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

Ladies and gentlemen, good day, and welcome to the conference call hosted by Federal Bank. [Operator Instructions] I now hand the conference over to Mr. Souvik Roy, Head, Investor Relations, The Federal Bank Limited. Thank you, and over to you, sir.

Good afternoon, Danish, and good afternoon, everybody. Thank you for joining us today. I know many of you have actually reached out with queries on the proposed transaction with the investor, which is Blackstone. And we thought it's best to hold this exclusive call to address them directly. We have our entire senior management on the call as always, and our MD will first take you through the contours and rationale of this transaction. After his remarks, we'll open the floor for questions. One quick thing. This call is focused especially on the transaction. So we request that you please keep your questions related to that and limited to one question per participant, so that we can take as many questions as possible. With that, over to you, sir.

Thank you, Souvik. Good afternoon, everyone, and thank you for making the time today. I'm sure most of you have gone through the EGM notice and the explanatory statements that we released. So I'll focus on the key elements and the strategic thinking before we open for questions. We have called this session primarily because last week was a significant moment in Federal Bank's journey. The Board approved a capital raise of approximately INR 6,196.5 crores through a preferential issue of warrants to funds managed by Blackstone. Let me first walk you through the transaction structure. We will be issuing warrants that on full conversion will represent up to 9.99% of the post issue paid-up share capital of the bank as fully diluted today. These warrants are priced at INR 227 per share, which is near our all-time high share price as at the time of pricing the transaction. The pricing reflects a premium of 9% to the 10-day volume-weighted average price and 12% premium to the 90-day volume weighted average price. These are norms prescribed by SEBI. And the third is that independent valuation. The transaction is at a premium of 8% premium to the independent valuation submitted to the Board. So this was effectively the last traded market price. It anchors the valuation of the stock and reflects confidence in the intrinsic strength of the franchise. As per regulation, 25% of the total consideration will be paid at the time of warrant allotment after shareholder and regulatory approvals are obtained. The remaining 75% will be paid at the time of conversion, which must happen within 18 months. Upon conversion of all warrants and maintaining at least 5% shareholding, Blackstone will be entitled to a nominee -- nonexecutive, nonindependent director. There are no special rights of any nature, no veto rights, no reserve matters and no dilution of our professional management and governance model. Now let me come to the strategic rationale. Over the past several quarters, we have been deliberately shifting the asset portfolio towards the medium yielding secured retail and granular SME as well as mid-corporate segments. As you are all aware, we have been talking about this shift in the asset portfolio over the last few analyst calls. And these are structurally higher RWA segments compared to the Large Corporate segment as well as the Home Loan segment. As we continue with this mix shift, obviously, our capital requirements will increase. Also, at present, our leverage ratio is above 10x compared to peer benchmarks, which are closer to 8. This capital raise allows us to reduce the structural gap in a calibrated manner while continuing to grow the business at our intended pace. Our internal ICAAP had -- ICAAP exercise had, in any case, indicated the need to raise capital in Q1 of FY '27 under normal circumstances. This structure simply advances that time line by 1 quarter without creating unnecessary and immediate dilution. To put the phasing in perspective, we expect to receive close to INR 1,550 crores, that is a 25% upfront in Q4 of this financial year post all approvals. The remaining capital will come after 18 months or earlier if needed, as I will explain in a short while. This sales infusion protects the near-term ROE as well as EPS, while still providing certainty of capital availability. There is also an important protective feature built into the structure. If our CRAR drops below 13.5%, whether due to strong organic growth or some selective inorganic opportunity, the investor is required to accelerate the warrant conversion to ensure the bank remains above that threshold of 13.5% CRAR. This gives us capital assurance and flexibility without timing risk of raising capital. Now why Blackstone? Of course, we wanted a long-term institutional investor with deep experience in financial services, a track record of building businesses and the ability to open strategic opportunities for the bank. Blackstone brings -- is a credible, stable anchor shareholder on the cap table of the bank, a large ecosystem of portfolio companies and corporate relationships in India, the ability to enhance institutional investor confidence and valuation resilience. This, in my mind, is not just capital. It is what I call conviction capital aligned with our medium-term strategy. Their presence signals their confidence and conviction in our execution track record, our culture and the long-term structural potential of the bank. It is a vote of confidence in our 90-plus years of legacy, our current management team and the strategy being pursued by the bank. Finally, what this means going forward is the capital question is now addressed for the next phase of our journey. This gives us balance sheet strength, growth headroom, the ability to pursue inorganic opportunities if we so choose and resilience against any external macro or sectoral volatilities. The focus from here is clear and unchanged, disciplined execution and profitable growth. On a lighter note, you may finally have one less question, one less recurring question on our analyst calls for the next couple of years or more about our capital raise. On a serious note, my management team and I are deeply conscious of responsibility that comes with capital. We intend to deploy it carefully, strategically and in a way that builds long-term value for our shareholders. Thank you. We now open the call for questions. And as Souvik mentioned earlier, request you to keep your questions brief and only around the capital raise today -- for today. Thank you.

