Cost of funds down, net interest margin to expand: IndusInd

IndusInd Bank has seen a slowdown in loan growth for commercial vehicles (CVs), says Romesh Sobti, MD and CEO of the Bank. However, Sobti expects an uptrend in the loan growth for medium and heavy commercial vehicle (MHCV) cycle from September onwards. He is also optimistic on the net interest margins (NIMs) and continues to see an expansion.

Also Read: Earnings to disappoint, midcap revival tough: StanChart

“We continue to see an upward movement in our interest margins. Although deposit rates are still high, they have come off from their peak and we have benefited from the overall reduction in the cost of funds. So, NIM expansion will be a trend that you will see in the future quarters as well,” says Sobti in an interview to CNBC-TV18.

Below is the verbatim transcript of Romesh Sobti's interview on CNBC-TV18

Q: The big concern for people this year is what’s happening with loan growth, not much on how asset quality has been moving. Are you confident of loan growth through the course of this year or are you beginning to see some headwinds there?

A: It works on the basis of which sectors we represent. It is not a secret that loan growth has slowed down especially in the areas that used to guzzle credit which is infrastructure, capital markets and real estate. There is a core in the working capital side that still continues apace that surprises us, so, we are not seeing such a dramatic slowdown. In certain areas like heavy CV, we have seen a slowdown because the volumes have come off. Overall, the growth in our case is coming out of a small base and continues over 25 percent.

Q: Is there any sign of recovery in any segment or are such data points not visible to you yet because the hope is that things are troughing out slowly for the economy?

A: I don’t think there are any remarkable signs yet. For instance, the sectors where we are, half of our book is vehicles. The small commercial vehicle (SCV) sector has a very solid, positive growth but in the other sectors we are still at the bottom. We are not seeing any specific upward movement yet.

Q: The largest damage for the equity market has been for the midcaps because of concerns on earnings and how much deceleration exists there. What are your expectations on these mid level corporate loans?

A: Mid level corporate loans also get affected due to the general payment slowdown. Considering the example of a power generator, a plant being set up where a small or midcap company has supplied a conveyor belt, the last 20 percent payments are held up. One has already seen those stresses. So, the midcap sector is a part of the whole chain and thus gets affected. There are stresses in that area as well, but it is not sector specific and goes across the whole board.

Q: What about your CV exposure in terms of how long the down cycle might be this time because when that sector gets into trouble, it is usually in for quite a few quarters? Do you fear to see some problems both in terms of asset quality and sluggish loan growth from that sector for the remaining year?

A: You have to look at different sectors. Most people talk about medium and heavy vehicle sector where there has been a dramatic slowdown. There, if you see cycles over 25 years, every four-five years you have a down cycle where excess capacity takes about a year to actually get used up. Now, that year will end by the middle of next fiscal year, around September. September onwards you would see a slight upturn in the medium and heavy vehicle sector.

Q: Last quarter, you recognised Deccan Chronicle as non-performing asset (NPA). Since then, there has been some news flow in terms of attachment of assets. Are you expecting any recoveries on that particular item?

A: We do expect recoveries. We have a class of assets that is still operational and therefore, they are not intangible assets. We have taken a conservative valuation and do expect some recoveries, but not instantly.

Q: The good thing about your bank in the last few quarters has been the steady and constant increase in net interest margins (NIMs). Do you expect the trend to continue?

A: Fortunately, after coming off by about 25-30 basis points, there is a recovery and NIM expansion. We continue to see upward movement in our interest margins. Although deposit rates are still elevated, they have come off from their peak and we have benefited from overall reduction in the cost of funds. So, NIM expansion will be a trend that you will see in the future quarters as well.