HDFC Bank Ltd (HDB) 2015 Q1 法說會逐字稿

Thank you for standing by and welcome to the HDFC Bank Q1 FY 2014-2015 result conference call presented by Mr. Paresh Sukthankar, Deputy Managing Director of the Bank. (Operator Instructions) I would like to hand the conference over to Mr. Paresh Sukthankar. Over to you, sir.

Thank you. Good afternoon to all of you. I think the results have probably been with most of you, you might have seen the actual numbers and the press release so I won't walk you through any large part of the details. I'll maybe just make couple of very brief observations on the numbers and Sashi, Bhavin, and I would be happy to take your questions.

If you look at the revenue side, net interest income growth for the quarter was about 17%. The net interest margin was at 4.4%, which was the same as the previous quarter which is the March quarter, but was lower than the 4.6% in June of last year. Operating expense growth remained muted at 4.6% so the cost to income ratio was 45.3% as against 47.9%. The total provisions were INR482 crores as against [INR527 crores]. And the net profit growth was 21%, net profit being INR2,233 crores. Balance sheet growth very briefly. Total balance sheet size increased by 18%. Loans and advances growth was 20.7%, that compares to roughly 13% for the system. Deposit growth was 22.7%, which again compares favorably with about 12% to 13% for the system.

Both of these of course had the one-off relating to the FCNR piece, which happened in the December quarter. So if you adjust for that, deposit growth and loan growth would be somewhere in the 17%, 18% range. The network of the Bank was at 3,488 branches and 11,426 ATMs and this presence is across 2,231 cities. So, we've added about another 85 odd branches in this quarter though on a year-on-year basis again, the increase would have been approximately 350. On the asset quality front; gross NPLs were at 1.07% so 1.1% rounded off, net NPAs were at 0.3%, and restructured loans were at 0.2%. The capital adequacy finally was at total of 15.1%, Tier-I CAR was at 11.1% and both these numbers, the Tier-I and the total capital adequacy, do not include the first quarter profits.

So, those are some of the key numbers. We throw the call open for questions.

(Operator Instructions) Nikhil R, Mumbai.

This is Mahrukh. Firstly Paresh, what is the breakdown on provisions?

The total provisions essentially are specific provisions and general provisions totaling to about INR65 crores including the standard provisions for the growth in the loan book as well as the provisions in respect of the unhedged FX exposure and SME and so on. So, that is roughly INR65 crores. The rest is all specific provisions.

Okay. And unhedged exposure, how much? It would be a small figure for you?

Yes. Between unhedged and SME and so on, it was about INR40 crores for the quarter.

INR40 crores for the quarter and that will be broken down into four quarter, amortized over four quarters.

INR40 crores would be the amount which is for this quarter. So, you have an equivalent amount in each of the four quarters.

And the other thing I wanted to check is that what would have been the retail growth if there was no reclassification because the business banking growth slowed partly because of reclassification?

Absolutely. In fact, I think that's important because that causes a distortion perception. If you look at the total loan growth and again excluding the [SME,] if you look in the total domestic loan growth, that's been approximately 17% and if you look at that on a like-for-like basis, the retail loan growth within that 17% would have been 14% and the wholesale growth would have been 23%.

Okay. And business banking particularly would have been how much?

Business banking has grown at little over 25% and the reason why the business banking portion in retail looks almost flat and hasn't shown much of a growth is because a large portion of the increase is essentially moved to the wholesale portion given the size of the exposure or the turnover of the customer.

So even on a sequential basis you are saying?

That's right. Within the entire if you look at it from a segment point of view or a product point of view, business banking has been one of the stronger growth pieces. So if you look regards the business banking, various retail, and other products; various segments, the fastest growth on a year-on-year basis has been in the corporate banking side, then followed by business banking and some of the retail products, including after that in terms of cards and personal loans and home loans.

And just in terms of capital adequacy, the new CBA norm, has that impacted Tier-I by how much?

By about 13 basis points.

13 basis points. Okay, perfect. Thank you so much.

Suruchi Jain, Mumbai.

I had a follow-up question on the provisions. If you could just detail provisions by different types of loans by the different segments. And my other question is on NIMs, whether they are lower due to the greater wholesale proportion versus retail or is it because of the same reason like you said last time on foreign loans being a larger proportion. And also my other question was on the seasonality in loan growth. I've noticed that usually first quarter is slightly slower in loan growth, would you agree and what would be the reason for that?

As far as your provision breakup, I mean the specific provisioning really has been a function of the increase in NPLs, which have been in three segments primarily and therefore the higher specific provisions would have been in each of those three segments. Again, each of these are about 1 basis point or 2 basis points so it's not large in any one particular segment. There's been some increase in NPLs on the agri side, some in SME, and some which is the normal retail including the commercial vehicle and construction equipment piece. So, the provisioning depending on what is substandard in this particular quarter would have been made for these three segments.

As far as the NIMs are concerned, when you look at vis-a-vis last year, you're right that in the second half of the year when we had the growth in the overseas FCNR linked lending where the margins were about 0.5% or thereabouts, the NIMs came down to about 4.2% and then came back to the 4.4% in the March quarter. So, sequentially actually the margins have remained stable. So beyond what was the change in mix because of the growth in the overseas book, there has been really no further change in NIM even though the corporate loan book on a year-on-year basis has grown as a proportion of the total loan book. So, sequentially in fact the margin has been just 1 basis point change so it's really been completely flat between the March and the June quarters.

As far as overall loan growth is concerned, there really isn't any meaningful seasonality to it or cyclicality to it. We continue to grow our loan book at a few percentage points faster than the system. Like I said if the system is at 13% and we have grown at 17% even excluding the FCNR linked piece and including that of course it comes to about 21%, we have seen in this quarter growth, which has been fairly healthy in terms of the corporate book. And as far as disbursements are concerned, on the retail side also we have seen some pick up on a sequential basis. However in the retail book itself, the net growth net of what are run-offs of the existing portfolio provides a slightly muted growth relative to the wholesale business. But there really isn't any significant seasonality that we are looking at.