[Operator Instructions] The first question is from the line of Mahrukh Adajania from Nuvama.

My question is around overall loan growth. So right, you said that this capital will help in the higher RWAs, which results from higher mid-yield and high-yield growth. So obviously, your growth in the chosen segments is good but the overall loan growth is below peers, right? So will that consolidation be over, right, just to kind of have the full leverage of new capital? When would we start -- when would the mid- and high-yield repositioning be fully done so that overall loan growth can also pick up?

Mahrukh, the fact that we get more capital -- our primary strategy of growing mid-yield segments will continue. All I can say is that one of the reasons this capital has come in is also a validation of our strategy of what we are doing, and our strategy continues to be that we should focus and grow our mid-yield segment. That is very core to our medium-term strategy. Of course, we have to -- as I said in my last call, there are segments even within mid-yield that we are beginning to see turnaround and growth happening. Like I mentioned last call, in our BuB segment and LAP, which were earlier not growing fast enough, we are looking to grow them faster. So I do see -- I continue to see opportunity in growing the mid-yield and getting to the kind of loan growth that you are looking at.

Okay. So from now on, you would see the mid-yield growth offsetting whatever you lose in the lower-yield segments. Is that a fair takeaway?

No, we will -- I mean, the math of it is a different issue, but I'm saying we will clearly want to accelerate our growth in the mid-yield segment.

And Mahrukh, this is Venkat. Just to add, we should also keep in mind external headwinds as well. Whilst we are cognizant and working towards increasing the proportion of mid-yield assets growth, we also have to keep in mind if there is some pockets of where we see stress, we will obviously wait for that to clear and then press the pedal. So it is a combination of external headwinds plus, of course, our internal. Whilst we are ready, like we said last quarter, we said BuB and LAP, we'll see better growth this quarter. So it is also, to some extent, we'll be mindful of the external factors also.

Our next question comes from the line of Rikin Shah from IIFL Capital.

Congratulations, Manian sir and the team for this deal.

Thanks, Rikin.

I had 2 questions. The first one, I just wanted to understand the capital allocation plan, almost INR 7,000 crores in totality, which could be coming in. And in the past, in your Strategy Day, you had indicated you want to build certain other businesses like wealth, capital management. So both organic and inorganic, what are the potential options on the table? And how are you planning to deploy? That's number one. And number two, the fact that you also mentioned that the deal structure has a covenant, which says that if the CRAR goes below 13.5%, the warrant may be exercised sooner. So it does feel like there could be some inorganic acquisitions on mind as well because otherwise, the CRAR wouldn't have gone below that level. So just that along with the fact that there is going to be some capital release due to the lower credit risk weights in the housing and MSME portfolio. So I was just trying to get -- put all of this together and think about how are you planning to deploy this?

Yes. So, Rikin, just a clarification, the fund raise is closer to INR 6,200 crores, not INR 7,000 crores. But that apart, on the -- the structure is -- it is deliberately designed in a manner that if we were to need capital, we can draw up on the capital. And of course, inorganic is something that you cannot predict and cannot be sure when it will happen. But like we -- our overall strategy that we laid out in February does have inorganic as one of the elements in that plan. And that remains true. I mean, we have not changed our mind on that. And in some of the areas you mentioned, we will look at both organic and inorganic opportunities. We are continuously looking at opportunities from time to time but nothing on the table just now to report, and therefore, we can't. But some of these things we will be alert to. All I can say is we'll be alert to.

Got it. And sir, if I can clarify on this. In your February Strategy Day, you had mentioned that capital and wealth management is something, which you intend to build. But is there any possibility to acquire some MFI or housing -- affordable housing kind of portfolios because those are certain mid- and high-yielding segments as well, which you intend to grow. So are those...

Rikin, all options are open. Like I said, we are alert to all the opportunities coming in the market. We are quite actively looking at them but nothing on the table just now. But yes, we'll remain open to all those.

