HDFC Bank Ltd (HDB) 2016 Q4 法說會逐字稿

Ladies and gentlemen, good evening, and welcome to HDFC Bank Earnings Call for the results of Q4 FY16, and financial year ended March 31, 2016, presented by Mr. Paresh Sukthankar, Deputy Managing Director and Mr. Sashi Jagdishan, Chief Financial Officer.

As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after a brief commentary by the management. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Sukthankar. Thank you, and over to you sir.

Good evening, everyone. As was just mentioned, I'll walk you through some of the highlights of the quarter's financial results, and Shashi and I will take the questions thereafter.

For the quarter, the net revenue growth was 20.3% with net revenues touching INR10,319 crores. That came on the back of a strong growth in net interest income, which grew by 24% to INR7,453 crores. Net interest income does account for about 72.2% of the total -- of the net revenues. The other component of net revenues, which is other income, was at INR2,865 crores, and grew by 11.8% for the corresponding quarter of last year.

If you look at the break-up of other income, of the INR2,865 crores, the largest component is fees and commissions at INR2,172 crores, and that grew by about 18% over the corresponding quarter of last year. The bond gains this year at INR115 crores were lower than about INR196 crores in the corresponding quarter of last year, so those were down 41%. FX was also down about 14% and which is why the overall other income was up 11.8%, although as I said, therefore the composition of the other income was fairly healthy.

Within the fees and commissions, the 18% growth, there wasn't any meaningful volatility or one-offs, and we did see some increases -- healthy increases on a year-on-year basis in third-party distribution, a little bit in retail assets and some wholesale commissions as well. Again, the increase in commissions on the third-party distribution side came with pretty strong volume increases in the insurance piece and the mutual fund piece, all of which sort of contributed to some growth in the fees and commissions line. So that was on the other income.

Moving on to the cost line, operating expenses were up by 18.9% and that meant that the cost to income ratio for the quarter was at 44.4%, as against 44.9%.

Just to go back for a second to the net interest income growth, which I mentioned, that was on the back of an increase in average assets of about 23.8% and a net interest margin -- a core net interest margin for the quarter at 4.3%, which is how we had translated to a net interest income growth of about 24%.

So coming back, provisions at INR662 crores included specific provisions for non-performing loans at INR490 crores, general provisions at INR161 crores, and other provisions of INR11 crores. The increase was meaningful in the general provisions, in particular, because of the stronger loan growth. So as against INR118 crores of general provisions in the corresponding quarter of last year, this quarter we had INR161 crores of increase in general provisions for standard assets.

The other assets actually includes also a contingent provision that we have made in relation to what was required regulatorily in relation to our state government exposure, which has been all over the papers, where all banks who have exposure to that state government were required to make provisions, although it remains a standard asset. For us that contingent provision has been created, and to that extent, we have used floating provisions. And therefore, there really isn't any change in the other provision line, because both of those are within the same section [and] same portion of the overall provisions.

Other than that the specific provisions are in relation to the NPAs for the quarter. We've also used for the full year, therefore, if you look at the floating provisions movement, we've had an opening balance in floating provisions of INR1,523 crores. During the year, we made earlier in the year floating provisions of INR115 crores. We've also utilized INR300 crores, so the closing balance of floating provisions are about INR1,336 crores. That's on the provision line.

After providing for taxation, the net profit growth for the quarter was at 20.2% and the net profit, of course, was INR1,698 crores. On a full year basis, as far as the P&L was concerned, net revenues for the full year were up 22%, net interest margin for the year as a whole was at 4.3%, cost to income ratio for the full year was at 44.3%, and net profit growth at INR12,296 crores, on a standalone basis was up 20.4% for the full year.

On the balance sheet side, we had seen a fairly strong growth, even up to December and we saw that momentum continuing in this quarter. In fact, we saw a bit of a spurt towards the last couple of weeks of the year as well, and which is why if you look at the overall balance sheet growth, was around 20% at INR7,08,000 crores. So for the first time the overall balance sheet crossed INR7,00,000 crores, it's INR7,08,000 crores. Total deposits at INR5,46,000 crores were up 21%. This, I think, is against a system deposit growth of just under 10% -- about 9.2% or 9.5%. Within our deposit growth of 21%, CASA growth was at 20%, savings account -- savings deposit growth was about 18%, and the CASA ratio therefore as of year-end, which of course tends to see a bit of a spike towards the year-end, but even with that the CASA ratio was at around 43% as of March 31.

The loan growth was even stronger at 27%. Of course, this is year-on-year point-to-point growth. I did mention that the average asset growth was closer to a little over 23%-odd, so we did see some spike towards the year-end. But the good part was that this asset growth or this loan growth came at very similar growth rates from both the wholesale and the retail businesses. And the mix of the loan book as of the year end was roughly half and half with 51% retail and 49% wholesale. So, again, strong loan growth and across both wholesale and retail businesses.

If you sort of peel the onion there, the wholesale business saw pretty healthy growth across each of the customer segments. On a relative basis, the fastest growing segment within wholesale was what we call the Emerging Corporates Group, which is, in a sense, the upper end of the middle market. The Corporate Bank Group was the next fastest growing, and then some of the others niche segments sort of were slightly slower growth rates, although they were themselves in the 20s.

