HDFC Bank, India's second largest private sector lender reported a consistent 30 percent year-on-year jump in its third quarter net profit at Rs 1859 crore. The bank's robust performance was driven by higher growth in other income and loan expansions in Q3.
Paresh Sukthankar, Executive Director of HDFC Bank told CNBC-TV18 that the bank's restructured loans stand at 0.3 percent at the moment and the gross NPA ratio has been almost flat for a year.
Besides, the retail business set the growth momentum for the bank in Q3 and Sukthankar added that it was primarily from the construction equipment and commercial vehicles business. He also said that the retail portfolio is normalising with less than expected losses.
Sukthankar further stated that HDFC's asset quality remains stable and healthy and he expects NIMs to be in the range of 3.9 to 4.3 percent.
As far as the Reserve Bank of India's upcoming monetary policy is concerned, Sukthankar is hopeful of a 25 basis point rate cut. He also believes CRR cut is important for good transmission of rate cuts in deposits.
Here is the edited transcript of the interview on CNBC-TV18.
Q: Take us through the net interest income (NII) growth first where it seems to have some kind of subdued trend in the current quarter, is growth levelling out a little bit?
A: The NII is a function of asset growth and net interest margin (NIM). The loan growth in particular has been stronger than what it had been in the recent quarter. It was 24.3 percent and this is at a time when system loan growth has been languishing somewhere closer to 15 percent.
I don't think there has been a disappointment in terms of the rate of growth in loans at least. The NIM did come off by 10 bps sequentially, although it was flat on year-on-year (YoY) basis. The NIM was 4.1 percent and that is how NII lowered 22 percent and was about 68 percent of our net revenues.
Q: Walk us through what happened with asset quality as well because there were minor elisions over there, which sector or space did you face some pressure from?
A: I think the asset quality piece has attracted little attention because it is coming off historical lows. To put it into perspective, I think you need to look at certain things. One in absolute terms, gross non-performing assets (NPAs) stand at 1 percent, net NPAs at 0.2 percent and restructured loans at 0.3 percent. It still remains amongst the best and also lower than what our historical averages have been.
If you look at it in terms of flow, one year back, say in December 2011, we were at 1 percent. The gross NPAs did come off to 0.9 percent and then have come back to 1 percent. If you look on a YoY basis, the gross NPA ratio has been pretty flat between 1.03 to 1 percent. If you look at it sequentially, there has been some growth but, it is 0.9-1 percent and net NPAs remain 0.2 percent.
Finally, if you look at the actual increase and where it has come from, it has been primarily on the retail side. It has come from a particular product, which is construction equipment and the commercial vehicles business. In each of our businesses there is an expected loss that we factor into the pricing and in quite a few quarters we have had actual losses, which have been lower than expected losses.
In some respect, this has been a trend towards normalisation. We are still at an average level for this product and remain below average or below the expected losses in the overall retail portfolio.
Q: What kind of direction do you see asset quality taking over in the next couple of quarters?
A: We have been saying consistently that our non-performing loans (NPLs) and our provisioning will be a function of our loan mix. Today, we have a mix of loans, which is about 53 percent retail and 47 percent wholesale. In the retail business, for each of the products, whether it is auto loans, commercial vehicle loans, personal loans or business banking, there is a certain cost of credit that we factor in across the entire range of retail products.
Since we have been through cyclical lows, we had been saying that there will be some normalisation. I am not trying to guide towards an immediate increase in NPLs but, realistically if you look at our historical averages, our gross NPAs have been closer to 1.2 to 1.4 percent range and net NPAs have been between 0.2 percent and 0.4 percent. That has been the historical average. We continue to be below that historical average and at this point of time, the asset quality remains stable and healthy.
Q: What about your NIMs because you did see a little bit of a cut in the current quarter, do you expect to see more losses there?
A: I think it is pretty much what you just said. We believe we will remain in a narrow range of 4 to 4.2 percent or maybe a 3.9 to 4.3 percent range, if you look at it from a longer-term perspective.
Clearly, within that range you have seen movements in both directions in the last few quarters. For instance, as you have seen fixed deposit costs come down or CRR cuts coming in, there has been some relief.
On the other hand, as you have seen base rates coming off or increased competition in the last festive quarter for instance, there has been some movement in the other direction. At this point of time, we still remain fairly comfortable that NIM will remain in that range of 3.9 to 4.3 percent.
Q: What are you expecting from the Reserve Bank of India (RBI) next week, what kind of cash reserve ratio (CRR) or repo rate moves?
A: We are certainly expecting and hoping for at least a 25 bps drop in the policy rates. More importantly, that needs to be accompanied by a cut in CRR. That is what we believe is important if the transmission is to take place.
As long as the banking system has liquidity adjustment facility (LAF) borrowings of anywhere between Rs 80,000 crore and Rs 1.2 lakh crore, banks are not going to be comfortable in dropping their deposit rates. Unless that happens, you are really not going to see a lower trajectory in terms of lending rates either.
While we are certainly looking for a policy rate reduction signal, it needs to be accompanied by at least a cut in CRR to ensure better transmission.