And in addition to that, Rikin, on wealth, we have already set in motion our organic plans to roll out wealth offering. Like I said in the earnings call, Q3, we will start the rollout. So irrespective of any inorganic, the wealth offering will start to commence operations as outlined in the strategy meeting.

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

Yes. So the question is maybe in terms of you said the structure is designed in a way that it meets the requirement as and when it is there. But maybe in terms of just want to know the timing in particular that our growth has been the slowest. Tier 1 has been very comfortable at 14.4%. So what led to the timing of the raise? And what were the options which were evaluated? And finally, out of that, we decided in terms of maybe a 10% stake and that too maybe with the warrants conversion over the period? Should we have waited for 1, 1.5 years and would have then raised the money, would have that made more sense? So I just wanted to know in terms of the options evaluated before finalizing the deal. And finally, like looking at this one here.

Right. So Kunal, like I mentioned in my introductory remarks, in any case, probably early next year, we would have gone for a capital raise in any case, right? Because we would have started absorbing capital. As I said, as we grow the RWA in the mid-yield segment, it will lead to some capital absorption, and we would have probably wanted to go somewhere in the beginning of next year, first or second quarter of next year at the latest, right? So like I said, now also the money is coming in, in Q4. By the time the approvals are in place, we will probably get into Q4. So that kind of precise timing on capital raise is never possible. And there are opportunities that happen, and you have to work with the opportunities that happen. So one, it is not significantly advanced and the rest of the capital other than 25% comes 18 months later, which is almost exactly what you are also saying that you should have raised money later. And in terms of structure, therefore, we thought it meets the requirement. In the meanwhile, it does not dilute the ROE and EPS. So I think we have some. And to get a large shareholder as on our cap table was important for us as an organization because first, it -- like I said, it is somebody with a large check showing conviction in our strategy. I think it's a very positive vote of confidence that will help the stock and help the bank. And the price at which we have done is obviously, as I said, it's a premium to all the SEBI regulated prices and very, very close to the market just now. And so we thought overall, it does make sense moving ahead and getting this out of the way and in a structure that allows us the flexibility to use the capital as we require.

But this is also, Kunal, a marquee name, a great name. So we have to be mindful of, we can't be timing some of these precisely. And if you look at the other big names, they are -- already they have invested in banks, whether it's Bain or Advent or Warburg Pincus, all of them. Blackstone, of course, being the largest [ player ] in the world, what better name could we have got. So -- and the structure, which -- it is aligned with our requirement as well. So we feel that it is [ natural ] timing.

Sure. And in terms of inorganic opportunity, you indicated that you evaluate whatever comes through. But any prioritization in terms of the product segment, which would be there at your end, maybe in terms of the existing product segments or a newer product segment, would any kind of prioritization could be there?

No. So the acquisitions, if at all, any opportunities come, we will again sync with our core strategy of liability side as well as medium- yielding assets, I mean, medium or high-yielding assets. I mean those core strategy will be only fed by the acquisitions that we do, and it will be consistent with our core strategy.

[Operator Instructions] Our next question comes from the line of Akshay Jain from Autonomous.

So my question is on growth guidance, where your current growth guidance is 1.2 to 1.5x nominal GDP, which translates to around 15% annual growth. So even at this growth, the annual capital consumption comes to around 50, 60 basis points, and you're raising close to 280 to 300 basis points of capital. Like is there any upward revision to this growth guidance? And number two is on Blackstone's role going ahead. So in the press release, you have mentioned that Blackstone will be a strategic partner and Federal Bank will use its operational experience and access to the larger India portfolio to scale up. Can you please throw some more light on what areas will you collaborate? And what will be the Blackstone's role going ahead?

Right. So Akshay, on the capital raise, like while you said 280 basis points, as you know, that part of that comes 18 months later. So it's not -- we are not talking of that today, right? It comes 18, 20 months later, actually by the time the approvals are in place and then 18 months, about 20 months later. So I don't think that is coming today. So we are not diluting today. And we do expect our growth trajectory to pick up as we go along. We continue to -- I mean, we are not yet revising our guidance. If at all, when we come back to you in this quarter end call, if we need to give a revised guidance, we'll talk about revised guidance. Today, we are not issuing any new guidance on the credit growth and things like that. But let's talk about that when we come back to you in the quarter end. Coming to Blackstone's role, of course, Blackstone has 50-plus investee companies in India, 2-odd lakh employees in them. They have -- those companies have borrowings. They have treasuries. And therefore, we'll work with Blackstone to find access to some of these as customers for the bank. And of course, there is no rights or no veto rights or nothing we have given. So their involvement will be, of course, as you know, we also give them Board rights only after the warrants are converted post the 18, 20 months' time frame. So I think they are a large investor, and we will -- like we would do with any other large investor, we would try and leverage and maximize the opportunities that they present to us. And that's what we meant by leveraging the opportunities with Blackstone.

