Numbers mentioned in UBS report exaggerated: Yes Bank

The Bank has given 60-80 bps credit cost guidance for FY15-16, Monga said.

Below is the transcript of Rajat Monga’s interview with Latha Venkatesh on CNBC-TV18.

Latha: Is your loan exposure to these 100 stressed companies that UBS has studied as high as 19 percent?

A: There is a relative exaggeration in terms of the analysis. In the report, they are talking about loan proposals and not necessarily exposures or loan outstanding. So, there is a huge factor of exaggeration in terms of what the exposures are and or what these exposures have been. They are essentially using cagey words because they are also not sure of how they can safely conclude from the data that they have.

So, if you illustratively look at one loan made three years ago, let us say for an amount the charge created for similar amount loan has been progressively been repaid, but charges remain the same. They don’t relate to the position and are not correct or accurate at all by any measure in terms of what the exposure would be. It is actually a little bit of an exaggerated account if I have to summarise that.

If you look at the otherwise position that the bank has been reporting on NPAs, we have gross NPA of 42 basis points. We even suggested credit cost guidance for financial year 2015-2016 to be between 60 and 80 basis points. We know what we are doing, we know what are exposures are and we are comfortable. This is a little bit of an exaggerated account. Some of the names in the list are not even stressed, so they just have been bundled as such.

Latha: Which would you say are not stressed? Names like JP Associates, Essar and GMR that have been mentioned.

A: Illustratively without trying to get into specific issues, but aviation sector in general is not something one should be worried about. I can take a specific case in point, we have discussed that in the past as well so there is a mention of our exposure to Lanco in this same. If you have a very good exposure to that company - it is doing a solar project, operating company, making profits, loan is being repaid progressively.

It is unreasonable to suddenly bracket everyone as stressed. Even in many of these groups, there are value assets in the balance sheets. There are some issues in their businesses and as bankers, it is our job is to find where value is and bank the value and not just worry about the fact that there is some issue here and there.

Latha: For an investor, the worry would be legitimate. For instance, GMR has a lot of money generating assets as well. But, a separate report by Credit Suisse also points out that GMR’s earnings before interest, taxes, depreciation and amortization (EBITDA) has been less than its interest outgo for the past 12 quarters.So, your exposure to companies like these and even for that matter JP or Essar, if it is indeed Essar Steel, it is only a non-performing loan (NPL) with some banks. So, if your exposure to even these three groups has gone up. Then the fact that you may use the word approved and not exactly loaned, still it would be a matter of worry.

A: I may also add already repaid. That is also not something which has been factored accurately here. So, there are several issues. We may have a cash deposit.

Latha: What according to you is the actual exposure as a percentage of your total loans to the 100 companies?

A: Safely less than half of what the report says.

Latha: So, it would be 9-10 percent.

A: Safely! We have reconciled some of these numbers because this is a research which per se is exaggerated. So I am saying it will be, let us not even stop there. There are risk mitigants in those exposures on top of that. You were also mentioning that there is some situation with EBITDA being not adequate, but if you look at financing in any company; is the financing all the same? Or let us say some of these companies have two assets.

What if one asset has severe EBITDA stress and the other asset is EBITDA surplus. At an aggregate, it seems that they are EBITDA negative. What if you have banked the EBITDA surplus business and someone else has banked the EBITDA negative business that report does not discern at all.

What report also says is that the exposures have gone up in last two three years, us, other banks, etc. Does that not mean that the exposures have been taken with the cognizance of the issues in those businesses underlying operating assets because the investment cycle in the country has not been very active in last three years?

No new risks have been added in the country. These are known risks in terms of both issues as well as the resolution which the projects are completed so you know what the status is, what the operating efficiencies are. So, these are very wrong to be generalised in the manner that the report does.

Latha: You spoke about some money generating assets and stressed assets. The report says that you have a larger percentage of collateral in the form of unlisted shares. Let me read that statement - Yes Bank at the higher share of term loans backed by unlisted shares and current moveable assets whereas some state owned banks and Axis had a larger share of loans backed by immovable property - 35 percent was the number. It juxtapose like that, unlisted shares would be not adequate collateral.

A: Is that the primary collateral? Does the report argue that? It is not the primary collateral. Let's say you are financing a new project, you want to take project shares also as collateral and lot of banks do that - those are unlisted shares, does that means that there is something wrong with the collateral.

Latha: It is just less valuable than immovable property?

A: Yes but what about looking at the total picture which the report does not. What if I have cash deposit in the bank, which the report ignores? It is loosely concluded numbers and exaggerated on top of that.

Latha: I think top 25 companies and your exposure to that has been mentioned. It again goes as loans approved as a percentage of your total loans.

A: Cumulative approvals. They are not approvals that stand good as of today. They may have been passed approvals, disbursed or repaid. You don't just keep adding.

Latha: What would be your total approval to Jaiprakash Associates as a percentage of total loan?