Okay. I just had a follow-up question on the loan mix. So last year you had about 54% coming from retail in the Q1 2014 quarter and now in the Q1 2015 you have about 52% coming from retail. So would you attribute say the higher corporate disbursements to the lower NIMs or you would not?

The higher disbursement on the corporate side would have made a few basis points difference. But like I said, the major contributor to the lower NIM would have been the growth in the overseas book, which came at a roughly 0.5% NIM. The reason why the wholesale book increasing is not going to make a huge difference is because you're talking at the margin of this 1% or 2% or just under 2% change in the portfolio composition. But remember on the retail side even within that slightly lower retail proportion, there has also been a slight change in the composition of the retail book.

So if you for instance look at something like home loans which last year was about say 12% of the retail loan book, now it's a little over 13% so again, there has been a 1%, 1.5% change in the composition of the retail loan book again towards a lower yielding product like home loans. So when you look at the change in NIMs, some of it is between wholesale and retail, which is the point that you were making. Again within retail, there has been some change in composition especially because the home loan piece has gone up and that's a lower yielding product. But on an overall Bank business, the foreign currencies related lending which was there for the FCNR portfolio back in November or for the period ending November last year would have also contributed to that.

Alright. Thank you so much.

Prakash Agarwal, Mumbai.

Nilesh here. Just wanted to check on the fee income trends, that's been [working]. So we've observed that for last couple of quarters, it was up slightly below trend. Just wanted to understand for this quarter specifically, which segments have actually grown slightly below and what was the (inaudible)?

Actually what has been the bump there for the last two quarters has actually picked up a little, which is the third-party piece sequentially picked up slightly I mean off a relatively lower base because that had been coming off for a few quarters. But the other negative impact, which is somewhat newer is the fees on card --. Sashi, you want to pick up?

We have had some changes last year [of income] which was introduced on December 1. There were some changes in if you recall most of the banks and we were market leaders in that particular product, which is called the EMI on jewelry on the costs where you swipe a card in jewelry shops and then you convert that into EMI. So the processing fees, there was a very substantial amount of loans getting booked there. So, we stopped that ever since the regulation said no to loans for acquiring the jewelry. The third one is the late payment charges on credit cards so that also sort of came in the last quarter, in the December, March quarter. So cumulative when you add all this into account, there has been a sizable 2%, 3% impact on the growth.

And somewhere in between there was this circular on the minimum balance also --.

On the inoperative.

Was that against a substantial amount also?

No, that's a very small amount.

Substantial amount right now because it's only for inoperative accounts, but it is also one of the factors.

One of the factors, but it is not such a substantial amount, which is why I did not mention it too much.

But sir, outside of these one-off in terms of more regulatory driven, the other fee income line items are behaving us per plan?

If you look at the overall fee growth in other lines, it has typically been in the low-to-mid teens. But when you of then put in some of these elements, which are really contractions going away from lower rate of growth, but essentially not continuing, then you sort of are coming to anywhere between this quarter has been just shy of 10%; but it's been certainly in this high-single digit, low double-digit range. So there are some underlying businesses which are doing slightly better, some which continue to grow at the similar rates, and then you have some fee incomes which are impacted by some of the specific changes.

Okay. One last question on capital. Now when you look at the Basel III disclosures, basically the consumption of Tier-I has been close to about 70 odd Bips during the quarter and when you look at the non-funded exposure between quarters sequentially has moved up by about 70% so what led to this sharp increase on the non-funded side?

On the non-funded side.

So number one is, Nilesh, I hope probably we have not considered the profits for the quarter. So whilst the consumption is about 70

basis points, if you hadn't backed that, profits for the quarter would be about 20 basis points.

Fair enough. Sashi, just the non-funded exposures have actually increased so I just wanted to understand any specific sector or any change out there because this came in at about 70%?

Normal trade and so on, there is no specific large ticket unusual there.

Two things always happens. Two things probably, which is not reflected in the fund, but which increases the risk-weighted assets is one is the operating risk-weighted assets. What happens is every June since you need to provide 15% of the last three years' average net revenues so that sort of adds almost about 20 basis points to Tier-I capital. And then you have the unhedged exposures, which will add some amount of risk weights and then the counterparty CD adjustments to FX and derivative exposures. So, all these are roughly about 30 basis points to 40 basis points of incremental risk weights which is not reflected or which is not visible in the fund based growth.

As far as the observation on the Pillar 3 disclosures in the non-funded outstandings that all these things from this quarter onwards we are including there not only the regular non-funded, which means the LCs and guarantees and all other non-funded exposures, also the FX contracts have been included there from a disclosure perspective. The risk-weighted assets were always included so which is why the impact of that on capital adequacy is not there. But in terms of disclosure when you're looking at the exposure distribution fund based, non-fund based, domestic, overseas; if that's the table. That if you noticed the note underneath, it includes also credit equivalent of foreign exchange and derivative exposures from a disclosure perspective. So that has been included, which was so far not there in that particular disclosure, but was obviously already there because there is no change in the level of those disclosures on a year-on-year basis to impact the capital adequacy.

Other than the ones, which I just mentioned.

Fair enough. Thank you very much.

Suresh Ganapathy, Mumbai.

Most of my questions have been answered. Just quickly on the FIPB stuff, any update on the status would be great?

Right now, there is nothing which is come through. Frankly, the earlier application as you remember was in respect of the existing shareholding and our wanting to clear through the FII as per the existing mix which was there. Now that we've taken shareholder approval for a potential capital raising, we have actually to put in an application which seeks approval for the capital raising and therefore in a sense, the earlier application is either I mean I won't say infructuous, but at least is incomplete without considering the potential capital raising that is intended. That application which we have to put in, we expect to put in the next few days or maybe a week or two, after which I guess the whole process would get reactivated.

