Informist, Wednesday, May 18, 2022

By Ajay Ramanathan and T. Bijoy Idicheriah

MUMBAI – The domestic and global policy environment has turned bleak. But even in this scenario, Bank of Baroda Managing Director and Chief Executive Officer Sanjiv Chadha is convinced that the state-owned lender will continue to deliver on growth and key metrics, paving the way to return on equity of 15% and return on assets of 1% by the next financial year.

"My sense is that in an ideal state, we should be looking at about 15% return on equity and return on assets approaching 1%. I am not sure whether this is the year when we will see it. Probably, next year is when we should target it," Chadha said.

For 2021-22 (Apr-Mar), the bank posted return on equity of 11.66% and return on assets of 0.60%.

In a freewheeling interview that delved into the bank's stated intent to grow loans by 10-12% in 2022-23, Chadha pointed out that supply disruptions globally had impacted retail demand for loans, even as corporate demand remained muted due to deleveraging by most players.

He, however, pointed out that despite this, Bank of Baroda had seen 16.8% retail loan growth in 2021-22, indicating that its digital-driven strategy had borne fruit.

The bank is open to inorganic portfolio buyouts this financial year to grow its retail loan book, along with co-lending with non-bank lenders and organically growing its own retail presence, he said.

At the same time, Chadha said the bank, which has positioned itself as 'India's International Bank', would continue to grow its corporate presence globally through four-five large international finance centres, even as it continued to evaluate and even exit some centres that might not be returning the value of capital invested.

On the asset quality front, Chadha said he expects the slippage ratio to improve further to 1.5% in 2022-23, but admitted that recovery of legacy bad loans would be hard work. 

Following are edited excerpts from the interview:

Q. When you look at 2022-23, what do you foresee? Will you be able to continue the momentum that you had in Jan-Mar despite the global and domestic environment turning adverse?

A. As far as the loan book is concerned, when it comes to corporates, they had very successfully deleveraged very substantially over the last few years. The interest coverage ratios are very healthy. Therefore, to my mind, any normalisation of interest rates should not impact their capacity to invest. As far as retail is concerned, there have been supply challenges, but we have grown nevertheless.

For instance, as far as cars are concerned, there was a semiconductor crisis. You have waiting lists that are very long. Nevertheless, we were able to grow our car loan portfolio by around 20% on year. So, I think it should be possible. There will always be some challenges. I think it should be possible to deliver on loan growth this year, which should be better than last year, despite the challenges.

On the treasury side, the fact that the market had anyway anticipated an increase in rates meant that last year, there was a 70-basis-point increase as far as the 10-year yields were concerned. To a large extent, the impact has been absorbed. Whatever figures you see in terms of profits is after absorbing the impact. For the current year, in terms of the available-for-sale portfolio, we have a duration of under two years. Within that, around 40% of the portfolio is floating rate bonds, which is largely protected as far as rise in rates is concerned. I think we feel fairly comfortable that we should see an improvement in growth momentum this year compared to last year, and whatever challenges are there on the treasury side, there will possibly be a countervailing impact in terms of net interest income. 

Q. Is there no stress from the forex side because there will be corporate customers with unhedged exposures and that has been a problem in the past.

A. When an aircraft lands, you come down to a level, then you are flat, and then you come down again. That is how the rupee has moved. Otherwise, I do not think where we are today is very far off from our real effective exchange rate. Unless we see really stormy developments, I think that is something that can be absorbed. 

Q. In terms of your global book, would there be some shrinkage because of the level of the rupee, or would you see bloating?

A. I do not think there will necessarily be too much of a correlation. For us, the global book gives us opportunities in terms of diversification of risk, and also trying to see where you would want to move capital depending on opportunities.

Last year, as far as corporates are concerned, there were challenges in terms of pricing in the domestic markets. The kind of risk return you might want was not available, which is why we focused more on the international side; you were getting better returns there. While our corporate loan growth was 3%, it was 21% on the international side. So, you have the flexibility, depending on where there are better margins, to put your capital there.