A: It is not something that we have discussed in the neither public domain nor am I at liberty to share these numbers, but as I mentioned, there is a substantial exaggeration in any case in the reported numbers - basis charge file.

Latha: What about a company like Essar Steel - its NPL is in some banks book. Is it NPL with you? Is it 0.3 percent of total loan book?

A: I continue to maintain the numbers in this context without getting into specific. It will be difficult to discuss specific names, but the numbers continue to be exaggerated. The situation of one bank versus the other will never be the same.

I do want to highlight the risk of generalisation for investors as well as for other stake holders that please do not generalise one bank exposure across any group; do not generalise one bank exposure in the same group's another bank's exposure in that group. It is not going to be a safe conclusion without knowing what banking merit has been put behind that, which the report naturally does not always dwell into. That is the key point, which is that does not conclude without having a good assessment of the actual risk.

Latha: What in your assessment could be the amount of restructured assets or refinanced assets. What will be your total of NPL plus restructured plus refinanced at the end of the June quarter and at the end of the September quarter. How much higher will it be vis-à-vis Q4?

A: Let me be a bit cautious about the fact that we are already in the result period. The gross NPA is 42 bps, net NPA will be 12 bps – these are March numbers. We have about 49 bps of restructured loans. I have not mentioned that we have about 50 bps of excess provisioning, you can call it counter cyclical provisioning.

Our NPAs are minus 38 bps if I factor the excess provisioning because that's there in the balance sheet. It has been set aside, but is not been used to present the NPA on net basis. It is a pretty good book in my view. 

We have given credit cost guidance of 60-80 bps for the year and that's something that this report doesn't change at all. In fact, I would want to hazard that the credit cost situation is slowly improving as the economy is also looking to do better, some de-risking is happening.

All those things are also generally stacking up in the background of the economy. NPAs and restructured assets usually will go up. We also had 60-80 bps NPA guidance last year, but our gross NPA is only 42 bps because we are also absorbing the NPAs into the profit and loss (P&L). So, the gross NPAs do not aggregate. I do not think we are worrying about the NPA situation worsening from here.

Latha: What was your guidance on restructured?

A: The guidance, we do not have a number, but restructuring in the bank and its history - we have a 11 year history with a couple of cycles. We have seen in that 11 year history, our restructuring had been very sporadic.

Latha: This is one of the nastiest restructuring cycles we have gone through. I mean I reported heavily on the 1997-2003. You became a bank only after 2003, so you did not see that ugly period. Since this is your first ugly period, what is the likely restructure guidance you have given?

A: You look at like for like. So, restructured with us are 49 basis points and you have some information with the other banks. These are very comparable numbers.

Latha: And how much maybe refinanced now that that is a new category?

A: Refinance is also an opportunity for us. Not necessary that we want to be refinanced. You mention 5:25, which has many genuine applications also, especially with investment situations where loan requirements are much larger. Banks in India are not used to giving more than 5, 7, 10 year loans. This will help them overcome that mental block. I doubt if there has been any 5:25 materialisation. I am not saying is that 5:25 will be not used. In fact, very good names are also discussing the application of 5:25.

So, what RBI has done thankfully in the last couple of years is that they have been able to curtail the restructuring in general that was taking place. They have carved out the merit out of restructuring and now the merit is being used for restructuring. So, the restructuring that you see now will have to be given first a benefit of doubt in terms of there is strong merit behind those restructurings.

Latha: Let me ask you one last question and that is not something from this report but simply because the commodity crash that we have seen. What is your exposure to steel and what is your exposure to metals?

A: We discussed steel on our last earnings call. We have a 3.3 percent exposure to steel sector. Two thirds of that is rated double-A or better which means that these are already rated companies without going into names, they are very well rated companies and the exposure is also coming from the bond business that we run. So, we do underwrite bonds.

Latha: So, this 3.3 includes the bond exposure.

A: Includes the bond exposure. So, that is the picture of steel.

Latha: And infra? Infra is again, it depends how you read infra. So, project finance, let us say, irrespective of infra or not, will be about four percent in our book.

A: Irrespective of infra. So, within that will be project finance infra, because telecom is also infrastructure in some definition. But, it is not of the same nature as what project finance in infra will be.

Latha: Is there anything else you wanted to add?

A: I think there is a lot to discuss in terms of the situation, like I said, in terms of, from our point of view, on this subject investors should look at this with caution. Look at this with the fact that these are conclusions which have been drawn from hypothesis, not necessarily based in fact, has not been verified with us. So, it is not something that, I think this report should be dismissed, in my opinion.

Latha: In your estimate, how much might your NPLs increase? And when I say NPLs, I mean all the three, NPLs, stressed assets, refinanced assets. Okay NPLs and stressed assets in June quarter.

A: I am giving you a more conservative number. Because like I said, last year, we had 60-80 basis points of credit cost. But, NPLs are only 42. So, where did the credit cost go. So, the credit cost becomes the affordability issue and it is a more conservative number in this that I am suggesting and that is something we have guided to stay between 60 and 80 basis points for this year as well.