain motivated and aligned with the bank's vision, which is a critical factor in our continued success. I also want to highlight that we have successfully protected our profit and loss account while implementing these measures. The onetime impact of the reorientation of profit before tax is -- of the reorientation on the profit and loss account is INR 292 crores. Had it not been for this provision, we would have ended the quarter with record profits. What we are effectively doing is keeping the plane flying while refueling it mid-air. While this might sound risky, let me assure you that it is anything but. We have a clear road map ahead and every decision we make is deliberate, strategic and aligned with our long-term objectives. As I conclude, let me leave you with a thought that is inspired by my time in Kerala as well as something I recently read about what Steve Jobs had said, "Fisherman repair their nets before their set sail." When the sea is too rough to sail, the smart ones don't wait, they get to work. They mend their nets, sharpen their tools and prepare for moments -- for the moment that storm breaks. Even in moments of stillness, there is progress. It's not about waiting passively, it's about preparing actively. Every measure we have implemented this quarter is part of our preparation. We are building a stronger foundation, sharpening our processes and positioning ourselves to sail faster and farther than the winds permit because even in stillness, there is growth and in preparation, there is strength. Thank you. Thank you so much. We are open for questions. Operator, can you help us with that? Thank you.

[Operator Instructions] The first question comes from the line of Mahrukh from Nuvama Wealth.

Congratulations on the new strategy. I had a few questions. Firstly, is the reorientation of deposits and loans complete or will there be some more consolidation even in the current quarter? And so -- or putting it in other words, would it be fair to say that the deposit and loan growth would have been higher if there was no reorientation in the quarter? So that's my first question. And my second question is on margins. So some of the unprofitable growth has been given up, and NII has also grown 3% Q-o-Q, which is good. But the reason why NII growth is higher than asset growth is because of average balances being higher. Or is there some costs which will pick up in the next quarter? As in that, is there -- would there be some quarter-end mobilization of deposits which should reflect in the next quarter? And the last one, if you could explain what exactly was written off because your credit costs excluding the INR 292 crores is a very small number, INR 0.5 billion. So there is no impact of the big write-off on credit costs. So were these all 100% provided accounts? Or how do we view it? These are my questions.

Some part of it, I'll ask my CFO to take, but the reorientation part, Mahrukh, reorientation is never complete. I think it's a process. We cannot expect it to be over in a month. But like I said, we have to -- we will balance growth and reorientation all the time, like we have done this quarter. Maybe it was the first quarter where we gave up growth in favor of the reorientation, but we will strike a balance as we go forward. And that process is a reasonably medium-term process, I would say. Other questions would Venkat want to take?

I think the other question, Mahrukh, which you had was on the credit costs. Like you've seen, the credit cost for YTD is 41 bps. And -- but for this, like you said, the credit cost would have been quite a small percentage. Having said that, with this catch-up, we do expect, even for the full year, to remain in the 40 to 45 bps range for the full year credit cost. On the write-off, the write-offs are all basically fully provided accounts. So there's nothing -- no impact on the financials. These are fully provided accounts. And this is in line with the Board-approved framework.

Okay. And margins?

So margins, yes, you are right. They are a result of the NIM improvement was -- the average advances where -- average liability and advances is what influenced the NIM.

And there is no other one-off for any of that which is likely to impact this going forward. This is a pure operating performance.

The next question comes from the line of Jai Mundhra from ICICI Securities.

Congratulations, sir, on a steady quarter. Sir, in your opening remarks, you've mentioned about auto loans, you have changed from floating to fixed. I believe, there could be some other products also, maybe gold loan, maybe business banking, maybe some other products wherein you can, sort of if you want to, you can change this. Any update on this floating-to-fixed thing? Is this complete at bank level? Or there may be some other portfolio wherein you want to do this?

Thanks, Jai. Yes, you are right. There are other products where this is possible. In fact, what I did not mention is, even in our small business segment, BuB segment, we have moved almost 20-odd percent of the portfolio to fixed rate. So this is a process after -- like I answered in the first question as well, this is a process. We can't do everything overnight, but we are quite clear that there is opportunity to do more of this. And you know that auto finance, most of the industry is on fixed rate, right? So it was a low-hanging fruit to change. And like I said, what is remarkable is probably this month, we will do 100% of our business in fixed rate, from 100% variable 3 months back. So I think these are all processes, which will take transition time. But you are right, there is opportunity to do more in more areas and we are working towards that.

