Will grow balance sheet by 10% in FY17: Bank of Baroda

Bank of Baroda (BoB) has stressed assets of Rs 26,000 crore between restructured assets and special mention accounts (SMAs)-2, said PS Jayakumar, MD and CEO of the bank. He expects half of these to flow into slippages.In an interview to CNBC-TV18, Jayakumar said while there can be a net stress addition between Rs 5,000 crore and Rs 10,000 crore in FY17, changes in the regulation can lead to better recoveries.For the bank, maximum corporate exposure is not more than Rs 2,000 crore per account, he said, adding, some of these large accounts in the iron and steel sector have moved to non-performing assets (NPA).Meanwhile, Jayakumar is of the view that BoB will grow its balance sheet by 10 percent in FY17.Below is the transcript of PS Jayakumar’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: Your profit and loss was extremely pleasing. It actually showed that gross non-performing loans (NPL) hardly rose. The small increase to 9.99 was largely because the balance sheet itself had shrunk. But in your analyst call there was a bit of a scare. You said Rs 15,000 crore more is the potential NPLs in 2017. What all does it include? Does it include all these GMR, GVKs, Lancos, Videocons, which we just discussed? The top-10 groups that you may be exposed to or is it something else? Should we expect something more than Rs 15,000 crore?A: What we said was that we have, you can all it stressed assets, about Rs 26,000 crore between restructured loans and customers who are SMA-2. And for the purpose of planning, we assumed half of them will flow into, I would have slippages. But simultaneously, we also expect fair amount of rebound on collections. So, net-net we are looking at, for the purpose of planning, at Rs 5,000 crore of slippages and a potential amount being Rs 10,000 on a kind of a more stressed scenario and that is what it is.Now, in doing so, on an account by account basis, we have accounted for flows of both smaller and larger accounts.Latha: A little more of granular detail on the troubled accounts. But even your recoveries, I had a question. You are expecting Rs 5,000 crore recovery. Even your recovery this year has been extremely impressive. Just what is this? Is this land owned by guys who have defaulted? How did you manage so much of a recovery and now, you even have to beat the corporates with the bankruptcy law. So this recovery is very impressive. How did you manage and why are you promising such a big number?A: It is more about having the proper processes in place. Our collection people have a war room, almost every single account is tracked centrally from here and then from the zones and then downward. So, a lot of emphasis on making sure there is recovery. We also split the collection organisation to have a specific sell that is only looking at client resolution if required, for additional financing. But, we also had, the first three quarters were not really good. And so, there must have been some catch up element in the way it flowed into the last quarter. So, instead of multiplying Rs 3,250 crore which was a recovery and then saying it is Rs 13,000 crore, we just took a little bit of a cut from there and said that we could recover Rs 10,000 crore. It should be possible particularly, as you mentioned quite correctly, with the anticipated changes in the regulation that is happening. And also, in an environment that is increasingly asking for better compliance from the borrowers.Latha: So, is this one-time settlements or is this through debt recovery tribunal (DRT)? How is this recovery coming?A: There are obviously, many one-time settlements that have happened. There was also some catch up in one-time settlements because, in general, there is a degree of reluctance to settle the debt when the offer made across the table is a little bit lower than what is the valuation of these assets that are pledged as security. But usually, those valuations are not good indicators because they it takes years to settle them. And, so we just moved forward with just empowering our people to settle across and move on.So, we have done that and that is part of the reason. But a large part of the reason is also working with clients and addressing some of the short-term needs and getting them back to perform. So, it is a combination of both of these that have resulted in the improved collection.Sonia: I wanted a little more colour on the view for FY17. I heard you mention that there will be an addition to gross NPAs by Rs 5,000 crore and by Rs 10,000 crore in the worst case scenario in terms of slippages. Can you give us details on which are the sectors that could see the highest slippages here on? What could the ticket size of the loans be so the larger ticket loans that are involved? What are the number of accounts, etc?A: First and foremost, the maximum corporate exposure we have to any single lending institution is not more than Rs 2,000 crore and some of these large accounts and the iron and steel sector have already moved into the NPA category. There are a couple of accounts which are kind of large and we just budgeted that they may flow into the NPA. But just going back to the next year financial number, here is how we are looking at it: if you step back and go into the prior year, which is year ending 2015, our pre-tax, pre-operating income surrounds nearly Rs 10,000 crore. This year, the number dipped down to about Rs 8,900 crore. So, our first effort is to catch back to the prior year number. And that is because we had a substantial flow of about Rs 25,000 crore to NPA during this quarter, during this quarter and the previous quarter. The resulting non-earning impact of that is what reduced the financials. So, if we were to hypothetically replace those Rs 24,000 crore that moved into NPA with good performing new loans, then we pretty much come back to the same number as last year. This is not taking into account the margin improvements that are likely to happen, that projected to happen on account of the fact that the interest rates have declined over a period of time. The effect of reduction in the base rate has happened, but the benefit of the lower interest rate from the deposit side will flow through the year. So, we are just going back to that number and saying let us at least achieve that, but that does not mean we stop there, but that is the minimum goal. _PAGEBREAK_And then when we look down, I looked at it and said, it will be good if we deliver an 8 percent return on equity. So, whatever is the difference between that, let us use it to show the balance sheet or let us use it for investment in growth particularly in the contest of the digitisation, the context of the consumer business having to be developed. And also the investment that we have to make in transaction banking and a few other things. So, really the objective is that you make an additional amount of earnings, but use it sensibly to shore up the balance sheet and also use it sensibly to invest growth and the idea is that it is a three-year effort to transform the organisation completely. We are not just looking at the current financial year. We would like to measure ourselves and we hope others measure ourselves to the extent to which we are able to reorganise and transform and build the market share and customer