Profits are better than expected. NPAs are down QoQ. What are the key drivers and also what has been the impact of IndAS?
We are sticking to our basics. Profit comes from four things – good growth, good NIMs and fees, expense control and last but not the least, good credit quality. As you see, our growth has continued well. Overall we have grown by 26% but within that, rural and housing has grown much more and the wholesale growth we have kept limited to just around 8%.
With this, our retail portfolio — that is rural plus housing — has increased to 47% now. This combined with good control of liabilities, passing on the increase in interest rates to the customers, have maintained our NIMs and fees of course. The hero of the performance really has been asset quality. The gross stage 3 as we call it under IndAS has reduced from 11% to 7.1% from last year to this year and the net stage 3 has reduced from 5.4% to 2.8% this year. This, along with the very health provision coverage of 62% and an extra provision of Rs 200 crore for unanticipated event risk.
Again sticking to basics, good growth, good product mix, excellent NIMs and good asset quality control led to 66% growth in PAT and ROE. We achieved our top quartile ROE last quarter staying at around 18.47% where IndAS helped us as in the first quarter, we took the entire required provision on our legacy portfolio and hence could lock into steady state ROE now. Just a robust business model is working for us. It is no rocket science.
Markets are pretty concerned right now about ALM mismatch. While there is a positive ALM gap for one year for you, how is it going to pan out in one month and three months and also how much short term money have you have raised in the recent one month post the IL&FS crisis?
In every bucket, my liquidity gap is actually positive. What it means is that the inflow from my assets over that period is much more than the outflow from my liability simple. In one-month period, I have a Rs 10,000-crore cumulative positive gap. In a one-year period, I have got close to Rs 18,500 crore cumulative positive gap. In percentage terms these are plus 150% or so in one-month period and 58% plus in the one-year period. We are extremely comfortable as far as our liquidity gaps are concerned.
I will quote two more numbers which demonstrate our ability to remain very liquid in even the current market. Number one, as on 30th of September, we are carrying more than Rs 6,000 crore of liquid assets in cash, FDs and other liquid instruments. You cannot argue with cash. This is cash on balance sheet. In addition to that, there is more than Rs 4,000 crore of undrawn bank lines and about Rs 2,000 crore of backup line from my parent. This is as far as my comfort on liquidity is concerned.
The third most important is demonstrated performance. From 21st of September when this whole issue started till today, we have raised a total of Rs 18,500 crore. About Rs 4,000 crore of it is market instruments — NCDs and CPs — and about Rs 14,500 crore is mainly bank lines. So, positive liquidity gaps, actual liquidity on balance sheet as on 30th of September and demonstrated performance on raising of fresh liabilities makes us quite comfortable that on growth in rural and housing, we will be able to easily support in Q3 and Q4 also, out of the liquidity that we are able to raise.
There are concerns on significant NBFC papers that may have come for rollover repayment over the next one to three months. How real is this concern?
Structural liquidity by its very definition does not assume rollovers. It is just the difference between your money coming in from your assets repayment, what you have lent the repayment coming in and what you have to repay. The outflows that you see and put in structural liquidity are actual outflows. You do not assume any rollover and that is the point I am making.
Without assuming any rollover, my gaps are positive. If we are able to rollover something, then it will be even more positive. But the assumption is that market instruments which come for repayment are not rolled over. That is structural liquidity and that is what the regulator sees. What it really means is the natural hedge coming from the profile of my assets, the repayments coming from my assets are enough to repay my liabilities over the next one year period.
Do you have any exposure in the IL&FS group — be it via L&T consolidated book or via asset management business?
My exposure to IL&FS is zero. My exposure to IL&FS Financial services is zero. These are the two entities which have defaulted. My exposure to ITNL is zero. My entire exposure of Rs 1,800 crore is to six road projects, four are annuity, two are toll. Five out of this six are operating for a number of years. One is complete and has applied for COD. Four of them are annuity projects, two are toll projects with a track record of 3 and 10 years respectively.
The entire escrow, the entire cash coming out of these projects are controlled by us. Not only that, our repayment is totally current. We hold Rs 450 crore in various reserve accounts. Our debt service coverage as well as major repair and other reserve accounts.
Rs 722 crore out of this Rs 1800 crore is in IDF and hence guaranteed by the government that is number one. Number two, each of these projects have positive equity value and hence we believe that as IL&FS projects go for sale, these may be the first projects which will get sold and we might get actually even prepaid and as the refinance opportunities come, there may be even fee opportunities for us. In conclusion, the exposures to these particular road projects are so well structured and so well protected that we expect zero losses from these projects.
What has led to the gross stage 3 NPAs to come down? Would you have to make additional macro provisioning in Q3, Q4 besides the Rs 110 crore that you have accounted for in Q2?
Gross stage 3 (GS3) has improved in every segment. It has improved because of higher correction efforts but more importantly continuously because of concentrating on early bucket, on zero DPT. We firmly believe that NPAs do not come down by concentrating on them. NPAs come down by concentrating on zero DPT. If you do not allow your loans to become bad in the first place, you do not have to cure them. That is our philosophy and that has led to this continuous improvement and it is across businesses.
Rural and housing of course has seen improvement. In wholesale, we disclosed the entire NPA, S4A, everything even standard assets which we believe are stressed were disclosed at the end of Q1. From here, it will reduce continuously.
Number two, we have made adequate provisions based on our models for these assets. Our provision coverage has increased from 53% last year to 62% now. That is number one. There is the idea of micro prudential provisions, These are not provisions that you need. These are provisions that you can make. You can afford to make.
The whole idea is being humble and saying that there can be situations like floods, earthquakes, etc, which you cannot predict and hence you cannot model and when such big things go wrong, your P&L should not get the shock. You should always carry something on your balance sheet. You can call it counter cyclical. You can call it provision against unanticipated risk and we believe these are the times when we are making good money, good profits. These are the times that we should keep sum for such events and in the first quarter we kept Rs 90 crore. In this quarter, we have kept Rs 110 crore.
We are carrying about Rs 200 crore of provisions which we cannot model. These are unanticipated events and for that we are just keeping this protection.
How do you read the current liquidity crisis in the NBFC sector?
The regulator has already taken some steps and I am sure it will take even more steps. But I look at every crisis. Over last two and a half years of this companys good performance, there have been various crises. We are talking about these crises today but demonetisation had more effects on the industry. GST, RERA, farm loan waivers, IndAS implementation came one after the other. Every quarter, something or the other is there and we look at every crisis. As something which will differentiate good companies from bad companies. We know that there are peers who have longer performance records and we look at these crisis as an opportunity to fast-forward our pedigree and show that we can perform well even through this crisis.
So I would not welcome the crisis but I look forward to show how L&T Finance Holding has the ability to give differential performance and stamp our pedigree despite such crisis.