Valuation key in Bharat Financial deal; CV space to do well in Q3, Q4: IndusInd Bank

Talking about Bharat Financial deal he said, it is an issue of timing and valuation, and not about competitive bid. The deal will happen only if valuation is right, because one has responsibility towards shareholders as well, he said.

Below is the verbatim transcript of the interview:

Latha: Let me start with the negative first because it is such a small part of what is an otherwise great performance. We are only used to seeing Rs 200 crore as non-performing assets (NPA) from IndusInd Bank. Twice in a row Rs 600 crore, that is a bit of a worry. How would you explain this to your investors?

A: You have got to read the gross NPA figure together with the restructured book and the only movement that has happened in this quarter is a move of two accounts from restructured to gross NPA. And if you actually read both of them together, actually there is a reduction from 130 basis points to 126 basis points.

Our credit cost has come down from 22 basis points to 17 basis points and additionally, we have made a floating provision of Rs 70 crore and have taken up our provision coverage ratio to just beyond 60 percent. So the NPA movement itself should not be an item to worry about. If you read it together with the restructured book, it is just the movement of two accounts. That is about it.

Latha: Your growth, 25 percent, where is it largely coming from?

A: It is divided pretty uniformly between the retail part and the corporate part. In the retail we have the non-vehicle retail which has grown 35 percent. The vehicle rate has grown slightly slower at 17 percent because there is a problem with the manufacturers on supply of trucks because of Bharat State-IV (BS-IV) and a little bit because of goods and services tax (GST), that has grown 17 percent and the corporate book grew 26 percent. So all parts of the balance sheet on the loan side have done well.

Reema: Your microfinance book from zero NPL has now moved to some NPLs. I know these are small numbers, just about Rs 31 crore and you have made provisions against the same, but is microfinance institution (MFI) emerging to be a risk for the industry as well as for the bank?

A: No, there is a lot being said about the MFI sector and there is a lot which is not being understood. These NPAs are not write-offs, I mean these are 90 days past due, that is about it and they will all mostly be recovered with a lag because recoveries are happening. The MFI sector, of course, ours was a very small component, Rs 31 crore, which we have fully provided, but we expect recoveries of that in Q2 and Q3.

So the MFI sector, the worries should be more about the growth, not really about the NPAs. There is a little bit of a blip and it is only limited to a few districts in Maharashtra and maybe some in Karnataka. But if you see, disbursements made after January 1 have a recovery rate of almost 99.5-99.7 percent.

Anuj: You said the issue with microfinance is more in growth, not in asset quality. So, should we assume that you are still working on that Bharat Financial Inclusion deal? We had the Bharat Financial management on record saying that they are in discussion with you. Want to know where we are right now in the discussion stage.

A: We are exactly where we were three months ago when this question was last asked of us. So there are discussions going on. But as we said last time also, there are multiple discussions going on. So nothing has been taken to the board, as we said even last time around.

Anuj: Is there a bit of a bidding issue between you and RBL Bank?

A: We are not aware of competitive bids holding up progress on this particular thing. It is an issue of timing, it is an issue of valuations, it is always that. Does it fit the bill? You have got to decide that. So you do not do it because you want to increase your assets and get a high yielding portfolio, you do it if it is only accretive to you.

So that is a judgement that has to exercised and once management is convinced, only then we will take it to the board.

Anuj: We understand that you have decided particular valuation and the Bharat Financial Board is not budging on that and RBL might be willing to pay slightly higher premium. But you are very clear that you will walk away if you do not get the deal at the price at which you are offering.

A: Any sensible acquirer would do the same thing. So you only do things if they are accretive to you, not because they grow your balance sheet and valuations always, you have a responsibility to shareholders. So you look at things from that perspective, does it give you accretion in return on assets (RoA), return on equity (RoE), interest margins, etc. on day one, then only you add value. And there has to be meeting of minds on that. Then only transactions happen.

