New Delhi: For the last few days banks have been underperforming the market, perhaps on back of fears that rising bond yields may scare results of banking stocks.
What is the credit growth outlook and how are banks dealing with high yields and where are interest rates headed? Kalpana Morparia, Joint MD, ICICI Bank reveals.
Morparia says that RBI's CRR measures will not impact banks with low bond investment, and low duration of portfolio.
She adds that rising interest rates are unlikely to impact credit offtake.
Excerpts from CNBC - TV18's exclusive interview with Kalpana Morparia:
Q: The market is a little worried about bond yields hardening beyond eight per cent. Do you think it will dent earnings and prospects for you as a bank, the fact that yields are going up consistently?
A: Given the fact that the mandatory holding of Statutory Liquidity Ratio (SLR) is really held to maturity, this will not create volatility, atleast for that set of banks that don't have a very large portfolio of government bonds and excess of the mandatory requirement.
As an economic matter, rising interest rates will impact the overall cycle of government bonds. Those banks, which have a low duration of government bonds, will be the least impacted by these rises.
Q: As a bank how do you see yourself dealing with or being impacted by the rising interest rates scenario? Rates are hardening and that is a reality.
How do you see yourself both from the credit offtake point of view, from NIMs, and from the treasury book. How do you see the overall impact and your self-dealing with rising rate scenario?
A: As far as net interest margin is concerned we consistently maintain the stance that the lending rates will be reflective of our funding costs.
Until about two years ago when we saw a steady decrease in our funding cost, that was in turn accompanied by lowering of interest rates across all business segments.
In the last two years we have seen that there has been a steady increase in interest rates and indeed lending rates have kept pace with that.
As far as the Treasury bond book is concerned, we consistently followed a stance to say that we want to stay with low duration.
The fact that 25 per cent of our government bond book is in 'held to maturity', there will be no volatility from a P&L perspective, given the rising government bonds.
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Q: For the next few months as you look ahead, what do you expect to see in lending and deposit rates, and do you expect that to impact volumes at all?
A: We have not seen any impact of the increases that we have made in the last two years. The credit growth continues to remain strong.
I think that is also a reflection of the pace of savings over all in the system. The corporate segment is indeed flushed with surplus funds.
We did a very quick review given the way markets have been behaving as to what would indeed impact any of the investment plans of the companies that we have assisted.
We found that given the level of internal generation that they had, the proactive capital raising that they had done, there is almost no impact of the volatility that we have seen in the equity markets.
So the corporate credit growth continues to remain strong. The consumer credit growth again is indeed quite strong although interest rates in the last two years would have hardened by almost 30-35 per cent.
If one looks at real wage growth, particularly in the services sector, that would have kept pace with this kind of increase that we have seen in interest rates.
Therefore affordability is increasing and we have seen no slowdown in the consumer credit side approvals as well.
Q: As a banker were you surprised by RBI’s rate hike coming in between meetings? What do you expect them to do next time around?
A: Given the way global interest rates have moved, I think the increase in the domestic rates by RBI was inevitable.
Whether they do it in between the two quarterly review meetings or do it at a meeting, I don’t think any one of us really felt that India could remain insulated from the overall hardening of global interest rates.
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Q: Do you see rates hardening substantially? Have we started a trend of rising rates which could take us even 1% as you look forward in the next 15 months or so?
A: I would assume so, because of the inflation numbers coming out and the signals that we get from the international regulators. My assumption is that interest rates will harden further.
Q: By one per cent over the next one year or so.
A: Over the next 15-18 months.
Q: You spoke about the low duration of your bond book. Could you give us some sense of what the average duration could be for your bond book?
A: We will report that number in June but as a strategy and as a philosophy of the bank, we have consistently maintained that we would want to carry a low duration.
Even though this bond book is held in the held to maturity portfolio, it does not create quarter to quarter volatility. But we have consciously taken a stand that we will stay with a low duration, which is a mix of low duration government bond, that is T-Bill and whatever floating paper that is available.
Q: One comment on the changes that RBI will knock the interest on the incremental Cash Reserve Ratio. How much do you expect that to impact a private bank like yours?
A: Overall the banking system will get impacted to the extent of 2-2.5 per cent of the cash reserve ratio that they were maintaining because it is not as though we were getting market related interest rates on the cash reserve ratio. The average was around 2.5 per cent.
Q: The bond yields have hardened to more than eight per cent. As a bank would you consider that given that the bond market is giving you eight per cent plus raising some of the term deposit rates that you have as a bank, fixed term, term deposit, longer term?
A: This is a constant review process. We have responded very quickly to changes in the interest rates by increasing deposit rates and looking at the increased funding cost, we have also looked at increasing lending rates.
It is a dynamic situation as it evolves; as we see the liquidity in the system we would appropriately adjust both the rates.
Q: You have had two years of very strong performance, do you see this as a slightly more challenging year, not in-terms of retail growth or franchise growth as such but talking about how you deal with changes in the market place and whether it is going to be a challenging year for your profitability?
A: Since the Net Interest Margins reflect both the funding costs and lending rates, one might see a temporary mismatch from one quarter to another quarter.
So if I take a year as a whole, we believe that with the strong fee income stream that we have, given the credit growth that we are continuing to see, this year too will continue to be challenging.
But challenge is a way of life in India and certainly in the ICICI group.
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