Sure. And sir, while you reorient the portfolio -- the loan portfolio, and at the same time, of course, there are a few products where it is not advisable to go all out. Your sense on the overall loan growth, would it be -- I mean so far, we were a growth leader if you were to look at across most of the banks. How would this status change? Will it be okay growing similar to system level or maybe a certain percentage points over system level while you do -- while you keep doing this reorientation? Any...

Our intention is to get to -- get back to a growth which is -- I would say a broad number of 1.5x, the system growth is what we will typically tend to target. Yes, that remains our target. The reorientation will take us there at a point in time. Yes, like I said, we are preparing for doing better. In my concluding remarks, I did say that we are preparing ourselves for better growth. So growth, of course, is an important imperative for us. We are not going to forgo growth for the sake of this. And gaining market share is an important metric we want to keep for ourselves.

Sorry, sir, you said 1.5x of the banking system group, right?

Yes, yes.

Okay, sure. And lastly, sir, on deposits, right? So of course, there is a huge competition in the deposits. One way to, of course, increase deposits or maybe CASA is to offer a staggered payout, a staggered offering, which some of the banks they do and they do it very well. Any thoughts on how do you want to improve the CASA and maybe the granular deposits? That will be very helpful.

So I look at it this way. The easy way out is to go and work on the price and get CASA and deposits. I would say that I have -- knowing the bank now for the last 4 months, I have reasonable confidence in the bank's franchise and its distribution. I think there is potential to leverage the distribution. So I think we have to do the hard work part of it better and get more out of our network and distribution. And I think we have the brand and the franchise to do that. So my initial reaction to your comment is we will not take the easy way out. We will -- we may have to work harder, but we will try to get it more granular and qualitatively superior way. I hope that answers your question.

Yes, sir. And sir, I think in your opening remarks, you mentioned that there are a few low-hanging fruits. I believe they would be there across most of the line items. I think you have touched upon the growth. But if you can also touch upon maybe the OpEx and maybe the other income and fee line item. That will be the last question as to what kind of, let's say, qualitative or quantitative change that we can see on the OpEx and maybe the fee line item?

Yes.

Jai, given the paucity of time, and this is related to our strategy, better if we discuss it on our strategy day. I'm sure you'll be there.

Sure, sure. No problem.

The next question comes from the line of Nitin Aggarwal from Motilal Oswal Financial Services Limited.

We appreciate the steps that you are taking in trying to deliver better results and improvement in...

Nitin, sorry to cut in. Nitin, can you be a little louder?

Is this better now?

Better, yes.

So I was saying that we appreciate the steps that you are taking to deliver better results and improvement in profitability over the years. A few questions I have, like one is around the slippages. So if I look at retail slippages overall have been holding very stable. And so how is the mix trending between secured and unsecured? Any color around MFI segment if you can provide? And what is it really like driving this, the stability in the slippages in retail, therefore?

Right. I'll ask Harsh to answer this question.

Nitin, Harsh here. On the MFI, there is definitely a higher level of stress compared to what it has been across, mirroring what the sector has been facing with. Comparatively, we have a better asset quality still holding on. If I look at Q1, Q2, Q3, Q3 has definitely been higher. But if I dissect Q3 into October, November, December, we have seen 2, 3 things emerging. The on-time collection has marginally improved in December, and there has been some movement in buckets from SME 2 to SMA 1, which is a healthy sign. Is the stress there? Answer is yes, higher than ever, but better than industry. And it seems that it's too early for me to comment and say that. It seems to be at the bottoming-out kind of a phase. You could see some pain in Q4, but nothing -- and then it should start improving is the feel which we get from the sector and the industry also.

And Nitin, I would say, unsecured -- these sensitive advances are still a small percentage of our balance sheet below 5% -- less than 5%. And therefore, while there is stress on that, you have seen our Q-o-Q growth on these sensitive segments has been fairly tempered. If you have noticed, our MFI segment is flat and personal loan is actually negative.

Actually, yes, the Q-on-Q growth on MFI, hardly 1% in this one. And cumulatively, between our unsecured portfolio of cards, MFI and personal loans is just about 5% of our total advances.

And just to add, Nitin, the slippage percentage annualized for us is still well below the 1%, which we have been guiding over the last many years. It's still around 0.83% of the advances.