Latha: Another angle on this comes from the Shriram City Union Finance-IDFC Bank merger, or at least their plans. If indeed the RBI were to allow Shriram Transport Finance Corporation to remain as a non-banking finance company (NBFC) with Shriram-IDFC as the parent and the bank, this is contrary to what the RBI has so far insisted, will you want to rework? Why would you also want to buy? You could also keep them as a separate sibling.

A: The RBI has traditionally followed the rationale that what you can do within the bank you should not be doing outside the banks. And I have not seen any evidence of that rationale being reverted back into different, so let us see what happens with this particular case. If there is a very strong compelling reason of why you cannot do it within the bank then the rationale might appeal to the regulators, but otherwise, they have always stuck to this that what you do in the bank you should not do outside.

Latha: But will it change your thinking also on this and other inorganic moves?

A: We are quite happy absorbing businesses within the bank. Only if there is a compelling reason, for instance if the costs go haywire, if you absorb them within the bank or there is a degree of specialisation that requires it to be kept separately, then we would look at doing that. Otherwise, I do not think there is any arbitration involved in keeping separate subsidiaries.

Latha: The other interesting angle in the IDFC-Shriram merger is the role of Ajay Piramal. I am not asking you only from IndusInd's point of view but as a veteran in the banking space. If he were allowed some 6-7 percent which is what will happen if there is SCUF-IDFC Bank merger through share swaps. Does that change the dynamics in the entire banking space?

A: At the end of the day what the regulators would like to see is one single promoter and there are people who hold 5 percent, for instance there are people who hold 5 percent in our bank also, they are private equity companies etc, but do they get designated as promoter. So what regulator would be happy to see is only one single promoter and if somebody else is holding 5 percent or 6 percent, I do not think that would be a cause for so much worry.

Reema: Vehicle loan which is about 30 percent of your overall portfolio grew at a slower pace than what we generally see in teens. We understand that this could be on account of the GST implementation and the uncertainty before that but was that the only reason, will things go back to the high growth that we have seen previously in your vehicle loans business?

A: Yes, we do expect that. As I said the demand is very strong, in fact we are now seeing a very strong pull from the mining sector which is beginning to bubble as well. So it is a question of supply. Freight rate, etc are holding up very nicely. I think the manufacturers will get their act right during this quarter and Q3 and Q4 are going to be very strong for the commercial vehicle which is the medium and heavy vehicle sector. Other than that we are seeing very good growth in the other products that we have whether it is two-wheelers or cars or tractors or small commercial vehicles or light commercial vehicles, so it is a very diversified. It is only the medium and heavy commercial vehicles (M&HCV) sector which is more affected but demand is strong and we expect high double digit growth in Q3 and Q4.

Anuj: Continuing with that theme, we had strong numbers from Ashok Leyland. Is it showing signs of a fresh up cycle for commercial vehicles because that would be very important from economy point of view as well?

A: Yes, I think so. I think the commercial vehicle sales and financing is a very fair indicator of what is happening in the economy because they are carrying goods. So that demand and the freights are holding up. I think it is a very good sign of the pick up that we are seeing in overall activity. Of course right now you might be seeing a little bit of turbulence there because of the GST element - that is very short-lived and even GST is going to be very favourable to the vehicle finance industry.

Latha: Generally the growth numbers, taking from what Anuj asked you, there are two varying or contradictory trends that we get from the banking space. The overall banking numbers, credit growth is still 5 percent but you bring in 25 percent. HDFC with that kind of a base throws up 20 percent and even higher than expected credit growth. Are there two speeds in terms of the economy with some sectors doing much better than others or is it that you guys are taking away market share?

A: I do not think there are two speeds of the economy maybe there are two speeds of the two banking sectors which is very obvious and very clear. If you look at the state owned sector, they have gone pretty slow there. I think it is a combination of all these things, there is growth happening in the economy; whatever figure you take, whether 5 percent or 6 percent or 7 percent, there is growth in the economy and there is certainly a shift in the market share. There is shift in market share happening from public sector undertaking (PSUs) to private sector banks within private sector banks also market share shifts, from MNC banks into private sector banks are also happening. So there is a shift of market share and that is feeding the growth rate that you are seeing in a few players that you mentioned.