See muted credit growth; asset quality to improve: BoB

Bank of Baroda 's first quarter earnings surpassed street expectations on Thursday but its asset quality deteriorated further. Profit fell 22.8 percent year-on-year to Rs 1,052 crore while net interest income grew by 4 percent to Rs 3,460 crore during Speaking on the first quarter the performance and the outlook going forward Ranjan Dhawan, MD & CEO, Bank of Baroda told CNBC-TV18 that worst seems to be over in terms of asset quality and things will only improve from here on. However, he was not so upbeat on the credit growth front although hoped for an improvement on back of revival in the economy. Neither does he see a spectacular change in net interest margin number going forward. With the infrastructure and steel sector still under pressure the bank has decided to stay away from financing these sectors, said Dhawan.Below is the transcript of Ranjan Dhawan’s interview with Manasvi Ghelani on CNBC-TV18.Q: Could you give us more details on the profit front?A: The whole of the last year or so, we have seen an increase in the non-performing assets (NPA), we have seen a sharp increase in the restructured book. Therefore, it is not as if year-on-year the profits have declined. We took a major hit in the December quarter but the results were better in March and we have further improved. In fact there is over 75 percent improvement in this quarter.And, the basic reason for improvement in result is that NPA levels and our total stresses asset levels has improved substantially and therefore profitability has improved.Q: But, asset quality still continues to be a problem. There has been a spike as far as your gross net profits (GNP) go. Going forward, what is your outlook? Do you see the stress coming down and by when do you expect that to happen? A: I am hesitant to give an answer to that for the reason that one quarter back I had indicated that I saw fair amount of pain in the asset book and clearly, it has not happened. In fact, our assets have improved. So, I am in fact tempted to say that we have seen the worst is over, the bottom is there and from now on, we will only see improvement. However, I am conscious of two things. Number one, what our clients tell us is that they are not seeing any growth. They are not willing to invest. Number two, the hard evidence on the street which is to say the quarterly results have not been encouraging. Thirdly, we know for a fact that there are certain affected sectors where the problems are not getting resolved. For example, the steel sector where we see that global steel prices have been depressed. There is China dumping. And a lot of steel companies are in great problem. And it is not just steel, global commodity prices have come down and the profitability of commodities has declined. For example sugar is in all sorts of problems and I do not see these problems easily working themselves out in the system very soon. Similarly our clients in the power sector have problems, they do not have fuel. So, I do not see a quick up-turn. There could be, there in fact is pain down the road also. Whether we have seen the bottom or not, I would like to think that we have seen the bottom and things will only improve from this, but there is no doubt in my mind that as a economy, we are not completely out of the woods as yet.Q: You have mentioned that power and steel have been taxing sectors for you. Going forward, will you reassess your portfolio in terms of allocation? Will you be more cautious in terms of lending? And are you looking at another set of strategising your lending operations and how do you go ahead going forward?A: We have already done so. You would observe that our year-on-year growth in credit is only about seven percent. So, there has been almost no growth in the corporate credit. Whatever growth has come, it has come from the small sector which is to say retail. Retail has grown by 16 percent, small and medium enterprises (SME) another 7-8 percent, agricultural growth and so on and so forth. There has been almost no growth on the corporate side. We are being very cautious over there. Q: Will this growth revive say in six months down the line?A: It will certainly revive. To my mind, there is no doubt that it will revive given that we are still as an economy growing over seven percent. There would be a demand for all products whether it be cars, be it houses, there would be a demand and growth will revive. If you ask me for a timetable, I am unable to give you one. There is the added factor that there is an overhang of excess capacity. For example, there are a lot many builders who took on a lot many projects and in some locations, there are completed apartments which are not being sold. So, those micro problems in specific locations will persist, but if you want an exact time table from me, I am afraid; I would not like to hazard a guess.Q: Though asset quality seem to be getting back on track to a marginal extent, there has been a lot of talk about refinancing of projects. As far as Bank of Baroda goes, refinancing of assets which you say was about Rs 4,000-5,000 crore in the last quarter, will this number or will this trend continue in the going quarters, what is in the books that is in store for now?A: Refinancing will certainly continue. I would like to state it in another manner. The working life of many assets is 20-25 years. For example if I finance a ship (normal life of a ship is around 30 years) with a seven year horizon and because margins are squeezed, he is unable to pay, and if I lengthen his repayment period, then I think it is perfectly in order. Earlier the financing that we used to do was not realistic, so rather than kick the ball down the road, the kind of repayment periods that we are now setting are far more realistic and are in tune with the economic life of the asset. Q: So for Bank of Baroda what is the restructuring pipeline looking like?A: In the last quarter it has been Rs 147 crore, so it has been negligible, so I would not say that there is a huge restructuring pipeline but it will occur. There are certain accounts which are under stress, perhaps some of them may need to be restructured, so they would need to be in due course of time restructured.Q: I am asking you one forward looking view on your slippages and net interest margins (NIMs) specifically to your margins, going forward what is your sense, would there be a spike or will we see the same trend continue?A: As far as NIMs are concerned, it will be much the same. We have seen an improvement of NIMs in this quarter and the reason for the improvement in NIMs is very simple. We were seeing a reduction in the yields on advances over several quarters because when there is no offtake in demand; when demand for credit goes down, they are in a better negotiation position. So, therefore yields had come down and in response to yields coming down, we have cut the rate on deposits. So that is one reason why NIMs have improved, I don’t see much change in NIMs, there would not be a spectacular change in NIMs going forward.