Federal Bank is all set to change gear as its new managing director and chief executive KVS Manian has taken up the challenge of lifting it to the top five league among private banks, from its current ninth-ranked status in India. 

Manian has taken several pivotal decisions, including scaling up beyond Kerala, driving volumes in medium-yielding businesses, reducing concentration of its top depositors, moving to a fixed interest rate model in certain assets and having a play in the affordable housing segment. He calls it a ‘strategic reorientation without disruption’ and feels these changes are essential for taking Federal Bank to the next level.  

A fundamental need for the Kochi-headquartered bank is to get bigger in other places while fortifying its strength in Kerala. The lender has a three-year plan to add 450 branches, largely outside Kerala. These are to be in high-growth states like Maharashtra, Karnataka, Tamil Nadu and Gujarat, with a focus on small and medium enterprises. Currently, it has 40% of its 1,550 branches in its home state, accounting for over 50% of deposits. 

“Our aspiration is to gain more relevant scale beyond Kerala. As we look ahead, we need some breakthrough efforts to make this happen,” said Manian. 

On the asset side, the bank plans to trim the low-yielding assets share from 64% in FY25 to 58% in FY28 while elevating the ratio of medium- and high-yielding loans. This will support net interest margin expansion in the medium term. 

The scalability areas are mid-market corporate lending, commercial vehicles, loan against property (LAP) and auto loans, particularly for used vehicles. New products such as affordable housing loans, micro-LAP and tractor finance are to be introduced.

The bank will not accelerate growth in unsecured lending until market conditions improve and the credit cost environment stabilises. Increasing exposure to high-yield unsecured loans like microfinance and personal loans will thus be halted. The bank will rather tweak other variables to enhance yields and optimise the portfolio’s performance. “The approach to low-yield assets, such as home loans, reflects this strategy, with the segment growing 9% year-on-year in the December quarter and achieving 80% penetration for savings accounts with home loan customers. However, rate competitiveness remains a challenge,” Manian told analysts.

While in the short term the bank will not press the pedal on the unsecured high-yielding loan business which is high risk in this current environment, the medium segment will get a push. “I don't particularly like a dumbbell kind of strategy where you at one end have very high-yielding assets and on the other very low-yielding business. So, we have stepped up volumes in the medium-yield segment, which is more core to the bank,” said Manian.

In the  auto loan segment, the bank has shifted strategically from a floating to a fixed rate model. This will be extended to certain other segments. The auto portfolio grew 25% year-on-year in the December quarter, despite a slower growth in the three months through September. “In one quarter, we transitioned to 80% fixed-rate disbursements, causing short-term volume and revenue impacts but positioning us for medium-term net interest margin improvement. Yields in this segment have already shown a small uptick,” Manian said. 

On the deposits front, the bank aims to increase its CASA (current account savings account) ratio to 36% by FY28 from 30% this fiscal. The share of current account deposits in the total mix is expected to rise to 10% from 6% during this period.

After taking charge last September, Manian has been pursuing the broader goal of reducing the bank’s risk by diversifying its deposit base. In the December quarter, the concentration from the bank’s top 20 depositors has decreased by 33%. “Deposits from LCR (liquidity coverage ratio) unfriendly sectors such as the financial sector have dropped significantly from Rs 18,912 crore to Rs 13,593 crore, a reduction of over Rs 5,000 crore. Furthermore, wholesale deposits plus CDs (certificate of deposits) and IB term deposits have fallen from 19.5% of our total deposit base to 18.2%, reflecting a drop of approximately Rs 4,000 crore. This is another step towards de-risking our deposit base and aligning with our quality-first strategy,” Manian told analysts.

The bank will not have high-value, deposit-driven asset growth in its path forward. “While such growth may appear impressive in the short term, it is inherently risky and unsustainable,” he added.

With a 7% share in non-resident deposits, Manian feels there is significant opportunity in introducing investment and wealth products to this segment. The wealth management services can boost the bank’s fee income. Forex and trading income can gain focus and cross-selling of wealth and insurance products can increase. 

The bank plans to reduce the partner-sourced credit cards from 70% to 55% by FY28 while keeping the rest 45% in-house. The personal loan sourcing through fintech partnerships is targeted to increase from 40% to 50% by FY28. 

As of 31 December 2024, Federal Bank's total deposits stood at Rs 2.66 lakh crore and advances at Rs 2.30 lakh crore.