Fund-based, distribution businesses fared well in Q3: IIFL

Financial services firm IIFL posted a decent set of earnings, with third quarter net profit rising 13 percent year-on-year.Some of the highlights of the quarter were strength in the company's fund-based and financial products distribution business, IIFL Group CFO Prabodh Agarwal told CNBC-TV18."Our capital markets business, however, was low-key due to volatility in markets," he said.On the lending side, IIFL Finance is changing its asset mix, by tring to increase exposure to low-yield, high-quality assets, Agarwal said.Below is the verbatim transcript of Prabodh Agrawal’s interview with Reema Tendulkar and Sonia Shenoy on CNBC-TV18.Reema: The topline growth was a bit muted if you look at in a sequential basis, just a 1.8 percent growth. Any particular reason for that? A: The thing is that we did very well in two of our businesses which is fund based and the financial product distribution business. While the capital market activities were sort of low key because of the adverse market conditions, but overall we think we achieved very healthy bottomline growth. Our profit after tax (PAT) grew by 13 percent year-on-year (YoY) for Q3 and by 19 percent YoY for the nine month period. Our net worth of Rs 3,000 crore, we achieved return on equity (RoE) of 17.5 percent. So, those are pretty healthy numbers. Sonia: Could you throw some light then on the asset quality of your non-banking financial company (NBFC) business? A: The NBFC business which is the largest business for us, the loan book grew by 25 percent YoY and currently it stands at over Rs 17,000 crore. Now, here what we are doing is, we are rebalancing our portfolio towards superior assets by reducing exposure to gold loans and to corporate mortgages. At the same time, we are growing our retail mortgages and commercial vehicle (CV) business. So, currently about 50 percent of our book is of mortgage. The retail mortgage, have grown by 65 YoY in the last one year, and the corporate mortgages, actually have declined by 3 percent YoY. We also have CV loans, medical equipment finance, gold loans, capital market loans in this segment. So, it is a pretty diversified book. In terms of asset quality, our gross non-performing assets (NPA) were 1.6 percent. Our net NPAs were 0.6 percent; that is a slight uptick from the last quarter when the gross NPAs were 1.4 percent and the net NPAs were 0.5 percent. The reason for this slight quarter-on-quarter (QoQ) increase in the GNPA and the net NPA is because of single loan account in the capital market segment. However, besides this one-off item, the GNPA ratios in all the other categories, either have improved or have held steady, including CV, capital market, gold loans, medical equipment categories.Reema: How have net interest margins (NIMs) fared considering we are in a low interest rate scenario? A: Our yield on assets have declined in a declining interest rate environment. Our cost of funds have also declined but our NIM has slightly compressed in this quarter. The reason for that is because of the change in asset mix because we are reducing our exposure to high yielding assets like gold loans and corporate mortgages. In gold loans the yield will be anywhere between 20 and 22 percent. In corporate mortgages also, the yield would be anywhere between 16 and 18 percent whereas the assets that we are growing now are much lower yielding. For example, a retail mortgage would be between 10 and 11 percent kind of a yield. CV loan would be 13-14 percent kind of yield. So, these are low yielding assets but we think that the asset mix would change where over time our risk charges would fall, our cost income would fall, our borrowing cost would fall and that should reflect. So, this is a conscious decision to sort of look at a medium to long-term time horizon to build our loan book.(Copy edited by Nazim Khan, interview transcribed by Priyanka Deshpande)Watch video for full interview