As far as the retail book is concerned, for a change, almost every single retail loan product, at least the top five or six products, all grew by somewhere in the 20s or even faster on a year-on-year basis. So whether it was auto, commercial vehicle financing, both of which were in the 22% to 24% range, going up to around 27% for cards, about 45% for personal loans; home loans was at 32%. So all of these are as per the PMIs that we look at in terms of these businesses as the way they're run. So this is based on each of these products and the loans that we have in these product segments, irrespective whether the individual loans are part of retail or wholesale. But this is the momentum that we did see in most of the retail lending businesses.

Moving on to capital adequacy, our year-end capital adequacy was at 15.5%, of which the Tier 1 ratio was at 13.2%. That 13.2% is about 50 basis points lower than what it was in March 2015. As you might recall, March 2015 was a bit of a peak in terms of Tier 1, simply because we had, in that quarter, raised equity last year -- the year before basically, in the March 2015 quarter. So from 13.7%, we are now at 13.2% in terms of Tier 1, reflecting the strong asset growth. And therefore, the consumption of about 50 basis points of Tier 1. The Board has recommended a dividend of INR9.50 per share, which is up from INR8 last year. This is of course subject to shareholder approval.

On the network, we finally actually did add quite substantially to our distribution network, which is a little higher than what we had planned. So there was some acceleration or some front-ending of some of the branches that we would have added over a period of time. As a result, we added 506 branches before we closed the year, and of these 506, approximately half, 256 were in semi-urban and rural locations. We therefore, now have a 4,520 branch network, 12,000 ATMs, and have a presence in 2,587 cities or towns.

Our employee strength also -- partly given the branch expansion, partly given a significant expansion in our retail lending businesses, and of course, all the other functions which support those resulted in an increase of almost 11,000-odd, from 76,000 to 87,000 employees.

Finally, on the asset quality front, gross NPAs were at 0.94%, so that's remained more or less stable at just under 1%. Our total restructured loans also remain at roughly 0.1%. And our specific loan coverage has remained at around 70%, [69.7%], so it's around 70%.

Those were the key financials. We'll be happy to take your questions now.

(Operator Instructions) Mahrukh Adajania, IDFC.

Just had a couple of questions. Firstly in terms of the draw-down on floating provisions, how much was it during the quarter?

So, almost the entire -- whatever floating provisions we have used during the year have been drawn during the quarter, it's around INR300 crores.

And that's on that one account?

About half of that is on account of that and half of that is on account of other accounts.

And this is because you are conservative, or it's RBI, because a lot of banks are probably indicating that the RBI thing is not finalized, so asking?

No, I think there has been a communication that had been received from RBI, if whether RBI -- if they have received anything subsequently, which we haven't till today (multiple speakers) then I don't know, but we have gone by what is required to be done, which was essentially 7.5% provisions to be made for two quarters, which is the quarter that has just gone by, and this quarter. Of course, given the nature of the exposure and the nature of the borrower, we all believe that this should be something which is fully recoverable, as it is a state government exposure in an area which is of critical importance for everyone and the banking system, because this is a large consortium where 65 -- which is the entire banking system, 65 banks participate. The amounts are used for a particular purpose that we are all aware of and each bank share is really linked to their market share in deposits. So, in a sense -- but the amount that we have provided for is in line with what the last communication received from RBI a few weeks back.

And there will be an equal amount in the next quarter?

That's right, unless there is a change in any communication that we subsequently receive from the RBI.

And the other question I had is that in general, what's your view on the slowing deposit growth for the system? I mean not for you, because it shows in your numbers that your deposits are growing well, but any general comments?

So on an overall basis, I think I'd probably make two comments. One, of course, there has been, as we know, a spike in the total currency in circulation and to that extent it seem to have been a bit of a loss to what could have been deposit growth. When that comes back, I think we'll probably add to -- if at all comes back into the banking system that would help. The other reason why apparently -- the currency could have itself gone up for various reasons, including sometimes when -- apart from the election story, which people talk about, the fact that some amount of public contracts and so on -- I mean spend, means that there are sort of cash disbursements to be made and so on. So there tends to be some movement from bank deposits to cash, which is one story.

The other piece and which is why I believe that over the next year or so we should see slightly healthier deposit growth is because, while deposit rates in nominal terms have come down from what were closer to 9% to maybe somewhere close between 7%, 7.5%, clearly, if you look at where inflation has been and where it is, real interest rates are a lot more attractive than what they used to be. So, as retail depositors and retail savers recognize the attractiveness of bank deposits, hopefully, we should see, as a system, slightly higher deposit growth.

So far it's not been troubling the system because loan growth has been fairly tepid as well, but I guess despite the soft deposit growth, as you've seen in the last few months, banks have been comfortable dropping deposit rates, because of what's happened to policy rates and inflation.

And just one last question, would it be possible to share the figure for slippages for the quarter?

The slippage, well I've got the slippage ratio, which is at about 1.5% annualized. The actual slippages during the quarter were INR1,700 crores.

Manish Karwa, Deutsche Bank.

Congratulations, good set of numbers. Just on this Punjab government, the total exposure then for you should about INR2,000 crores, is that right?

Yes, that's right.

And historically has there been any case of banks losing money by their exposures to state governments, any other state government, has it ever happened?