Q. What would be the number that people look at and say 'these are ideal numbers for the bank'? Can you grow from here, or is it an exceptional year? What are the expectations for 2022-23?

A. We have been able to improve our current account and savings account ratio to 44% from 37% at the time of the merger (with Dena Bank and Vijaya Bank). This is going to be a source of abiding strength. Particularly as interest rates rise, having a good CASA ratio is immeasurably important. This is an advantage that will sustain. This year, we have improved our net interest margin to 3% from 2.75%. I believe this is a margin that we should be able to sustain and improve going forward.

Our fee income has improved by 12%, and I think it is possible to have similar or more improvement this year too. I would believe that the bank has stabilised after the merger. But I think a lot of cost and other gains that we have seen are likely to be sustained. My own sense is that the profitability level that we see now, and the momentum that has been generated are sustainable. 

Q. You have guided for 10-12% credit growth for 2022-23. But return on equity and return on assets have been under pressure over the last couple of years. How do you improve these?

A. This was a reasonably good year; we now have a return on equity of 12%. My sense is that in an ideal state, we should be looking at about 15% return on equity and return on assets approaching 1%. I am not sure whether this is the year when we will see it. Probably, next year is when we should target it. I think we can make further progress in the journey towards that. 

Q. Yours is a bank with a lot of subsidiaries, both international and domestic. Do you think they have just not contributed as much as they should have to your book? How do you expect to change that in the coming days?

A. It's a bit of a mixed picture. Some of our subsidiaries are doing very well, for instance our Kenyan subsidiary. They have been consistently generating 15-20% return on equity for us.

When it comes to domestic subsidiaries, I think IndiaFirst Life Insurance Co is well poised. It is currently the fastest growing life insurance company in the country. We believe it is a mature business and there is a possibility now of looking to take it to the market. How and when is a function of how markets are at that point in time; they tend to be volatile. This is a year that we would actually start exploring that opportunity and if the timing is right, look at IPO-ing that. 

Q. What is the status right now in terms of consolidation of your offshore operations?

A. There are two ways to look at it - the retail banking viewpoint and the wholesale banking viewpoint. To be successful in wholesale banking, you do not need to be in 20 countries. If you are there in four to five key jurisdictions, you are good to go. I would believe that Singapore, London, New York, Dubai and GIFT City should be good enough to do wholesale banking whichever way you would want to do it. We have closed down some operations, Hong Kong being the latest. That does not mean we are downsizing the business. In fact, in 2021-22, international grew 21% for us.

On the retail side, I think the world over, all banks have seen that you can be successful only in select geographies and not everywhere. In fact, some foreign banks struggle in India too. So, I think we are looking at our operations, evaluating where we can bring value on the table. For example, our African subsidiaries are doing very well. Some others might be sub-scale, and we may want to exit. For example, we exited Trinidad and Tobago, and we might look at a few others.

It is a conversation we will have, make sure we evaluate it from the viewpoint of both delivering value to our customers where we can add value, and making sure that our shareholders get full value from our investments. 

Q. What is the strategy in retail? Will it be organic-driven or loan pool-driven?

A. We need to be flexible. In the last year or two, there were some challenges in terms of pool purchase because of some regulatory guidelines, and because NBFCs themselves were in a bit of a difficult position. The kind of growth they had some years back was not there. The possibilities were a little more limited.

Our growth mostly came from organic. In fact, our organic retail portfolio grew 17% last year. As we now enter the new year, I think it should be possible to do both. I think it should be a broad-based interface with co-lending arrangements with NBFCs and also the ability to grow organically at a pace that is pretty much market pace. 

Q. What would be the ideal provision coverage ratio if you include technical write-offs? What kind of slippage ratio do you think is desirable on your book, considering where it is right now?

A. In terms of provision coverage ratio, we have probably attained levels that are fairly good and consistent with what the board might want and what the regulators might want.

