AFS portfolio comfortable; won't up base rate now: UCO Bank

The Reserve Bank of India (RBI) on Tuesday eased cash and bond holding norms for banks. It has allowed banks to shift a part of their available for sale (AFS) portfolio to held-to-maturity (HTM), a move that will restrict a sharp rise in long-term yields and reduce mark-to-market (MTM) losses on banks' investment portfolios.

Speaking to CNBC-TV18 about RBI's move, Arun Kaul, chairman, UCO Bank said, its AFS portfolio has not seen much depreciation and the bank is in a comfortable position. He also said that he sees cost of funds more or less remaining the same. So, there is no urgent need for it to push up the base rate immediately. "Our AFS portfolio approximately is about 22 percent of the G-Secs of which the major amount is treasury bills. We have not been buying securities since yield went below 8 percent," he added. AFS is a debt or equity security which is purchased with the intent of selling before it reaches maturity, or selling prior to a lengthy time period if the security does not have a maturity. Bank of Baroda chairman SS Mundra told CNBC-TV18 that the bank did hold AFS portfolio which was sensitive to interest rates. "As far as MTM is concerned, the relief would be relevant on September 30 when we close the books. Even if I look at today's situation, the figure would be around Rs 500 crore and would be something, which will not be required to be provided for," he added. Further, he added that there is continuing stress on asset quality in the prevailing circumstances and he does not see any incremental impact on asset quality post RBI measures. Below is the verbatim transcript of their interview to CNBC-TV18 Q: How much do you have in available-for-sale (AFS), how much in held-to-maturity (HTM) and how much relief therefore in the September quarter itself in terms of less mark-to-market (MTM) losses? Mundra: We had an AFS portfolio which was really sensitive to rate of interest. AFS portfolio would also carry the non-interest rate sensitive securities, treasury bills etc. which was around 14-14.5 percent, then of course the HTM and all other things are there. As far as relief is concerned, number one relief or no relief or what would have been the MTM situation would be ultimately the relevant date would have been 30th September when you are closing the books and you are marking it. Even if I look at today's situation, there would be something if I put the relevant date as today something like Rs 500 crore or so. This would be something which will not be required to be provided for. This is how the situation is. Q: We have to take a ballpark figure. 10-year bond was Rs 95 on July 15th and it fell to a low of Rs 86 or even lower when the yield was 9.47 percent. Mundra: That is the point I am telling. If I would have been required believing that the peak yield which had gone up to 9.40 percent or so would have persisted till 30th September then I would have been required to provide something like Rs 500 crore towards the MTM. This now under the new dispensation would not be required to be provided for. Q: You are also getting a relief on not having to reduce your HTM to 23 percent by March 31st. You can freeze it at 24.5 percent. So on an overall basis there would be little more gains in the year end. It will be difficult to calculate perhaps, but your profits would appropriately go up. Can you give a ballpark for that as well? Mundra: It is very difficult. As you also said to give a ballpark figure would be almost next to impossible, but the point I am trying to tell you that now with this and the remaining AFS portfolio we would not be seeing that there would be any significant pressures. Q: For UCO Bank in particular can you detail what stands in your AFS portfolio, HTM portfolio and how much would you be transferring post the measures last evening? Kaul: Our AFS portfolio approximately is about 22 percent of the G-Secs of which the major amount is treasury bills. So, we are in a very comfortable position. There is not much depreciation of portfolio at all. We have not been buying securities for quite sometime since the yield went below 8 percent and we have been very slow on the buying. Duration of the portfolio should be around 2-2.4 percent. So, there is not much of a problem as far as the UCO Bank is concerned. _PAGEBREAK_ Q: Certificate of Deposit (CD) rates have fallen by about 50 bps. Overall, are you going to sense some relief in wholesale borrowing cost or total borrowing cost at all and related question therefore is there any pressure to raise base rates? Would the pressure on cost of funds fall meaningfully or do you think that pressures remain to increase base rate sooner or later? Mundra: There are 2-3 things. I have been maintaining that the measures which have been taken by the Reserve Bank of India (RBI) are primarily directed towards the short end of the yield curve. Some spill over in the long end of the yield curve would happen, but all those measures were directed towards the short end and. The measures which were announced on Mopnday only confirmed that belief which I have been maintaining for all this time that is one point. Because there was a disproportionate reflection on the long end of the yield curve compared to the measures which were taken and there was a significant hardening which we have now seen that after the pronouncement of new measures it has already come down, so obviously for the players who were on the borrowing side in the wholesale market it would have benign impact that I believe. If I talk about Bank of Baroda (BOB) we were