Dena Bank's exposure to discoms stands at around Rs 7000 crore of which Rs 3300 crore of debt has been restructured, says chairman and managing director Ashwani Kumar.
Under the new Financial Restructuring Plan (FRP) for power distribution companies (discoms), state governments will have to take over the complete debt of power discoms of eight states — Rajasthan, Andhra Pradesh, Uttar Pradesh, Tamil Nadu, Haryana, Jharkhand, Bihar and Telangana.
As on June 30, 2015, Dena Bank's exposure to the various sectors stood as follows: infrastructure — 20.38 percent, power — 13.3 percent, roads and ports — 3.49 percent and metals and steel — 5.76 percent.
Meanwhile, Vaibhav Agrawal of Angel Broking says an SEB package will be positive for the banking sector.Below is the verbatim transcript of Ashwini kumar and Vaibhav Agrawal’s interview with Ekta Batra and Anuj Singhal on CNBC-TV18.Ekta: If you could just highlight for us whether you have had any conversations with the government or heard anything concrete in terms of the distribution company (discom) debt restructuring. For example would the state governments possibly take over around 100 percent or maybe 50 percent of the discom debt? Has that been touched upon?Kumar: No, the talks regarding discoms are there but so far nothing concrete has come there. However, hopefully something is taken over by the government this is what is being talked about.Ekta: In your interactions or in what you have picked up, would it be a 100 percent takeover of debt by state governments or would it be limited to 50 percent and 50 percent restructuring?Kumar: No, Dena Bank’s exposure to discoms is around Rs 7,000 crore out of which about Rs 3,300 crore has been restructured. I have not had any discussion with the government but the plan of state government taking over loan is already under discussion. What amount they take, whether they take 50 percent or 100 percent that is still not very clear.Ekta: Could you just highlight for us in terms of your exposure to discoms has there been any sort of incremental lending that has taken place by Dena Bank over say the past quarter to the discoms and additionally which might be the discoms that you do have exposure to?Kumar: No, we have exposure to Rajasthan, Uttar Pradesh and a few others. Incrementally exposure has been taken only where out of restructuring we had to lend for working capital. Otherwise, no fresh sanctions have been made so far to the discoms.Anuj: From your analysis have you studied the impact of this issue and are there any banks that you like in particular because of this development or would it be too early to take a call like this.Agrawal: We have to wait for the contours of the actual package, but clearly the whole state electricity board (SEB) thing has been an overhang for the banking sector because it is not just about the SEB loans itself and the loses that they are incurring but the impact it is having on the entire power sector itself and the private sector generation projects etc as well. So if the government is able to find a resolution to this problem, I think sentimentally, clearly and even in terms of asset quality outlook as far as at least the power sector is concerned things would improve. So, any package and the credibility of that package could be a positive for the sector._PAGEBREAK_
Ekta: What is your sense in terms of credit growth at this point in time? What are you seeing in terms of corporate credit growth as well as maybe incremental lending to stress sectors such as infrastructure and power where do you stand?
Kumar: If you see the credit growth year on year, it has slightly improved from 9.2 percent last year to 9.6 percent this year. Regarding Dena Bank, our focus has been on retail, small and medium enterprises (SME) and agriculture where our growth vis-à-vis the growth of the industry is better in consumer lending, agriculture lending and SME lending, so our focus is on these sectors where there is a big improvement in terms of our growth. Say, for the SME sector the growth is 3percent in the industry, we have grown at about 10 percent. For consumer durables also, the growth in Dena Bank is 24.7 percent against 12.7 percent in the industry. So, these are the focus areas where we are growing. Regarding the financing to infrastructure, yes, we are open to financing of infrastructure. Wherever we find the projects that are viable, and will generate the cash and they do not land up in any subsequent issues of environment or policy.
Anuj: Let us discuss some of these talks and how you would be placed on them. First is IDBI Bank, where we have seen a big rally from Rs 50 to the current levels and the other is Indian Overseas Bank (IOB), if you have covered that?
Agrawal: On IDBI, clearly even at current levels, the stock is trading on about 0.7 times price to book. So the minute you start talking about a possibility of moving it to an Axis Bank kind of structure, and draw the parallel in terms of price to book something two times plus, one gets the sense that the upsides over a longer period of time can be quite a lot. Obviously it would not happen overnight. Even in case of Axis Bank we have seen back in 2003 onwards, it took almost 3-4 years, where even Axis Bank was trading at that one time kind of price to book and as it developed its retail business, as it improves its processes in line with other private banks, it got re-rated. So, there would be potential for even IDBI Bank. There would be so much scope to improve processes, incentive structures, etc. So it can be a long journey of improvement and if the structure is actually made pretty much on the lines of Axis Bank, I think it would be positive for the stock even from current levels, eventually, but one has to has to wait for that even to actually happen, before that, one would once again look at the near term issues with the bank where the asset quality stress is quite high, their exposure to stress sectors is one of the highest among peers. So, in the near term we remain a sort of a hold on the stock, but on this event I think there would be a lot of upside once it actually materialises.
Ekta: What might your outlook be on net interest margins? There were certain targets which were put out by the bank post Q1 FY2016, where your net interest margin range should be around 2.5-2.75 percent. Now with the base rate cuts that have come through as well, what is your projection in terms of net interest margins:? Would there maybe be a lower range that you would be looking at?
Kumar: No, I think with the cut in base rate, we have cut by about 30 base points, so about 70 percent of the assets would be reprised, whereas the deposits which are maturing within one year would be around, say 40 percent of our total deposits, so in that term the projection which we were expecting to be 2.5-2.75 percent by march 2016, that will be slightly impacted and it should be lower by about 10-15 bps.
Ekta: In terms of asset quality, IOB and Reserve Bank of India’s (RBI) prompt corrective action that they have initiated, what might your outlook be in terms of your gross nonperforming assets (NPA)? You stood at around 6 percent on percentage basis in terms of your gross non performing loans (NPL). Where do you see it by this fiscal end?
Kumar: By this fiscal end, we are definitely trying to bring it substantially down. Definitely around 5.5-5.75 range and efforts are being put for recovery and compromise. We have already decided and got the board’s permission to sell assets to asset reconstruction companies (ARC) of about Rs 2,500 crore. We are already going for the process. Similarly, we had identified a good number of accounts below 2 lakh which also we have put up for sale to ARC. So, we hope as the economy recovers, the chances of which appear to be very bright, I think there interest rates should slowly come down and with credit growth picking up, though our credit growth is around 5 percent year on year as compared to around 9-9.6 percent of the industry but we are now moving to increase our credit growth also. So with both numerator and denominator being affected, we are hopeful that the NPA should substantially come down in March 2016.
Ekta: Sale of Rs 2,500 worth of loans to ARC has been initiated and has not already taken place?
Kumar: No. It has not taken place, but we are already in the process, so it should happen before the December quarter.
Ekta: What would your top picks be from maybe an earning season perspective?
Agrawal: From an earning season perspective as well, it is the private banks where we expect the numbers will remain relatively consistent. Even they are seeing some amount of asset quality problems but their profit and loss accounts (P&L) are more than capable to absorb that in and we are not seeing an undue increase in net NPA’s even going ahead. So, we would remain positive on private sector banks. Valuations have also corrected for some of the more corporate oriented lenders and I think that provides an opportunity to enter into these stocks. So, we remain a buy on stocks such as ICICI Bank, Axis Bank and Yes Bank and at present inviting and we have a buy on HDFC Bank as well.
Agrawal's disclosures: We have recommended these to all our clients.
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