KVS Manian on Monday took charge as managing director and chief executive officer (CEO) of private sector lender Federal Bank
One of the key challenges for KVS Manian, who took over as managing director and chief executive officer of private sector lender Federal Bank on Monday, could be to boost the deposit franchise amid a declining share of low-cost deposits and also improve the liquidity coverage ratio (LCR).
The Aluva-based lender’s top-notch asset quality, measured loan growth and low unsecured loan ratio have attracted investor attention. Manian is expected to continue his predecessor Shyam Srinivasan’s legacy of sustainable growth.
“The appointment of Mr. KVS Manian, a veteran banker with a rich experience of nearly three decades, should help the bank deliver on its strategy and ensure strong and 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, there is the Federal Reserve’s liquidity coverage ratio, which stood at around 111-112 per cent in Q1FY25, higher than the regulatory requirement of 100 per cent. However, the Reserve Bank of India has now come up with draft norms that prescribe an additional liquidation factor of 5 per cent for deposits linked to mobile and internet banking. Analysts have pointed out that the impact on the liquidity coverage ratio due to the Reserve Bank of India’s norms, if implemented, could be between 10 and 30 percentage points.
Srinivasan had said the lender wanted to operate within the 105-120 per cent LCR band, while stressing that the bank would try to stay away from bulk deposits.
If the RBI’s draft rules come into effect, then the Federal Reserve may have to aim for a higher LCR, as some of the public sector banks have a ratio above 130 per cent.
As banks are offering attractive rates on fixed deposits, most of them have seen a decline in deposits in current and savings (Casa) accounts over the last one or one and a half years, and Federal Bank is no exception.
The lender’s collateral deposit ratio fell to 29.27 percent at the end of June 2024 from 31.85 percent a year ago. However, collateral deposits grew 5 percent sequentially during the April-June period.
“Despite its class-leading deposit franchise, Federal Bank has failed to translate this advantage into superior cost of funds, largely due to a weak Casa ratio. As Federal Bank continues to improve its business share and product penetration in its wholesale banking relationships, current account mix remains a key factor to monitor,” HDFC Securities said in a note.
Another aspect highlighted by analysts is the disadvantage of pricing, especially compared to larger banks. Better pricing is key to improving return on assets (ROA), which was 1.27% in the June quarter, compared to 1.30% in the same period last year.
“While we believe Federal Bank remains well positioned to deliver a sustainable RoA of 1.3 per cent, improving net interest margins (NIMs) supported by shifting portfolio mix towards higher yielding products would be a key enabler for the bank to achieve 1.4 per cent RoA by FY27E and would drive the next leg of the stock re-rating,” Axis Securities’ note said.
Manian, who joins Federal Bank after spending over two and a half decades with Kotak Mahindra Bank, embarks on a new journey to take Federal Bank into the next phase of growth.
Manian is an Electrical Engineer from IIT (BHU) – Varanasi, holds a Post Graduate Degree in Financial Management from Jamnalal Bajaj Institute of Management Studies, Mumbai, and is a qualified Cost and Works Accountant.
First published: September 23, 2024 | 19:50 IS
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