Application to raise 5% equity, why does it require approval?

Because depending on how they classify the existing shareholding, we would know whether there is depending on how they would categorize let's say HDFC shareholding or whatever, we have to figure out whether there is room for in the foreign shareholding cap of 74% or not. So naturally the new capital raising, the proportion in which we could access domestic or international or in whatever combination would be a function of an interpretation of the earlier shareholding.

But problem, Paresh, is that the way the government works, this can be put on hold for the rest of the year. I mean it's not that you require capital urgently, but the thing is you can get it done to the extent that it is 50-50. You will still not be in violation of the norms if you do 50-50?

You're right. So we're not going to be waiting for the first one to come in before we put in an application, but we would have to figure out when we put in an application, whether we want to put in an application of a certain percentage or theoretically anything which is incrementally in the same proportion as the sectoral cap or otherwise. So all I'm saying is that at this point of time, we haven't yet put in that application for the fresh increase and understanding of what is the reading or the expectation of reading for the existing shareholding would certainly be an important thing to understand why I'm trying to arrive at how we raise the incremental capital.

Fair enough. Thanks so much, Paresh.

Amit, Mumbai.

My question is on the fee income. So just wanted to know that is there no relationship between the loan growth and the fee income growth at all? I mean is the entire fee income for you largely transaction based?

That is largely correct. I mean there [wouldn't] be no relation, but the fees which get generated from our lending would be a little bit on a couple of retail loan products and again a very small amount on the business banking side. But most of the other fees are from transactional third party distribution, cash management, trade, custody type cash transactions, ATM transaction. So, it's really not relating to the loan growth at all.

So the only other question then is that whatever slowdown that we are seeing in fee income right now, you mentioned that 2% to 3% got impacted due to some regulatory changes.

Yes. Unfortunately, and I think we've spoken about this in some of the previous quarters as well, various different regulatory or other changes have impacted different fee lines going back to where we were not charging fees for ATM transactions to the lower fees that we would earn on distribution of mutual funds or later on insurance or be doing away with sale of gold coins or the lower acquiring commissions on debit cards to the lowering of or the doing away with charges for non-maintenance of minimum balances for inoperative accounts to some changes in what can be charged for on the credit card for customers (inaudible) their transactions. So I think different regulatory pieces, but what we spoke about a little earlier which Sashi mentioned was specifically incremental changes which happened in this quarter. But yes, it's got nothing to do really with any pickup or slowdown in different segments of retail loans as much as with these specific products.

So, basically most of the regulatory changes largely would have impacted the yield part of the income or you basically stopped doing certain product at all? What I basically wanted to know was what's the underlying volume growth that is there which is still not getting reflected in the income per se?

So, two things. Except for an odd product where the product itself has come to a halt let's say like gold coin sales and so on where I mean the product itself was stopped. But rest of it, the reason why it doesn't still show up as much is because in lot of these cases the change in fee yield as you call it or the commission rate is a change which is where the commissions have come down to 50% or come down by a third or come down to a third. So even if you have a volume growth which is happening in some of these products, the volumes would need to double or triple to come back to the rupee value of some of these products. So when you look at the overall fee growth, you will have some lines where there will be no change in the yield and volumes are increasing and therefore they are growing perhaps at for the sake of argument say 15% or 20%. There are others where you've had what we just discussed, which is the volumes may have grown or may have been flat, but the yields have come down sharply and therefore on a overall portfolio basis, the fee growth has been around 9.5%, 10% in this quarter, but in the last few quarters also at anywhere between 9%, 10% to about 13%, 14%.

Okay. Thank you.

Kashyap Jhaveri, Mumbai.

In our last conference call, we had highlighted about this overall portfolio behavior in terms of asset quality being better than what we have seen historically also and so with the credit cost. Now if I look at our Basel III disclosures in this quarter, the delinquency number would have been something like about 1.6% or so, which is slightly higher than what we have seen historically in case of your bank except at the time of CBOP measures. So, is there any change in assumption to that comment that you had made last time?

No, not really. In fact, if you're looking at -- are you talking about gross slippages? So, gross slippages are actually still lower than on a year-on-year basis. So if you look at the annualized gross slippages in the first quarter of this year, the annualized slippage ratio would be about say 1.5%. The first quarter of last year, it was 1.87%.

So is it because in retail loans, we do have some intraquarter adjustments which are there?

But you would have a situation sometimes where a customer whose NPA becomes regular might again slip into NPL, that does tend to happen. And again in some cases especially where it's non-retail, it could happen in a particular quarter like if you have some F&E exposure or some agri exposure, which is not necessarily going to happen every quarter, but happens in some quarters and does not happen in some quarters. So, there is always some variability even within quarters. But broadly, I would still say that the gross slippage or the absolute level or the percentage level of gross NPLs still remains reasonably stable. I mean in the previous quarter, there was not much of slippage, this year you have some slippage.

But if you look on a full-year basis, it's still in that 3 basis point, 4 basis point swing one way or the other at 1.07%, at say therefore 1.1% rounded off. If you look at the last almost two years, we have been at around 1%, have gone up to 1.2%, came back to 1.1% and 1%, and now we're back to 1.1%. So, really we have been in a range of about 20 basis points, 30 basis points. Even if I look at the peak in this last two years of about 1.2% odd, that's to my mind still a little lower than our 18-year average. So I will still maintain that it is a tough environment, but within that we have seen from our absolute the lowest we've ever seen at 10 basis points, 15 basis points and then down again and up again. But broadly, asset quality still remains reasonably stable.

That's it from my side. Thank you.

Saikiran, Mumbai.

I just quickly have a question on the cost growth, it's very much muted in the first quarter. I understand you had [chatted] earlier also there is some sort of an operating leverage, which can kick-in going forward. But how do you see this moving into FY15 and then maybe for the next couple of years?