Our next question comes from the line of Parag Thakkar from Fort Capital.

Yes. Congratulations, Manian, sir. Am I audible?

Yes. Yes. Thank you.

Yes. Yes. Congratulations, Manian, sir. It was absolutely a fireworks, very good results, expanded. And now this raise, as you said, the global PE fund giving us vote of confidence. So just wanted to ask, I saw that Blackstone has investment in one company called BSF. And that is, I think, a company where I think -- based on my study, you can get deposit accounts. Is it fair -- I'm getting right in this direction?

Of course, yes. Like I said, they have more than 50 companies in India, which they own, they are controlling rights in. And yes, one of the names is what you said. But it's not only that. We will look at all the entire ecosystem and see what we can maximize. Yes, we will.

And sir, as many banks and NBFCs are hinting that after the GST cut implementation, they are seeing a very good growth pickup. So is it true for us also that in our chosen segments, which you referred to, mid-yielding segment?

Yes. So we have seen pickup in auto and segments like that. Yes, we have also seen that. But what we need to see is whether it is the spike post month of poor sales or is it a sustainable sales, time will tell. But yes, initial October month, many of these have been -- sales have been quite good. Let's maintain [Technical Difficulty] of that. Yes.

Sure, sure, sure. And just for the confirmation that we will not do any large acquisition, right, which will dilute ROA and ROE because you are completely focused on delivering value to shareholders and so ROA and ROE should be the key criteria. So there will not be any acquisition or anything such which will dilute our ROA, ROE kind of thing, right?

Parag, we remain extremely conscious. Like I said, any acquisition we do or if an opportunity arises, it will still be part of our core strategy. Our core strategy remains improvement of metrics like ROA, ROE. And we will -- whatever we do will be in sync with those objectives. I assure you that.

So basically, over the next 2 to 3 years, what should be our goal as an ROA, 1.4%, 1.5%?

Yes, that is what -- if you look at our February document also, we have said that range, right, Parag, yes, that remains our...

[Operator Instructions] Our next question comes from the line of Vishal Gutka from ASK Investment Managers.

Can you hear me?

Yes, Vishal.

Although a couple of participants already asked but I will also try to make an attempt. So Blackstone globally is known for making acquisitions like in hospitals, they have done a lot of consolidation. So here, there could be a chance because we've been a more South focused bank. I think a lot of PSU banks might be in government thinking like Punjab & Sind Bank, they are thinking, which has a decent presence in Northern India. So that will make in the pan-India bank or maybe smaller banks within the southern basket could be a potential candidate?

I've not thought about the PSU banks part of it, Vishal, but let's see that the opportunities present themselves, and we will evaluate. That's all I would say just now.

Our next question comes from the line of Anish Rai from UBS.

So a couple of questions about the Board structure. So I just wanted some clarity. So I thought you partly answered it but in Q4 FY '26, when we have 25% conversion, that is not when the nominee director right gets figured, right? That gets figured only when Blackstone's ownership reaches 5%, correct? That's the right way to think about it?

No, no, not 5%. After they exercise all their warrant, 9.99. It doesn't require 25% stake, it triggers after the 100% is reached on all the warrants that -- if it drops below 5% is when their right drops. Yes, they relinquish...

Understood. Understood. Okay. So other related question was, so just wanted to check that this nominee can be a part of subcommittees of the Board, right? So there are no guidelines or regulations around it. It's completely a Board decision.

It's entirely NRC and a Board decision. There is no commitment or no covenant at this stage, nothing. They get a Board position. All the committee decisions are entirely left to the NRC and Board and then EGM, all of that, yes. It will follow its normal course of...

Anish, further clarifications are all provided in the EGM notice. We have already given that in case if you want to refer to it.

Yes, we have tried to make our explanatory statement quite elaborate in the EGM notice. If there are any further queries, please feel happy to reach out to our IR team.

Our next question comes from the line of Anand Dama from Emkay Global Financial Services Limited.

