Very interesting interview and some key incremental insights i could not find in such a straightforward way in other Q4 interviews:
- (Covid Wave 2): Expects April and May to be affected, but after two or three months, things will come back. 2nd wave is giving mixed signals. On one hand, it looks like a hard one to deal with. On the other hand, it is not a national lockdown. Sectors such as manufacturing and exports are still moving.
- (Savings rate @ 5%): Customers want safety, plus our savings rates are still very competitive. Plus we have a great brand, institutional feel and customer service, so we think our deposits will continue to grow.
- (Incremental asset side): Earlier, our growth came from SME and consumer financing. Now, our incremental growth is coming from home loans. Last year, our home loans grew by 37% and asset quality is great. (Sahil’s note: I have also highlighted this shift in loan book composition in many earlier posts. This has been a secular trend, not a one off. But it has been accelerated due to covid IMO).
- (Why the move away from unsecured lending?): Unsecured lending will also continue to grow, but we will carefully watch the economic environment for that. Want to participate in secured financing where peace of mind is high because asset quality is good. Also, home loan is a long journey with a customer. (Sahil’s notes: interpreting last part as large opportunities for cross-selling of other financial products like credit cards, insurance, mf, other loans to prime customers).
- (Guidance on asset quality): Pre-covid we were at 2.6% GNPA. Given current underwriting standards & trends, we are heading towards gross of 2%, net NPA of 1% and provisions of 2% on a sustainable basis. We are modelling our risk parameters for this and can meet this guidance, post the Covid second wave provisioning. (Sahil’s note: the 2% provisioning is including for NPAs as well as rest of the loan book).
Overall thoughts: It looks like bank is doing some serious thinking about the composition of their loan book. Now that they have a brand and have managed to capture customer headspace, they are utilizing the stickiness of CASA (some would argue it is not, I would argue it is to some extent. When they reduced SA rate, i simply created FDs out of my SA, did not run to open new bank account) to guide them through slightly lower CASA growth at the cost of being able to lend to much more prime segments of the market at lower rates but more importantly much better credit quality. Home loans are indeed an interesting gateway product since they are sticky, large duration, large sized, and thus provide a gateway for bank to cross sell multiple other products to these customers over decades. The fact that bank wants to be cognizant of economic environment and not mindlessly keep giving out unsecured loans also shows thoughtfulness on the part of the bank. They are not shying away from unsecured loans, only being conservative. In banking business a conservative banker is a good banker. I would rather go with a banker who wants to calibrate and deliberate before giving unsecured loans. Bank has also raised lending standards (higher LTV, higher credit score, higher minimum balance requirements, lower loans to first time creditors) since covid hit, all of which points to thoughtful lending. The interview has served to increase my confidence in the investment thesis. At the same time, following remain key monitorables which can break the investment thesis for me:
- Asset quality and credit costs of 2% GNPA and 2% provisions are reasonable. Let us see if bank can meet these medium term post covid.
- As asset side grows, the operating costs should grow much slower and get amortized over a larger base. This should lead to reduction in Cost to income ratio and thus profitability for the “retail” segment under which header all the opex for branch opening goes.
- the CA part of CASA is still quite low (10%) compared to peers (40-50%) as i had shown in previous posts. This is an important source of 0% funds for the bank and If i could ask just 1 question to the bank: it would be their strategy for growing the CA of CASA.
Disc: largest position in PF and so I am heavily biased. This or any of my posts are not investment advice.