Right. And so that actually was my second question as to how are we looking at the unsecured loan segment as a part of our strategy to drive ease? Because all along, Federal has always -- the intent has been to drive the unsecured business because the mix is very low versus peers. And now with the decline in PL book and the ongoing pressures in MFI, what is our strategy there to grow the unsecured business over the next few quarters?

Nitin, I partly answered that question. As I said that in the short term, just now, I don't think we are going to press the pedal on these segments because it will be like wading into the storm. So we are not planning to do that. Having said that, in the medium term, will we marginally increase this portfolio? We will work towards increasing. But philosophically, philosophically, one thing I would like to just put on the table is I don't particularly like a dumbbell kind of strategy where you -- at one end, you have very high-yielding assets and on other end, you have very low-yielding assets. And the average doesn't make any sense. So like you noticed, we have stepped up volumes in the medium-yield segment, which is more core to the bank. And therefore, I don't want to be on this trajectory of saying that, let's build unsecured to some person to get our yield up. I think in the short term, our yield management will focus also on the mid-yield relatively risk-free segments rather than focus on the high-yield, high-risk segment in this environment.

If I can just add to that to just take off from where Manian left it. Clearly, on the unsecured retail side, credit cards continues to be a focus for the bank because we do believe it's a payment instrument cum a credit instrument and is well-positioned given the demographics of the country. So we've been growing our credit card business and with adequate emphasis on distribution, product enhancement, et cetera. So while personal loans has shown a decline, credit cards, if you noticed, has actually shown an improvement quarter-on-quarter, albeit on a small base.

The next question comes from the line of M. B. Mahesh from Kotak Securities.

Manian, this question on this INR 290 crores of provisions that you have made, if you could just tell us, a, how did you come to this number? B, what are the conditions under which it will be utilized?

Yes. So Mahesh, this is -- basically, what we have done is we have benchmarked our provisioning practices to the best-in-class in the industry from whatever we know. And therefore -- and what these do essentially, Mahesh, is they preponed the debit rather than change the debit. These debits would have happened, losses over a period, they would have happened. The idea is to recognize them in a timely manner and get them provided in a timely manner because many of these decisions we take to grow or not grow are determined by how the profit and loss looks at this point in time. And like I said in my introductory remarks, our managers also need to be aligned to the risks that come from the business. And it is better to reflect those risks in a timely manner to ensure that the team acts at an appropriate time. So I would say these are essentially timing differences in some ways and not incremental. These costs would have, anyway, hit us in due course. We have just taken them ahead.

Manian, the question is in the sense that we've not seen like frontline banks don't kind of make provisions on the standard book outside of what is available, outside of that contingent buffer that was created during COVID. So when you say that I have done this in line with some of the best-in-class banks, how do you kind of make that comment?

Mahesh, these are not provisions against standard assets. These are provisions against NPAs. That's why you can see our GNPA has not gone up, and our NNPA has gone up and PCR has gone up -- sorry, NNPA has gone down and PCR has gone up. So these are provisions against NPAs. That is why I said that these costs would have -- come in any case in due course, we have just advanced them. We were following the prudential -- we were -- IRAC norms we were following, but we have improved the norms of provisioning. That is the basic difference.

Sir, the second question is that if your look at your early buckets, are there any signs of stress in the balance sheet building up there? See the reason of asking this question is that given that this provision has come in this quarter, the worry is that in the next couple of quarters, we are not kind of putting a bit of a surprise with the higher slippages coming in from some of the unsecured portfolios where there is a little bit of heightened risk at this point of time.

No, Mahesh, the unsecured portfolio risk, as Harsh explained earlier, we can't say it is not there, it is, of course, there. It is -- and that is reflected in the current quarter as well. But I don't see a significant dramatic change or surprises coming out of that. I think it will be business as usual. And of course, the unsecured -- like Harsh said, one more quarter of pain is there. It will be -- maybe marginally higher, maybe marginally lower. We don't know how it pans out, but we don't expect surprises on the asset quality.

The next question comes from the line of Param Subramanian from Nomura.

Congratulations on the quarter. Firstly, again on the provisioning bit. So on this INR 292 crores, you called it accelerated. But if you could break it down between how much was, say, for the back book or how much is for a structurally higher PCR because we are holding on to this 40 to 45 basis points of credit cost guidance, right? If we are going to be conservative in terms of provision going ahead also, how are we confident of retaining that credit cost guidance? Yes, that's question one. I'll come back.

