Private sector lender ING Vysya Bank posted 39.52% rise in net profit to Rs 127.4 crore in the March quarter on the back of higher core earnings.
In an interview to CNBC-TV18, Shailendra Bhandari, managing director and chief executive officer of ING Vysya Bank says the Asset-Liability Committee (ALCO) will take a call on deposit rate cut soon. “Deposit growth remains a challenge in FY13,” he asserts.
According to him, net interest margins were lower due to priority sector lending in Q4. "If you look at the full year NIMs, for the last several years, it has been very steady around 3.25% to 3.3%. So, we don’t see any reason why the pattern should break," he adds.
Below is an edited transcript of his interview with CNBC-TV's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.
Q: What is your strategy going with pricing deposits and loans for the next few months? We are seeing very disparate kind of moves from people after the Reserve Bank of India (RBI) policy and the transmission has not been quite complete from what the RBI probably intended.
A: If you are talking about the final decision on deposit rates and the base rates, we have been tied up with our board meetings. Asset Liability Committee (ALCO) is yet to take a final decision. As of now, I don’t think there has been a uniform action, a lot of banks have lowered deposit rates. So, it looks like we will do something on that front. But being relatively medium size to smaller player we will follow the industry leaders. So, if some of the larger banks do reduce base rate, I am fairly sure we will follow.
Q: The larger banks are reducing lending rates only in specific segments and that too by only 25 basis points. That doesn’t move the needle too much. Can you explain this reluctance to pass down 50 basis points (bps) and whether you see this to be the norm during the course of the year that the Central Bank might indicate something, but banks might be reluctant in transmitting all the cues?
A: In all fairness, the last two times when the Reserve Bank raised the policy rates, which was from 8% to 8.25% and then to 8.50%, most of us didn’t raise our base rate. So, to that extent, it is not entirely a surprise that some of these banks are reluctant to drop it because it would come at a cost to the margins.
If you take out aberration, we saw at the end of March, when deposit rate spiked over 10-11%, but otherwise the longer-term deposit rates, the one-year deposit rates are not substantially different from what they were in February.
So, it is not unfair for banks to watch and see how deposit rates play out. Obviously, if the RBI follows this up, whether this was a one time policy move or whether this is going to be a directional move, I do imagine at that at some stage banks will act.
Q: The statement that the RBI put out post this 50 bps cut saying, “we don’t have that much more headroom to move on whole lot of rate cuts?” Is that what is keeping peoples hands so constrained?
A: I don’t think banks are necessarily waiting and watching the TV to see whether somebody from the regulator has made a new statement. The basic issue, which is driving banks, is the demand for credit, the cost of funding that credit and the NPAs. I think the factor, which should reduce or which should lead to a drop in lending rates, would be two-fold. One would be reduction in the deposit cost, which is yet to happen in a material sense. And the other is if some of them are worried that NPAs are going up and they would like to reduce the burden on borrowers.
Q: Provisions have gone up for you this quarter. Is that a function of what you expect to see in terms of slippages in the quarters ahead or just a cautionary move?
A: It is reasonably clear. If you look at the fact that our gross NPAs rose by about Rs 25 odd crore in the quarter, but we provisioned Rs 56 crore. We are sort of provisioning far in excess. But at the margin we have done well over 100%. As a result of which, our entire NPA has a 91% provision cover ratio.
I am delighted that the quality of our credit is so good. But we do want to be cautious, so we are actually building up this downturn. I have been predicting it for many quarters and I have been wrong. I hope I continue to be wrong. But in case, there is a downturn in our credit, we would be well provided for.
Q: Your net interest margins (NIMs) came of a little bit. Do you expect the deposit rate cuts now over the next few quarters you can get back to that 3.5% kind of Net Interest Margin or do you expect it to be sluggish for the next six months?
A: We have a slightly seasonal pattern in our net interest margins. NIMs for the March quarter were lower than that for the December quarter. But if you look at the March quarter, last year, they were almost exactly the same 3.29-3.3%.
What happened in our case, this also happened last year, is that apart from any pressure on deposits we also tend to complete our priority sector requirements. So, every year we have a seasonal pattern that our March quarter and the June quarter NIMs are depressed.
For example, although I am not saying that should happen this year, but last year in the June quarter our NIMs came down from 3.35% to 3.05% and then went back to 3.50% in December. So, we have seasonality. But if you look at the full year NIMs, for the last several years, it has been very steady around 3.25% to 3.3%. So, we don’t see any reason why the pattern should break.
Q: Deposit growth rate is also quite muted at 17%, do you expect this trend to turnaround in the next few months or do you think it will be challenging for banks to get deposits despite rates being lowered than 25 bps or so?
A: I think it’s a concern. Clearly, there is an issue on liquidity and there is a concern on deposits. The real deposit growth rate, if you view March 23 for the system as opposed to March 30, was even less than 16-17%. So, this is a challenge. I think as liquidity comes back and some of it will come back in the first six months of this year. It should be good. But I think deposit growth will remain a challenge in this year.
Q: A large part of your loan book has exposure to telecom as a space and that is sector that has been under stress because of the cost that may ratchet up for the entire space. Are you worried about telecom specifically as a vertical and worried about asset quality from there?
A: Our telecom exposure is with clients who are part of ING’s international relationships. These are the true blue chips in the international sense. Any exposure we have has typically got either a bank guarantee behind it what you call an stand-by letter of credit (SBLC) or it’s called a corporate guarantee of an entity which has a credit rating which is extremely strong that is AA or a AAA, S&P.