So, as far as the food credit itself is concerned and the state government lending within food credit, because food credit has an element of FCI and state government exposures, to my mind, no component of food credit has -- have banks lost money ever historically, to the best of my knowledge.

And this exposure is actually directly to the Punjab state government, right? It's not to any subsidiary or not to any -- ?

Absolutely. It is directly to -- because these are agreements made on behalf of the consortium by a lead bank and then distributed to everyone else, and those payments go directly to the government itself and not to any separate entity of the government.

So, it's actually a sovereign credit that we're talking about. So ultimately at some point of time, the government has to pay back.

I would think so. I mean, that's what I think, the entire system has believed and which is what the -- which is why the lending has been based on also the consortium and everybody's share as a percentage of deposits. Obviously, if there has been a provisioning, which has been mandated by the regulator, there is some concern on that and which is why I think we've been asked to make provisions at least at this point of time.

And on your fee income, I think this quarter has been reasonably strong, and this is on a very strong fourth quarter last year, wherein you had a very high component of mutual fund income. So this quarter what is the big driver for fees?

So, two, three pieces which have -- as I had elaborated, we saw particularly -- I think the highest growth we saw year-on-year this quarter was also on third-party distribution.

Especially insurance.

Yes, especially insurance, which saw a growth both in life and non-life, the volumes we saw were up. On a year-on-year basis, that is for this quarter over the corresponding quarter were about -- up close to 20%, but sequentially, we saw an increase of over 50% in terms of life insurance and maybe slightly higher at about 5%, 6% on the general insurance side.

Volumes on the mutual fund side were also pretty healthy; on a year-on-year basis were up almost 50%, although the mix of mutual funds being what they were, the unit rates were significantly lower. But the overall third-party piece did have a strong quarter. We had some wholesale and other commissions, which also did well. Retail assets, again we saw strong growth in retail asset disbursements, which also has some processing fees, which again saw double-digit fee growth.

And then finally on the retail liability, direct banking and kind of fees, again we saw a sort of mid-teen growth there. So I think it's come from three or four lines, almost across the board, driven by maybe a little bit of seasonality which happens in the fourth quarter, but otherwise, primarily from that seasonality or otherwise contributing to higher volumes, and fortunately, no negative on account of change in rates or regulatory changes.

And lastly, our investment book is down 10% quarter-on-quarter. Anything to read here, have you let go something over here?

The only sort of changes that we sort of tend to make in our investment portfolio would be to the extent that we hold some commercial paper, or which we sort of -- depending on short-term opportunities we might look at, but other than that, is there anything else Sashi -- in investment book? Can you explain that?

I think that is also sort of gone up during this quarter -- no, it has come off during this quarter. We use this for -- we had a fair amount of surpluses in the previous quarters because of higher deposit growth and we had parked -- refinanced it with repo borrowings. I think that has come off during this quarter.

So, it's all market thing only, as you probably thought that the borrowings would be better or deposits have grown faster?

Had earlier, which now have been deployed, so I think the investments would have come off. I guess you'd have seen a growth in the loan book, which has been strong. So to the extent that there might have been any investments were there in short-term paper or otherwise in market instruments, which we could sort of join back into loans, that would have happened during this quarter, especially towards year-end.

Sameer Bhise, Macquarie.

Just a couple of data points. One is, what's the outstanding international loan book right now in terms of percentage?

6% Sameer.

And RWA number if I could get.

So total risk weighted assets as of March 2016 are INR5,29,700 crores-odd. This is as against INR4,22,000 crores-odd in March of last year.

Just finally employee count has gone up after, say, almost two to three years of kind of tepid growth; primarily led by branch additions or we are seeing any --?

Actually, it's probably been the second year of pretty healthy growth. The year before that, which is March 2014, we actually had a small maybe negative of about 100 or something of that, let's say flat. Last year we added approximately -- year before, March 2015, we added roughly 8,000 employees and this year we've added about 11,000. So both these years have been pretty strong. So, you've seen two years of rather strong, if you mind, growth in the employee strength.

And the growth comes from both branch banking and also from other retail product vertical -- asset product verticals, namely the -- whether it's an auto loan, or personal loans, et cetera.

And when we say these retail lending businesses, it includes both our sales teams, as well as the (multiple speakers) and collections, the entire teams which support each of these businesses.

Prashant Kumar, Credit Suisse.

So on retail lending business, you mentioned that the overall business momentum remains healthy. However if I look on a QoQ basis, then this vehicle financing segment that hasn't really grown that much and within that more specifically, CV segment has been growing at a relatively lower base. And if I compare it to your peers, and they have been growing at a very healthy pace. So just wanted to understand like what is the reason for that, like why we are not getting traction in that segment and are we deliberately pulling back? So, your thoughts.

One, we're not really pulling back in any of the retail loan products, including the two that you mentioned, whether it is auto or CV/CE. If I look at the portfolios for both of these, then the auto loan book has grown about 22% year-on-year, commercial vehicles and construction equipment together have grown about 24% year-on-year. And even sequentially they have grown at about 3.9% and 1.7%.

So, there is really no sort of deceleration deliberate or otherwise that we're looking at. Of course, the December quarter, because it has a festive season, tends to see a bit of a spike, but even from there we've grown sequentially.