So, the cost control piece or the improvement in the cost to income ratio really has a couple of elements to it. One is the operating leverage which you referred to, which I'd mentioned earlier as well, where we are seeing investments which have been made where the costs are largely in continue to sort of help the revenue growth without at the margin as much of an increase in expenses and that has got to do with more of the branches that we had opened and which breakeven literally along the way. And I think that has a little more to play out. There is also the element of actual cost control where we are talking about the fact that we have been holding a tight leash on operating cost growth.

And some of that is tactical and some of that therefore will have to be unwound as the topline growth or the level of activity and level of business picks up once again. So on a net basis, I would say that the cost to income ratio will probably remain roughly stable. We had come down from the 47%, 48% which we had for a few quarters going back a year or so to between 45% and 46% in the last couple of quarters. When you look at just the absolute expense growth, that has remained muted for a while and I think some slight pickup in that is realistic. But since that is probably going to be accompanied by the fact that we are also seeing the level of activity, the level of disbursement, and therefore revenue growth slightly higher, I don't think the cost to income ratio would move too much.

And the second question from my side. With the new regulations on the REIT refinancing as well as the regulatory subventions on the infrastructure financing, how do you now see the infrastructure financing for your Bank and also general comments on anything that would be useful?

So see, there are two elements to this. One is just the fact that as the investment cycle picks up, as you have larger number of newer projects in infra or otherwise; we have in the last couple of years been selectively increasing our exposure on the term side whether it's Brownfield, Greenfield project finance and a little bit in infra. And to that extent, I think we certainly do see opportunities for us to grow that book especially as you have some new projects where we do have a credit appetite and as the market picks up. The second part of that of course is does that lending becomes even more attractive or viable because you have the option of raising the term bonds to finance that activity so that you're not running a gap, but you also have some benefit on the PSL side. I mean as you know of course, the reserve requirements not being there makes that funding source a little more viable and then the fact that you have raised those and funded these activities would give some relief on the PSL.

So, I would say that the second one would only make the first decision that much more attractive and probably increase our appetite a little. But even without that in the last couple of years, we had started increasing the exposure to some of those sectors as we have got more comfortable with certain segments of these of course not across the board, but where we have had the appetite. So, I think the new dispensation on being able to raise money through the bond route is a positive. Of course we have to see what sort of an opportunity is there in terms of the size of that market, at what rates will these bonds be available, and then how much does it add to the inherent risk return on this kind of lending whether it is for infrastructure or affordable housing. But it's certainly a positive, but I guess dimensioning how much better and how much of an opportunity it is will I guess be clearer only along the way as the market develops.

Great, that's useful. Thank you very much.

Manish Ostwal, Mumbai.

My question on the retail loan book growth especially some of the auto vehicle categories. Some of the peers have reported reasonable growth in a category like auto loans and two wheeler, but we have seen a fall in that category also. So, are these little bit increased credit [concern] or norms there to control the risk or how that pan out?

Actually on the auto side, there is no credit concern why we would want to tighten the risk norms or tighten the credit norms to slow down the loan growth or whatever. In fact there the growth tends to be a function of the actual car sales and for us the loan growth or the portfolio growth is also a function of at what pace the earlier loan portfolio is running off because remember this is a three-year or three-, four-year door-to-door loan and therefore the average duration would be more like 18 months. So, it keeps running off and therefore as the industry itself or as the portfolio loan growth in terms of incremental growth has come off or incremental disbursement had come off, the run-offs at some stage are sort of fast enough or rapid enough to not allow the loan growth, the portfolio to grow at a very high rate.

If you look at just disbursements because ultimately the disbursement growth will fold back into the actual loan growth, in the last quarter, in the June quarter, there was a sequential pick up for the March quarter so in fact in order to lower 5%, 6% growth in terms of just the disbursements on auto loans on a sequential basis. So depending on how the car sales pick up, we should see our portfolio growing; but there certainly isn't any deliberate attempt to mute that growth because of any credit concern as far as the car loans is concerned. On the commercial vehicle side, there has again been a marginal pickup, but there again it's a question of the underlying demand and there, there are still some segments where the growth is somewhat cautious.

Secondly, the entire credit card portfolio because from last quarter to this quarter we have seen 14% decline, which is one of the highest in last two quarterly trends so any specific there?

The credit card portfolio hasn't degrown on either year-on-year or quarter-on-quarter basis. You spoke about which product, did you say credit cards?

Yes, credit card portfolio, sir.

No. So the credit card portfolio actually a year back was about INR10,570 crores, March it was INR12,257 crores, and now it's INR13,272 crores so it's actually grown both year-on-year and sequentially.

Okay. Maybe I have quoted the wrong number. And last point is that the provision line item, is there any investment depreciation writeback and secondly, could you give the breakup of the provision line?

So the investment depreciation provision was some INR3 crores, INR4 crores; it's almost negligible. And the total amount of the provisions effectively reflects the specific provisions because to the extent of the general provisions, there was an equivalent amount of release of the floating so that really netted itself off. So, the total amount to the extent of general provisions.

Okay, sir. Thank you very much.

Rakesh Kumar, Mumbai.

Just slightly if you can elaborate on this Kisan Gold Card thing. There has been quite a strong growth in this product so what is the ticket size and what is the indicative yield we are getting on this loan product so just for some understanding purpose?

This is the basic crop loan. This is essentially what qualifies as our direct agri and this is the lending which is done based on the scale of finance for different crops in the markets that we operate. So as we have grown our rural branches and as we focus on the agri lending for certain customers in certain regions and based on the customer segments that we are looking to service, this is the standard crop loan. It's styled as a Kisan Gold Card because the customer can draw this down through the card route. But the typical ticket sizes again varies because you have it for different farmer segments. We've got two or three product names for that because we do it for the actual cultivation, we also do some term lending. So it's not a single product, it comes under that one category because that's essentially the direct agri loan.

What could be the average yield we are getting on this loan book?

Anywhere between 11% to [7.5%].

