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    Sumant Kathpalia on IndusInd Bank margins, Hindujas raising stake & more

    Synopsis

    IndusInd Bank's MD and CEO, Sumant Kathpalia, has stated that despite deposit costs being higher than the market, the bank plans to continue prioritizing granularisation of liabilities. Currently at 43% as per Basel-3, the bank aims to increase the percentage of granular liabilities to 48-50% by expanding branches and focusing on providing optimal rates for clients. Kathpalia further stated that the bank is confident in maintaining a stable margin scenario.

    Sumant Kathpalia-IndusInd-1200ETMarkets.com
    Sumant Kathpalia, MD & CEO, IndusInd Bank, says in the last eight quarters, our margins have been very steady between 4.15% and 4.25%. That's been our guidance and we have been able to maintain it. Our mix of the book gives us the margin. We have a very well balanced book between fixed and floating, So 51% of our book is fixed. One can see stability of margins and that is what we are seeing in this bank, a very stable margin scenario between 4.15% and 4.25%. Our guidance for the Planning cycle six is 4.2-4.3%.

    What should we start with? Hinduja Group increasing stake, quarterly numbers for IndusInd Bank or the fact that you got an extension from RBI?
    You can decide the order and we can answer all the questions.

    Let us start with quarterly numbers. Let us understand the environment. It has been a good environment for banks but is this as good as it gets? Do you think going forward the base effect and the cost of liability could have an impact on margins and credit growth could also slow down?
    The system credit growth may slow down but you have to look at each organisation in a very different way. If you look at us, we have domains. Our domains are coming from cyclical lows, for example, the CV cycle or the microfinance cycle or the diamond. They have all contact businesses and were affected during Covid to a large extent.

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    What we have seen in the last 12 months on the CV cycle or we are not seeing with the rural economy recovering in the rural banking segment, I think the diamond starts coming up with the lab diamonds coming into play. You will see tremendous growth and we are very, very comfortable with the growth projections which we have given 18 to 23% and that is where we think we should be able to do the growth.

    In addition, we have consumer businesses which are about 35% because they come from a small base and we are entering MSME and SME which have actually grown by 8% quarter on quarter. We have a very well diversified portfolio with domain specialisations which are coming from cyclical lows for us to give the confidence to the market that we should be able to maintain the growth which we are seeing in the market.

    Let us also discuss the outlook when it comes to your overall deposit growth which has been robust in the quarter. The cost of deposits has been higher by about 34 bps sequentially. How much higher can it go from here? Would you say that to a certain extent this deposit growth is eating into your margins to a certain extent?
    So let me first talk about the margins and I think you will understand. We have maintained, if you look at the last eight quarters, our margins have been very steady between 4.15 to 4.25%. That's been our guidance and we have been able to maintain it. Our mix of the book gives us the margin. We have a very well balanced book between fixed and floating, So 51% of our book is fixed. One can see stability of margins and that is what we are seeing in this bank, a very stable margin scenario between 4.15% and 4.25%.

    aving said that, our cost of deposits is higher than the market because we are in a granularisation journey. A large balance sheet needs to have granular deposits. We continue to focus on granularisation of liabilities. We are today at 43% as per Basel-3. We want to get to 48 to 50% by the end of three years, which means that there are three or four things that we will do. We will continue to expand our branches. We will continue to give the right rates to our clients. We will launch a digital preposition called Indi and we will do another very innovative offering called Community Banking and a very differentiated approach to continue to create liabilities of what extent we need to manage our growth.

    I find it a bit intriguing that while other banks and peers are talking about a bit for contraction, you continue to maintain it is going to be an expansion there. What is the kind of expansion we can expect in net interest margin? What's a sustainable level – 4.5% thereabouts?
    No. We said that our guidance for the Planning cycle six is 4.2-4.3%. We were in the margin range of 4.15-4.25%. I think we should be able to deliver 4.2-4.3%. While the fixed rate growth will give me the margin, the floating rate both if the interest rate changes will have a decline in the interest rate. So it's a well balanced book but because the mix is changing towards the consumer, the margin expansion will happen.