If you look at rates of growth, I guess for individual banks or players that sometimes can be misleading just given the fact that different players have different shares of the market. So if you are a relatively smaller share or a smaller base, our increase in a month sometimes is a multiple if not -- multiple of the growth that some others are seeing, but also the absolute portfolios of some of the banks. So we certainly remain committed to growing each of these businesses. And I think that's something which we've seen continuing for the last few quarters at least.

Actually one of the reason was that I was looking at this RBI-base classification and their CV growth was only 15%. But if I look at [the entire classification] then it's 24%. So yes, one of the reason was that.

And just one more follow-up question, you mentioned that roughly half of the contingency provision used in this quarter was toward some other accounts. So were there some relatively middle sized corporate accounts, or they were SME?

No, they were more corporate accounts. Yes, we used it for one -- we had some slippages, we used it for one corporate account.

And sir, in last quarter you mentioned that we saw some increase in slippages from SME and Agri segment. So based on the current quarter's asset quality performance, would it be fair to assume that has been like more or less contained or that is like more or less over, or do you think that it could come back?

So, actually both of those segments, one, you're absolutely right that in the December quarter we had seen a spike in business banking and Agri NPLs. We've actually seen a healthy pullback from there in both the segments. Of course, Agri tends to have a seasonality, so you tend to have -- I think the December and June quarters has increased and you tend to recover some of those in the following two quarters. So there is a degree of seasonality to that. But nonetheless, in this quarter, we have seen both those not just stabilizing, but actually getting pulled back a little in terms of the -- for the slippages and the NPL formation there.

Adarsh P, Nomura.

My question was more towards, just from a perspective of returns being made on various retail products. I would think cars is getting to a point where ROEs are low, so just wanted your opinion on how competition and pricing is leading to ROEs of some of the large segments in the retail side?

I think all the retail products certainly are competitive, simply because many more players have in the last couple of years increased their presence and increased their focus on retail. So, from a pricing perspective, they might have been -- certainly been some intensifying of competition. And that higher competition also tends to seep through in terms of payouts to dealers, and therefore, some of the costs that are associated with customer acquisition.

However, on the flip side, given our economies of scale, given the higher proportion of digital in terms of the origination of some of these products, as well as our continues changes in the way we process these at the back end, in terms of reducing touch points, cutting turnaround times, all of those give us some savings in terms of operating costs. And our credit quality has, in most of these products in the last few quarters been fairly stable.

So if you look at it on an overall basis, we still get returns on each of these retail lending products, which are well above the thresholds from a risk-reward point of view. Some of these are less rich in terms of returns than what they might have been at peak, but they're still very healthy in absolute terms, at least for a player with scale like us.

And would that be true for car loans, like, I would have --?

Yes, it would be true of car loans. Of course, if you look at the car loan business, [you would see] an aggregate between the new car financing, the used car financing, the dealer floor plans, and the overall business that you generate from all of these, including maybe other products that you might sell to those customers. But, yes, if we look at the car loan piece, again, given the credit losses and the operating costs, it's still been an adequately rewarding business.

And my second question and last one is on the LAP business, which will probably be in the business banking side, and if you include HDB Financials part of it, it would be a very large part for us. Just wanted to understand, obviously I think this book is for us different from the way NBFCs have built it, but anything that you're seeing which is a little different here in terms of asset quality, or things are relatively stable?

You're right that our book is a little different from the way, at least the perception is off NBFC is doing it, because we tend to have a higher cash flow bias than purely an asset value bias. And you are right, our LAP is a part of our business banking piece. But I think when you look at the overall business banking piece, which you see as on a year-on-year basis has grown by about 22%, the growth rates have been more or less similar across the various components of business banking, including LAPs. The concerns, which have been there, generally, on asset quality for this segment in the system, I mean I keep getting asked this question, I think so far at least our LAP portfolio has remained fairly stable.

And as far as any LAP which is being done by HDB, they of course have their own policy and segment portfolio. These numbers, as you know, are standalone and not consolidated.

But would that book be a little more similar to NBFCs or more similar to what the bank does?

I think it may be somewhere in between and as much as -- if you look at the overall approach of HDB, it ultimately has a culture of growing business and credit in a similar vein to what the bank does. So I am sure, just given the customer segments they service, it will be slightly higher risk than what the bank does, also slightly higher in terms of asset yield, but still certainly better than what some of the or many of the NBFCs might do in that business, in that product.

Alpesh Mehta, Motilal Oswal Securities.

First question is related to our interest income on investments. You have partly answered this question, but if I look at the total growth on this line item is around 43%. Even if I were to adjust the sequential drop in this quarter on the investment book, the book would have grown by around 20% and in a falling interest rate scenario it seems to be slightly different, considering the yields would have gone up in this year. So what's happening in this line item?

I think, when you look at the interest on investments and look at the yields, you're right, it has come down from the fourth quarter of last year to the fourth quarter of this year by a good almost 40 basis points, so somewhere between 35 basis points and 40 basis points. So the yield on investments, of course, have come down. The growth in interest on investments is essentially because average investments went up, and as Sashi mentioned earlier, gross of LAP. Though we dropped in this quarter on CP, through the earlier couple of quarters, we had a larger investment book, essentially to defray some of the surplus liquidity that we had because deposit growth had been stronger than the advances growth for some time. But nothing beyond that, there is no really -- other than the increase and slight decrease towards -- in the last quarter on CPs, there really hasn't been any major shift in the composition of our investments.