11% to 7.5%. Okay. Secondly on this Basel III disclosure correctly what you mentioned that operating risk capital requirement has gone up because of the denominator factor. So, this $34 billion number could remain the same throughout the year so just because of this we might not see increase in --?

Yes, it will remain until next March.

The operating risk rate doesn't go up because you do this on a three-year rolling basis. So for all the quarters in this financial year, the operating risk charge will remain the same under the basic indicator approach.

And this capital requirement for credit risk rising basically due to the non-fund exposure rise or there is any other reason related to it?

Apart from the growth, as I mentioned to Nilesh or someone else, this is on account of the increase on account of unhedged exposures and also the new requirements coming from the CVA, the counterparty CVA adjustments that we do for our FX and derivative exposures. So, that has roughly about 13 basis points to 16 basis points so about 29 basis points of that on capital.

Would this figure revert to some normal level or would it remind the same?

These are two incremental requirements, which kicked in from this quarter and which will remain. I mean they won't increase other than to the extent of the underlying exposures changing, but the unhedged exposure thing is a new circular where the incremental capital or provision requirements we referred to earlier kicked in from this quarter while the general provision requirement for that is to be made every quarter over these four quarters. The capital requirement, the increase in risk wage has happened immediately so that is about 16 basis points and the CVA adjustment again is 13 basis points which is happened, which should continue. These are not going to go away, but they won't necessarily increase other than to the extent of the actual size of the exposures.

Okay. Thanks a lot.

Vivek Verma, Mumbai.

This is Jatinder. Sir, can I have the number of employees as of now?

So, the number of employees are 70,400.

And what was it last year, sir?

It was about 69,600.

Sir, of these employees, could you give a brief idea how many are actually eligible for ESOP?

That really is a function of a certain number of levels and certain performance tiering because it's not just there are four or five ways within which the employees are eligible, but only for certain performance tierings.

And sir, could you give some broad sense in terms of what type of entry level wage increases are you seeing on a year-on-year basis and some middle management or general wage escalation on a year-on-year basis?

I think on an overall basis because this obviously will be slightly higher percentages on a much lower amount at junior levels and then reducing at middle and senior levels. That is a combination of some market comparisons and certain annual increases, but the overall annual very sort of roughly weighted average will still be somewhere in the 8% to 10% range.

Adarsh, Mumbai.

My questions were done with. Thanks.

Manish Chowdhary, Mumbai.

Just a couple of questions. Firstly in terms of this ForEx revenues, they were down sequentially as well as YoY. So if you can just tell if there is a one-off there in this particular quarter or is it something more related to the flows. And secondly, in your initial comments you had mentioned that you're seeing some amount of pickup in the retail side so if you could elaborate which segments you're seeing the pickup from?

So on the FX side, there are two reasons for the gap. Last year in this particular quarter there was a very successful FCNR linked product so that we had very strong flows in and that was an element of the underlying deposit plus the FX contract on that, which was making it attractive for customers and which was profitable for the Bank. Those volumes are clearly lower because as you know in the subsequent part of the year when you had the FCNR scheme with the swap, a lot of those flows were absorbed at that point of time so since then, the FCNR flows have been lower. The regular other corporate trade flows have remained stable and in fact have improved slightly so that has not really seen any material change. And the third part is that last year there was some trading revenues, this year there's actually a small negative on the trading side so that you could say is a bit of a one-off especially when you compare it, a small negative this year with a bigger positive of last year.

So two extreme factors, one linked to flows on retail FCNR deposits and the other swing, which is a little more I would say one-off in that sense is the trading profit last year with a bigger trading loss this year. Actually the trading opportunities also have tended to vary because if you look at the forward markets this year in the last I guess a few months with the RBI intervening in the FX market through the forwards route, that particular market has been a little more rate bound than earlier, which of course means both lesser trading opportunity, but also for the corporate or customers, their outlook on the need to hedge sometimes can vary because they see that as fairly stable. And customers then tend to look to hedge their exposures if they see greater volatility; but if they see relative stability, that can impact as well.

And on this retail advances?

On the retail side, there are products which are linked to underlying sales of products and there are some which are on their own. So if you look at business banking as a business though part of the exposure comes in retail and part in wholesale and if you look at personal loans or credit cards, these are products which have done extremely well, they have been growing in the 20%s. Products which had become somewhat sluggish were products where there was a linkage to underlying sales of for instance car loans and commercial vehicle loans because the underlying sales of those products had clearly in fact contracted last year. This year again April was somewhat sluggish, but then in May and June we saw a pickup and again this is true of the underlying sales of those products and immediately then reflected in the higher disbursements in both these products though much more on the auto side and a little lesser on the commercial vehicle side.

But specifically if I look on a sequential basis quarter-on-quarter, we did see a 5%, 6% increase in the disbursements on the car loan side. Of course, we don't know whether this is sort of a one-off pickup because it's too early to call it a trend in just one quarter, but that was what I was referring to when I said there has been some pickup and again you have seen that car sales have picked up whether it was because of the continuation of the excise benefits or just sort of more positive sentiment in the market or some new models being introduced and so on. So a combination of factors, but that is also been our experience when you look at disbursements of these products in our car loan portfolio.

So I mean to sum up, it's largely the car loan portfolio, which you are referring to?

Yes, that's right.

Because the rest of it is growing largely on its own steam.

That was already growing, right. Of the two products which had slowed down, the CV piece had contracted by about almost 15% odd and the car loan business had slowed down to about 7.7%. So, that's really what I'm referring to because the car loan business is the largest portion of our retail loans.

So, any signs of pick up in CV side? And secondly, in terms of home loans there was some slowdown in probably your portfolio acquisition this quarter so could you give us the number of how much you acquired?

