"We are committed to substantially outperform the market"

SMART TALK/ Shailendra Bhandari, Managing Director & CEO, Centurion Bank of Punjab

If there is one bank which has been serious about consolidation, it's the Centurion Bank of Punjab.

The Rana Talwar-led north-based bank has lapped up two banks in less than two years; north-based Bank of Punjab in 2005 and south-based Lord Krishna Bank (LKB) in 2006 which is still awaiting RBI approval.

The stock market has rewarded the bank as its share price gained 63 per cent in the past one year and over 35 per cent in the last six months outperforming the Sensex. The bank currently trades at over 4 times and 3.5 times estimated book value for FY08E and FY09E respectively.

With a clear focus on the retail and SME segment, the bank is committed to beat the banking industry growth and also maintain its profit margin, which is one of the highest in the industry. The bank will continue to look for inorganic growth opportunities on an ongoing basis in future too.

Shailendra Bhandari, managing director and CEO, discusses the status of the LKB merger, its growth objectives and new initiatives with Priya Kansara.

What is the status of the LKB merger?

The board of the two banks and their respective shareholders have already approved the merger in September last year. Now we are awaiting the RBI approval.

After the LKB merger what is going to be your regional strategy?

The bank is very strong in the north. For example, in Punjab and Haryana, we are the largest private sector bank.

Further we will have 92 branches in Kerala after merger with LKB. We would then be the largest new generation private sector bank in Kerala. Our strategy is to have a presence across the country with domination in a few areas where we can figure in the league table. For example, on the retail side, we like to be among the leading players.

Currently, we are among the top three players in two-wheeler finance, top six or seven in the commercial vehicle finance (trucks), top ten in personal loans, top ten in the monthly disbursements of home loans, top five in the life insurance space, top three in the general insurance and top ten among the mutual fund distributors. And all this is without the merger of LKB. Post merger, this will change a bit.

How is the bank geared to meet the challenges posed by Basel-II norms?

As of December 2006, our capital adequacy ratio was 12 per cent out of which Tier-I was 11 per cent. Since this is fairly high, we are planning to raise Rs 700 crore of Tier-II capital.

Basel-II will not have any significant impact on us since we are mainly focused on the retail and SME segments, where the risk weightage is lower. While retail loans constituted nearly 69 per cent, SME was about 15 per cent of our loan book in December 2006.

Currently, we have an even mix of all retail loans with home and two-wheeler loans contributing about 24 per cent each.

How are you tackling the higher risk related to retail loans?

Globally retail is considered to be the least risky business. No single retail can kill the system whereas a large corporate can do so. We have a policy of accelerated provisioning for bad debts.

For example, in the case of clean loans like credit cards and personal loans, we do a 100 per cent provisioning within three months of non-performing assets (NPAs) whereas the RBI requires it to be done within one year.

For secured loans other than mortgages, we make full provisions within six months whereas RBI requires this to be within three years.

Are you witnessing a slowdown or delinquencies in the retail business because of higher interest rates?

There has been a slowdown in fresh business especially from mortgages because of rising real estate price and interest rates. Real estate has definitely seen some slowdown. There has been a slowdown in cars and two-wheelers too. But we believe this is a normal seasonal slowdown.

Our NPAs in mortgages is a fraction of the market average. And we have not experienced any delinquencies so far. But the good news is that people taking up mortgages are very young. Moreover people's salaries are going up. The underlying demographics is thus leading to a very strong demand.

How much growth do you expect over the next few years?

We are committed to substantially outperform the market. Our deposits of Rs 15,000 crore as on March 2007 have grown 50 per cent y-o-y.

Our advances grew 65-70 per cent compared to the market average of 29-30 per cent. So we are growing roughly at 2-2.5 times the average industry growth rate. And we will continue to grow faster than the market.

So what's your strategy to beat the market?

The strategy is to have a strong pipeline and channel. We have 2500 people sitting with 1600 two-wheeler dealers across 750 towns and cities. Our network without LKB is 279 branches in 143 cities.

Apart from a good asset coverage, we are very good at credit and collection. And our biggest strength is the low unit cost of processing which makes us profitable.

How is rising rates affecting your cost of funds and margins?

When we grow at such a high rate, we need to get more term deposits as low-cost deposits (current and saving deposits) tend to be more granular. For example, the number of savings accounts cannot jump from Rs 20,000 to Rs 2 lakh in a month.

Similarly, the minimum average balance cannot grow from Rs 13,000 to Rs 1,30,000 in a short span. So we have attracted more term and bulk deposits. But we have not chased the atrocious rates that prevailed in March. We are passing on the rate hikes wherever possible.

Our focus is on maintaining the net interest margin which is amongst the highest in the industry. For example, our average cost of deposits went up to 5.6 per cent as of December 2006, up one per cent y-o-y. But our net interest margins remained steady at 4.8 per cent during the period.

Do you expect RBI to tighten the rates further?

Very unlikely. But there may be one last hike. Inflation should come down in the June quarter mainly because of the base effect and the low credit growth traditionally witnessed in this quarter.

Besides, there are enough experts globally who feel that the US Federal Reserve will ease rates in the last quarter of 2007.

What do you expect out of Cerma?

We have a 25 per cent stake in Cerma, which will offer estate planning services, escrow & custodial service and real estate management and advisory services. We have tied-up with a very well know Delhi-based legal auditing firm S N Gupta & Co for this.

No bank in the country is offering this service as of now and we expect the interest level for this product to be very high once we market it aggressively and target the right segment.

Cerma is for those who have accumulated wealth and want advice on more sophisticated areas like real estate and wills. Thus the target group of people would be high networth individuals.

Initially, we will target our existing customers. But we are ready to service new customers for a relatively higher fee.

Can you explain your motive behind the tie-up for equity broking?

Our tie-up with Ambit Capital and TV18 for broking business is a perfect marriage and we see a lot of synergies. Each partner is bringing something to the table. Ambit has an equity broking set-up with research, membership on the stock exchanges and the delivery engine.

TV18, apart from the tremendous brand value, has its financial portal which has two million registered users interested in the stock market. The bank also has around three million customers taking assets and liabilities together.

Further, the bank can offer cash and demat account required for transacting in the equity market, which gives us float and other income besides a 20 per cent share of the broking company's profits.

The broking income will not accrue directly to the bank but to the broking company.

In the meantime, if there is an opportunity to acquire an existing broking firm which is attractive and is available at a reasonable price, we will go for it.