What would have been the average investments growth for FY16? These are the period-end numbers, but average would be --

The average investment growth would have been almost 48% -- 47%, 48%.

Whereas the period end number is only 8%. Secondly, about this, yesterday RBI came out with a guideline for investment advisory services to be transferred to a separate subsidiary. Any quantification of impact of that on our operations?

No, not yet. We haven't really had a chance to give it a serious thought.

But the entire third-party operations has to be shifted there, is that my correct understanding?

(multiple speakers) while we haven't studied the --

We just saw a ticker Alpesh. Maybe we need to understand that better. So probably after next week or so, probably we will have a chat with you.

I guess it's got a couple of years right?

Yes. It's a three-year window.

And last two questions, any guidance on the branch addition for the next two years? And lastly, what percentage of our retail loans are originated via (inaudible)?

As far as the branch additions are concerned, I think our normalized beginning of the year expectation is always that we will add 200, 300 branches, and that usually is the base sort of budget that we try and put in place. However, as the year progresses and if we believe that there were a few couple of hundred branches or 50 branches, or 100 branches that we know we could add more, and we have both the ability to identify those, as well as the financial wherewithal to do that, then, we have a flexible another 50, 100 branches that we can add. But I would say the base kind of growth rate that we would run with right now could be approximately 200 to 300 branches.

As far as the origination through digital channels, I think it really varies, because they're different products. Personal loans, which was probably ahead of the pack, now has -- almost 30% of our origination through the digital channels, some others are in the teens, some are in the -- touching [20-odd], low 20s. But I think it really depends on the product, and these are still relatively early times.

The first product was personal loans, so that's where the traction also has picked up. The other products are just something that we have started very recently, so we'll have to wait and watch.

And the personal loan you mentioned, around 50% of the origination is happening via digital channels?

15% to 17%.

But on a year-on-year basis (multiple speakers)?

Yes, the growth rates, right, but he's saying percentage of --

The origination, yes.

On an incremental origination basis it would be slightly higher than that -- than the 15% to 17%.

And last question, the difference between the CV and the CE loans were, internal classification versus the RBI classification, largely driven by the large fleet operators, the dealer financing that you must be doing, because that number -- the difference is increasing?

That's right.

Manish Ostwal, Nirmal Bang.

My question on this home loan portfolio, so have you purchased anything during the quarter from HDFC?

Yes, we did. During the quarter, we've purchased INR4,799 crores, let's say, almost INR4,800 crores. And for the full year, we have purchased about INR12,700 crores -- INR12,770 crores.

And secondly, sir could you explain the MCL impact on margin and the asset yield?

Well, our MCLR relative to the base rate for a one year rate came off by about 20 basis points, and for the shorter end, the drop would have been anywhere between 25 basis points and [30 basis points to 35 basis points]. Approximately a third of our book has earlier been floating, but as of now, obviously how much shifts to MCLR is a function of when the customers -- when those linkages move from what was earlier base rate linked to MCLR linked, as and when they come up for maturity or annual renewal.

So immediately to try and estimate what might be the impact, it's tough to say. I think, we've been consistent in our communication that over the last more than 10 years, we've had net interest margins, which have been somewhere between 4% and 4.3%, 4.4%. And any impact that we might see, based on the interest rate cycle and the transmission of rates through the MCLR or because of competition, I think at this point of time, we see all of these still keeping our NIMs within this earlier mentioned range of 4% to 4.4%.

Lastly on the digital side, I heard on TV that you were talking about -- Bank has taken initiative, both wholesale side and the retail side, digital thing, so could you throw some light on what we are doing on the digital side, what are the initiatives we have taken? And secondly, in terms of key goalposts, especially on the retail side, what are our goalposts, especially from digital competitions, given the newer banks are coming in that segment and the competition level is also getting different?

I could sort of do the rest of the call only on that one, but I'll just try and mention couple of things. The idea is that through digital, we are essentially saying we'll understand our customers better. We have better data on our customers. We will use that data, analyze it and use it to make more appropriate customer offerings, because we understand those customers better or we change processes as well. We will be able to deliver to our customers in a much more convenient manner across channels of their choice, across -- and giving customers an experience which is uniform across channels. In doing all of this, the idea is to make these relationships stickier to get a larger share of the customers' wallet, as well as to give the customer an experience, which is significantly better in terms of turnaround time, and sometimes product structures as well. Obviously, this continues beyond just our deposit and lending products into payment products, into trade products, especially on the wholesale side. And I think the basic theme or the underlying objective is the same. Finally, of course, when we do this, apart from giving our customers a better experience, we will hopefully be also able to reduce our costs by improving our sort of processing engines at the back end.

Have we set any goalpost in terms of --?

I don't think we can share any specifics on -- we of course have goalposts on each of the initiatives, but we don't really have anything which we are putting in the public domain.

Before we take the next question, my request would be that since we are coming close to an hour on the call I would request that if everyone can just limit themselves to one or two questions that'll be good.

(inaudible).

Thanks my question has been answered.

Jhanvi Goradia, Motilal Oswal Asset Management.

My question is on ForEx income. So as I see last [two, three] years it's almost been stagnant and although it may be our conscious decision to stay away from riskier products, but just wanted your sense on the trajectory going ahead?