As far as the slippage ratio is concerned, we had guided last year that we might look at something under 2%. I think we have ended up at about 1.6%. I believe there is scope for improvement further. I think about 1.5% should be a good number to look at this year. As I mentioned earlier, there is a secular improvement in the corporate credit cycle which is still going on. It should be possible to improve credit quality further as we go along. 

Q. But credit cost saw an increase in 2021-22.

A. If you were to strip out numbers where we have made extra provisioning because we thought it was prudent to do so, it is okay. We should look at further improvement this year. We are looking at 1.5% or thereabouts. 

Q. Any guidance on the recovery from write-offs? What kind of numbers do you have in terms of recoveries from write-offs?

A. I think it is also a function of the age of the portfolio. A lot of these are pretty old NPAs. Also, a lot of National Company Law Tribunal cases on big-ticket items have happened. I think now on, recovery will be hard work and more on smaller accounts. We may not see spectacular progress but hopefully, steady progress. 

Q. When the mergers happened, there was a lot of concern because of issues that cropped up during technology integration. How does it look for you now, and what kind of digital spend do you still need to make it the best in class?

A. I think the technology piece has worked well for us and that has enabled whatever we have been able to do on digital, which is where technology actually ends up impacting the end customer. It is a good platform. Ultimately, technology works when it delivers value. I think it has delivered us enough value in terms of 'bob World', where we now have 20 mln customers. It is impacting most of our customer base. There will be things you need to do to leverage technology further. How can you now use your database to deliver value to customers? Make sure that you have customised products that work for them.

It will also work in terms of digitalising various processes, not only retail, but also MSME, corporate to some extent, agriculture also, that is something which will happen. Then of course, you will need to invest in things like cloud in terms of having proper middleware to interface with external parties through application programming interface. That is the investment that we must do. This is a journey that is never going to end. We just hope we can remain ahead of the curve.  End

Edited by Avishek Dutta

Informist, Wednesday, May 18, 2022

By Ajay Ramanathan and T. Bijoy Idicheriah

MUMBAI – The domestic and global policy environment has turned bleak. But even in this scenario, Bank of Baroda Managing Director and Chief Executive Officer Sanjiv Chadha is convinced that the state-owned lender will continue to deliver on growth and key metrics, paving the way to return on equity of 15% and return on assets of 1% by the next financial year.

"My sense is that in an ideal state, we should be looking at about 15% return on equity and return on assets approaching 1%. I am not sure whether this is the year when we will see it. Probably, next year is when we should target it," Chadha said.

For 2021-22 (Apr-Mar), the bank posted return on equity of 11.66% and return on assets of 0.60%.

In a freewheeling interview that delved into the bank's stated intent to grow loans by 10-12% in 2022-23, Chadha pointed out that supply disruptions globally had impacted retail demand for loans, even as corporate demand remained muted due to deleveraging by most players.

He, however, pointed out that despite this, Bank of Baroda had seen 16.8% retail loan growth in 2021-22, indicating that its digital-driven strategy had borne fruit.

The bank is open to inorganic portfolio buyouts this financial year to grow its retail loan book, along with co-lending with non-bank lenders and organically growing its own retail presence, he said.

At the same time, Chadha said the bank, which has positioned itself as 'India's International Bank', would continue to grow its corporate presence globally through four-five large international finance centres, even as it continued to evaluate and even exit some centres that might not be returning the value of capital invested.

On the asset quality front, Chadha said he expects the slippage ratio to improve further to 1.5% in 2022-23, but admitted that recovery of legacy bad loans would be hard work. 

Following are edited excerpts from the interview:

Q. When you look at 2022-23, what do you foresee? Will you be able to continue the momentum that you had in Jan-Mar despite the global and domestic environment turning adverse?