growth and technology and all of that stuff coupled with an increase in the pre-operating revenue.Sonia: So, if you do see better recoveries and lower slippages as you indicated, what would that do to your overall gross NPA number because you are almost sitting at 10 percent which is the highest that we have seen in the last many quarters for gross NPAs. Can you give us an indication of what it could look like in FY17?A: I would think we would grow our balance sheet by at least 10 percent, so to that extent, there would be some denominator effect. But more than targeting gross NPA, which is one way of looking at it, we are targeting what is an unprovided amount, what is the one minus of provision coverage ratio (PCR). We are also targeting the net gross NPA number because those are the real numbers at risk. So, gross NPA might come down, inch a little bit downward based on all the data we have, but really it may not be really significant. The number to watch for is the one minus PCR, and also to watch out the absolute amount of money and the net NPA number.Latha: And you are saying that your overall slippages for FY17 at best is Rs 5,000 crore, at worst Rs 10,000 crore. Where would you lean?A: It is a probabilistic number. Personally, I would lean on the Rs 5,000 than on the Rs 10,000 crore. My colleagues would lean further down and say it will not reach Rs 4,500 but when we are overall making a plan, we plan for the worst and work for the best. So, that is why we also disclosed this.Latha: That is very positive. You spoke about the 10 percent growth in balance sheet. Actually, your net interest margins (NIM) are another point of surprise. Would you be able to better that?A: Certainly, this quarter, our NIMs were 2.7 percent, but if we ex out some of the reversals that happened because of the further catch up on the NPA and some other items, we are close to 2.7 percent. So, our forecast is we should be on the 3 percent NIM on the domestic side. On the international book, we had a net interest margin about 0.8 percent, but a large part of the asset book over there is purely tactical and purely opportunistic in nature which we can run down in a jiffy. So, ex that we are probably close to 1 percent and we would like to go up to 1.25 percent, that is the plan. I am talking about the plan for 2017.Latha: What about capital?A: As of now, there is no requirement for capital.Latha: So, will you get some capital because of your reduction in your international activities? Any impact on capital, better or worse?A: The impact on capital has to be looked at in a couple of ways. One is that the international, there is no real capital. These are head-office money sitting over there. They really do not constitute capital, it is just a method of expressing it, but not in an accounting sense. We have to focus on getting better quality accounts. Right now, we are on the average at Triple-B plus lender and we need to move up on that, so that would mean we can grow more without necessarily putting more risk capital. And there are some optimisation we are working on plus there are many risk deficient strategies we are working on. So, overall, the capital growth rate will increase not because of incremental fund raising from equity holders, but more through efficiency and better management.Sonia: One final word on how you are viewing the industry as whole because some brokerages have done a calculation of the numbers that we have got so far and things are not looking very pretty, the pre-tax losses have gone up by 40 percent quarter on quarter for all the banks that have reported earnings so far. Can you say with any fair degree of certainty that the worst seems to be over as far as asset quality pressures are concerned?A: We could say that. A lot of these provisions that you have seen for us and for the others probably is one of catch up nature. And recalibration of how the NPAs should be done including the asset quality review (AQR) exercise that is being done by the RBI. So, that is part of the issue. We have to look in the context of an improved enforcement environment and I would also think that the economy should see some pick up as we go on to the third and the fourth quarter. So, keeping all of this in mind, I would think the worst is over. At least I feel quite confident the worst is over for Bank of Baroda.Latha: I just want a little more of granularity, like I asked you initially is on the NPA, all those gas based power plants, steel, everything is counted for?A: Our exposure to gas based plants is not significant. In fact our coverage ratio must be quite high. Yes, all the iron and steel, including those lent to micro, small and medium enterprises (MSME) customers, the numbers we disclosed are on an aggregate for the bank, not necessarily for any part of the bank. So, they are all fully accounted for as of now.Latha: Are they largely SME or are they largely these big indebted groups?A: The restructured accounts that you see are fairly big exposures. When I say big, big for us, not necessarily on averaging about Rs 800-1,000 crore. The other SMA-2 largely consists of smaller accounts and a few large customers who habitually pay us on the 89th day. It consists of both. But we are at the raised asset, so we assume a larger amount of flow rate happening from there.Sonia: One final word on how you are viewing the industry as whole because some brokerages have done a calculation of the numbers that we have got so far and things are not looking very pretty, the pre-tax losses have gone up by 40 percent quarter on quarter for all the banks that have reported earnings so far. Can you say with any fair degree of certainty that the worst seems to be over as far as asset quality pressures are concerned?A: We could say that. A lot of these provisions that you have seen for us and for the others probably is one of catch up nature. And recalibration of how the NPAs should be done including the asset quality review (AQR) exercise that is being done by the RBI. So, that is part of the issue. We have to look in the context of an improved enforcement environment and I would also think that the economy should see some pick up as we go on to the third and the fourth quarter. So, keeping all of this in mind, I would think the worst is over. At least I feel quite confident the worst is over for Bank of Baroda.Latha: I just want a little more of granularity, like I asked you initially is on the NPA, all those gas based power plants, steel, everything is counted for?A: Our exposure to gas based plants is not significant. In fact our coverage ratio must be quite high. Yes, all the iron and steel, including those lent to micro, small and medium enterprises (MSME) customers, the numbers we disclosed are on an aggregate for the bank, not necessarily for any part of the bank. So, they are all fully accounted for as of now.Latha: Are they largely SME or are they largely these big indebted groups?A: The restructured accounts that you see are fairly big exposures. When I say big, big for us, not necessarily on averaging about Rs 800-1,000 crore. The other SMA-2 largely consists of smaller accounts and a few large customers who habitually pay us on the 89th day. It consists of both. But we are at the raised asset, so we assume a larger amount of flow rate happening from there.