So, for starters, I must say that you know the FX revenues that we generate are not necessarily risky, because they not are really trading and positioning-related, as much as based on customer flows and the margins that we get on those customer flows. There certainly has been a quarterly volatility in terms of the growth rate that we have seen. However, if you look at it on a year-on-year basis, that is the full-year FX revenues for this year at about INR1,228 crores, we are almost 19% up from the full-year revenues last year. So if you set aside ups and downs from quarter-to-quarter, I think it still remains a healthy business, which is based on customer flows, the margins are slightly lower, given the relatively lower volatility we have seen this year. And, of course, as far as trade volumes are concerned, given what's been happening to both imports and exports, while we have seen some increase in volumes, the growth rates there have not been as high as they would have been had overall imports and exports at the country level been better. But still 19% on a year-on-year basis. On a full-year basis, is still we believe fairly healthy.

MB Mahesh, Kotak Securities.

Just a couple of questions. One is with the introduction of UPI, do you see it acting as a barrier in terms of fee income generation on the payment-related work that you do? And second is, just from a clarification perspective, our initial understanding was that floating provisions is now part of Tier 2 capital, just trying to understand how does the utilization work.

So, as far as the first question is concerned, we see any of these introductions as opportunities, given that we are a leading player in adopting almost any of these new offerings that have come into play, but in any case your question was, does this affect fee incomes, is that most of the payments-related businesses really -- already don't really generate, on a standalone basis for those transactions, any meaningful levels of fees. The convenient and fast and one-click kind of payments are essentially services that you're offering customers who have account relationships with you, and of course can be extended beyond the normal account we have for our retail individuals to payments, whether they are for utilities or for the supply chain of entities.

So, I don't see this as -- when you look at the top four or five fee generators, you will find that I have never -- have rarely mentioned anything to do with directly payments- related businesses.

This includes the entire MDR and whatever that comes through the chain on the payment side, right?

Yes. So that piece may have some impact, but I think typically what we've seen is that when something is much more convenient or is providing a high level of flexibility, if there is some erosion in the margin or the unit fees that is charged, it more than gets offset over a period of time, at least by the higher volumes that this facilitates. So, I think our focus would rather be on being a market leader in terms of end-use cases for each of these and then looking at what the opportunity is there, maybe for revenue generation.

As far as floating provision is concerned, floating provision can be used for netting off from your -- to arrive at your net NPAs, when you look at gross, or you can use it for Tier2 capital. So at any point of time, whatever is the closing balance of your floating provision, up to a certain level can be added to your Tier 2 capital.

And that is a very specific RBI guidance which allows that.

My understanding was that you decide either or, so that's why I asked.

It's either, or. We're not netting it off from NPAs.

Nilesh Parikh, Edelweiss.

Sir, just one question, this is (inaudible) from Edelweiss. Sir, how much of your deposit -- FCNR deposit that you raised under RBI window will mature in October?

Between September and October, almost (multiple speakers).

Entire [$3.4 billion].

So, October and November.

[$3.5 billion], right?

[$3.4 billion].

Ritika Dua, B&K Securities.

Just one. Have we shared on the call, I've just joined in late. Have we shared any strategy how we see the housing loan book going forward?

Let me -- I haven't covered it, so I'll cover it for you for sure. The genesis, of course, is the arrangement that we have with HDFC, where we originate home loans, which are the HDFC home loan product. All the loans that we originate are booked by HDFC, based on their -- the normal criteria that we have for underwriting and so on. And then, we have an option, so it's a right and not an obligation to buy up to 70% in value terms of what we've originated, so that's the background.

Since it has always been an option till the year before, that is till March 2015, we were buying back roughly 50% of what we would originate, which was primarily only the BSL portion. In this financial year, which has ended, March 2016, we have been taking a full 70%, which is what we were entitled to. And at this point of time, we seem to be on track to continue to do that, but it is an option, so it's really our decision that we would take, based on our liquidity, our alternative asset opportunities, but it's something that we have to agree with, and take what we believe we have an appetite for. At this point of time, as I said, the 70% still seems something that we're likely to continue to do.

So when you look at the loan growth for us in our books, this year, when you look at the roughly 32% growth in home loans, that is purely because it's not that our origination would have grown at 30% or 32%. It's just that we have moved from what was -- what we were taking on our books, which was around 50% of our origination, to this year 70% of the origination. So there is a bit of a spike in the book, and therefore the growth rate in this year.

Hiral Desai, Anived Portfolio Managers.

Paresh, two areas where you seem to be significantly outperforming the industry, one is the CASA momentum, and the second is the corporate loans. So if you could talk briefly about both the pieces and will you see this sustaining going forward?

Well, I don't have a guidance on any growth rate in terms of sustaining this forward, but we certainly seem to be well positioned in both of those. But let me -- there is some disturbance coming through --.

Mr. Desai, if you're on a speaker mode, could you switch it to handset, because there's disturbance?

No, I'm on the handset.

This disturbance is from your line, sir.

Okay, that's better. Thank you.

Actually sir, I will have to mute Mr. Desai's line for us to stop this disturbance.

Okay, and then I can continue.

Go ahead, sir.