A. As far as the loan book is concerned, when it comes to corporates, they had very successfully deleveraged very substantially over the last few years. The interest coverage ratios are very healthy. Therefore, to my mind, any normalisation of interest rates should not impact their capacity to invest. As far as retail is concerned, there have been supply challenges, but we have grown nevertheless.

For instance, as far as cars are concerned, there was a semiconductor crisis. You have waiting lists that are very long. Nevertheless, we were able to grow our car loan portfolio by around 20% on year. So, I think it should be possible. There will always be some challenges. I think it should be possible to deliver on loan growth this year, which should be better than last year, despite the challenges.

On the treasury side, the fact that the market had anyway anticipated an increase in rates meant that last year, there was a 70-basis-point increase as far as the 10-year yields were concerned. To a large extent, the impact has been absorbed. Whatever figures you see in terms of profits is after absorbing the impact. For the current year, in terms of the available-for-sale portfolio, we have a duration of under two years. Within that, around 40% of the portfolio is floating rate bonds, which is largely protected as far as rise in rates is concerned. I think we feel fairly comfortable that we should see an improvement in growth momentum this year compared to last year, and whatever challenges are there on the treasury side, there will possibly be a countervailing impact in terms of net interest income. 

Q. Is there no stress from the forex side because there will be corporate customers with unhedged exposures and that has been a problem in the past.

A. When an aircraft lands, you come down to a level, then you are flat, and then you come down again. That is how the rupee has moved. Otherwise, I do not think where we are today is very far off from our real effective exchange rate. Unless we see really stormy developments, I think that is something that can be absorbed. 

Q. In terms of your global book, would there be some shrinkage because of the level of the rupee, or would you see bloating?

A. I do not think there will necessarily be too much of a correlation. For us, the global book gives us opportunities in terms of diversification of risk, and also trying to see where you would want to move capital depending on opportunities.

Last year, as far as corporates are concerned, there were challenges in terms of pricing in the domestic markets. The kind of risk return you might want was not available, which is why we focused more on the international side; you were getting better returns there. While our corporate loan growth was 3%, it was 21% on the international side. So, you have the flexibility, depending on where there are better margins, to put your capital there.

Q. What would be the number that people look at and say 'these are ideal numbers for the bank'? Can you grow from here, or is it an exceptional year? What are the expectations for 2022-23?

A. We have been able to improve our current account and savings account ratio to 44% from 37% at the time of the merger (with Dena Bank and Vijaya Bank). This is going to be a source of abiding strength. Particularly as interest rates rise, having a good CASA ratio is immeasurably important. This is an advantage that will sustain. This year, we have improved our net interest margin to 3% from 2.75%. I believe this is a margin that we should be able to sustain and improve going forward.

Our fee income has improved by 12%, and I think it is possible to have similar or more improvement this year too. I would believe that the bank has stabilised after the merger. But I think a lot of cost and other gains that we have seen are likely to be sustained. My own sense is that the profitability level that we see now, and the momentum that has been generated are sustainable. 

Q. You have guided for 10-12% credit growth for 2022-23. But return on equity and return on assets have been under pressure over the last couple of years. How do you improve these?

A. This was a reasonably good year; we now have a return on equity of 12%. My sense is that in an ideal state, we should be looking at about 15% return on equity and return on assets approaching 1%. I am not sure whether this is the year when we will see it. Probably, next year is when we should target it. I think we can make further progress in the journey towards that. 

Q. Yours is a bank with a lot of subsidiaries, both international and domestic. Do you think they have just not contributed as much as they should have to your book? How do you expect to change that in the coming days?

A. It's a bit of a mixed picture. Some of our subsidiaries are doing very well, for instance our Kenyan subsidiary. They have been consistently generating 15-20% return on equity for us.

When it comes to domestic subsidiaries, I think IndiaFirst Life Insurance Co is well poised. It is currently the fastest growing life insurance company in the country. We believe it is a mature business and there is a possibility now of looking to take it to the market. How and when is a function of how markets are at that point in time; they tend to be volatile. This is a year that we would actually start exploring that opportunity and if the timing is right, look at IPO-ing that. 

