Shyam Srinivasan: Federal Bank's Dravid Draws Curtains On 14-Year Tenure

Right next to his work desk is a cricket bat signed by Rahul Dravid, a cricketer Srinivasan admires greatly and looks up to. "I think Federal (Bank) is in the same space of being credible and consistent," he says.

As Srinivasan walks into his office cabin for the last time, before hanging up his boots this weekend, this feeling of "happily dissatisfied" is probably playing on his mind.

For 14 years, Srinivasan has led one of India's most consistent banks. On Monday, Kotak Mahindra Bank veteran, KVS Manian, will take over as the new managing director and chief executive officer at Federal Bank.

Srinivasan emerged as a dynamic leader for Federal Bank which, till the early 2000s, was focussed on being a successful regional bank.

“As I settle into my role, I am confident that our cherished dream of making our bank, one that delivers quality and consistency in results, exceeds customer expectations, rewards stakeholders profusely, and makes its competitors feel that here is a bank worth reckoning will be a reality not far from now,” Srinivasan had written in his first ever annual report as the CEO of the bank.

In his last annual report of FY24, he said, "Today, I am reasonably reassured that we have worked very hard as a team to remain true to that statement."

The market seems to have rewarded this consistency as well. The Federal Bank stock has outperformed Nifty 50 and Nifty Bank by a large margin in the 14 years under Srinivasan. Federal Bank rose 694% in these years, compared to the 394% rise on the Nifty and 494% on Nifty Bank.

As of March 2011, Srinivasan's first formal year as MD and CEO, the bank's outstanding advances were at Rs 31,953 crore and a deposit base of over Rs 43,000 crore. Return on assets were at 1.34%, while the capital adequacy ratio under Basel II was 16.79%.

In the last reported quarter, Federal Bank had advances and deposits at Rs 2.2 lakh crore and Rs 2.66 lakh crore respectively. This represents a compounded annual growth rate of around 15% and 14% respectively.

Federal Bank was always strong in the non-resident deposit and small and medium enterprises lending business. Under Srinivasan, it focussed on opening up the bank to business outside its home market.

"We positioned ourselves in our expansion into geographies where remittances are a large part," Srinivasan had told NDTV Profit.

Tamil Nadu, Maharashtra, Karnataka and certain areas in North India became focus areas for Federal Bank. "Now we are 1,500 branches and 900 of them are outside Kerala, mostly in these geographies."

Along side expansion in these areas, Federal Bank also started offering more SME lending services to smaller companies there. It was only in 2015-16 that Federal Bank also created its corporate and institutional banking division, which has grown over the years to account for 35% of the total loan book.

These strategies have worked out well for the most part. However, Federal Bank has had its share of struggles with maintaining asset quality. The lender's asset quality has remained range bound, but has had bump ups during crucial time periods for the broader banking industry.

For example, Federal Bank's worst asset quality numbers in Srinivasan's tenure were in the first four years between FY11 and FY13.

Later, in FY15 and FY16, the bank had to bear the brunt of worsening bad loan ratios, like the broader banking sector, owing to a high share of below investment grade corporate accounts.

Corporates rated BBB and below constituted 43% of total corporate loans in FY15, which was brought down to 28% in FY16. As of March 2016, corporate non-performing assets accounted for 36% of total bad loans. The weakness in the corporate portfolio also had a rub-off effect on the SME book, where the gross NPA ratio was at 4.17% at the end of FY16.

In FY18, when the Reserve Bank of India changed stressed asset recognition norms, the bank had to move to accelerated reporting of bad loans, which once again led to a spike.

Finally, in FY21, after the second wave of Covid-19, Federal Bank saw a sharp spike in bad loans, resulting in the second worst gross NPA number in Srinivasan's term. This was largely led by the bank's microfinance portfolio which suffered recollection issues.

As of June 30, Federal Bank's gross NPA figure stood at 2.11%, the lowest it has been in these 14 years.

In March, RBI barred Federal Bank and South Indian Bank from issuing new co-branded credit cards. This impacted Federal Bank, as it was one of the few lenders in India partnering with fintechs to issue new cards.

"The Bank is in the process of rectifying the areas that are deficient and will seek regulatory clearance prior to resumption of new issuance," Federal Bank had said then. New co-branded card issuances are still in abeyance at the bank.

Another instance was Srinivasan's tenure itself. In January, Federal Bank announced that it had not received an approval from RBI on extending Srinivasan's tenure by another year, after Sept. 22. This prompted the lender to find suitable successors, a search which ended in Manian.

As the new leader takes over, one of the key areas for improvement will be higher risk taking at Federal Bank, analysts said.

"New CEO Mr Manian can strengthen product offerings and help improve RoA, which is lower than peers due to heavy de-risking," analysts at Nuvama had said in a note after the bank's results were announced.

Analysts at Systematix build in slightly higher advances growth with the expectation that the new management will try to consolidate the existing business and leverage upon the existing strategy towards growing the higher margin product lines and deliver sustainable risk adjusted returns over time.

Anand Dama at Emkay believes that Manian's vast experience in building retail and corporate portfolios at Kotak Mahindra Bank will help sweat Federal Bank's otherwise strong platform.

This will "deliver better growth/margin-driven higher RoAs/RoEs, hence calling for higher valuations similar to those for IDFC Bank and City Union Bank," Dama had previously said.