Expect FY12 credit growth of 25-30%: YES Bank's Rana Kapoor

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YES Bank reported a strong set of third quarter numbers. The company's net profit rose 33% to Rs 254 crore YoY. Its net interest income (NII) grew 32% at Rs 428 crore versus Rs 323 crore, YoY.

Talking first to CNBC-TV18, Rana Kapoor, the managing director and CEO of YES Bank says the bank's CASA, branch banking and retail strategy are in tandem with each other. "Our CASA sequentially has improved by 1.6% from a level of 11% end of September to 12.6% representing the single biggest leap forward in our CASA balances in any one quarter."

Today's 50 basis point CRR cut is sure to send a positive feeler to the market, says Kapoor. This he feels can motivate banks to look at cutting down on rates - both lending and deposit in the near future.

While NPA's and credit loans are hanuting quite a few public and private sector banks, Kapoor says the worst appears to be over. "Most private banks are reporting an improvement in their gross and net NPAs, including the ability to manage fairly high levels of coverage."

For FY12, he expects the bank to report a credit growth of 25-30%.

Below is an edited transcript. Watch the accompanying videos for more.

Q: What did you make of the monetary policy today? How much would it perhaps alleviate the stress in the banking system according to you?

A: The monetary policy has been very encouraging because there was a mixed bunch of people who were not expecting much to happen, but the CRR cut is a very firm and clear message that liquidity is top of the mind with our regulator and 0.5% increase is a very good message to the market. The fact that Rs 32,000 crore of liquidity will ease into the system, is a very positive development.

Overall the content of the monetary policy seems to point towards future dovishness, towards future relaxation of rates driven by liquidity injections. I think it is a very good development.

Q: It's another solid set of numbers for YES Bank but the only wrinkle this time has been a little bit of a shave off in your net interest margins at 2.8%. Can you give us an indication of what the margins could look like for YES Bank from hereon?

A: A shift from 2.9% to 2.8% with almost the same level compared to the corresponding period in markets where you saw both rates and liquidity tightened towards the end of the quarter is very marginal because 10 basis points is very negligible in our industry. But more importantly is to really focus on elements like CASA and the improvement in the savings account balances, dovetail with what we have seen in terms of the current account improvement.

If you see our CASA sequentially has improved by 1.6% from a level of 11% end of September to 12.6% representing the single biggest leap forward in our CASA balances in any one quarter since our inception in 2004, which is a very important step. If you look at savings account balances, they have improved overall by 44% intra-quarter itself and savings account balances corresponding to December 2010 have improved by over 99%.

So the trend line on CASA and branch banking contribution of liabilities, which is really what will address the net-interest margins (NIMS) in the medium to long-term, is in a very constructive and linear trajectory. I am very encouraged by this savings deregulation both for resident and NRIs. It augurs particularly well for a bank like ours, which is rapidly growing both our retail liability product offerings as well as augmenting our retail asset offerings.

If you see, retail assets have also grown to an overall contribution of around 15%, a number that used to be as low as 5% less than two years ago. So it's moving very much in tandem with our branch banking and retail strategy.

Q: The other thing that the market is watching very closely is asset quality and here some of the private banks including yours haven't really shown that kind of deterioration. Do you think there is a possibility of some further slippage from hereon because of the lag effect of what's happened previously or do you think we are bottoming out in terms of asset quality and as the cycle reverses the pressure could alleviate?

A: The NPA and the credit concerns are at a low ebb because the worst is over. If you see the results of at least four of the top five private sector banks, which are now in public domain, almost all of them have demonstrated an improvement in both gross NPAs and net NPAs including the ability to manage fairly high levels of coverage.

In our banks' case specifically our net NPA is just about 0.4% and gross NPA is 0.2% with a provisioning coverage of 80%. We are not seeing any material impact of the current risk environment because of proactive risk management. We have compromised somewhat on growth, but have heightened our ability to proactively address risk and manage them well in advance of their becoming of any problematic nature.

This is very key - a banks dynamism in changing gears, accelerating when the economy allows and then somewhere consolidating and mitigating risk when there are environmental issues, macroeconomic and sometimes even sociopolitical issues as we have seen more recently here.

Q: How soon do you think the banking system will start cutting down on rates - both lending and deposit? Do you think deposit will be the first one to fall?

A: Judgmentally, a CRR cut of 0.5% certainly motivates the banks to start looking at a rate cuts at some point in the future. A 0.5% is a bit too early because the banking system is borrowing over Rs 130,000 crore. So that number has to come down very sharply through future CRR cuts and certainly OMO interventions. These are very important.

When you see overall borrowing levels dip to a level of let's say Rs 40,000-50,000 crore which is fairly normalized, I believe at that stage there maybe some discussions at least in some Asset Liability Committees (ALCOs) for a reduction in deposit rates.

At some stage when we see a repo rate adjustment as well, I hope by March, you will probably see a combination of both - deposit and interest rates coming down. But most of that in our judgement will happen in the new fiscal year between April and September.

Q: So how does that really bode well for you because you had guided for a 25% loan growth in FY12. Does that stand at this point? If the interest rate cycle starts to turn from this level, how much of an incremental credit growth do you see from hereon?

A: This is definitely the busy season. If you look at loans as well as credit substitutes like investment assets, at least at our bank we have reason to believe that we will see anywhere between 25-30% credit growth for the entire year, fiscal 2011-2012. For the banking system as a whole, the guidance in the policy today at 16% or so seems fairly realistic and a bank like ours, given our stage of evolution should do at least double of that.

Q: A big chunk of your incremental lending was supposedly to be directed towards the priority sector and we have seen these kinds of issues crop up for banks in the last five or six months. Do you see a pressure on your margins because of that or do you think you could hold on these levels that you have done this quarter around?

A: Going forward with growth in savings account and current account balances, relaxation in CRR, improvements and reductions hopefully in repo rates in the next two-three quarters, is anybody's guess, but at least we have reason to believe that the NIMs will only improve going forward for most banks including our bank.

Q: You have taken a lot of measures to improve your liability franchise. Do you think we are done with the measures that were needed to be taken or do you think there could still be something in order to improve the CASA ratio and so forth?

A: We are very determined. This deregulation on residents and NRIs is great news for YES Bank. We remain hardwired as far as our CASA objective of 30% by 2015 is concerned. The December numbers, an increase in CASA from 11% to 12.6%. So 1.6% improvement in CASA in one quarter is a very important encouragement for the teams working on liabilities at YES Bank. We are confident that we should be able to get to 30% CASA by 2015.

Q: On the move that's happened today from the RBI, the money that's released, you will be lending at a base rate of 10% or so. How much do you think it will add in terms of profits in the coming quarter?

A: The 0.5% reduction helps to improve NIMs by about 3-4 basis points. We have reason to believe that there will be a couple of more 0.5% reductions over the next few policies in order to mitigate the liquidity formations as in almost Rs 100,000 crore plus of borrowings at present. This will greatly help the banking system to improve its margins apart from improving liquidity and transmission of lower rates in course of time to our clients.

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