    If you have to talk about the credit cycle for the next 2 to 3 years, do you see a mid teen kind of credit growth and a possibility of very low NPAs? Is that a possibility for the next 2 to 3 years? Can investors be reasonably sure that the trend is going to be strong and NPA concerns are not going to be there?
    We are in a benign credit cycle. However, for the bank, the contact businesses have some flows. So if a gross flows,, they are still on the higher side at 1.7-1.8%. I continue to believe that you will see the gross flows moderating specifically in the MFI side where we had Rs 600 crore gross flow this quarter.

    You would see that going down to about Rs 200 crore next quarter because our 30 plus has gone down to 1.1%. So I think over a period of time now, with the contact businesses stabilising and the restructured book declining to less than 1% I think for IndusInd and for the industry, I think the next 12 months at least, you will see a benign credit cycle in the industry.

    Are you happy and also disappointed that the Reserve Bank of India gave you an extension but instead of three it was two years?
    One can look at a glass half empty or half full. The board applied for three years. RBI did its due diligence and found that it is appropriate to give two years and we have to live with it. I am happy that it is not six months or one year and two years gives enough time to do what you want to do.

    Now, one year and 10 months are left, which means the board will have to again apply for another extension for you soon?
    Yes, within the next 18 months they should apply.

    We understand that RBI has also allowed Hindujas to increase their stake in IndusInd Bank. When is that expected to happen? Is it likely to happen in FY24 irself?
    First of all, I think there is a little bit of misunderstanding out there. I think there are circulars which the regulator has issued, which allows promoters to apply for a stake raise. As our promoters too have applied for a stake rise and filled up the forms which were required to be filled. There is no communication from the RBI or any approval from RBI as of now that they can increase the stake. It is in the process and as and when the process gets completed, will we know what the status of that application is?

    Whenever the approval goes through and Hindujas are about to increase their stake, there are two ways you can increase your stake, I am just breaking it for the viewers. You can buy from the open market because they have cash or the bank can do a fresh approval. What would be the route?
    I think you should ask them this question. Past precedence shows, Hindujas have always subscribed to primary issues. They have never bought shares in the secondary market.

    If you need capital, would the bank go ahead with the primary issuance because the bank does not need capital?
    That is the question. You are absolutely right. Ido not think we need the capital because our internal accruals are enough to take care of any growth right now, which is organic growth. If there is an inorganic growth opportunity and we are evaluating inorganic growth opportunity when we may need capital or our board feels that we should raise capital because they want to maintain the CET-1 at about 16% or 17%. Otherwise, I do not see us raising capital in the next 4 to 6 quarters.

    There is news that there could be organic expansion and that you could be planning and foraying into MF insurance as well as broking business. Could you clarify that or confirm that for us? What is the strategy? What is the timeline of getting into these new businesses?
    Again, these are para banking activities and para banking activities require the regulator’s nod to get into. We do not have the regulatory approvals as of now to get into the para banking activities. As and when we get the para banking activities, we will come out with a strategy as to how we want to take the para banking activities forward.

    Yes, we like the brokerage space because we are into wealth management. We like the non-life insurance space because we do a whole lot of non-life insurance for our partners because of the vehicle finance business which we have and we like the AMC place because it is very capital efficient.

    Have you made those applications to the regulators? What stage are those applications at? Anything you can clarify in terms of the timeline for us?
    We have not made the applications. We are in the process of doing the due diligence before we make the applications.

    We always compare banks with the industry average and for a bank of a balance sheet size of yours, what to your mind will be the growth for the industry per se? Also, can you indicate to us what your growth would be because I remember some of the criticism which shareholders or analysts had about IndusInd Bank was why is it growing slower than HDFC Bank when the balance sheet is much smaller than HDFC Bank?
    It depends on the type of businesses you do. It is very easy to say…. We were in contact businesses and our contact businesses which is 43% of our portfolio got affected during Covid and we were not able to access those customers. That is why the slowdown happened, when buses or trucks were not plying and one could not reach the microfinance customers, you cannot see growth in those segments.

