Private sector lender Federal Bank de-grew almost Rs 2,500 crore in Q1FY14, so second quarter earnings may not be dramatically different from the first one, MD and CEO Shyam Srinivasan said in an interview to CNBC-TV18.
“Drop in Q1 net profit was mainly due to provisions and because of slippage in couple of Corporate Debt Restructuring (CDR) accounts. The gold loan book also degrew,” he elaborated.
The south based bank’s April-June net profit plunged more than 44 percent year-on-year to Rs 106 crore on the back of a huge surge in provisions and contingences that jumped three-times to Rs 245 crore as against Rs 63 crore a year ago.
The bank’s operating profit grew 16 percent on sequential basis and Srinivasan is hopeful that the full year it could be a lot better in terms of growth.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: Provisions are up 150 percent on a Q-o-Q basis and up 290 percent on a Y-o-Y basis? What necessitated the need for such high?
A: This is largely on account of one account which was provisioned partially, we provided 100 percent for it and a couple of Corporate Debt Restructuring (CDR) accounts that slipped. We have provided quite prudently for that and we have maintained our overall coverage ratio at 70 percent. We did not want to dip into our coverage to flatter the profits.
We focused on the operating profit and the balance sheet is getting a lot cleaner. Operating profit grew quite handsomely 16 percent on a sequential basis. On an operating level the performance is more encouraging.
Q: Your total gross Non-Performing Loans (NPL) are down 5 percent on the quarter, but as a percentage of the total book they are up from 3.44 percent, to 3.51 percent. So it looks like your asset book has shrunk. You are lending less as of June 30th as compared to March 31. That is significant. Do you think this contraction will continue for sometime?
A: There are a couple of things. One, was on the large corporate side almost Rs 2,000 crore odd repayments from short-term loans and we did not seek to renew them. We also consciously degrew gold partially only because we wanted to make sure that we do not run into the wrong end of the pricing structure. Having said that, we see gold growing back but on large corporate advances I will keep my fingers crossed, because I am not yet seeing much momentum. Whereas, retail, Small and Medium Enterprise (SME) growth is robust, but large corporates is something that is on the watch. We degrew almost Rs 2,500 crore in Q1, so that is why the denominator effect is playing out on the gross NPL.
Q: Is this degrowth or contraction of your balance sheet to continue for the current quarter as well?
A: Q2 may not be dramatically different, but for the full year it could be a lot better. Q2 depends on how the drawdowns happen on all the sanctions we made on the large corporates, but I do not see a magnificent rise in the large corporate advances.
However, retail and SME will bounce quite well; SME grew handsomely in Q1, that will continue but overall numbers may not be dramatically more, because large corporate tickets really swing the denominator, but that we will be more watchful of.
Q: Do you expect asset quality to get worse before it gets better?
A: It will be a mixed bag. We have seen good progress on retail and SME. That has been effort elastic. The large corporates have been very choppy. Couple of large restructured accounts slipped.
So, Q2 could be better for us, than it was in Q1, because we have been addressing some of these for many quarters now. The market remains quite fluid. I am not yet convinced that the bigger corporates who are overleveraged have come out of the stress they are at. There are multiple factors playing out. So it is a period of extreme watch. I don’t think we can predict with great confidence how the year will play out.
Q: We understand that there was a relapse of two accounts which got restructured this time. Could you tell us a little more on that and is that a trend that we could watch for going forward or will continue?
A: Can't quite say whether that is a trend, but these two even at the time of being restructured six odd months back, it is a large consortium led restructuring. One is the large pharma company in the north and they were not meeting their standards and therefore they were sort of dissolved from the restructuring. I do not think it is a trend.
We do not see many more such restructured accounts which are as shaky as these were. We were conscious of these two, but did not want to prolong the problem, which is why we absorbed them as loss assets and moved on. That may not be a trend, I do not see that.
At least in our book the bigger restructuring is the electricity boards which are for now performing to the original standards. They may request a change in the terms, but I do not see them slipping.
Q: You spoke about gold. You said abundant caution has made you contract that book. Can you give us some colour on whether you saw defaults in gold and even for the system actually if you can?
A: We did not see defaults, but there were calls for payments and customers had to either bring in more or to liquidate. I think the net impact in slippages term was under Rs 4 crore if I remember the right number on a Rs 6,000 crore plus book, so we did not see any defaults.
However, the system is a lot more conscious and cautious about the growth in gold. Everybody is looking for price stability, because the volatility in price causes the stress. If price stability, which we are seeing now which has more or less been in the Rs 26,000-27,000/10g kind of rate, then we are in the zone to get the growth back. For now there has been stress, particularly the Non-Banking Financial Companies (NBFC) may see some stress.
Q: You spoke about that one account for which you had to do 100 percent provisions and a few CDR accounts as well. Do you see high provisions extending into the next quarter as well?
A: I will not venture into giving a very profound provision forecast, but it will definitely be a lot better than what we see in Q1, because this was a combined effect of two large restructured accounts slipping and an account that required a 100 percent provisioning and at the same time we held onto our overall coverage ratio, so this mix impacted. That may not repeat.
Q: Your loan growth was pretty weak this quarter at 8.5 percent. You are already saying that this quarter and the previous you are probably in contracting mode. For the year what will you grow in terms of your total book, as well will you have to raise money at all on the capital front?
A: My guidance is more around how we see in the areas that are more predictable; retail and SME. We are tracking and trending 20 percent plus and with that we will continue.
With large corporates I will have to watch for at least a couple of quarters to be a lot more confident on growth being predictable and sustainable.
At the beginning of the year we had guided for a 20 percent growth; almost equally weighted in all the businesses. We are being a little more circumspect on large corporates only because the drawdowns on quality sanctions are not happening. So I will be a little more watchful of that before I extend a confident forecast. But the growth in retail and SME are predictable and sustainable.