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Bankers expect 22% credit growth, better asset quality

Published on Tue, Nov 10, 2009 at 14:47 | Source : CNBC-TV18

Updated at Tue, Nov 10, 2009 at 16:45

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MD Mallya, Chairman and Managing Director, Bank of Baroda

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It has been a muted second quarter for the Indian banking industry. Poor loan growth and rising non-performing assets (NPAs) hurt; margins however improved. What's more, public sector banks outsmarted private sector banks.

Commenting on a report issued by the Royal Bank of Scotland (RBS), its author and Research Analyst, Jatinder Agrawal, says, the credit growth in the first half of the year has been muted but is expected to be better in the second half. "We have upgraded PSU banks and expect the RoE to improve. We also expect the asset quality to be better than anticipated."

MD Mallya Chairman and Managing Director of Bank of Baroda expects a 22% credit growth in FY10. Second quarter net interest margins (NIMs) improved on a quarter-on-quarter basis and is expect to increase further, he says, adding that re-pricing of deposits is still to play out. "Economic recovery will ease non-performing loan (NPL) pressure."

Here is a verbatim transcript.

Q: You are bullish on credit off take, your buy calls on a bunch of stocks, Bank of Baroda included, is because you see credit off take picking up as well as margins increasing. The last numbers we have of credit off take were disappointing-so on what are you basing both volume of credit and margins are going to expand?

Agrawal: In general we have not changed that 16%-growth target; it has been there for quite some time. Just that its there in the report again reiterated. Clearly the first half (H1) has been muted and I believe that in the second half (H2), based on our feedbacks with bank managements, growth should pick up.

Q: What is your prognosis on the same for the H2 of the year and how we would close this entire financial year because you would have that base effect that would help off take for the second half?

Mallya: I would still keep our guidance as far as growth is concerned at about 22% for the full year 2009-10. Obviously credit growth for H1 was muted but then we see signs of pick up; in the recent past we have seen both on the retail and also on the corporate segment. Maybe it has not been upto expected levels but I would still say going forward the credit pick up could still be very strong and as far as Bank of Baroda is concerned, I would keep the guidance at 22% growth.

Q: What about margins, do you think there is scope for margins to increase now; we did see one more deposit cut coming from State Bank of India (SBI). So do you think margins can still expand because your deposit costs will fall or do you think you cannot really manage lending rate hikes anytime soon because not so many people are borrowing?

Mallya: As far as the margins are concerned, I think the re-pricing of deposit is yet to fully be completed. I think going forward still re-pricing of deposits gets done. Therefore I would expect a marginal decrease in terms of overall cost. That certainly would have to facilitate improvement in margins. For example in Q2, our margins where better than in Q1-I think it was a steep increase from 2.4% to about 2.9%. Therefore going forward I would still say that net interest margins (NIMs) in the range of 3% are possible as far as Bank of Baroda is concerned. I agree that maybe lending rates may not go up from the levels at which it is hovering now. But taking into effect the re-pricing of the deposits, I think margins should see an increase.

Q: Can you take us through why you have made a case for public sector banks over private sector banks, your top picks now are SBI , PNB , BoB and IDBI Bank ?

Agrawal: In general it is a case for re-rating of public sector banks. We have been cautious on the sector for quite some time. So it's a change in stance on the sector thought process and clearly because of high Return on Equity (RoE) and valuations relative, we have looked at Public sector banks as a better bet.

Q: you are not terribly concerned about NPL, SBI reported almost a Rs 2,000 crore in gross NPL in Q1 and Q2?

Agrawal: Cannot discuss stock specifics but in general we are going into an environment where asset quality will get better on an incremental basis. So what I would have thought six months back in terms of the estimated increase in gross NPLs, there are clear positive signals which have led to a revision in the credit cost estimates on the lower side.

Q: The banking system was saved in the poor showing of the NPL front because of that restructuring chance that you got for a couple of quarters, that might start showing up finally now, you think the NPL picture could get worse for FY11?

Mallya: For one, I don't think the NPL picture could get worse. You have seen signs of recovery as far as various segments are concerned. Therefore whatever accounts which have been restructured could behave properly in terms of servicing interest and installment. So therefore maybe what has happened in the first six months could be an aberration and things could improve beyond that in the current year. On the Bank of Baroda point of view, the results have been very clear that we have been able to contain the fresh delinquencies; a delinquency ratio of about 1% in the current context could be considered quite and fairly robust. Therefore overall I would say asset quality may not deteriorate further as far as the system is concerned. Maybe one could see an improvement as we move along.

Q: There has been a fair bit of equity capital being raised by banks so far and not more in the pipeline, any concerns on significant equity dilutions and consequently RV getting affected a fair bit going forward or is that overstating the matter?

Agrawal: For banks in general, our thought process is that the risk of our equity capital allocation has decreased progressively. The key reason being that ROEs are a shade upwards in the range of 19-20% on an adjusted basis and because credit growth is slow, incremental capital requirement to maintain that growth is lower. So we do not factor equity dilution across our coverage universe.

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Q: We saw SBI reducing rates and after a long time SBI's rates are actually lower then several big public sector banks, do you think another round of deposit cuts will therefore come from the PSU banks, more importantly will this be followed by a lending rate cut as well?

Mallya: As far as the deposit rates are concerned, the pricing depends on a number of factors-liquidity and also perhaps the overall asset liability matching that we would normally do. Therefore at this point in time, liquidity being quite very robust again credit off take have not been materials, I would accept perhaps there could be a case for moderation as far as the deposit industries are concerned. But lending rates as of now, I would feel they would remain stable and it may not go up or come down. Let's see how the credit pickup really affects the overall liquidity in the system.

Q: What have you made of this entire 70% provisioning norm, what were you factoring the gross NPLs at and were you factoring high provisioning in anyways for most banks going forward?

Agrawal: Yes, partly because of the restructured loan category, which came across over the last six months. On an average basis it's about 58 basis points down over FY10 to FY12 in terms of credit cost estimates.