No. So like we said, this whole provision is on existing NPA accounts. It is not on any -- it's not on standard book at all, okay? So that is one clarity I'm reiterating. And second, we are clear that in spite of changing the norms on -- while the INR 292 crores has a catch-up effect as well as the current effect, our guidance that we will be between 0.4% to 0.5% continues to hold good. We are reasonably confident of that.

Okay. Fair enough. Secondly, Manian, this -- in the slide 6 of the presentation, we've shown the risk-adjusted NIM. So it's down over the last 2 quarters. Of course, this quarter, you have been impacted by the accelerated provisioning as well. But going ahead, if we are looking at an environment where rates will get cut and we have also added some risk on the book, right? Unsecured is 5% of the overall book, right? So this adjusted margin is despite that. So how are we planning to manage overall margins and ROA going ahead in that context that rates might come down, maybe the cost of risk is going up broadly?

So Param, this is a dynamic thing. It -- I mean, we'll have to watch quarter-by-quarter. We don't know when the rate drop happens. Rate drop obviously has an impact on the book. We have a significant book which is floating rate. So I would say that I would not commit myself on the front foot. I will watch the ball and play.

And also to add to what Manian said, Param, 2, 3 things which he said earlier. The NIM is influenced both by liability and the asset. So all the work which we are doing on the average CASA growing and all that will continue to help us offset some of the -- if the rate drops, if the rate cut happens. Secondly, the pivot towards the mid-segment, medium-risk business where we are seeing uptick in margins, even though it's a bit small now, but I'm sure all of this will add up and help us try and maintain the NIMs around the current level.

Got it. Fair enough. One last question, if I may. How are we thinking about capital going ahead? So we are at 13.8% Tier-1. So anything on that?

No thinking just now. You -- as you know, we have not taken the current year's profit and net of dividends, of course, into the capital adequacy calculation as of now, and that will add something to the 13.8% number. So just now, I would not guide on anything on capital raise.

Congratulations on the quarter again.

The next question comes from the line of Kunal Shah from Citigroup.

Firstly, on cost. So you indicated we have been taking measures in terms of at least reducing the wholesale, improving the LCR, but the impact is still there in terms of the cost of deposits. It's -- when we look at it slightly, maybe that's going up. So just want to get the sense in terms of why that benefit is not reflected in terms of the cost. And second, you mentioned LCR. When I was looking the LCR disclosure, it seems like LCR is still 118% You indicated LCR at 133%. So was that like NSFR, which you are referring to rather than the LCR? So that was the other question.

So, Kunal, just to clarify, the LCR bit first, 118% is the average for the quarter, and 133% is the exit LCR. 111% was the exit LCR last time. So that's 111% to 133% I mentioned. 118% is the average LCR through the quarter. So that is one. On the cost of funds, Kunal, of course, these things are playing out. It is -- in 2 months, we cannot change the cost of funds quickly. This is directional. These efforts will show results, I'm sure, over medium term because all these changes, some of these have played out during the quarter till the end of the month, right? So I think the impact may not show now, but we are confident that over a period of time, it will show. And second is, of course, the CASA mix has to change. Of course, as you see, we have maintained our CASA mix through the quarter as we drive towards improving that mix is when real cost of funds benefit comes. I also wanted to just clarify here since you asked, this is just a trigger that you asked, but it addresses many other questions raised. The NIM game is as much a liability game as an asset game, and we are very conscious of that. And the NIM game is not only about choosing the right asset portfolio, it is also about choosing the right liability portfolio, and we are extremely conscious of that. And whatever we do, we will take that into account. For example, one of the liability mix issue is around current accounts, right? Our proportion is lower. So there are things we need to do to change that. These are not quick fixes that can be made. Having said that, over the medium term, we will correct some of these to get those benefits.

Okay. Also, CA, we saw a decline, which is, again, creating some pressure on cost of deposits. So is it more to do with maybe, as you indicated, some decline in more than INR 3 crores plus when you look at it in terms of the concentration, anything with current? And what initiates we would be taking to manage the current account deposits?

So just to clarify, the current account EOP is showing negative, but average in current account has grown during the quarter by 1.5% -- 1.5%, 1.6%. So average is what determines our cost of funds and not the EOP numbers, so that I just wanted to clarify that as a fact. Having said that, we will talk more about the strategy on current account in our 21st meeting, but it is clearly one of the areas which is important to get our cost of funds down.

