Lower lending rates likely if liquidity stays for 6 mths: Mistry

Speaking to CNBC-TV18 Keki Mistry, Vice Chairman and CEO, HDFC said that there is plenty of liquidity. "We have seen it reflected in the cost of borrowing. No question about it." Retail deposits haven’t come down the way bond rates have come down, he said. "We have to ensure that incremental funding comes from retail deposits." In periods of tight liguqity, retail deposits is excellent funding, he added.

If this current liquidity continues for another six months, then you will see lower lending rates. But the quantum of lending rates is difficult to say, he said. He said that a good monsoon will translate into lower food prices.

"Last year, we reached the bottom for commodities. We go the benefit of falling oil, commodity prices." Going forward one may not get that advantage, he said.The ability of an RBI to keep lowering interest rates has some limitations, he maintained.

When asked whether there would be pressure on margins in the second half of this fiscal year, he maintainted that focus for them is on RoE (return on equity). “Higher return on equity comes from sweating the equity.”  He mentioned that they ploughs back only 50 percent of profits. He is comfortable with spreads which have moved in a narrow band.Below is the transcript of Keki Mistry’s interview to Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: The market yields have fallen by 50 basis points in the past six months, the new 10-year yield is now below 7 percent. Do you see your lending rates falling?A: Interest rates, yes, there has been plenty of liquidity in the system. We have seen that reflected in market rates, we have seen that reflected in our own cost of borrowing. There is absolutely no question of a doubt about that.For example, take the case of a 5-year bond. A 5-year bond, two months ago would have been priced at 8.3 percent. Today, if we do a 5-year bond, it will probably be priced at 7.8-7.9 percent on an annualised basis. So roughly, incremental costs may have come down by 40 basis points.Everyone carries a very large balance sheet. When you carry a large balance sheet, by the time the reduced incremental cost of funding translates into a significant enough change in the overall cost of funding for you to justify a reduction in interest rates, it takes time. It will happen, but it takes time.Now, if we were to look at a marginal cost of funding also, it is not that every bit of borrowing that you do is market related. You borrow money from a variety of sources. We borrow money for example, through retail deposits. Now, retail deposit rates have not come down the way bond rates would have come down, for example. We have to necessarily ensure that a certain percentage of our incremental funding always comes through retail deposits. In period of tight liquidity, when interest rates are high, retail deposit is an excellent form of funding for us. And it creates stability as far as investors are concerned.Anuj: So, from the point of view of the customer, should the lending rates fall now?A: If we believe that this source of liquidity will continue into the next six months then I have very little doubt in my mind that you would see lower lending rates going forward. Quantum of the reduction in the lending rates is difficult to say at this point of time. It depends on the level of liquidity, it depends on a whole host of factors, which we are not aware of today.A couple of points hereon on interest rates per se. Whilst, we have had very good monsoons, which is a fantastic boom for all of us, good monsoons will hopefully translate into lower food prices and food is an important element of the consumer price index (CPI).Let us also not forget that another part of the CPI is commodity prices. Last year, we probably reached the bottom in terms of commodity prices for many of these commodities, crude prices for example. So, we got the benefit of falling oil prices, we got the benefit of falling commodity prices. Going forward into the current year or into next year, will we get that kind of advantage? I doubt very much.Therefore, part of the benefit we will get from falling food prices, will partly be offset by the fact that commodity prices will probably go higher. Therefore the ability of the RBI, for example, to keep lowering interest rates has some limitation.Sonia: Do you see any pressure at all on you margins in the second half of the year?A: We have to look at margins differently from spreads and I keep saying that. Margins are dependent on the level of debt equity that you carry on your balance sheet. Our focus is our return on equity (ROE). From a shareholder perspective, we believe that the most important thing that we can give to our shareholders is not higher accounting profits, but higher ROE. And higher ROE comes from sweating the equity as much as possible. If you keep raising equity every three years or four years as some people do then you will always have high margins, you will always have high net interest income (NII) but your ROE will always be lower. So, our focus is pushing or increasing our ROE on a year-on-year (Y-o-Y) basis rather than just focusing on margins.So, leave aside margins for a moment. Margins would be impacted by the fact that every year, we make a decent amount of profits. We pay back nearly 45- percent to 50 percent of our profits back to our shareholders as dividend. So, we plough back only 50 percent of our profits. The amount of profits that we plough back is not enough to fund the disbursement needs of the following year.Therefore, all incremental funding that we do, all incremental disbursements we make in the subsequent year will be funded out of borrowed money. Therefore, with every passing year, the debt equity ratio and the balance sheet keeps increasing.As the debt equity ratio increases, the weighted average cost of liabilities also increases and therefore, even if you assume stable spreads and maybe even increasing spreads, you can still theoretically see a situation where net interest margins can come down. But, what happens is when you expand the debt equity ratio and you sweat the equity that much, you ROE keeps rising and that is our focus.Let us talk of spreads. Spreads, we are comfortable with, we have always told our investors and you can see that over the last 10 years in our all investor presentations that our spreads have moved in a very narrow band. The lowest level of spreads, we probably had in the last 10 years has been 2.20 percent. The highest spread has been 2.35 percent and the current level of spread we carry is 2.26 percent. Current level meaning, I am talking about June, I am not talking of the current quarter.Anuj: So, in this kind of an environment, what kind of loan growth do you see this year?A: We do not provide guidance because of variety of reasons, but what we have always told our investors over the years is that if we take a 5-year view or a 10-year view, we are fairly comfortable with saying that we would look at a 15-18 percent growth in the medium-term to long-term. We do not look at each quarter. There may be a quarter where the growth is faster, there may be a quarter where the growth is lower, but if you take the next few years, we should be looking at a 15-18 percent growth in the individual loan book.Sonia: What is the value of your unlisted investments currently and are you looking at any point to list any of them?A: Before I talk of unlisted investments, it is important to also understand that Indian accounting is a little different from what you are used to seeing in the International Financial Reporting Standards (IFRS) or now even under Indian Accounting Standards (Ind AS). We hold all our investments at historical costs and being in the financial system, we would be applying or adopting Ind AS only in 2018. So, there is still time to adopt Ind AS. Till that time, investments are reflected at historical costs.The unrecognised profits on our listed investments, when I last saw, was close to Rs 70,000 crore. We are talking of USD 10 billion and the unrealised gain on the unlisted investments -- and this is a number which anyone can dispute, you may have a different value, I would have a different value -- my sense is would be close to USD 5 billion.