Federal Bank wants to be high on governance, financial performance axis: CEO

The fact is there is a slowdown of some nature. There are stresses everywhere. But what I think gets appreciated in situations like this is where the governance is stronger. So, I believe, if there is a governance score and institutions are scored on governance (not just board process, but the whole ecosystem of how you self-govern), and if you rank them in order, then the market capitalisation and the premiums should tie back to that as opposed to some imaginary future numbers. The problem today that most are facing is that what was once looking perfect is facing disproportionate pain, where the earth is falling off suddenly.

Therefore, all things being equal, when something that was looking so good suddenly looks so bad, what may have failed is the governance discipline.

This is the only discriminating factor because the environment – whether India is slowing or accelerating – is the same for everybody. But some come through remarkably well and some endure disproportionate pain. So, the discriminating factor in this must be the level of self-governance.

It is a necessary, but not a sufficient condition. So, I am of the view that the fortunes of institutions should be greatly tied to some widely-accepted governance metric, which sometimes can be ambiguous because you can’t measure it just by financial numbers. The quality of the board, the construct of the board, the rigour, the managerial process/integrity, the reporting process, and in today’s world, the regulators are vigilant – this is what keeps institutions in check.

I believe a bank like us has not got enough respect for the fact that between growth and governance we have been consciously pursuing governance and growth followed. I hope we can sustain that and keep delivering. I would like to believe we are in the top right quadrant – high on governance as well as financial performance.

Our agenda is to be the most admired bank, double our growth in the next three to four years, and be high on the governance axis.

Consolidation is an industry phenomenon, public or private is just incidental. Whether we are going to aggregate or whether we are going to stay by ourselves is the question. We have to first ensure that we continue on the path of high growth and strong governance. To be on this path, if organically we can keep scaling up, that is best.

Now, inorganic opportunities should not be the way to pursue the scale up. So, at Federal, we have not (at least during my time in the bank) gone out and pursued aggressively to acquire something. Whatever said and done we are a large organisation (maybe not as large as the largest, but we are large enough). At the end of the day, we are an 80-plus-year-old bank. So, we have a certain style, culture and history.

Now, whichever (entity) we want to merge with or acquire or whatever, there is that culture (of that institution to deal with). And it takes time for two cultures to fuse and come out with a new version.

So, we have to be mindful as to what price we are buying that growth. If it is affordable then we should. But then if an acquisition is affordable then invariably it is not good. You don’t buy an elephant because it is cheap. You don’t know where to keep the elephant. So, our view is to pursue organic growth, work very hard on it, and keep it growing.

Any integration takes up to two years (to complete). If in 18-24 months we are able to grow business organically by ₹30,000-40,000 crore, then what is the great value in making an acquisition (because it distracts). Integration and buyout cannot be taken in short slices of time, but long slices of time.

Our view on any inorganic growth is that if we are getting something which is nice – ₹30,000-40,000 crore – at an affordable price, yes, we will certainly look at it. But to be honest, because the governance angle of the bank, which is the board, is good, they will naturally challenge anything that looks dodgy. Their question will be: why are you not growing organically and pursuing this (acquisition) at a price?

In the first three-four years (after Shyam took charge of the bank in 2010), we grew only at a CAGR of 13 per cent. In the last four years, we grew at a CAGR of 18-20 per cent. So, the 20 per cent CAGR is a credible, repeatable outcome for us. So, if we are growing at 20-22 per cent CAGR, we are growing three times the market, which is growing at 6-8 per cent. So, we are gaining market share and becoming more relevant and prominent in our geographies. There are two themes in the bank – from prominence to dominance (in Kerala) and from presence to prominence in other markets. The good news is that in Kerala, our share has increased materially.

The merger of State Bank of Travancore with SBI gave the latter scale, but gave us an opportunity. We now have 1.03 per cent of the market share (pan-India). We had 0.7 per cent market share five years ago.

Our total business was ₹2.5-lakh crore as on March 31, 2019. This was ₹63,000 crore when I took over. Our belief is that if we grow by 18 to 20 per cent per annum, this can grow to ₹5-lakh crore in four years. This is our run rate. Without altering the run rate too much, we can reach ₹5-lakh crore.

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