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Plans >15% business growth with Lite Branch and Heavy Distribution approach

Federal Bank’s (FB) FY22 annual report highlights its focus on footprint expansion during the first half of the decade (2012-22). While the emphasis was on consolidation, the bank drove its business with a Branch Light and Distribution Heavy approach and aimed at transformation from presence to prominence. Now with covid-related uncertainties abating and competition increasing, the bank plans to increase its outreach in Network-2 (ex-South) by over 25-30% over the next 3 years. Incremental expansion would be in newer catchment areas. Further, recently-added business lines such as credit card, CV and microfinance are well underway and gearing up to contribute meaningfully to incremental growth going forward. Bank plans to grow at 15-17 % business CAGR, i.e., ~1.5x increase in business, over the next 2-3 years

key takeaways: 1) Collection efficiency at >96% as at Mar’22; 2) personal loan disbursements of Rs7.7bn (50bps of total loans) through self-service facilities; 3) fintech partnerships with Fi and Jupiter leading to 2.5x increase in customer acquisition in FY22; 4) ~50% of incremental business loans disbursed to ‘new to bank’ customers; 5) ~17% market share in personal inward remittances; and 6) purchase of PSLCs increased to ~11% of total advances in FY22.

Steady improvement in business market share over past 5 years.

Over past 3-4 years, FB focused on breaking the ‘typical old generation regional bank mindset’ and built capabilities to enhance its status from ‘presence’ to ‘prominence’ in ‘rest of India’. To achieve this goal, it strengthened its digital capabilities and revamped business architectures. The strategy has started yielding positive results as reflected in the steady improvement in its credit / deposit market shares to 1.2% / 1.1% respectively as at Mar’22 from 1.1% / 1% in Mar’18. Total customer base stood at 10.4mn as at Mar’22, offering a huge cross-selling opportunity.

Balance sheet granularisation continued.

During FY22, while FB continued to focus on available opportunities, balance sheet granularisation remained on track. The share of retail assets increased to 55% of total assets (vs 54% in FY21) and that of retail deposits to 94% of total deposits (vs 90% in FY21). Further, the share of top-20 depositors at 3.35% (vs 4.8% in FY21) is amongst the lowest in industry.

Fintech partnerships (Fi, Jupiter) accelerated new customer acquisition; added >2.5mn new customers in 12 months.

Given fintechs’ specialisation in providing more value-added services in specific areas of business, FB has strategically planned to collaborate with them and acquire more new-to-bank customers. The strategy has yielded positive results as reflected in its acquisition of >2.5mn new customers via partnership with Fi and Jupiter during the past 12 months.

Plans to add 200-250 branches in Network-2 (ex-South) over next 3 years.

Since 2015, FB has been consolidating its branch network and did not add any branch until FY20. However, with covid-related uncertainties now abating, and to tap newer markets, it plans to increase its outreach in its Network-2 areas (ex-South) by over 25-30% over the next 3 years.

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