In an interview to CNBC-TV18, BK Batra, deputy managing director, IDBI Bank gives his views on the bank's Q3 performance. The bank's third quarter (October-December) net profit rose marginally just by 2% year-on-year to Rs 417 crore in 2012-13 as net provisions against bad loans came to nearly Rs 1,135 crore as against Rs 415 crore a year back.
On the bank's non performing assets (NPAs) numbers Batra says, "A significant portion of this has been taken away by higher provisioning. We are in a difficult time as far as the asset quality is concerned. Stress has been there so far throughout the year and therefore there has been our share of addition to NPAs as well. We have added about Rs 500 crore odd of NPAs and there has been addition of restructured assets also, but the percentage of provisioning on restructured assets has gone up from 2 percent to 2.75 percent and that has to be done on the entire stock of assets.
However, Batra is optimistic on the bank's Q4 results. He says he expects the bank to have lesser restructuring and provisioning in Q4 as compared to the numbers in Q3. "Since most of the burden of restructuring has been taken care of, we expect lesser restructuring and lesser provisioning this time. We must remember that this 75 bps extra provisioning on restructured assets was a one-time increase and therefore whatever addition to restructured assets takes places from now onwards, in a way, would add to only that much of additional provisioning," he adds.
Below is the edited trasncript of Batra's interview to CNBC-TV18.
Q: We are seeing a fairly big jump in the gross Non-Performing Loans (NPLs) itself. It has jumped from Rs 5,800 crore to Rs 6,400 crore. It is a sizeable jump in gross NPLs as well as a big jump in provisioning. Can you take us through why the provisions are up? Is it because of large restructured assets? Can you take us through asset quality, slippages, restructured assets and the provisioning required?
A: The bank has done pretty well on certain fronts. That is why our Net Interest Margin (NIM) has improved. For the quarter it is 2.30 percent and for the past nine months it is 2.09 percent. This is one positive. The other positive is that our fee-based income has also registered a sizeable increase vis-à-vis the corresponding quarter and even the previous quarter.
Also, our cost-to-income ratio has come down. We have exercised quite a tight control on various cost components because of which our cost-to-income ratio for the quarter is 32-33 percent. Because of these factors, our operating profit is little less than double, more than Rs 1,500 crore, vis-à-vis Rs 800 crore odd corresponding quarter.
Yes, a significant portion of this has been taken away by higher provisioning. We are in a difficult time as far as the asset quality is concerned. Stress has been there so far throughout the year and therefore there has been our share of addition to Non-Performing Assets (NPAs) as well. We have added about Rs 500 crore odd of NPAs and there has been addition of restructured assets also, but the percentage of provisioning on restructured assets has gone up from 2 percent to 2.75 percent and that has to be done on the entire stock of assets. That is another factor why our provisioning as gone up. So whatever provisioning was necessary, we have made and it has helped that we have done better on Net Interest Income (NII) front, fee front and also on cost-to-income ratio.
Hence, we have been able to make the necessary provisioning and still retain the profit at a decent level though it has not registered any significant increase.
Q: Do you think the net interest margin of 2.3 percent is sustainable going forward because there is an argument in the market that it is unlikely to be sustained?
A: We have been trying to improve our net interest income (NII), net interest margin (NIM), despite all these adverse factors. I have been saying that we are onto changing the mix of our asset portfolio and ofcourse, when you change the mix in favour of small and medium enterprises (SMEs), in favour of other priority sector, initially there are certain challenges. But particularly on the SME front, the returns are better and if you are able to control asset quality there it does contribute to actual improvement in NIMs rather than the other way around. And I think that is what we would try to focus on more even within the priority sector. Rest of the priority sector portfolio doesn’t yield as much margin as Micro and Small Enterprises ( MSE), but that also has to be done and then we makeup through other sources of income.
Q:. How much did the restructured assets go up by in the quarter ended December and therefore what is the total restructured book as well what were the fresh slippages in Q3?
A: Our restructured assets have gone up by around Rs 3,000 core, that is a significant number. Our NPAs have gone up by around Rs 500 crore odd. But most of the restructuring which was in the pipeline, has been taken care of. The restructuring which is remaining to be done in Q4 and onwards, would be lesser. Therefore, I would say that from now on, we can expect the burden of restructuring and therefore the burden of provisioning to yield. That is what should actually bring in better times for us in terms of overall profitability.
Q: When you said Rs 500 crore you meant fresh slippages of Rs 500 crore?
Q: You have also increased your provision coverage ratio isn’t it?
A: That is true, we have made use of increased operating profit by making all necessary provisioning and we have been a little liberal with that, so that we do not have to make up for that during Q4 and onwards.
Q: Since the gross NPA has gone up by about Rs 500-600 crore odd on a QoQ basis with respect to asset quality, how would you expect the coming six months to be? Will it be an improvement from what we have seen in the last nine months?
A: Because of the provisioning that we have done, our net NPA ratio has actually come down. It has come down from a little above 2 percent to below 2 percent. Since most of the burden of restructuring has been taken care of, we expect lesser restructuring and lesser provisioning this time. We must remember that this 75 bps extra provisioning on restructured assets was a one-time increase and therefore whatever addition to restructured assets takes places from now onwards, in a way would add to only that much of additional provisioning. Therefore, from now onwards I would expect an improvement to take place.
Q: You had some loan sell downs. Will you be able to maintain that kind of loan sell downs?
A: We have not done any loan sell down. Our loan book itself has been growing at a very modest pace and therefore there is very little reason for us to divest loans.
Q: You benefited from this stake sale in Credit Analysis and Research (CARE) Ratings. If you can tell us what is the constant element we can expect in fee income since that obviously is a one-off?
A: CARE has given us about Rs 180 crore of income, which is classified as other income, but then I don’t count free income and without counting that, our fee income has gone up and that is what encourages us on other fronts. This is especially encouraging because if otherwise the business has not been moving as well as it would in good times. We also have been able to do better on the front of fee income, it specially is quite encouraging. We see it sustaining in this quarter and the coming quarters as well.