on the lending side. We have been maintaining comfortable liquidity. We have been consistently shedding the high cost deposits even which we were considering high cost even by the previous standards, forget about the present high cost. So, my yield from that small portion which I have been un-lending maybe reduced slightly. Of course that does not matter anything in the overall earnings side, but this is how I look at it. Q: What is the cost of lending looking like in the new arithmetic and do you think there nevertheless is a pressure to push up base rates? Kaul: If you look at the banks, typically bank deposits are comprised of both short-term, medium-term and the long-term deposit. There is not much impact on the medium and long-term deposits. The short-term deposit which has just matured, in last one month we did notice some re-pricing risk on that. For a bank like UCO Bank there is a very small component where the re-pricing risk would be there or the re-pricing take place. Would it push up the overall cost of funds? If it does push up the overall cost of funds then banks have no option but to pass it onto the borrowers. I do not think it is going to substantially push up the cost of funds. On the contrary because the Current Account Savings Account (CASA) is improving. I see cost of funds more or less remaining the same. So, there is no urgent need for us to push up the base rate immediately. Q: Do you see a lot of incremental worsening because of the tightening measures that came in post July 15th and hence maybe asset quality could be worse than anticipated earlier for Q2 in particular? Mundra: To be very specific to your point if this tightening would have continued and if there would have been the similar impact on the long-term interest rate structure then yes. It would have had an impact on the asset quality that is quite obvious. But as long as it has not spilled over and there is no fundamental change in the overall structure there would be stress on asset quality. There is continuing stress on asset quality in the prevailing circumstances which I have been mentioning all the time. But with the present situation I do not see any significant incremental impact which is coming into. Q: Our discussions with some of the private bankers indicated that there is a pressure in terms of having to raise interest rates. Therefore, overall maybe not by a great deal, but is the cost of money going up at least by 25 bps for all your borrowers? We know that a lot of banks even now in the last one month after the RBI measures actually were lending to Non-Banking Financial Companies (NBFC) and other borrowers at a higher premium to their base rate because their costs willy-nilly had gone up? Kaul: We are finding two types of demand in credit market. One, there is a segment of customers who are able to raise money in the commercial paper (CP) market or the bond market which was lower than the base rate. Since that route has stopped for them, they have come back to banks asking money at the base rate or marginally above the base rate. Second segment is the borrowers who used to borrow the foreign currency. They have shifted over from foreign currency borrowing to rupee borrowing, because rupee has depreciated. Marginally borrowing cost for both these class of borrowers might have gone up. Otherwise I do not see overall across the board the cost of borrowing would go up. _PAGEBREAK_ Q: Do you expect Non-Performing Loans (NPL) to increase because of this and other reasons? The economy is slowing and slowing a little more. Kaul: These two sets of borrowers, the one who are able to raise money in the CP market and the bond market and by and large the good rated borrowers, the other segment is borrowers who raise in the international market. They want to shift to rupee. They are relatively good quality borrowers. So, per se saying that these two factors led to increase in NPLs is not correct. Economic conditions would have overall impact on the borrowers, I quite agree with that. If the economy is under stress the borrowers would be under stress overall. Q: We have seen this very sharp recovery in bond yields. Any more rallies left you think? Kaul: What we have noticed was a knee-jerk reaction. From 8.90 percent last night suddenly it went down to 8.21 percent and is now stabilising around 8.36 percent. It should hover around these levels for quite sometime now. Q: What is your sense about CD rates? They have fallen by about half a percentage point. Will they come down further? Mundra: Yes, I think little more of softening may come into the CD market and Arun Kaul also mentioned for 10-year maybe 10-15 bps band would be there where it can move either way, but these are the levels which will persist for sometime. Just picking up one point that I would like to make that what he was mentioning about the borrowers with foreign currency borrowing, we should also recognise the fact that a good part of these borrowers also have the export earnings. To that extent if the borrowing cost is increasing probably the relative realisation will also increase. So there cannot be one formula fit all and to put the entire basket of borrowers who have done external borrowing in one category may not be taking really a realistic picture. Q: Would you see any sort of impact or worsening on your domestic Net Interest Margins (NIM) going forward? Mundra: Whatever has happened so far had only a beneficial impact on the NIM. As we have been mentioning we expect to maintain our domestic NIM at 3 percent plus as we end into the year. As of today that situation is pretty intact.