So, the contributors to the strong growth rate that we've seen, I think on CASA it's been a combination of factors. What has been particularly heartening for us is that current accounts, which were languishing for a couple of years have seen pretty strong growth this year, on both a year-end and in average basis, although we always tend to see a bit of a spike towards year-end. And savings accounts, again, at 18%-odd, despite what was seemed to be competition which would have impacted growth rates because of competition, or at least certain players in the competition offering higher rates.

So I think what it really boils down to is the service that you offer, the product range, the brand, the distribution, the higher convenience, either through digital or other offerings, all of this might sound sort of motherhood and apple pie, but that's the difference, which we bring to the customer. There is an added momentum because of the expansion that we've done over the last few years, and the fact that we've also been focused on increasing our share of existing customers through higher degree of cross-sell, whether bundling at the time of initiation itself or through the life cycle of the customer. So I think it's just continued execution, which has helped us on the CASA side.

As far as the wholesale book is concerned, we've grown across multiple customer segments within wholesale and we've clearly added market share, we've increased our share in the wallet of individual customers on the corporate side, as well as the emerging corporates side. A slight expansion in our product range where we were a little more -- almost exclusively a few years back in the short and medium-term end, to now short, medium and to some extent on the long-end as well, has probably also helped us gain some additional market share there.

So in terms of working capital and the term loan would sort of more or less be 70%/30% or that has changed?

It would be more or less 70%/30%.

The emerging corporate piece that you talk about that is also largely working capital driven?

That is true.

And lastly, just wanted -- if you could talk about the sourcing trend on mortgages, what is the monthly run rate currently, or if you could give me a quarterly number?

So we have been originating at roughly -- a little higher than INR1,400 crores per month. So we've been at somewhere between INR4,000 crores to INR4,500 crores per quarter.

Vibha Batra, ICRA.

My question is again on home loans, your home loans that you buy back from HDFC Limited, those will be linked to HDFC's PLR or your NCLR or base rate?

No, it's linked to the HDFC' s PLR, because that's where the customer has got his loan originally from.

And it is a sizable chunk in your book. So, commercially if you were to see, and you were to raise home loan bonds, which do not attract CRR and SLR, would it be more profitable for HDFC Bank to do like on book lending, our buy back from HDFC Limited? Are there any agreement constraints that you can't book the loans in your own book directly?

No. So I think as I just explained earlier, the reason why we have had this arrangement in place is because we believe it's beneficial to us and I'm sure HDFC may has done it, because they believe it's a win-win for them as well. The logic is that if we have one HDFC branded home loan product in the marketplace, which currently is the HDFC Home Loan, it obviates any potential brand conflict of having HDFC or HDFC Bank Home Loan product. So there is the HDFC Home Loan product, which is highly recognized, highly respected and pretty much the best home loan that you get in the market. That's one.

Secondly, HDFC is by far the most efficient processor of mortgages, which is evident if you look at the costs and the credit history that they have got, right. So from our point of view, our strength is in the origination and our desire would be to take care of our customers' needs across -- all the financial needs, including for home finance. And, therefore, for us it makes sense to sell the best home loan product to our customers, to get HDFC's expertise and economies of scale by their processing these for us. And then our taking the loan on our books, which the current commercial arrangement is that we can take up to 70% on our books and the remaining 30% we get a fee. So essentially for the 30% that we don't take, we in any case, have a sales commission that we are earning as if we were an origination engine. And on the other hand, for the 70% that we originate and ultimately get the loans back on our books, we would have accessed the more efficient credit and processing engines which HDFC can provide.

So I think that's the logic of it, it's a win-win for both of us and it's something which is in the public domain, given that it's a related party, and we are very comfortable with the way it works.

And when you said -- I don't know if I heard it correctly, one-third of your book is floating. I mean, you mentioned --

On an overall basis across our entire book, that's right, roughly.

And you are counting home loan as a subset of this?

Yes, the home loan is a part of that floating rate.

And your LAP book how much -- what percentage would be through cross-sell from your own customers?

The LAP book, as I said, LAP earlier -- is a part of our business banking portfolio and roughly half of it would be customers who already have an existing relationship with us, and maybe half would be new to bank customers.

Pankaj Agarwal, Ambit Capital.

Sir my question was is this 70% you buy back from HDFC Limited, you don't get the processing fee, right, the processing fee or the distribution fee from the HDFC Limited?

We do, although that is effectively being -- when we are getting the residual -- when we pay them on an annualized basis, their total cost includes obviously any processing fee that they have paid us.

The reason I'm asking is that if I look at, you must be paying around 1% on these loan side to HDFC Limited, whatever you're buying?

That's right. But yes, approximately that's it there.

But if I look at like some of the housing finance companies, they're running this business at like 40 basis points to 50 basis points OpEx to asset ratio, right? So, doesn't it make sense to do it internally, rather than outsourcing these operations to HDFC Limited?

No, see the thing is you're looking at on a stock basis, when you have a company which is built a large stock book over a period of time, when you are looking at the floating -- because we've our cost that we incur when we are looking at, let's say, we spoke about LAP, or the overall processing cost that we have across a range of products, as well as the collection, because it's the original processing costs, including things like doing the valuations and ensuring the projects are right and so on, as well as the ongoing collection, both for regular customers, as well as for delinquent customers. All of those are services that are being done by HDFC for us.

