One of the key challenges for KVS Manian, who took charge of private sector lender Federal Bank on Monday as managing director and chief executive officer (CEO), could be to boost the deposit franchise amid a dwindling share of low-cost deposits and also improve the liquidity coverage ratio (LCR).
The Aluva-based lender’s best-in-class asset quality, measured loan growth, and low share of unsecured loans have drawn investors’ attention. Manian is expected to carry forward the legacy of his predecessor Shyam Srinivasan, of sustainable growth.
“The appointment of Mr KVS Manian, a veteran banker with rich experience of nearly three decades, should help the bank deliver on strategy and ensure strong sustainable growth,” Axis Securities said in a note.
At the same time, there are challenges around deposits and loan pricing that the new CEO may need to address.
First is the liquidity coverage ratio of Federal Bank, which was around 111–112 per cent in the first quarter of FY25—above the regulatory requirement of 100 per cent. However, the Reserve Bank of India has now come up with draft norms that mandate an additional 5 per cent run-off factor for deposits linked to mobile and internet banking. Analysts have pointed out that the impact on the LCR due to the RBI draft norms, if implemented, could be anywhere between 10 percentage points and 30 percentage points.
Srinivasan had said that the lender wanted to operate within the band of 105–120 per cent LCR, while highlighting that the bank would try to stay away from bulk deposits.
If the RBI’s draft norms come into effect, then Federal Bank may have to aim for a higher LCR, like some of the public sector banks that have the ratio upwards of 130 per cent.
As banks are offering attractive rates on fixed deposits, most of them have seen a decline in current and savings account (Casa) deposits over the last year to year and a half, and Federal Bank is no exception.
The lender’s Casa ratio has fallen to 29.27 per cent at the end of June 2024, from 31.85 per cent a year ago. However, Casa deposits grew by 5 per cent sequentially during the April–June period.
“Despite its best-in-class deposit franchise, Federal Bank has failed to translate this advantage into superior cost of funds, largely on account of a soft Casa ratio. As Federal Bank continues to improve its share of business and product penetration in its wholesale banking relationships, the current account mix remains a key monitorable,” HDFC Securities said in a note.
Another issue highlighted by analysts is the pricing power handicap, particularly when compared to bigger banks. Better pricing is key to improving the return on assets (RoA), which was 1.27 per cent in the June quarter compared to 1.30 per cent in the year-ago period.
“While we believe Federal Bank remains well positioned to deliver a sustainable RoA of 1.3 per cent, improving net interest margins (NIMs) backed by shifting the portfolio mix towards higher-yielding products would be a key enabler for the bank to deliver an RoA of 1.4 per cent by FY27E and would drive the next leg of stock re-rating,” the Axis Securities note said.
Manian, who joins Federal Bank after spending over two and a half decades at Kotak Mahindra Bank, embarks on a new journey to take Federal Bank to the next phase of growth.
Manian is an electrical engineer from IIT (BHU) – Varanasi, holds a postgraduate degree in financial management from Jamnalal Bajaj Institute of Management Studies, Mumbai, and is a qualified cost and works accountant.
First Published: Sep 23 2024 | 7:50 PM IST
By Companies
Source: Companies