Deposit repricing signals normalisation


Informist, Wednesday, Aug 10, 2022

By Alekh Archana and T. Bijoy Idicheriah 

MUMBAI – Repricing of deposits is part of the normalisation of the interest rate cycle and liquidity, and will help banks improve their depositor base, said Sanjiv Chadha, managing director and chief executive officer, Bank of Baroda.

According To Chadha, The Potential For Any Downside Risk From Treasury Operations Remains Limited Since The Rate Hike Was Bunched Up During Apr-Jun

"Because of COVID-19, interest rates had come down on loans and deposits to the extent that rates on deposits were actually in negative in real terms," Chadha told Informist in an interview. 

"Normalisation is when deposits get priced appropriately, and it is good because that also means there is a possibility of growing the deposit base at a faster pace. It also makes sense for depositors to put money in banks," he said.

Last week, the Reserve Bank of India hiked the repo rate by 50 basis points, taking the cumulative hike in the policy rate since May to 140 bps. Since then, banks have been aggressive in increasing their lending rates, but lethargic when it came to raising deposit rates.  

The latest repo rate hike and expectation of further liquidity tightening have boosted the prospects of deposit rate hikes by banks to support the strong demand for credit. 

According to Chadha, the potential for any downside risk from treasury operations remains limited since the rate hike was bunched up during Apr-Jun.

Bank of Baroda reported an over 79% on-year rise in net profit for Apr-Jun at 21.7 bln rupees. Treasury losses were at 5.9 bln rupees. 

Healthy growth in loans and lower credit costs offset the impact on treasury operations and supported profitability, Chadha said, adding that the bank's asset quality is expected to see a further improvement due to lower slippages and continued recoveries. 

Directionally, based on the current situation, the bank's net non-performing assets ratio is seen below 1%, going ahead, he said. The gross and net non-performing assets ratios fell to 6.26% and 1.58%, respectively, as on Jun 30.  

Following are the edited excerpts from the interview:

Q. Treasury performance may be an overhang for the rest of the year. Do you see that being compensated from other lines of non-interest income? 

A. As the economy strengthens, interest rates go up, there will be treasury losses, but we will make up for that by better credit growth and margins. What is important is where you are in aggregation. I think from that viewpoint, the bank has done well even in Apr-Jun.

The bank has done well because of two reasons. Over the last very many quarters, we have seen lowering of credit costs, largely led by an improvement in the corporate credit cycle. Despite successive waves of COVID-19, almost every quarter, the gross and net NPAs came down. But what we have seen in addition now is that we seem to have overcome challenges on growth. We have seen an 18% year-on-year increase in our loan book--within that, (we have seen) organic retail growth of 23.2%--along with an improvement in margins. 

In the future, because all these rate increases were bunched up in one quarter, the potential for any downside risk from the treasury is limited to that extent. The treasury will always work this way. Last year, when the interest rate was down, it worked in our favour. When interest rates were down, there was no credit growth and margins were under pressure on account of liquidity, treasury income supported the results of the bank.  

It is pretty much part of the normal cycle that now you are looking at a different balance sheet, where there are treasury losses, but there are corresponding benefits from other parts of the book. 

Q. What is the strategy on cross sales and fee income, considering the emphasis on bob World, the bank's mobile banking application? 

A. bob World and the digital agenda of the bank cut across all businesses... it is much wider than only generating fee income.

For instance, we had a growth of over 140% in personal loans. That is made possible only because of bob World and data mining projects. We are able to access customers much more successfully for personal loans. Personal loans are growing at a rate and assuming a size where they are contributing both to the topline and bottomline. 

Similarly, even for MSME (micro, small and medium enterprises) loans, in terms of transactions, more than 90% can go through the digital channels. In terms of customers interfacing with the bank, now three times as many customers interact with the bank through bob World compared with visiting 8,000-plus branches.

The benefits that you're getting from bob World and the digital agenda of the bank are not limited to cross-sell. Cross-sell is important, but it is relatively a small piece. It is the process efficiency, the efficiency of the customer interface and the fact that you can cross-sell not only fee products, but also loan products.

Q. In the earnings call, you said you will raise funds for the replacement of tier-I bonds. What are the plans?

A. We have maturities of around 2,500 crore (25 bln rupees) of tier-I bonds. We have approval from our board for raising over 4,000 crore (40 bln rupees) by way of tier-I and tier-II bonds. That's something which we will do over the course of the year whenever in terms of interest rates we are in the right slot. Otherwise, we are comfortably placed on capital.