And just one comment, you indicated that the reorientation would also create some kind of short-term headwinds. So any areas wherein we could see further pressure or maybe this would again be with respect to slightly lower growth and increasing the coverage or there could be more headwinds in some other operating metrics?

No. So of course, you have seen some kind of asset growth side, you have seen the headwinds already, right? So that's what I meant by that. Of course, there -- headwinds, in the sense, as we choose each area and try to transition, any transition from one approach to another approach, does go through some friction, right? So there are multiple initiatives. And some initiatives will work, some will not work. Some will take some time to mature, some will take less time to mature. Like I told you, the auto transition has worked almost with very, very little headwind, right? But I can't say that everything we do will have no headwind. So I'm just being, I would say, cautious on that. And we have to be practical about what works, what doesn't work. Everything we do, we will never have 100% success rate on everything we do, right? We need a reasonable success percentage.

This is largely in line also with our philosophy of fund before lending. So we want to make sure we get the deposits story strong. And in line with that, we'll grow the advances.

The next question comes from the line of Suraj Das from Sundaram Mutual Fund.

Am I audible?

Yes.

Yes, you are Suraj. Please proceed.

Two questions. One, I think in the initial remarks, you mentioned some headwinds on the gold loan growth going ahead. So if you can maybe elaborate on that thing. The second one is on the CV and -- CV book. So basically, if I see the disbursement growth this quarter has been pretty good. I mean, on a Q-o-Q basis, it is roughly 20%, 25-odd percent. So what kind of growth you are seeing? And then how do you see this growth going ahead? And also, I think you mentioned that you are now changing this book from floating to fixed. So what could be the blended rate on the CVC book, if you can, let us say, highlight? Is it lower single, double-digit or mid-teens kind of a blended yield?

I'll ask Harsh to take these questions.

Suraj, this is Harsh here. I'll come -- start first by the gold piece. The gold, as you are aware, the RBI letter of 30th September has been sent across to all banks and NBFCs. And there are quite a few changes in terms of processes and practices, which are being done, which has definitely caused a little bit of a disruption in the industry as a whole. Banks have -- and NBFCs have reached out to RBI in terms of how to soft-land this thing and take it forward. And we are also in discussion with them. So there's nothing too different from that part. There have been challenges in terms of some NBFC have issues regarding LTV on agri classification, on renewal of gold loans. So those continue to be industry-level phenomena. We are reasonably confident in terms of complying with all the things. There will be a requirement for customer reorientation because of these changes. And plus RBI has also -- is also looking into it, and we'll be coming back shortly on how this can be smoothened out also. So this is something which is an industry-wide phenomenon. So we will see 1 or 2 quarter disruption before things stabilize and growth comes back. Coming to commercial vehicles. The growth has been good, albeit a smaller base, and we continue to look at growing this significantly more. The growth rates may taper off because as, in the sense, we may not see a 39% Y-o-Y kind of a growth or a 40% growth. It may gradually come in as the base increases, but it will be significantly higher than the industry because couple of things which have been done. It's a pan-India rollout. We are now going into Tier 2 and Tier 3 cities also. And also some new products have been added, and customer base is being expanded. So we continue that. Our entire commercial vehicle book is on a fixed rate only. The one which Manian had mentioned about was on auto loan, where we have moved...

Retail auto.

Retail auto loans. Commercial vehicle is always fixed.

Sure. And on the gold loan piece, in terms of these regulatory things, are we compliant at the moment or still some changes to make?

No, we are compliant and we are doing whatever you're doing is in complete discussions with the Reserve Bank.

Operator, we can probably take two more questions and wrap it up.

Sure, sir. The next question comes from the line of Abhishek from HSBC.

So this 0.4% to 0.5% credit cost that you mentioned, this is we estimate for FY '25? Or this is a BAU kind of level which you think you could maintain for slightly longer time frame?

Yes, Abhishek, for the full year guidance, it's 0.4% to 0.45%. But going forward as well, we do expect the credit cost to be in the around 40 bps range.

Okay. Because I would think that going forward, there would be some more normalization. So -- but you think you can maintain the 40 bps and that won't sort of inch up next year?

It also depends on how we grow, which part of the business grows, how much is the growth in the unsecured. So there are a lot of factors which comes into play. But on -- based on current visibility, we expect it to be around the 40 bps range going -- 40% to 45%, you can say, is the range going forward as well.

