Aditya Puri, MD and CEO, HDFC Bank is hopeful that the bank is likely to maintain its margins in the range of 4.2-4.5 percent. However, cautions of minor impact on margin, which would be made up in the rest of the year.
Speaking to CNBC-TV18’s Latha Venkatesh, he said that the private sector expects its growth to continue given the fact that it does not have any loan growth pressures.
"Our NPLs range in 1-1.2 percent, that remains intact and we have a substantial operating leverage, because we have gone into rural India and opened almost 45 percent of our branches there in the last two years and taken our entire product range there. So, we are absolutely confident of growth," he elaborated.
Meanwhile, he expects the 10-year bond yields to settle in between 8.4-8.6 percent range, because the RBI will focus primarily on controlling inflation and that has to be built into the pricing.
Below is the verbatim transcript of Aditya Puri's interview on CNBC-TV18.
Q: How much points will you give first monetary policy statement on a scale of 10?
A: I will be a nut not to give a 10.
Q: What does it mean basically to a bank? Does it mean a higher cost of money because repo rate has gone up?
A: The difference from where I can see your question is coming from and the way I look at it. I look at it over a period of time. So, I would rather define where I see the policy taking me and the economy than just saying what happens to this repo rate because that rate can also change depending upon the state of the economy.
I am very happy with the policy for two reasons. One, it clearly sets out the basis on which policy will be decided and what is the end result. So inflation is important, growth is important and the rupee stability is important.
It also says that whatever measures were taken in July to stem the movement of the rupee based on favourable trends continuing will be unwound. The disruption came with the July measures.
First thing he has done is on the short tenor 75 basis points down, this will bring the call rate down, the certificate of deposit (CD) is already down to 9.5 percent, it will bring the CD rate further down. It will bring the rates in terms of bulk deposits down which is a large proportion, it won't happen overnight, so don’t ask me when will you lower your base rate because there is an issue in transmission.
He had clarified that liquidity will also come as the foreign currency non-residential (FCNR) deposits keep coming in and the regular monetary policy will be restored once he has confidence in terms of the actual functioning of the economy. So, I don’t think we could have asked for more.
Q: What do you think the cost of money will look like? Is it likely to inch up or lower?
A: In the short run it will inch up a bit. In a six month horizon, it will go down.
Q: What has been your response in your bank to the FCNR (B) product? Is it a decent response and do you see it increasing by November?
A: Yes, absolutely. Any product that we introduce is four days old. It takes a while for it to gather momentum. But this is the best opportunity NRIs are going to get in their life. Where the hell can you take almost a country risk or a bank risk and depending upon the number of times they leverage you get between 16 and 18 percent. So, there will be lot of money coming in there.
Q: What about the raising of overseas debt up to 100 percent of your tier-1 capital, are you going for that?
A: Yes. We have spoken to a few banks and we are in the process of documentation and will be getting that as well.
Q: What is your estimate, will the system get that USD 10-15 billion you are talking about?
A: I think USD 15-20 billion should not be an issue.
Q: Which means that will provide enough liquidity?
A: I think that along with the fact that if you see there are lots of joint ventures that are also coming in. If those quasi government people go out for their bonds money will start to come in. On the other side gold imports of the quantum that we talked about are history because you have taken the legs out of it.
Banks cannot get in consignment. The jewellers cannot buy in consignment and there was some front-ending of gold demand, so I believe the current account deficit (CAD) will be below USD 70 billion. So, we are at the bottom going up at the cost of being overoptimistic and these days people are saying you are one of the few running bulls, watch it.
Q: What about the 10-year yield? Because you are saying that there is so much money coming in, that would be the initial place of parking money, do you think the yields have some distance to go down or because of this indication that repo has gone up will the yields go up?
A: They will go up to begin with. As of now, they will settle in between 8.4-8.6 percent range, because fundamentally what he is saying is that I do intend to control inflation and that has to be built into the pricing. So, yields had gone down to about 8.19 percent. Last I saw was about 8.45 percent and so, around that range will be the 10-year.
Q: At HDFC Bank do you think margins will be an issue in the current quarter because cost of money was high? Could they go down below that 4.3-4.3 percent?