Q. What is the status right now in terms of consolidation of your offshore operations?

A. There are two ways to look at it - the retail banking viewpoint and the wholesale banking viewpoint. To be successful in wholesale banking, you do not need to be in 20 countries. If you are there in four to five key jurisdictions, you are good to go. I would believe that Singapore, London, New York, Dubai and GIFT City should be good enough to do wholesale banking whichever way you would want to do it. We have closed down some operations, Hong Kong being the latest. That does not mean we are downsizing the business. In fact, in 2021-22, international grew 21% for us.

On the retail side, I think the world over, all banks have seen that you can be successful only in select geographies and not everywhere. In fact, some foreign banks struggle in India too. So, I think we are looking at our operations, evaluating where we can bring value on the table. For example, our African subsidiaries are doing very well. Some others might be sub-scale, and we may want to exit. For example, we exited Trinidad and Tobago, and we might look at a few others.

It is a conversation we will have, make sure we evaluate it from the viewpoint of both delivering value to our customers where we can add value, and making sure that our shareholders get full value from our investments. 

Q. What is the strategy in retail? Will it be organic-driven or loan pool-driven?

A. We need to be flexible. In the last year or two, there were some challenges in terms of pool purchase because of some regulatory guidelines, and because NBFCs themselves were in a bit of a difficult position. The kind of growth they had some years back was not there. The possibilities were a little more limited.

Our growth mostly came from organic. In fact, our organic retail portfolio grew 17% last year. As we now enter the new year, I think it should be possible to do both. I think it should be a broad-based interface with co-lending arrangements with NBFCs and also the ability to grow organically at a pace that is pretty much market pace. 

Q. What would be the ideal provision coverage ratio if you include technical write-offs? What kind of slippage ratio do you think is desirable on your book, considering where it is right now?

A. In terms of provision coverage ratio, we have probably attained levels that are fairly good and consistent with what the board might want and what the regulators might want.

As far as the slippage ratio is concerned, we had guided last year that we might look at something under 2%. I think we have ended up at about 1.6%. I believe there is scope for improvement further. I think about 1.5% should be a good number to look at this year. As I mentioned earlier, there is a secular improvement in the corporate credit cycle which is still going on. It should be possible to improve credit quality further as we go along. 

Q. But credit cost saw an increase in 2021-22.

A. If you were to strip out numbers where we have made extra provisioning because we thought it was prudent to do so, it is okay. We should look at further improvement this year. We are looking at 1.5% or thereabouts. 

Q. Any guidance on the recovery from write-offs? What kind of numbers do you have in terms of recoveries from write-offs?

A. I think it is also a function of the age of the portfolio. A lot of these are pretty old NPAs. Also, a lot of National Company Law Tribunal cases on big-ticket items have happened. I think now on, recovery will be hard work and more on smaller accounts. We may not see spectacular progress but hopefully, steady progress. 

Q. When the mergers happened, there was a lot of concern because of issues that cropped up during technology integration. How does it look for you now, and what kind of digital spend do you still need to make it the best in class?

A. I think the technology piece has worked well for us and that has enabled whatever we have been able to do on digital, which is where technology actually ends up impacting the end customer. It is a good platform. Ultimately, technology works when it delivers value. I think it has delivered us enough value in terms of 'bob World', where we now have 20 mln customers. It is impacting most of our customer base. There will be things you need to do to leverage technology further. How can you now use your database to deliver value to customers? Make sure that you have customised products that work for them.

It will also work in terms of digitalising various processes, not only retail, but also MSME, corporate to some extent, agriculture also, that is something which will happen. Then of course, you will need to invest in things like cloud in terms of having proper middleware to interface with external parties through application programming interface. That is the investment that we must do. This is a journey that is never going to end. We just hope we can remain ahead of the curve.  End

Edited by Avishek Dutta