Will focus on NIMs plus fee income: L&T Finance Holdings

L&T Finance Holdings posted a good set of earnings in Q4 with strong growth as disbursement were up 50 percent on a sequential basis.

In an interview to CNBC-TV18, Dinanath Dubhashi, MD and CEO of the company spoke about the results and his outlook for the company.

“We realise that even we are very competitive in cost of funds etc, net interest margins (NIMs) will always be a losing battle vis-à-vis banks, hence where we need to make money is NIMs plus fees”, he said.

A: That has been a strategy. Let me just take a few steps back and explain this. One year back we put our strategy saying that we will grow now only in businesses where we believe we are strong, where we have leadership positions, where we have distinctive positions. So, this growth as you see is in businesses where we believe we are strong i.e. in wholesale, in housing, and in rural. Each of these businesses have grown, contributed tremendously to profitability. So, 23 percent growth in disbursement year-on-year (YoY), close to 60 percent growth in disbursements quarter-to-quarter (QOQ) has been one main factor for the increase in profitability.

Second, more important factor is since we have not done any loss making products and in fact run them down aggressively, the contribution of these products to the overall balance sheet has come down from 8 percent to 4 percent, and is another thing which is leading to profitability. This in addition to very smart growth in fee income, which is 87 percent QoQ, and a big reduction in expenses --which expense to income ratio is now down to 23 percent from where we started above 30 percent, all these four are contributing to the profitability growth that you are seeing.

If you see profit after tax (PAT), it has grown by 22 percent for the year and 32 percent for the quarter. So, very frankly just very basic steps of good financial management having been put in place are showing results.

A: As far as disbursements are concerned, all these three businesses, we are seeing good growth. We believe that a compounded annual growth rate (CAGR) of close to 25 percent over the next two to three years we can definitely maintain as we take more and more dominant positions in each of these businesses. Now according to our strategy, what we do is, we don’t keep the whole disbursement on our book as a function of risk, as a function of capital allocation and also for earning fee income. So, balance sheet growth will be more moderated, will be between say 16-18 percent over the next three to four years.

As far as NIMs are concerned, now this is an interesting question, NIMs I believe that while we have more or less maintained our NIMs, if you see, our NIMs plus fees has substantially gone up. Now this is going to be the continuous strategy. We realised that even we are very competitive in cost of funds, etc. NIMs will always be a losing battle vis-à-vis banks and hence where we need to make money is NIMs plus fees and that is what we are doing.

A: Provisions are always not to be taken as today’s credit growth. They are to be taken as readiness for tomorrow. So, the provisions are in two parts, one, first of all out of this whole thing the regulatory provisions are just about Rs 200 crore and the rest we have taken as accelerated provisions. Now there are two large parts of this accelerated provisions. One is getting ready for the 90 days past due (DPD) regime. So, as we speak from April onwards we are into 90 DPD regime.

So in March itself we have taken the entire provision and income reversal as if we were at 90 DPD. So, this problem is over for us now and from this year onwards we will have to take provisions only on incremental NPAs if any. However, accelerating DPD story is over for us, we have taken entire provisions and moved ahead. So, that is as far as first part of the accelerated provision is concerned. So, these are not to be taken as deterioration of quality but it has to be taken as being ready for future.

The second is infrastructure. While the new book i.e. after FY12 book of infrastructure is very robust and very good, we are carrying some legacy assets of below FY12 like rest of the sector. There it is important that we continuously increase provision coverage to be ready to take substantial haircuts when we actually come to resolutions. So, these are especially in sectors like thermal power plants and EPC contractors.

Within a year we have increased the provision coverage on infrastructure from close to 24 percent to about 50 percent. So, we have doubled provision coverage and we believe now we are well on the way of making infrastructure a very strong balance sheet and be ready for growth. So the increase in provisions we have to take in the context of the company getting ready for aggressive growth by protecting and strengthening its balance sheet. So, we have taken incremental provisions for that.