Also, the profitability is now at levels where it should be able to support loan growth. Even last year, we were able to support the growth largely through internal accruals. This year also the profit of the bank should be able to support. Therefore, we don't anticipate, at this point in time, any requirement for us to go to the market for pure equity raise. 

Q. Across banks, we have seen that write-offs are declared, but recoveries tend to be abysmally low. What has been your experience?  

A. Recoveries that you are seeing now are from smaller-ticket loans. For larger-ticket loans, whatever recovery had to happen has happened in most cases. 

I think the important point is that whatever is going to happen now with recoveries is an additional upside. The bank is at that stage where provisions are at a high level. The net NPA is around 1.5%. Therefore, whatever recoveries come in, they will help the bottomline. The challenges that were there, in terms of either credit quality or the ability to absorb losses, are all in the past. 

I don't believe that we have any big-ticket items now where you would see lots of upside coming on a quarter-on-quarter basis. But you are going to see steady recoveries coming from these smaller loans. 

Q. So would we see a sub-1% net non-performing assets ratio? 

A. Logically, we will get there. But otherwise, if you just extrapolate, based on the current case that seems to be the direction in which we are heading.

Q. What are the plans for subsidiaries?

A. We are looking at the credit cards business where we are seeing very good growth momentum. The question is whether it is a good time to bring in a partner. Not because of any benefit from capital release, I think we can fund the capital requirements, but more in terms of what the strategic partner brings on the table or in terms of governance. That's something which we are looking at.

On the mutual fund side, since the merger (of Baroda Asset Management) with BNP Paribas' mutual fund businesses is completed, we should see much better growth momentum going forward (for Baroda BNP Paribas Mutual Fund).

Q: The bank had plans to leverage on BOB Capital. Any update on that? 

A: It's not a business which is either capital-intensive or can give you an upside in terms of valuation. That is the nature of that business. BOB Capital is always going to be an auxiliary business with the support of the bank rather than being an independent business. 

Q. Has there been any progress in the stake sale in Nainital Bank? 

A. The bank is improving its performance. In terms of the Banking Regulation Act, the current position (with regard to the bank's 98.57% stake) is not going to be indefinitely sustainable. Over maybe the next year or two, we should reach some kind of resolution in terms of the direction for the bank. But it's not something that is going to be there immediately. 

Q. Is it at a stage where it can go for an initial public offering? 

A. It's not really a size which would allow that. I don't think the bank is at that stage. 

Q. What are the plans for global business? Are you still closing some centres while focusing on some others? 

A. From the numbers, you will see that the international business is doing very well.

The year-on-year growth, both in deposits and advances, is about 30%. That gives us tremendous flexibility. Last year, for instance, the spreads in terms of domestic corporate credit were very, very low. Therefore, it made a lot of sense to focus on the international business.

It's equally clear that in today's world, we don't need to be in 100 centres to be able to grow. So we have shrunk our physical footprint. But at the same time, we have had 30% growth. That demonstrates that both are not necessarily related. That's the way we would like to see things--how you can limit costs, limit regulatory risks, make sure you have an efficient distribution network. At the same time, take advantage of the flexibility that the international balance sheet gives you in terms of diversifying the risk, and also focusing on growth opportunities.

Q. Do you have any medium-term note offering planned for global operations? 

A. Not really. Along with a loan growth of 30%, we also had 30% growth in deposits. Given the footprint that we have, I think we are able to mobilise the resources organically. 

Q. Do you see a sudden spike or rush for deposits as credit picks up, especially with credit-deposit ratios trending at this point of time? 

A. I think that is seen as part of the normalisation cycle. 

Because of COVID-19, interest rates had come down on loans and deposits to the extent that the rates on deposits were actually in negative in real terms. That's not something which is likely to remain forever, nor is it a good thing even if it remains forever. 

Normalisation is when deposits get priced appropriately, and it is good because that also means that there is a possibility of growing the deposit base at a faster pace. It also makes sense for depositors to put money in banks.

I think that normalisation is probably par for the course, part of the cycle, and entirely welcome. But the other part, which is important to appreciate, is that there is still reasonable liquidity in the system.

The third part is that if you look at our balance sheet--because there was liquidity surplus for the last couple of years--we still had assets, which are short-term, and at low rates. This gives us scope for reordering our balance sheet, and making sure that you can move into asset categories which give better returns.  End  

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Namrata Rao

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