Deutsche Bank’s profit after tax from India operations recorded compounded growth of 42 per cent per annum in the past five years. In an interview with Manojit Saha and Somasroy Chakraborty, its chief executive officer here, Gunit Chadha, says the bank will continue to invest in its India franchise to sustain growth momentum. He also talks about the likely sale of their credit card business. Edited excerpts:
Do you think high inflation could hurt India’s economic growth? Will there be a slowing in credit demand if lending rates continue to remain high?
There is certainly a tussle between growth and inflation. I think the Reserve Bank of India has been prudent. It has raised interest rates in a moderated and balanced manner, so that growth does not come off sharply. Having said that, inflation appears to be stickier than what most people thought it would be, partly due to exogenous factors like oil prices. It is Deutsche Bank's view that we could see a further 75-basis points increase in rates during 2011.
Credit demand in the industry has been reasonably strong. Deposits have not been growing fast, may be due to cannibalisation of banking deposits by bullion and real estate. I believe the impact on credit growth because of rising interest rates will not be too severe. But should these elevated interest rates sustain well into 2012-13, then there certainly will be an impact on consumption demand across industries. However, we expect a reversal in interest rates, starting towards the end of 2011. If that happens, the impact on consumption and investment will be well mitigated.
Banks' asset quality in India has been fairly healthy, despite the economic slowdown. Do you expect the quality of loans to remain good?
We believe the foundations of India's economic growth remain strong, as reflected in the macro GDP (gross domestic product) numbers. Most industries – apart from a few like real estate and airlines – are sitting on very strong cash positions, as they raised funds from capital markets in recent years.
In 2011, we expect several Indian companies to access long-term,10-30 year funds from export credit agencies and global bond markets. On the consumer side, unsecured delinquencies have also declined sharply. Restructured assets of the 2008-09 crises are a very small proportion of banks' loan portfolios and are holding up well. So, unless inflation spikes or persists over several years and supply-side reforms take a back seat, resulting in huge demand contraction, we believe banks' non-performing asset portfolio will remain in reasonably good shape.
In India, which businesses are the main growth drivers for Deutsche Bank? What is the growth expectation from your India operations in the coming years?
We have built a very strong investment banking and global markets’ franchise in India, in which we continue to invest. In 2010, we were number two in equities capital markets, helping companies in IPOs (initial public offers) and follow-on offerings. We were the undisputed number one for Indian companies raising dollar bonds. In institutional broking, a business we started five years ago, we are now among the top four. On customer foreign exchange, a business we dominate globally, we are again among the top four. In M&A (mergers and acquisitions), we are number four in India. So, when we put all these businesses together, we are clearly sitting somewhere at the top of the investment banking pedestal.
Add to this our strong transaction banking business across cash management and custody services, where we are number two in India. We have been fortunate to have avoided the big fat tail-risks in all our businesses. The business has been built with strong client-centricity and, I am proud, to add a passionate and stable management team.
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Between 2004-05 and 2009-10, Deutsche Bank India's compounded growth on profit after tax was 42 per cent per annum. Our return on assets improved to 1.7 per cent from 0.7 per cent during this period. We do believe we can sustain strong growth in the Indian franchise over the next three years.
There are talks that you are likely to sell your credit card business to IndusInd Bank. Can you confirm?
The credit card business is less than two per cent of our overall business in India. We are not restructuring because of big impairments in that business but because we feel that we don't have footprint in India to scale up the credit card business, in an acceptable timeline, to achieve profitability of serious magnitude. We are in the midst of restructuring now and should announce a decision soon.
Does it mean retail banking will not be your focus area in India?
I want to put it on record that we are very committed to our retail banking business in India, as we are to our other businesses. Within retail, we are growing our deposits, private banking and secured lending businesses. We have over Rs 1,500 crore in mortgage assets itself. Give us more (branch) licences – we hope to get two-three this year – and we will open more retail branches.
RBI will come out with guidelines on foreign banks' presence. The regulator prefers foreign lenders to set up subsidiaries, instead of operating through branches. What are your views?
It is currently at a consultative stage between the RBI and market participants. From a foreign bank's viewpoint, the option to stay wholly-owned is critical. Priority sector lending needs to be re-defined, local control must permit global systems and, finally, foreign banks will need to understand what will be the level playing field when it comes to branch licensing. I think we are moving in the right direction, with RBI having put a paper and banks responding to it. It is still a work in progress.