In an interview with CNBC-TV18's Reema Tendulkar and Nigel D'Souza, Cholamandalam Investment MD Vellayan Subbiah said a turnaround for its vehicle financing segment was still some time away.
"We still see viability issues for truck operators in the field, payment cycles are getting stretched, utilisation is still not significantly up especially when the light commercial vehicles, small commercial vehicles," he said.
Also read: Home equity loan biz to see more growth: Cholamandalam
"Therefore, our belief is that it is beginning to bottom out but it is going to take a little while here before it starts to get any better."
Below is the edited transcript of the interview with CNBC-TV18.
Nigel: Your asset quality deterioration didn't look too good. Take us through the details?
A: In terms of asset quality overall, non-performing assets (NPAs) continue to remain high. We saw that even two-three months ago where we said that we do not see any real improvement in the market in terms of viability for the truck operators and this has been totally isolated to our vehicle finance business.
Our home equity business continues to perform quite strongly but on the vehicle finance side, we still see viability issues for truck operators in the field, payment cycles are getting stretched, utilisation is still not significantly up especially when the light commercial vehicles, small commercial vehicles.
Therefore, our belief is that it is beginning to bottom out but it is going to take a little while here before it starts to get any better.
Reema: Give us some metrics for vehicle financing: that is where the pressure is, perhaps in asset quality. Only for vehicle finance can you give us some numbers? How much it has deteriorated, by what percentage point, how much is the disbursement mean, give us some numbers particularly for vehicle financing and how much worse can it get from hereon?
A: Just to give you a sense when we were at our best performance about two years ago, net credit losses of vehicle finance was in the order of about 0.5 percent. Right now, we are doing close to about 1.7 percent. So that is the level of deterioration. It is basically 1.2 percent on percentage terms of our average asset book that this book has deteriorated.
So are things going to get better, I would think so but this is as significant a deterioration that we would have predicted. So 1.7 to 1.9 is what we think is going to be the bottom and I think that is where we are at right now.
In terms of disbursement, we have taken a slightly more cautious stand given that we have not seen the collection side pick up and disbursements have de-grown by about 10 percent in the vehicle finance book quarter-versus-quarter.
Nigel: What about your NIMs, what did they come out at? We don't have that figure with us.
A: NIMs are more or less staying the same. There are a couple of things that are going to help in the medium-term -- so we are not seeing yields drop in the market.
That is a good sign, our belief is the cost of funds are going to come off as we look at the next three quarters here. So we are going to see a reduction in cost of funds.
We look at it from a NIM perspective before losses. The NIMs are basically going to remain strong and probably improve. So NIMs will improve but the challenge is basically on credit losses.
Nigel: So the NIMs will improve to around 8 percent you believe?
A: I think we would go up by between 0.5 and 1 percentage point is what I believe the improvement in NIMs can be. Obviously a lot of that is coming from the cost of fund decrease so we have to see how fast that is going to come off -- most predictions are that base ratess are going to remain at the same level but we are seeing more softness when we look at what is happening on the other sides for funding.
Cholamandalam stock price
On August 01, 2014, Cholamandalam Investment and Finance Company closed at Rs 407.75, down Rs 8.55, or 2.05 percent. The 52-week high of the share was Rs 459.75 and the 52-week low was Rs 205.00.
The company's trailing 12-month (TTM) EPS was at Rs 25.38 per share as per the quarter ended March 2014. The stock's price-to-earnings (P/E) ratio was 16.07. The latest book value of the company is Rs 160.00 per share. At current value, the price-to-book value of the company is 2.55.
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