So, the home loan piece in terms of our actual loan origination and so on had continued, there's no sort of slowdown in that. In terms of what we acquired in this quarter, which is what we purchase in this quarter from what we had been sourcing, that we did about INR1,100 crores or so this quarter. Again if you look at the total amount that we had acquired last year and just sort of prorated them, it's not much lower. But in the last quarter of last year whatever had not been purchased, we picked up almost INR4,000 crores so sequentially you're right that the amount that we have acquired is a little lower. But the home loan book itself year-on-year has grown at about 14.2%, roughly between 14% and 15%, and the actual origination which would ultimately because whatever we purchase, they may be bunched in one quarter or the other, but the amount that we look to purchase ultimately is a function of what we have originated and the PSL component which we want to take on our books. So, that should continue to do reasonably well.

Thanks so much.

Jyothi Kumar, Chennai.

Would you relook at your buyout relationship with HDFC post the changes from RBI on affordable housing?

By itself, that does not really change the structure of this particular arrangement because the benefit of this arrangement is that we accessed the efficiencies and the economies of scale of HDFC by outsourcing certain activities to them which they process at an extremely low cost and on the other hand, they benefit from getting some incremental origination at a market driven fee. And secondly, that what we take back on our books is the portion of the home loan which we are really keen to have on our books, which is the portion which qualifies for PSL.

Now when you look at the new opportunity which is thrown out by the new RBI circular, what it really means is that if we were to raise seven-year bonds to finance this, then to that extent the portfolio that we have on our books would not require PSL and of course the bond raising would not have the reserve requirements. So, both of those are available to us for the portion that we take on our books subject of course to an RBI clarification on [approvals] in any case. So, the other benefits are sort of independent of these and whether these benefits would accrue would be a function of our raising those bonds and getting RBI approval to the extent that the circular says if you're acquiring loans from another entity, it would require RBI approval. But by itself, it doesn't really change the dynamics of that arrangement.

Secondly, if I can squeeze in one more question. Can you talk about underwriting trends in car portfolio? Do you think they remain as is let's say possibly 18 months back or are you seeing incremental deterioration this year?

You said the credit card portfolio or car portfolio? The auto portfolio has actually remained more or less the same. I mean if you look at the overall car loan portfolio, which is of course a combination of new cars and about roughly 10%, 15% of used cars. There we are off the load of delinquencies and losses, but they still remain well within the loss parameters that get priced in. So, the underwriting standards by and large have not changed at least in the last year or so nor is the portfolio trend sort of driving a change. I mean we have seen sort of in the last six, seven quarters, a few quarters where there has been some increase in early delinquencies and then which has again stabilized and come back. So, I can't see a trend in any particular [relation].

At the existing level also, would your observation stand true?

I think by and large, that's been true of the industry at least my understanding that experience of other lenders also is that the passenger car portfolio has remained fairly stable in terms of asset quality for most banks and of course the variability in asset quality has been in CV and certain other segments.

And one last data question. In how many centers now you do the Kisan Gold Card? I think two quarters back you were mentioning about 1,600 odd places.

I'm sorry, I don't have that data point right now with me.

No problem. Thanks.

Nilanjan K, Mumbai.

Just wanted to revisit this question on this affordable housing. So if I read you right, if you raise seven-year plus bonds and you want to seek regulatory incentive even for your existing as well as new buy outs will need an approval, is that right?

Yes. I mean the existing in any case, I don't think even for an entity themselves, it's not sort of part of the circular that we'll get benefit. It's supposed to be for increment of our growth. But the circular mentions that if it is for loans acquired from other intuitions then it requires approval.

So the related question is whatever the deal structure is right now with the parent company, obviously that factors in some kind of efficiencies on both operations as well as the cost of funds. So in case you tend to get some benefit, is there a provision or is there a possibility that you could rework on that?

Our dealing on this particular transaction or structure is certainly conceived to be at an [incident] basis. So if there is anything which sort of changes the relative attractiveness to one or the other, it would certainly be open for us to come back to the drawing board and discuss this. Right now, these regulatory changes we are referring to does not really impact the issues that are part of this arrangement. So, the fact that you could also apart from what you are doing right now get a lower cost of funds or get some PSL benefit if you were to fund that through the bond is really a decision which the bank has to make in terms of how we would like to fund that portfolio.

So right now we are funding it from our regular deposits because given the size of that in relation to our overall book, we are not running a gapping risk which is unacceptable and so on. But if you were to grow our affordable housing book further or for that matter if there are opportunities on the infrastructure side, which somebody asked about earlier, then the opportunity to fund that through the term bond and the fact that because there are no SLR requirements for those bonds, the grossing up of that cost, which would normally have happened before this dispensation, that and the fact that there is no (inaudible) benefit makes that a little more attractive. But it doesn't really to my mind by itself meaningfully change the current arrangement.

What I wanted to understand is the current scheme of the deal or the structure of the deal between these two entities. Does it have a inbuilt provision to call for a change if one of the parties starts benefiting? That's what I'm trying to reach at.

The arrangement in any case is renewed annually and therefore if there was any change due to happen, it would get discussed and renegotiated as part of the review process.

And secondly, in terms of the amount that you actually raised, I'm sure there will be components of PSL, affordable housing, and the others. Would you share what is the market composition currently that you believe that you raise or that you think is the market composition on this home loan side? What percentage would roughly be about, let's say, affordable housing?

Of the account that we are taking on?

Yes. Not the amount you've taken, but essentially that you source, let's put it this way.

I really don't have what we source. If I was to take a bit of a guess, it might be about 60%, 70%. But honestly, I mean at this point of time we haven't sort of seen what portion of that would be affordable housing by this new definition because as you know, I mean this is just come out, we haven't yet sort of reviewed that.

And sorry, two data questions. I missed out on the breakup of the provisions if you had given it earlier.

We had a total of approximately INR65 crores as the general provision and we had specific provisions. But the amount of INR800 and odd crores would be equivalent to the specific provisions for this quarter because an equivalent amount was released from the floating provisions to cover the increase in general provisions.

So our floating provision which used to be about what INR1,865 crores will come down by INR800 crores. Is that right?

