Mumbai: Kerala-based Federal Bank Ltd has launched an ambitious drive to expand its branch network and headcount, undeterred by the problems its peer Dhanlaxmi Bank Ltd is facing after it embarked on a similar strategy some three years ago.
Executive director Abraham Chacko on Tuesday said the bank will open 100 branches on Saturday to take the total to 938. The plan is to have 1,000 branches by July, he said. The bank will also add 2,000 employees in fiscal 2013 (FY13) alone to manage the new branches, after having added 2,000 people in the past two years.
The strategy is “to be an all-India bank with roots in Kerala and to target small and medium enterprises across the country,” Chacko said on Tuesday at a press briefing.
Dhanlaxmi, also a Kerala-based lender, is struggling with mounting losses after an aggressive expansion drive increased costs sharply.
In the December quarter, Dhanlaxmi posted a wider net loss of Rs 36.87 crore compared with a loss of Rs 7.26 crore a year ago. The bank’s expenses rose to Rs 427.31 crore from Rs 409.96 crore as it added branches and increased its employee strength from 1,400 in FY09 to 4,780 in the first half of FY12.
Chacko said Federal Bank is mindful of keeping its costs under check. “We expect these branches to break even in the next two years and will maintain a cost-to-income ratio of below 40% (it is around 38% now),” he said. “We will slow down after achieving our 1,000-branch target.”
Sri Karthik Velamakanni and Sai Kiran, analysts at Espirito Santo Securities, said it would be wrong to expect Federal Bank to go the Dhanlaxmi way.
Federal Bank’s expansion plan has been on the cards for some time now and was put on the table only after its new chief executive could familiarize himself with the bank, they said in a phone interview.
Shyam Srinivasan took over as managing director and CEO of Federal Bank in September 2010 and only recently started investing in expansion, while keeping costs under check, they said.
In the December quarter, Federal Bank’s profit rose to Rs 201.8 crore from Rs 143.1 crore a year ago, riding on 20% loan growth.
To be sure, Federal Bank, ranked seventh among private banks by market capitalization, is much bigger than Dhanlaxmi, the last among the 41 listed banks.
Velamakanni and Kiran from Espirito Santo said Federal Bank will benefit from its plan to build branches outside high-cost tier I cities. “We look at this as an investment for the future and expect them to maintain their cost-to-income below 40%,” Kiran said. “The growth in top line (revenue) will ensure income and, unlike Dhanlaxmi, whose costs doubled in some quarters, relatively low expenses in smaller towns will ensure costs are in check.”
Varghese K.I., additional general manager at Federal Bank, said the lender expects to spend Rs 50 lakh on each new branch and pegged the per employee average annual cost to company for new employees at Rs 50,000. “Besides increase in loan demand, we also expect to gain from garnering cheaper current and savings account deposits,” Chacko said. The bank expects to improve its return on equity to 19% in FY13 from 16% now, and its return on assets to 1.4% from 1.3% now.
Velamakanni and Kiran said both these targets are achievable. “The only challenge for them is acceptability of their brand outside Kerala,” Kiran said. Only a few regional lenders have been able to grow into pan-India banks, among them Bank of Baroda and Canara Bank.
About 55% of Federal Bank’s branches are in Kerala. It expects to bring that percentage down to 50% by building most of its new branches outside the state.
Shares of Federal Bank fell 0.11% to Rs 405.15 on BSE on Tuesday, while the Sensex fell 1.09% to 17,173 points. Espirito has a “buy” call on the stock with a target price of Rs 450 a share.