So if I look at these on a flow basis, when we started off the arrangement, these fees were slightly higher. And as we built scale, some of these fees which were I think closer to about [1.25%] or something like that potentially come down to [0.95%]. So, I guess, from our point of view, as long as it sort of makes sense for us, we will certainly look at getting these done as per the current arrangement.

But going forward, let's say, it makes some more sense to do it internally, can you reconsider this arrangement? Is there any clause in the agreement?

I think the hypothetical -- it's hypothetical, because there is no -- it's something which is negotiated every year in terms of the rates and so on. So I don't think we can say that it is cast in stone, nor that's something which we're not comfortable continuing. So I mentioned earlier that when there was a rationale for renegotiation it was done and the rates were brought down. Whether -- if there was any such rationale again, whether it would lead to a further renegotiation of the rate or any other structure, I think that's hypothetical.

Simmi Chhabra, Frontline Securities.

The question is about the business strategy going forward. You mentioned that you opened 506 branches in the last one year, out of which 256 were concentrated in semi-urban and rural areas. My question is, is the expansion going forward, is it going to be concentrated in rural and semi-urban areas, what are your primary product offerings in those areas, and what is the cost of opening one branch in such areas?

So, first of all, there is certainly no concentration in any one segment. At 256 out of 500, we're roughly half and half. And that has been the case now for about a year and a half, in fact, almost two years. So if you go back to prior to 2014 for two or three years, we did add about 80% of our branch, new branches were being added in semi-urban and rural, but last year and this year -- 2015 and 2016, we've added roughly 50:50 between urban, metropolitan --

[55%] to semi-urban and rural, yes.

That's the total stock of branches. If you look at as of the year-end, the total number of branches it's [55, 45]. We will continue to grow in both these markets. Obviously when we are adding new branches in semi-urban and rural, especially in rural and unbanked locations, these are -- many of these are new locations. But when we are adding branches in urban, they are obviously new branches in existing locations. But we certainly see an opportunity to add market share in both these.

What are the primary product offerings in these areas, semi-urban and rural areas?

In the semi-urban and rural, most of our branches, a good 80%, 90% of our branches our entire range of products gets offered.

Including the asset products, card products, etcetera.

And what is the average cost of opening one branch?

It really depends usually on the size and the location, because we've one and two main branches, where the costs are extremely low. And when it's a new location, these costs are slightly higher just given the network and other things.

So there is no standard way to do --

(multiple speakers) and it's not something which -- given our model for the branch, which is more a sales and service outlet, and we do our processing at regional or central hubs, that's not a large part of the expense.

We'll take one last question, because I think we have been at it for quite some time now, it's almost an hour and 20 minutes, so one last question we can take.

Sandip Parikh, Reliance Mutual Fund.

I was just seeing the market share over the years and then the incremental market share, so our market share in deposits have gone up from 4.7% in 2014 to 5.1% in 2015 and 5.6% in 2016. And the same for loans is from 5% to 5.4% to 6.2%, but our incremental market share is really stacked up quite well. I mean, this year it's 12% for deposit and 14% for incremental market share on loans. So, particularly on loans, if you can explain what has led to this -- essentially it's a significant gain in market share. So, if you can explain it a little.

Actually it's more of the -- I mean when you look at the -- when you mention the numbers on incremental, I think it tends to sort of exaggerate the achievement, simply because, one, the system which was growing -- usually it used to grow in the low teens, as you know has dropped in terms of its growth rate. So the system has now grown this year at, say, around 9%, 10% both in deposits and advances and therefore, clearly our gain in market share on the incremental has gone up substantially.

As far as our growth rate itself has gone up a couple of percent, so the divergence between system plus, which usually -- and we still believe on a long-term basis, a system plus 4%, 5% seems a much more a long-term secular increase in market share that we have done in the past as well. So, it's been a bit of systems slowing down and our slight acceleration. Our slight acceleration has been on the back of this year, both wholesale and retail, rather than one or the other growing a little faster. Usually, we have, if one of our customer segments is growing at for instance say 20%, the other would have grown below maybe a couple of percent slower. This year, we've had both the businesses seeing healthy traction. And within retail, again, when we have six or seven products, usually in our experience we've had two, three products growing fast, one or two slowing down and then therefore on a blended basis, we see a certain growth rate. As it has happened in the last couple of quarters, we've seen almost every product gaining steam.

And, finally, I don't think we should extrapolate any one year too much. This also has been the first full year after our capital raising last year, meaning 2016 has been the first full year after a capital raising in the March 2015, and usually with surplus capital and a very comfortable liquidity position, given the deposit growth that we've seen, you see, in some ways, a super-normal growth, which doesn't necessarily lend itself for extrapolation on an ongoing basis.

So I think we still remain very well positioned to gain market share, but the absolute gain in market share, in terms of percentage gain in market share that you referred to, I don't think I can say whether that is something which can be sustained.

Thank you, ladies and gentlemen, that was our last question. I now hand the floor back to Mr. Sukthankar for closing comments.

Well, thanks so much for patiently listening to all the Q&A. I do hope that we've been able to address most of your queries and concerns. Thanks once again. Bye.

Thank you very much members of the management. Ladies and gentlemen, on behalf of HDFC Bank Limited that concludes this conference. Thank you for joining us and you may now disconnect your lines.