Yes. So, we are right now at about INR1,765 crores or so, so about 52 basis points, 53 basis points.

And what would be the risk-weighted assets for the standalone bank?

The risk-weighted assets would be INR3,67,350 crores.

And you're not adding back the profit of this quarter?

No, we're not. We have not added back.

So, it will be roughly about 30 basis points?

About 50 basis points.

50 basis points, okay. Because I thought the CVA and USC together makes up about 29 basis points.

Yes.

Okay. Alright. Thanks.

Kajal Gandhi, Mumbai.

My questions have been answered. Thank you.

Jigar Valia, Mumbai.

First question, if you could just share your perspectives on payment banks and maybe small banks and more from a perspective of how could they have an impact on SA balances for the banking sector? That's the first question.

I would say there would be a segment of customers who if they are looking only at the facility of transacting that to for a certain amount in the balances, then that and which is in the larger scheme of things more likely to be the customer base is currently financially excluded, but which will get the ability to access through these banks. I think that is probably the customer base that is going to be added to the system and probably could potentially go with these banks. But most customers who are existing end customers or who are coming to the banking system and looking for means of accessing the payment system for clearing of check or a deposit; but also looking at borrowing, looking at various other financial needs; then they would still look to move to or to transact with a full service bank. So I would think that the payment banks in particular are a great move from a financial inclusion perspective, but I don't know whether and I don't think that the customer base that is accessing the full service banks like us, whether the introduction of these banks will materially change the opportunity for banks like us.

Does it really change anything from the thrust on a rural banking perspective? Any change in model that we may have to look at? And is there a way where a bank can actually collaborate and probably benefit from payment banks or small banks?

Actually in our experience, there are a lot of customers in the rural areas who probably might have even had some banking relationships with existing banks, but a lot of their financial needs have not really been met or have not been met with the turnaround times or at the service levels that they aspire to get and the product offering itself from a lot of these banks is not as full service as these customers want. So again for all of those customers who want maybe a car loan or a light commercial vehicle loan or a tractor loan or a prop loan or a loan against gold jewelry or whatever on the lending side from the bank's point of view or who want a combination of these plus other services, those are the customers that we are looking to access. And to that extent given the size of the market, given the relatively low levels of penetration; we still see rural and semi-urban as a huge growth opportunity.

In addition to accelerating these customers segments, banks do have targets to achieve and do want to add a certain number of customers whom they are bringing into the banking system for the first time. These could be across the board or certainly in specific districts or specific villages that have been allocated to banks as part of the financial inclusion targets that banks may have. And maybe in some of these segments the truer payment banks might have a more viable or more affordable model of accessing these customers where the customer needs are much more niche and specific to purely accessing the banking system from a deposit and transactional payments remittance point of view. But certainly, this does not change our focus. In fact a lot of the growth that we have preemptively done in the last few years is to ensure that we build a presence in these markets where we see the opportunity both in terms of existing customers looking to move to banks who provide better services as well as the growth in that market as the economy grows and the trickle-down effect of that is felt in these semi-urban and rural areas.

Next question from my side is how far are we away from any next major overhaul on our IT infrastructure? We've seen lot of new banks coming up with various new products in a series of be it time banking or video banking, et cetera, et cetera. And is it that we have any issues in terms of implementing any of these on our existing systems and would we need an overhaul?

No, we would not require any overhaul. In fact most of the enhancements or the newer introductions are actually part of our ongoing rollout of products. Lot of these are already in vogue already. In fact if you look at our digitization initiatives, which have been from time to time getting rolled out across different products, they are absolutely enabled off these same core systems that we have. The flexibility that our systems have to add whether it's a new app or another digital platform on the loan side or other bells and whistles on various products of this, all of those are not just capable of being launched, but in many cases already are being offered to our customers right now.

Last question, 7% of advances is right now overseas. How do you see this number by the end of the year?

About 7% of our advances are overseas. I don't see that changing too much. While last year it went from roughly 4% to 7% or the one-off opportunity linked to the loans for the FCNR which was [soft] with RBI, but otherwise it had been 3%, 4% for a couple of years and now it's gone to 7% again, it's likely to remain roughly at that level.

Perfect. Thank you, sir.

Approximately how many questions do we have?

We have only two questions.

Okay, fine. So then we'll quickly finish those.

Hiral Desai, Mumbai.

I was little late on the call so I'm not sure if this has been already discussed. I had a question related to the Annual Report for 2014. The retail advances number in the Annual Report is about INR1,65,000 crores while the number that we had disclosed at Q4 end was about INR1,50,000 crores so obviously there is some reclassification on the business banking piece. But what else would create such a large difference because historically this has not happened?

So, the classification for --

See, what's reported in the balance sheet, the retail assets number that you see, that includes overseas retail also as part and parcel of the same thing. So, the report that we have given you is clearly a domestic retail that we have given you. That's the difference of INR15,000 crore, which is coming on account of that.

This would largely be due to retail overseas assets?

Correct, yes.

And how large would that book be?

That is the FCNR [$1.9 million] that we have spoken to in the third quarter. So if you add back to that, the retail numbers that we have given, you have reached the number which is given in the balance sheet.

The unsecured advances are about 24% of our loan book. Now if I adjust for the credit card and the personal loan, which would account for about 11%, 12% of that, what would be the other unsecured products that we would have?

Those would primarily be short-term corporate lending. And you're talking about the total portfolio not only on the retail side?

No, the total portfolio?

So, the rest of it is essentially corporate lending which will be on the shorter term so business accounting, export finance, and so on; which would be unsecured.

On the unhedged currency exposure, I don't know if you've discussed this, just wanted to know what would be the provisioning amount during quarter for that.

Between the unhedged FX exposure and the SME and stuff like that, it's about INR40 crores.

Okay. Thanks and all the best.

M.B. Mahesh, Mumbai.