    Having said that, the credit growth in the system would be around 13% to 15% and we have given a guidance of growing at 18% to 23% and that is what our guidance is and I believe IndusInd will always grow ahead of the other banks because A) we come from a small base and B) our domains are coming from cyclical lows and we believe we want to continue to maintain or gain market share in these domains.

    There is a buzz in the market and when the stock of Karnataka Bank, Federal Bank go higher, your name is connected. Why don’t you clear the air once and for all that you will not buy any listed bank and there are no plans?
    You can continue to comment on every rumour, but that is not our style. If there is anything we are doing, it will be public knowledge. We are not doing anything right now which I think requires us to make any comment in public.

    I am going to take the clock back. There was a high growth period for IndusInd Bank, Then came the IL&FS crisis, then came the 2018 slowdown. You had to re-engineer, re-tool your balance sheet, your growth and everything else for risk management. Then came Covid and the repair phase where you were able to really grow and build upon your microfinance as well as your diamond business. But in the next three years, how will it be different for you?
    The new way to track the bank is how much have we diversified. If you look at the microfinance business now, it used to be a JLG business. We have now turned that into a micro banking business. The bank has diversified into what is called as merchant acquiring business where Rs 4,000 crore of book has been created and this in the next three years will be Rs 15,000 crore and which comes at a yield of about 23% to 25% and a fees of 4% with a current account balance sheet.

    The ROA of this business is 7%. You will also see the launch of liabilities, of home improvement and launch of scooter loans in the deep rural areas. Our microfinance business will grow 25% to 30%, but the JLG portion of that business will become 55% to 60% rather than 90%. So, that is one change which you will see in the business.

    The second change which you will see in the business is diversification of the vehicle finance and you would have seen that already in the LCV where we were 1% market share, today we are 9.5% market share and we believe we will be 12% market share and we will be a domain leadership for the bank in the next two years and we believe that we will be number one next to Chola in the LCV business.

    We have launched a used car business and we believe that in used cars we are early entrants and we believe we can make a very good blueprint for that. That also comes at a 15.5% yield in the business and we are already doing about Rs 600 crore a month and we want to take it to Rs 1,000 croreThe way we have diversified our tractor portfolio, we are already at 9.5% of the tractor segment. We have done different things.

    In diamond, we are taking a community approach and not a diamond approach. A community approach means that we will finance the ecosystem which is from the employees to the vendors to the real diamond and to the outside diamond through GIFT City, I think that business will become a very cohesive business in itself. Growth will come from domains, but the growth will come in a very diversified manner. Then, our cards and PL has been a very slow business and I think you have seen the scale up.

    We have launched mortgages. You will see a book of rampant growth in the mortgage because it lends stability into the book and we are scaling up our SME and the MSME segment to become 35% to 40% of our book from 20%. So, I think the bank has enough levers to show the growth and the bank will become very well diversified and will continue to be in line or ahead of the market in the growth phase and in the domains, we will gain market share.

    The three differentiating businesses of IndusInd Bank. Number one, microfinance business. We know there is a rural slowdown. Second, the auto finance business, you spoke about the numbers there. You have got a very large book there, but that is one space where luxury cars are selling, two wheelers are not selling. And the third, in a sense, is the diamond finance business. But America is in a recession and diamond exports may not be that great. So, in three differentiating businesses of yours, there is a macro headwind. Am I right?
    Not at all. If you look at the diamond business, that is where the ecosystem is coming into play and while US may be in recession, But we are seeing a huge demand from China and UAE for our diamond business and you will see the growth happening and, of course, the government is supporting the growth of the lab diamond, which is also a very differentiated offering.

    We are becoming micro bankers. And While rural economy is recovering from a slowdown and is coming up, the differentiated and the well-to-do businesses in the rural area, which is the KCC, which is the personal mobility, as well as the lending against warehousing, is doing fantastically well and there is a huge opportunity in that.

    On the consumer side of the business, the mortgages business will continue to grow and on the vehicle side, we have diversified the book in such a way that no stoppage or no recession can actually stop…. In April, which is the worst month, we are still seeing disbursements, which we would have seen normally in the months of October, November and December. The diversifications have really helped us make sure that we continue to build the scale and continue to see the scale in these businesses.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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