In an interview to CNBC-TV18, Romesh Sobti, MD & CEO of IndusInd Bank shared his expectations for FY18.
Below is the verbatim transcript of the interview.
Q: Will you continue to grow at 25 percent plus in FY18?
A: The size of the balance sheet we have, we do not stretch to do 25 percent sort of thing because we have got full life-cycle coverage both on the corporate side and also on the full product range on the retail side. So we are just bringing some depth in those businesses.
Retail, for instance is harnessing and harvesting existing customer base. Corporate is deepening to what you have, there are also some shifts in market share which are happening which are also helping the cause.
Q: It never is an issue of your ability. It is a question of are there enough good credit outside. Are you as confident of the growth that you will be able to find good credits to the extent of 25 percent growth in your balance sheet?
A: There are couple of issues to work there. One, if you reconstruct the loan growth, the focus is solely on bank loan growth but there are also surrogates which have come in like commercial paper and bond markets, if you put them together the loan growth is actually 10 percent and if you look at just the bond market, it is 20 percent and retail is 15 percent. If you reconstruct then there are different layers to it.
The other point is do you have a long enough runway for growth, the top end corporate, the good enough credits, as you say. I think there it's a pricing game and I think our competitiveness on pricing has improved as a consequence of growth in our current account and saving account (CASA) for instance and the fact that we have a fixed rate book - that is giving us spread in the margins. Those excessive margins we are using to subsidise some of the growth on the AAA and AA+ names. So there we are seeing pretty decent traction.
Q: But what about margins itself. There is a pressure coming from lower inflation and hence as you say competition from the bond market plus the very logic of the marginal cost of lending rate (MCLR) regime is that incremental credit will be cheaper, so should we be prepared for lower spreads or lower margins?
A: Incremental lending will be cheaper but incremental liability is also cheaper. The question is what the pace of the two is. What is falling faster? So far we have seen that they are either falling at the same pace or deposits have slightly lead the pace. So margins are stable. It is not that hugely expanding and I do not think they are hugely contracting as well, so stable margins. If your book is well balanced then both should move in tandem and that is exactly what we are seeing in our book at least we see a slight expansion in margins because of the fixed rate book.
Q: That is your specific advantage but will incremental credit possibly mean higher risk. Your last slippage number was a bit of a shock in the sense you went from Rs 281 crore in Q3 to about Rs 600 crore plus slippages. Was that a one-off? Will it peak off in the current quarter?
A: It is clearly one-off. We made some excessive provisioning on standard assets because of that particular asset and that should reverse this quarter anyway and there were two accounts which we sold to asset reconstruction companies (ARCs) after writing them down very severely. So we do not expect that to happen but overall our credit cost still came at 62 bps and our target has always been around 60 bps. I do not think we moved the needle too much there.
Going forward we expect credit cost should be sub-60 bps for us and we hope that it is more towards 50 bps than 60 bps because we have seen a much better book behaviour on the retail side and whatever we saw was giving us trouble. We either write-off or we sell after writing down. So in the next financial year we will come anywhere between 50-60 bps on the credit cost.
Q: There was also a feeling, probably a couple of month back that since growth is not much, it is best to grow inorganic. Where are your plans? Very obviously, Bharat Financial Inclusion was mentioned. Where does the plan stay at all on Bharat Financial?
A: Without taking any names, there is nothing that we have so far taken to the board also. So that is the truth around these things. Of course, we have discussed and proposals come to us. A lot of investment banks bring proposals, non-banking finance companies (NBFCs), microfinance institutions (MFIs) and portfolio sort of thing. They are always being assessed. We have got a full division just assessing these possibilities. But unless you go to the board and do an affirmative nod from there, you do not do that.
Our play on mergers and acquisition (M&A) and inorganic play is very simple. Any acquisition, whether it is a portfolio or it is NBFC or whatever, has to fulfil two criteria. One is that the acquisition should either give you a domain specialisation or a domain leadership. Otherwise, just gathering assets is not -- we are growing at 25-27 percent, it is not gathering assets. We must have some domain specialisation and that is why we have bought the diamonds financing businesses which we have covered. We bought the credit card businesses of Deutsche Bank. We have just bought, which has not been actively reported, the IL&FS' securities business and what they call, professional clearing membership, 20 percent market share in professional clearing membership. It brings custody; it brings depository and all that. Therefore, it must fulfil this obligation.
Number two, it has to be accretive to us on day one. You cannot predicate the whole thing on the basis of 18 months down the road I will have synergies and things like that. So unless, it is return on assets (RoA), return on equities (RoE) accretive to me on day one, and that includes valuation, valuation has to be appropriate, we are not interested.
Q: Do you think you will find your ideal inorganic partner in FY18?
A: What is ideal for me may not be ideal for the other partner, so it has got to be a meeting of minds.
Q: Are the meeting of minds looking like happening this year?
A: At this point of time, we do not see anything of that side, but there is more light being seen on portfolios rather than the whole entity but portfolios, certainly -- we like that approach; portfolios come without the baggage. So you do not have any legacy issues and anything like that, so we pick and choose. That is why the diamond business, we really like that business.
Q: I must ask you this. What are you expecting from the RBI at the monetary policy?
A: The pathway to the policy is not thorny in the fact that inflation looks more benign than was thought and the Q4 figures came off a little bit maybe because of demonetisation. So expectation is that rates will remain stable.
Q: Yes, considering that it is a neutral stance, maybe a rate cut is difficult to expect.
A: The commentary is important.
Q: What do you expect the commentary to be?
A: We expect not be to be as severe as last quarter.
Q: If it indeed were not as severe as last quarter, as you put it, if it were softer, do you see scope for deposit and lending rates to fall?
A: People are going to wait through the quarter and the impact of the monsoon and things like that because this is just pre-monsoon sort of a situation. I do not think rates are going to fall in a hurry, but the lag that was there probably will get caught up. Whatever lag between the policy rate and this thing probably will get caught up.
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