HDFC Bank Ltd (HDB) 2017 Q1 法說會逐字稿

Ladies and gentlemen, good evening and welcome to HDFC Bank Conference Call for the results of Q1 FY17, presented by Mr. Paresh Sukthankar, Deputy Managing Director and Mr. Sashi Jagdishan, Chief Financial Officer.

As a reminder, all participants lines will be in the listen-only mode. 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, and first of all, thanks for being on this call as late as 7:00 PM. As you probably know, we had our AGM this afternoon. So we couldn't start earlier. Since the results have been with all of you for quite a few hours now, I won't really walk you through a detailed commentary on the results. I'll just probably walk you through five or six key parameters which you might have noticed, but just -- and then we kick off the Q&A.

So if you look at net revenue growth for this quarter, it was 19.6%. Net interest income growth was 21.8%, net profit growth was 20.2%, deposit growth was 18.5%, advances growth was 23%, overall balance sheet growth was 20%, net interest margin was 4.4%, gross NPAs were 1.04%, CASA was 40%, 39.9%, capital adequacy was 15.5%, branch strength was 4,541.

I guess, there will be much more, which will come through in the questions. So let me just stop here and throw it open for questions right away.

Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Mahrukh Adajania, IDFC securities.

Just a few questions. Firstly, could you give the slippage for the quarter and then, if possible, break it down into corporate, retail and SME, rough proportions?

Sure. So the increase in NPLs this quarter were about INR600 crores, INR570 crores or so. The gross slippages were INR1,761 crores, the reductions INR1,233 crores, upgradations of INR322 crores, write-offs and then recoveries and therefore the net went from INR4,392 crores to INR4,920 crores.

So if you look at a total increase of just under INR600 crores, as I said, INR570 crores, three components to it. Roughly a third or little more than a third was Business Banking, which is the SME piece, about another third or a little less than a third was Agri and the remaining third was a mix of a little bit of retail one, some middle market and so on. There wasn't any large corporate flow at all in this quarter.

Got it. And is there some softness in Business Banking or SME, because that's what we heard at the previous call also or it's just business as usual?

Well, so we did see -- in the December quarter, we had seen some slippage, in the March, there was a pretty healthy pullback in terms of slippages had come off and again, this quarter, we have some slippages. So I think there has been, there have been some slippages, but when we look at it, it's really not a particular segment of or an industry or a region which is showing any slippage.

You do have a handful of accounts, which typically tend to be vulnerable and then some of them flow through, either it happens on an ongoing basis, a few accounts and sometimes you have a little larger flow. I don't think there is anything which would make us revisit in any meaningful way, the SME or the Business Banking strategy, still remains very comfortable.

Okay. And just a quick comment on the CV cycle, because June sales were weak, but that's just one month of weak sales, so anything that you read into it?

I guess, one month and again whether it be the sort of rains had anything to do with it and so on, is a bit of a question mark. But from an asset quality perspective, actually CV has still continued to improve marginally over the previous quarter. And, for us, if you look at it from a year-on-year growth point of view, the CV loan book has grown by just under 19%. So, to that extent, I think that piece remains fairly okay for us at this point of time.

Okay. And just one last question. Now that we will see the FCNR deposit redemption next quarter, what will be the impact on the balance sheet?

So, for starters, you'll probably not see it in the next quarter because those deposits largely mature in October, you'll probably see it in the following quarter -- in the December quarter. And we obviously have a plan on addressing that essentially from a rupee liquidity perspective, because those were FCNR deposits swapped with the RBI and therefore they were part of the rupee funding plan, and in fact, that exercise has already started. We're already holding some liquidity and we'll continue to build that such that, that transition should be fairly smooth. So pretty comfortable with those deposits maturing and moving up.

Okay, but would that lead to some balance sheet contraction?

Yes, it would. We -- the part which contracts is essentially the overseas leg, which is in our foreign branches the loans that we have given to the NRI customers in foreign currency, which should be approximately $2 billion and that's the -- that would go off both on the asset and the liability side because they were borrowings and then lend to the FCNR -- to the NRI customers. So in the rupee book, it's just substitution of those deposits with other funding, which could be deposit or other funding sources. And in the overseas book, you would have both assets and liabilities coming off by roughly $2 billion.

And on the rupee book, what was the amount or what is the amount?

About $3.4 billion.

Nilesh Parikh, Edelweiss Securities.

The question is on OpEx. So just wanted to understand, when I plot the OpEx growth for the last many quarters, we've seen -- started to see some bit of trending down of the growth rates. Fair to assume that bulk of the investments that we wanted to do in terms of expansion are behind us for the time being. And we could see further -- I know, you don't get targets, but just wanted to understand from a direction perspective, can we assume that this trend continues for some time?

