One of the key challenges for K V S Manian, who took charge of private sector lender Federal Bank on Monday as managing director and chief executive officer (CEO), will be boosting the deposit franchise amid a dwindling share of low-cost deposits, as well as improving 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, focusing on sustainable growth.
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“The appointment of K V S Manian, a veteran banker with nearly three decades of rich experience, should help the bank deliver on its strategy and ensure strong, sustainable growth,” Axis Securities said in a note.
At the same time, there are challenges regarding deposits and loan pricing that the new CEO will likely need to address.
The first challenge is the LCR of Federal Bank, which was 111-112 per cent in the first quarter of 2024-25 — above the regulatory requirement of 100 per cent. However, the Reserve Bank of India (RBI) has now proposed 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 LCR from these draft norms, if implemented, could range from 10 to 30 percentage point.
Srinivasan had said that the lender aimed to operate within a band of 105-120 per cent LCR while highlighting that the bank would try to avoid bulk deposits.
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If the RBI’s draft norms come into effect, Federal Bank may need to aim for a higher LCR, similar to some public sector banks that have ratios above 130 per cent.
As banks offer attractive rates on fixed deposits, most have seen a decline in current and savings account (casa) deposits over the past 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, down from 31.85 per cent a year ago. However, casa deposit growth has been healthy, increasing 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 a superior cost of funds, largely due to 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 area to monitor,” HDFC Securities said in a note.
Another issue highlighted by analysts is the pricing power handicap, particularly when compared to larger banks. Better pricing is essential for improving the return on asset (RoA), which was 1.27 per cent in the April-June quarter, compared to 1.3 per cent in the same period a year ago.
“While we believe Federal Bank remains well positioned to deliver a sustainable RoA of 1.3 per cent, improving net interest margins backed by a shift in portfolio mix towards higher-yielding products would be crucial for the bank to achieve an RoA of 1.4 per cent by 2026-27 estimates, driving the next phase of stock rerating,” the Axis Securities note added.
Manian, who joins Federal Bank after spending over two and a half decades at Kotak Mahindra Bank, embarks on a new journey to guide Federal Bank into its next phase of growth.
Manian holds a degree in electrical engineering from the Indian Institute of Technology (BHU) Varanasi, a postgraduate degree in financial management from Jamnalal Bajaj Institute of Management Studies, Mumbai, and is a qualified cost and works accountant.