Congratulations, sir, for this conviction capital to come through. My question is that whether your growth has bottomed out in second quarter and which are mid-yielding products that you are going to look at growing faster so that basically you will have a capital consumption and you want this capital at this point of time. If you can just name those products and how are you going to grow in those products, if you can help us with that?

So Anand, that product set doesn't change. It is -- we have added a few products to that. But the mid-yielding segment for us has commercial bank, has CV, it has CE, it has auto, it has LAP, it has gold, it has BuB, small business segment. So it's a variety of products there. Like we said, we also pilot launched our tractor part of the business. So even that goes there. So there are these multiple products, which haven't dramatically changed. It is just that in some of them, we were already getting good traction. Some of them we found traction over the last quarter. Some of them, we are expecting to get traction over the coming quarters, 1 or 2 quarters, yes.

Our next question comes from the line of Kaushik Agarwal from [ GTHT ].

Congratulations on the deal. So just wanted to understand from you, if there is any specific mandate from Blackstone with regards to any financial metric for the bank? Like is there anything which they have indicated around the OpEx, credit cost or return ratios or anything else as such if you can throw some light upon?

No, there are no business covenants attached to the transaction. They have come like any other minority shareholder who would come in. There are no business metrics that are prescribed under the agreement with them -- under the shareholder agreement with them, nothing.

Our next question comes from the line of Shailesh Kanani from Centrum Broking.

Just to clarify, these are covenants post coming into -- post subscription to the warrants, there are no business conditions. They come in like any other shareholder.

Yes, is my voice audible?

Yes.

Sir, congratulations, first of all, great deal. Sir, just one question. You have answered other parts. Post this infusion, if you want to kind of highlight one single biggest transformation which Federal aims to achieve from this, if you can throw some more quantitative light on that?

Shailesh, of course, there are many things that will be helped by this. But if you ask me to name one, I would say that this is a big vote of confidence from a globally reputed investor. It adds confidence to the rest of the investment community on the company. And I do believe that a large investor like this coming and showing confidence in our business strategy gives more conviction to many other players. And I would say that is one big gain of doing that apart from all the other things that the capital in the bank can, of course, do in terms of growth and taking some bets and things like that.

Next question comes from the line of Pritesh Bumb from DAM Capital Advisors.

Congratulations on the deal. Two questions from my side. One is on this capital or warrants conversion, it will be Blackstone's call, right, for the conversion when they want to do, right?

No. So warrants are convertible at the 18 months. In normal course, in the 18th months, it will be converted. So it's not their call. I mean on 18th month, they have to make a conversion, right? Otherwise, they forfeit the 25% that they have put in.

So what I was checking is that within 18 months, they have to convert, right, within, not 18th month.

Yes. Technically, yes, yes. Cutoff is 18 months. But as I mentioned to you a while back, if there is a need for capital and our CRAR drops below 13.5%, as per the agreement, they are obliged to accelerate their warrant, I mean, bringing in the 75%.

Got it. So assuming they convert it in a few months, in terms of bank stance, once the capital comes in, maybe your cost of funds may drop due to the infusion. But will there be a strategic call that you may do more tech spends or do more physical expansion or -- which will increase your OpEx in the near term? Can that happen basically? Or is that a thought process if capital comes in, we'll expand some of the unsecured businesses through...

Pritesh, let me put it this way that just because more capital has come in, we will not change our core business strategy. I think our strategy was very well described, at least we thought about it fairly in depth, and we also communicated in fair amount of detail. Yes, can we do some of -- something slightly bolder? Yes. But broadly, we will not deviate from our core strategy that we have followed. Because finally, remember one thing, this shareholder is also -- new shareholders is also coming on the back of their conviction on our strategy, right? So it is not that we are going to be -- we will be as responsible with the capital as we ought to be. So I would say, yes, some things bolder, can we do? Yes. But at least it is not -- so for example, tech, I don't think we were going to -- anyway, we were going to do what is required in tech. So I don't think we will do something different or anything dramatically different. What is required we'll anyway do. But like in the case of acquisition, you might get bolder or timing can be changed, things like that. So at the margin, maybe some change, but core strategy will not change.

Operator, can we end the call?

Sure, sir.

Thank you, everyone, for joining us today. Like I said, we are very excited with this development, and we do believe that it's a huge, I like to call it, the conviction capital that we've got. And I think we are quite excited about pursuing the strategy that we have laid out. And hopefully, every quarter, we are able to come and show progress in sync with our strategy, and we're looking forward to seeing you all every quarter. Thank you. Thank you so much.

Thank you.

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