Understood. And one question on growth, especially deposit growth. So I understand that you want to choose better quality deposits. But it's a slightly more difficult thing to do than being choosy on loans, I would think. So -- and your deposit growth is still not ahead of the system despite the size not being like really large. We see 2 or 3 really large banks still growing their deposits much faster than system deposit growth and gaining market share. So how choosy can you really be because this limits your overall loan growth going forward? So what -- yes, what's the thought process there? Do you see yourself as a 15%, 18%, 16% deposit growth mark? Or that requires you to take deposits, which you don't want to take?

So Abhishek, we will talk more about this on our 21st meeting. Having said that, there is a level of confidence we have in our franchise and our network. And I think we -- there is a potential to leverage the network to deliver more, and there are steps that we are taking. We will talk about some of them in our 21st strategy discussions. But yes, I understand where you come from. But like I said, it is an easy way ahead to -- incrementally, if I raise deposits at 7% and lend at 8% on the corporate book, on the other side, it can -- there can be growth, but there can't be NIM and there can't be profitability. So I think we have to be deliberate. We have to make our right choices. And given our current state, we do believe that we should make the right choices and build a more sustainable franchise rather than look for short-term benefits.

Sure. Okay. Okay. We can probably discuss this further offline.

We take the last question from the line of Gaurav Jani from Prabhudas Lilladher.

So just firstly on this recalculation or reorientation. So do you actually envisage an improvement in margins after this entire exercise is done? So last 7, 8 quarters, we have been in the 3.1% to 3.2% level. So structurally do you see the margins improving after this exercise?

Gaurav, as you heard me through the call, obviously, the measures we are taking are to work towards an improvement in net interest margin. But you also know that going ahead, we might have a drop in repo rates and things like that. So like I said, we'll have to play. Of course, we are playing for increasing NIMs. Having said that, the NIM is dependent on several factors. And we'll have to see how it goes. But obviously, the objective is to improve NIMs, yes.

Secondly, sir, on the fixed versus floating, right, just to harp a bit more on that. So we are already at about a 30% fixed number, which is in line with the larger banks. So because of this recalibration, do you see that mix going up further? Or it's just an internal sort of revolving that will happen and the mix will remain at 30%?

Yes. So as you can -- you've seen our portfolio investor deck where we give this MCLR and loan book by interest rate split. So obviously, there is -- we believe that there is scope to increase the fixed rate book in some of these products which we talked about earlier, right, a bit earlier. And in a declining interest rate scenario, that might actually be better strategy to do is one. But even structurally on the balance sheet, I think I would say that we would generally prefer a slightly higher proportion of fixed-rate book because don't forget that banks essentially on the liability side borrow fixed rate. There is no floating rate borrowing on the borrowing side. So I think, fundamentally, fixed-rate assets are a better ALM match for balance sheets of banks. And that's what we keep in mind.

Sure. And sir, lastly, just hopping on the credit cost a bit, right? So barring Q3, which is the reported numbers, the previous 7, 8 quarters saw provisions of about, say, 20, 25 basis points adjusted for the aggressive growth that Federal would have seen. So my question is, what is actually leading to a higher credit cost guidance?

Abhishek, like we said -- Gaurav, sorry. Gaurav, as we said earlier, the credit cost is over a period, not an additional credit costs we are taking. We are bringing forward the debits on credit cost. This credit costs would have hit us in our earlier norm as well but with a lag. So it is more a lead lag effect. And therefore, fundamentally, over a period of time, it does not change our credit cost guidance because over a period of time, on an average, it would have resulted in the same credit cost.

Okay. No, my sense was, sir, probably this probably would have only impacted a few quarters, right? I mean this may not -- this should not sustain.

The debits depend on the performance of the portfolio and the composition of the portfolio as we go forward. And that guidance we gave you that we are not just now proposing to grow our unsecured side so much. So therefore, we are not expecting that to change in the short -- next few quarters, next couple of quarters, we are not expecting that to rise, and therefore, credit cost guidance does not change significantly. As and when we change the proportion, we will come back to you with the revised credit -- revised guidance.

Ladies and gentlemen, that concludes the question-and-answer session. I now hand the conference over to Mr. Souvik Roy for his closing comments.

Thank you, and thanks, everybody, for joining us today, and again, for your thoughtful questions and feedback. With that, I think we wish you a great day ahead. And thank you once again. We look forward to connecting with you on our Analyst Day, which is scheduled for the 21st of February. Take care, and see you all then. Thank you so much. Good day.

Thank you. On behalf of The Federal Bank Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.