NII growth sluggish due to de-risking strategy: Canara Bank

Canara Bank’s first quarter numbers disappointed street expectations with regards to topline growth and the amount of non-performing loans (NPLs). However, chairman and managing director of the bank, S Raman, says there is no need to worry and that they are still on a strong wicket.

Speaking to CNBC-TV18, Raman says that topline growth was sluggish because of a deliberate plan to de-risk the company’s balance sheet. “We reduced our short-term corporate loans on clean basis by Rs 12,000 crore during the last year and this quarter we have gone down further on that road by reducing this portfolio by Rs 10,000 crore. This is one major reason why you find that top-line has not grown,” he explained. When it comes to NPLs, however, he says that the agriculture and medium and small enterprises (MSME) is where they face trouble. But on a positive note, Ramam says that these are mainly small accounts, and they have a good history of being able to recover them. “There is a huge amount of time for us and we are very, very confident that we will be able to get recoveries,” he said. He goes on to say that they currently do not have any major accounts on their books which might sleep or need restructuring, which should be a comfort for the market. Below is an edited transcript of his interview with Latha Venkatesh and Reema Tendulkar. Q: Top-line hasn’t done much and there is a good 10% increase in the total stock of NPLs QoQ. What were the major culprits? A: So far as the top-line is concerned, we had mentioned last time that the bank was very heavily dependent on two things for its credit growth over the last several years. One is the short-term corporate loans. We thought it was important to de-risk the balance sheet, so we reduced our short-term corporate loans on clean basis by Rs 12,000 crore during the last year and this quarter we have gone down further on that road by reducing this portfolio by Rs 10,000 crore. This is one major reason why you find that top-line has not grown. But this has been on account of some deliberate thinking and not chance. In fact, we are happy that we are doing it. In the process of doing it there is always some amount of pain, but then when the survival of the bank is concerned it is good. We would be concentrating on the real steady growth on the retail from now onwards. As far as the NPLs are concerned, yes they have been a bit more. The major pain points have been agriculture, almost Rs 400 crore has slipped during this quarter. The second major pain point is maybe in MSME sector where we have had slippages of like amount. But if you look at the nature of the NPLs, only one big account of Rs 60 crore has gone into NPA status. So all our NPLs are essentially smaller accounts in which Canara Bank has had a great history of being able to recover. Last year we recovered Rs 3,300 crore. This time the slippages happened right in the first quarter, so there is a huge amount of time for us and we are very, very confident that we will be able to get recoveries. On the asset quality front, the CDR references in June in the public domain are around Rs 20,000 crore of which Canara Bank has an exposure of only Rs 400 crore. So what we did in this quarter is actually two things. One is we restructured all the ECB accounts which amounted to about Rs 5,500 crore. We had made the announcement when we announced the results of last quarter and this is precisely what we have done. We have taken some amount of knock on account of this restructuring. We also had to make extra provisions to the extent of almost Rs 176 crore for two things; one is about Rs 120 crore for these restructured accounts of the SEBs and secondly for the diminution in fair value with respect to a few other accounts which were already in the pipeline which we did this year. So although the figures may not sound impressive, we are on a very strong wicket is what I would like to say. Q: What were the fresh slippages number and what was the total restructuring done in this quarter? Also, what is the total restructured asset book? A: Total restructured book is about Rs 14,000 crore as of now, out of which about Rs 5,500 crore is the State Electricity Boards (SEBs). If you look at the NPLs plus the restructured asset, it is well below 8% even today. So the total amount of stress if you see at the portfolio, the stress is in perfect control. Figures may not reveal too much but that is a reality. So we are much better than what the figures have indicated. Q: What the net interest margins were for the quarter? A: Net interest margin is 2.40, it was competitive quarter it was 2.39. It is low because of the slippages of Rs 1,500 crore. As I said, we are going to be recovering a lot of these. We have already recovered Rs 100 crore out of whatever is slipped by this time. These are small accounts in which Canara Bank has been extremely good at recovering amounts and we are very-very sure the picture of the NPAs is going to be much different. We do not have any major accounts in the pipeline which are likely to slip, so that’s one huge comfort which market can have from Canara Bank. _PAGEBREAK_ Q: This 1.98% of gross NPLs, do you see it stabilizing here or could it go a little north of 2%? A: In fact that’s a good question. As I said, our credit portfolio has actually been flat and this has been a deliberate strategy because economy has not been performing that great. Also, there are no credit proposals at all in the pipeline from investment point of view, which has been the bread and butter for most banks for the last four or five years. So if the growth which we ought to be expecting of around 15-16% happens, then the ratio wise there will be a dramatic drop. Instead of seeing 1.98% we will be seeing 1.8% or 1.78%. So the gross NPL as a matter of ratio is a bit distorted this time. Q: Are you planning to continue with your strategy of deliberately de-bulking your short-term corporate loans? Is that something which is going to continue and hence put pressure on your net interest income? A: There are two things. We have followed what we feel is a good strategy. We had a corporate loan of more than Rs 1000 crore repayable in four tranches. When the request came for a rollover, we said why don't we actually test whether the company would be able to pay. But they were not able to pay, there was a delay of 3-4 days. Then we said we'd like the entire money back after which we will consider whether to lend or not. So I feel there is some amount of de-risking which needed to be done, which has been done. It has created some amount of pain in terms of top line as well as the NIM, but then this is a necessary step which has been done and it is going to stand for the bank at a very good state in the coming quarters. Q: What is your provision coverage ratio and how does it compare with the March 31st period? A: Today coverage ratio is 66.53 in relation to 67.57. So our coverage ratio has actually improved this time. Q: This 66.5 is for March 31? A: 66.53 was the figure now and 67.57 was in March 2012. Q: How much is your fresh slippages this quarter? A: Fresh slippages this quarter is about Rs 1,457 crore. Slippages have been a bit more, but then the points of pain have been agriculture and MSME. The large portfolio has stood well. We have no accounts in the pipeline which are showing cracks, so our asset portfolio book is going to be really good. We are not going to have any problems and the small accounts we are going to require very aggressively in the coming 1-2 quarters. Q: In the coming quarters, you think slippages could be much less than that? A: Much less.