Mumbai: Almost two years after failing in an attempt to buy its competitor Catholic Syrian Bank (CSB), Kerala-based Federal Bank Ltd is switching its sights back to its mainstay customers—small and medium enterprises (SMEs) and Keralites living outside the state.
The plan to acquire CSB has been abandoned and Federal is focusing on increasing its own branch network outside Kerala, managing director and chief executive officer Shyam Srinivasan said.
Customer focus: Federal Bank MD and CEO Shyam Srinivasan. By Saanskrut Kumar/Mint
“SMEs and NRIs (non-resident Indians) are the heart and strength of the bank and will continue to remain so,” Srinivasan said in an interview on Wednesday. “Going forward, as we increase our footprint outside Kerala, we will continue to focus on organic growth.”
In 2009-10, Federal Bank tried to take over Thrissur-based CSB, but the attempt failed because of differences over valuation.
“Pricing didn’t work. Second, the reasons we had considered CSB are very different from the reasons today,” Srinivsasan said, pointing out that Reserve Bank of India norms have since changed to allow banks to open branches anywhere except tier I locations without seeking special permission.
Shyam Srinivasan of Federal Bank talks about the lender’s growth plans outside Kerala and why the SME sector remains important to it
The bank has 826 branches, 450 of them in Kerala. It plans to increase its branch network to 1,000 in one year, 50% of which will be outside Kerala.
Srinivasan, who took the helm in September 2010, said although Federal Bank is undergoing transformation “there are a lot of things we do well which we don’t want to lose in the process”.
SME loans make up 30% of the bank’s Rs 34,000 crore advances; deposits originating from NRIs make up 20% of the bank’s liabilities.
Banks like Federal will likely face challenges in a tough economic scenario, analysts say. India’s economic growth, which slumped to the slowest pace in nine quarters at 6.9% in the three months ended September, is slowing after a series of interest rate increases to douse inflation that has remained stubbornly high. The global sovereign debt crisis remains a concern.
“It is unfair to expect the management to perform quarter after quarter when both domestic and global economies are weak,” says Rajiv Mehta, a research analyst at India Infoline Ltd (IIFL).
“For Federal the risk comes from SMEs,” he said.
SMEs corner more than 50% of the lender’s advances because Federal Bank, unlike some of its peers, classifies loans worth more than Rs 25 crore as corporate loans even if the borrower is a small entity.
“So a Rs 200 crore turnover company for example may be classified as a corporate (entity), but in reality it is a small company which could be hit more in the current scenario,” Mehta said.
Srinivasan said the bank is well prepared because these loans are secured through collateral.
As of September 3.6% of the bank’s total loans were classified as non-performing, a majority of them owed by SMEs, Srinivasan said.
Bhavesh Kanani, who tracks the bank at Centrum Broking Pvt. Ltd, said Srinivasan has recently been attempting to lower exposure to risky SMEs even at the cost of margins.
“Last quarter, for example, the bank’s net interest margin (NIM) was 3.8%, just below HDFC Bank’s 4.2%. Srinivasan is open to lower it even it to 3.5% to balance the risk,” Kanani said.
Federal Bank’s NIM in fiscal 2010-11 was just above 4%. NIM is the difference between the interest rate a bank charges for loans and what it offers for funds, and is considered a key measure of banking profitability.
The bank also faces increased risk from rising bad loans in the airlines and power sectors. Power sector loans amount to Rs 1,700 crore while airlines make up Rs 400 crore. adding up to about 6% of the bank’s loan book, while the real estate sector accounts for just below 2%.
Srinivasan said his bank is ready to consider debt restructuring proposals if approached by borrowers.
“These companies have not approached us yet. Near term these businesses are going through stress and we have to work with them. But if you belive in the India story, power consumption will happen, travel will happen,” he said.
Since April, Federal Bank shares have dropped 12.77% on BSE to Rs 366.7. The benchmark 30-share Sensex has dropped 15.23% in the same period.