A: Normally, we are in a range of 4.2-4.5 percent and will remain in that range. There could be some minor impact on margin which would be made up in the rest of the year.
Q: You have not come to the market in the long time. Sometimes back HDFC gave you money. There was those warrant conversions. Aren't you coming to the market for capital?
A: I will tell you why we have not come to the market. One, our profitability has been good. Two, we normally consume if we grow top-line at 30 percent plus we consume a higher amount. So the top-line has grown, but the bottom-line has grown faster than the top-line because there is operating leverage built in. So between 9-9.5 percent of something tier-1 is where we are looking at raising. At the moment we are way above 10 percent.
Q: Wouldn’t they be because Basel is coming and because PSU banks will need capital much more than you, other banks will need much more than you, no desire to front run, take the capital first and be ready for growth when it comes?
A: We will be ready for growth when it comes. We do not think as it stands somewhere in the 14-18 month period, if we say we want to raise at 9.6 percent you could even go down to 9 percent.
We have traditionally not timed the market on the basis of who is coming and who is going and given our stock we believe that we have enough people who would want to take our capital. We are also saying that the best for India is yet to come. So if these measures pan out then we may get capital at a slightly higher value.
Q: Would you wait for perhaps a year?
A: Maybe more.
Q: There were reports that you will probably grow at less than 30 percent now. Is there likelihood that the current quarter or maybe the next two quarters would see profitability because of NPLs, because of loan growth pressures?
A: No, now you are becoming very wide. Firstly, we do not have loan growth pressures. Secondly, we do not have any pressure on NPLs. Thirdly, our formula is very simple. Real GDP, multiplier of 3 is where the system grows. We grow 4 to 6 percent better than that and that remains intact.
Our margins range in the 4.2-4.5 percent and that remains intact. Our NPLs range in 1-1.2 percent, that remains intact and we have a substantial operating leverage, because we have gone into rural India and opened almost 45 percent of our branches there in the last two years and taken our entire product range there. So, we are confident of growth, absolutely.
Q: Many of your rural branches have already turned profitable for you. What is the game plan? When you look at semi-urban branches and rural branches the view is they will be less profitable than urban branches. But yet you have gone full swing, are you at some point expecting them to turn even more profitable than urban branches?
A: Let me tell you the basis on which the board and us decided. Arguably 60-70 percent of India still lives in semi-urban and rural India. If you look at the way the country is progressing, if we get our infrastructure right, if we get the right prices on agriculture. We must set up manufacturing. If we get the right jobs the affluence there will increase. So, that is definitely an area that you want to be in.
In addition when we went there we found that most of the banks that have gone there have gone on the liability side of the balance sheet. The asset side is a virgin market. So, we have spent the last three years taking both our assets and liability products there and they are not less profitable than urban, they are smaller, but the profitability is about the same.
Q: Do they meet the cost of setting up of brick and mortar?
A: Absolutely. The rent on an average in Bombay is between Rs 200 and Rs 500/square foot. The rent in Jhumri Telaiya is Rs 9/square foot.
Q: But will the pay scales of an HDFC employee be the same?
A: No, pay scales are also different. A guy coming to Bombay from a village is in hardship. Most of their salary go as paying guest.
Q: So will HDFC Bank in a few years even make this 30-35 percent look ordinary?
A: You have fixated with numbers. You must not talk about the percentage.
Q: No I am only asking you a direction, will it be even better because you have entered an area where others haven't?
A: The growth will continue and whatever 25-35 percent is no mean growth since we have been there for 20 years and that too on a bigger base and so, will our rate of growth be hampered by the bigger base, the answer is no.
Q: There were NPL threats on your CV and construction equipment categories. Is that stress increasing or have you been able to counter it by aggressive growth elsewhere?
A: Whenever we have stress in our portfolio we slow it down and so, we did the same. The stress has not increased and we hope with the activities that the government and the Cabinet Committee on Investment (CCI) is trying to push through, once construction activity takes up it runs through the whole economic fabric.
We had investment that had no output. So with a capital output ratio with a 30 percent saving I should be getting 7 percent growth rate. When somebody asks me is 5 percent normal, I say if we function on a normal basis we will get 7 percent. The only reason was mining. That is where the commercial equipments trend came from, the lack of infrastructure projects.