One, we've seen a slowdown in retail, just trying to understand given the fact that it seems to be more driven by the maturity of the loan book which you already have in the books, what is the kind of incremental loan book that you will need let's say in a car and CD portfolio for you to move back to let's say a 20% number? And two, what is the kind of competition that you're seeing in that space right now? From a market share perspective in the incremental disbursements, how are you seeing this moving right now?

I would think that the disbursements would have to increase by somewhere between 20% and 25% to first of all come back to at least somewhere between the mid to high teens in terms of the growth rate for auto. I don't know whether 20% growth plus in terms of loan growth will require an even higher growth rate in disbursements, which is probably unrealistic unless car sales really go through the roof which is just sort of unlikely. Sorry, what was the other question?

From a disbursement point of view that you're seeing today, what is the kind of competition that you're seeing given the fact that we seem to have increased number of players in that space right now?

In the last couple of years, the heightened competition was more to do with manufacturer linked financers for some of the larger manufacturers where they were gaining market share especially because of their favorable pricing for their own products. The rest of the competition in terms of existing or newer players within the banking system while that has intensified, we have been able to actually protect and we believe in the last few quarters marginally improve our market share if we just relate the number of cars that we have financed to the total number of cars that are reported by [SAM] as cars being sold. So it is a competitive market, but I think we've been able to consolidate or hold on to our market share despite the increased competition. This is in the last couple of quarters. But the portion of the market, which has gone probably from banks to some of the financers in terms of manufacturing, that of course has stayed where it is.

Next question is just wanted to understand why we are doing this entire capital raising plan because currently if you look at the entire capital consumption that we have right now and given the fact that the loan book growth is somewhere in the range of about 20% and the underlying ROEs are more or less in that range; just trying to understand what is driving the loan growth, what is driving the capital issuance? Two, if you look at many of the regulatory requirements of capital, most of them are not kicking in before the next two, three years. Are you seeing a dramatic growth in loan book over the next one quarter or the next couple of quarters for which you're raising this capital?

The capital raising is certainly not for the next couple of quarters, it's for the next two years. But if you look at our ROE of roughly 20% which you referred to, remember we have a payout ratio which is about 22%, 23%. So the sustainable growth rate based on internal generation or internal retained capital would be somewhere in the mid-teens. So, there is a certain amount of consumption of capital of course depending on whether loan growth is at 20%, which is where it has been right now or it grows from there. As far as loan growth is concerned, traditionally we've seen that the system loan growth tends to be at a certain multiple of GDP and we have grown 3%, 4% faster than that.

So if we believe and if you tend to also subscribe to the view that GDP growth in the next couple of years moves from the sub-5% to maybe closer to 7% or higher over the next two, three years; then clearly there will be some pickup in loan demand and loan growth for the system. And if we maintain growth over that system growth, then we should also see some increase, but again that is based on -- I don't have a guidance on any growth number, but I'm just saying that will be a model that one can look at in terms of what system growth could be if GDP growth picks up. So, is there some consumption of capital right now? The answer is yes. In the event that the economy picks up and loan growth picks up, could that consumption of capital be a little higher? Potentially, yes.

Regulatory requirements both in terms of the poor equity requirements, the total Tier-I and right now as you know, there are no 81 instruments really so chances are that would probably need to be maintained through capital. If you look at the increase in the capital conservation buffers, all of these kick in every year over the next four or five years so it's not at the end of three or four or five years, but it's literally every single year. And in the meantime of course, you also have the existing Tier-II which tends to runoff because it doesn't qualify under audits, it's being phased out under the Basel III. So clearly, this is capital raising does enable us to meet our capital requirements for growth and for regulatory requirements, but it's not certainly with a time horizon of a couple of quarters, it's more like a few years.

I just wanted to check from a growth perspective, are you seeing something different which will take you from a 20% loan growth to 25% over the next few quarters?

There are too many [pieces]. I wouldn't be talking about that on this call, but right now we have.

Thanks a lot.

I thought that was the last question. Is that right?

We have one more question, sir. Adarsh P, Mumbai.

Just wanted to check on the fee side. You'll obviously said it's more transactional in nature, but is it safe to assume certain parts of it is now bottomed out? I kind of missed out the first part so I don't know if you've kind of --.

I think what we said was that there was some parts which had bottomed out in the sense that for instance, third party distribution fees at least there we saw a little bit of a pickup from clearly what has been a line that has declined for almost a year-and-a-half. But the fact that other businesses which generate fees are doing reasonably okay, but some of which have been hurt by lower fee yields or affected by certain changes. Therefore the net fee growth is really a combination of some lines which have been impacted because of regulatory or other changes, some where you continue to see a moderate growth with no change in yields, and some where you're seeing some pickup in volumes and incomes have grown off a relatively lower base.

So, still you think this year would be below balance sheet kind of growth? Would you kind of think in the next four, five quarters you get there or --?

I think at least for this financial year it appears as if fee growth at least on the fees and commissions line would probably lag loan growth. There are of course other lines like the overall FX piece and the bond gains piece which will remain somewhat volatile, but not linked to loan growth in any case.

Just on the third-party, is there any difference in the way you'll report in the Annual Report the full-year number of commissions made on life insurance because I see your commissions that you've made has come down disproportionately vis-a-vis volumes versus if I compare say an ICICI or an Axis? So I just want to understand that you'll got something extra earlier, you'll have cut that down or because I see that's a little bit disproportionate hit that you'll have got?

Our volumes were down by about 25% last year so even the fees are roughly in line with that.

So it's a double whammy because as you know, the actual commission rates than the mix change and the regulatory changes were slightly lower and then the volumes were lower last year.

Okay. Understand that. Thanks, Paresh.

There's no further questions from participants.

Thank you once again all of you for patiently listening to this rather long call. I hope you've been able to address your queries. Thanks and bye.

Thank you, sir. That does conclude our conference for today. Thank you for participating on Reliance Conference Bridge. You may all disconnect now.