In an interview to CNBC-TV18, Shyam Shrinivasan, managing director and chief excutive officer Federal Bank gives his views on the bank's Q3 numbers. The bank's net profit rose only by 4% year-on-year to Rs 211 crore. The lender took a one-time hit on a corporate account, which borrowed around Rs 1400 crore from a consortium of banks. This dented its profit margin.
Shrinivasan, however, is optimistic on the numbers of the entire FY13. He is targeting a net interest margin (NIM) of 3.5-3.6% in FY13.
On the net interest income (NII), Shrinivasan says the disappointed NII numbers were due to increase in volumes. " Last December, our NRI term was about Rs 1,100 crore. Today it is about Rs 6,400 crore. So what were paying, sub 4%, now we are paying close to 9%. While it is good that it is good volume growth and customer growth, we have to carry the cost of higher deposit. That has had a significant impact," he adds.
Below is the edited transcript of Shrinivasan's interview to CNBC-TV18.
Q: First and foremost, net interest income (NII) was a bit of a disappointment. Was is it a fall in volumes, was it an inability to pass on higher interest rates or was it an inability to bring down interest rates for your deposits?
A: Curiously, it is because of the increase in volumes. Last December, our NRI term was about Rs 1,100 crore. Today it is about Rs 6,400 crore. So what were paying, sub 4%, now we are paying close to 9%. While it is good that it is good volume growth and customer growth, we have to carry the cost of higher deposit. That has had a significant impact.
In addition there have been minor impacts on account of a couple of large NPAs through the year. The impact of that is playing through but clearly the larger one is in terms of the NRI term deposit cost increase. It has helped us reduce a lot of our bulk deposits but it has had a bearing on the overall cost only because the rates have gone up substantially.
Q: What is the mood on India? How are global investors looking at India now after the reforms like the fuel price hike?
A: The numbers speak for themselves. Last year we had about USD 25 billion of equity coming into India from outside. Most foreign investors are now close to overweight on India but they will continue to maintain those positions and add to them judiciously whenever they see value within the stock market.
I attribute this to another factor which is that India and China basically have been signaling that monetary tightening is over. There is a fair chance that this year we will see some form of easing in terms of the availability of credit. That will lead to a broadening of the economic growth cycle which has been on pause for the last two years. As a consequence, you have plenty of themes to ride. Value versus growth, broadening of valuations from large caps to midcaps, all these will come to play. So, really it is a stock picker’s market as I see it. The money, however, will definitely keep coming in.
Q: What are your expectations from the Reserve Bank of India (RBI) because you track the macros as well. Do you expect them to move quite aggressively at their next policy meet?
A: If I was on the seat of the RBI, I would not really do anything aggressive because everything is pretty much falling into place. The government is making good noises like the power reforms and the money is coming in. So, to that extent, the RBI doesn’t need to really cut rates aggressively because it has an impact on the currency. You don’t want the Indian rupee going into free-fall because of all these balance of payments concerns that are hovering in the background. So my best guess is they just sit back and not really do very much.
Q: You touched upon the other issue of couple of non performing loans (NPLs). Can you take us through that? The net NPL jump is a bit startling and your stock is getting punished for that today. Why is it that the NPLs have risen especially at the net level. How many accounts are these and is this something like a trend or a one off?
A: This is one large agri marketing company. It’s a quasi-government or government supported company. We have had this on our book for a long time and that has played out into a problem. We have recognised that this quarter, so that’s one large account of over Rs 200 crore and the impact is quite substantive. If you look at out retail SME - that’s been improving quite significantly as it did this quarter also. This is one off impact of this account we think just has to be borne. Hopefully, this is the last of these kind of accounts that are stressed largely because of various events in the market. There is no other large account of that nature in the portfolio.
Q: Give us more on the trajectory on the NII front because that was actually subdued. There was an estimate by analyst that it could be flat this quarter and the previous quarter it was up around 7 percent and in this quarter actually it has declined 4 percent which is much below what the street was expecting. What is the trajectory that we can expect for Federal Bank in terms of growth in the Net Interest Income (NII) front for possibly even into FY14?
A: We think the NIM for the full year will be something about 3.55 which means sharp recovery in Q4. That will be the entry downgrade going into FY14, because whatever is the impact of the various reverses, we need to take it in its run rate now.
Q: What about the NII? Will this NRI deposit interest rate deregulation continue to impact NII next year as well?
A: NII has borne the impact of all these increases. December last to last year and December last year was a period where it is most pronounced because December 16 last year was when the deregulation took place. So, the full book that is a one year book has got reprised. From here, it is the new base. If the retail and SME advance which have grown quite smartly in Q3 continues at the current momentum which it will, we see the NII coming back to a steady and healthy double digit growth rates.
Q: What exactly is the slippage in third quarter? What is the addition to restructured assets? What’s the total restructured book?
A: The overall slippages in this quarter were Rs 422 crore out of which Rs 71 crore were two large ticket loans which slipped or recovered in the same quarter. That leaves us Rs 351 crore. One account in that was a large account of Rs 215 crore which is what the significant string has been because the impact on that is over Rs 100 crore - both, between revenue and credit cost. Retail SME and agri slippage is about Rs 135 crore which has been steadily declining from the high of almost Rs 300 crore down to Rs 135 crore. That is better than sequential previous quarter. So, retail SME, agri all combine about Rs 135 crore; one large account of Rs 251 crore and two accounts that slipped and recovered in the same quarter of about Rs 71 crore. The restructured book for the quarter was Rs 215 crore.
Q: Can you just highlight exactly what were the upgrades this quarter as well? Do you see the loan from the government’s stable that you had Rs 200 crore exposure to, getting upgraded in the coming quarters at all?
A: I can’t comment on whether they will upgrade but we have provided for the maximum haircut that was sought by them. So, in any case, it will have no P&L impact prospectively. It will be a gain if indeed we are able to recover better. But at this point in time, we have provided for the maximum haircut that we have visualised on that account.
Q: How much is your provision cover?
A: 75 percent.