So when you look at investments, if you're talking from a distribution perspective or a branch expansion perspective, there is some movement in terms of the number of branches that we would have opened, because if you recall, last year, in the first three quarters of the year, we had opened about 250, 260 branches in nine months, and then in the March quarter we landed up opening about 230 or 240 branches, which effectively meant that about [100-odd] branches that we were going to add in this quarter, that is the June quarter, we really managed to get those advanced and open virtually in the last few days of the month of March.

So to that extent, it's not that we are opening significantly lower branches overall from an ongoing perspective, because we're not looking at it for a quarter or a financial year, we're just looking at the number of branches that we are adding on an ongoing basis. But it's probably true that the spot that we needed to achieve in terms of distribution on branches, we had, to a larger extent, done. So will we continue to have a few hundred branches this year as well, the answer is, yes. Some of those branches effectively got opened in the last month of last year, last financial year.

Other than the branch distribution expanding, other investments, whether it's on the digital side or in terms of increasing our physical -- our staffing presence on the semi-urban, rural side for some of our retail businesses, that is BAU. That will continue to happen depending on where the needs are. The improvements that we would look to achieve on the cost-to-income side or on terms of managing, pairing OpEx itself, that I think we're looking to achieve through the improved productivity that we believe we should get through as more and more branches breakeven, as well as through the higher share of digital as it picks up.

Okay. So in terms of on the expenses side, what you're suggesting is that the pace may continue. My thought was that, incremental branches yes, would be opening, but the cost of incremental branches would be starting -- will start to come off.

That's probably partly true, Nilesh. I'm not completely denying your point. I'm just saying that, how much of that change in the cost of the new branches will move the needle immediately, maybe not too much, but what you're saying, I'm not denying completely the fact that, there will be some reduction at the -- where we are today at about 4,500 branches, whether we add 300 or 400 or 500 or 250, there's a fair amount of flexibility there, because we do have a sizable footprint now.

And the other thing was on the fees, just some softness this quarter. So just wanted to understand, any particular vector that we should be focusing on here?

The usual sort of fluctuation tends to be a little more in third party products. On a year-on-year basis, actually third party product is still done fairly well, but on a sequential basis, clearly, March is always the absolute peak which you tend to hit on third party. Other than that, really no major change. I've said for some time that we would -- a more realistic growth trajectory in the fees and commission line has always been low-to-mid teens.

The line which obviously was a little soft was the FX line, which has been coming off for a while now and there again, I think it's only when the trade volume start building up again and if we start having a little more volatility, which gives back slightly better margins would we see that line pick up. But that's one, and then, of course, bond gain, it was a strong quarter with what happened in terms of ease and so on.

[Initially].

So, I would just -- in the initial part of the quarter. So overall other income growth is really a function of therefore what I just mentioned on fees and then the FX bond gain piece.

Amit Premchandani, UTI Mutual Fund.

This question is about -- regarding the US terminal and merchant acquiring space. Do you see any pressure on the fee income line from this space, given aggressive promotion by Paytm's of the world? Also, is there likelihood of any impact on the floor that you have on these accounts? And is the dependency rates for these kinds of transaction inevitable or you can take steps to ensure that the dependency rate is much more muted?

From the way we look at, clearly, there are two pieces. One is, is there an increased use of plastic in whatever form to basically through our POS terminals as well as through our payment gateways. And we've seen a pretty healthy volumes -- volume increase going through across both these. In terms of fee rates, I don't think there has been a particular reduction in the fee rate --

Because of these FinTech players. However, the competition has been quite intense for some years now, even among -- within the banking space itself. But as Paresh has alluded, we have not seen any significant deterioration, say over the last 12 months or 15 months, but yes, this is a space that we are watching because we do hear about Paytm coming and probably putting in some different or a FinTech company is coming to invest in other alternate mechanisms of acquiring. So we are watching this space and we'll probably have a review probably in the next couple of quarters on that.

Sir, what is the difference between say, fees charged by a Paytm POS kind of a mechanism as compared to a HDFC Bank POS?

Frankly, we have not yet seen any -- we have not sort of observed them too much in the markets for us to sort of really worry or take notice of them at this juncture. Probably they will be more on a -- yes, as I said, we probably -- there are multiple players, not just Paytm. I think what -- we also have other alternate acquiring mechanisms like the PayZapp, a business which we've launched. So if we were to equate these kind of mechanisms probably we'll be akin to any other FinTech player in the future. So the physical POS machines is different, the payment gateways are different, the other mobile-to-mobile pays or the QR code methodologies that the FinTech companies are adopting is different. Our philosophy has been that we'll participate in all these channels.

And sir, you have shared that almost 75% to 80% of your fees is retail in nature. Can you share with us, what percentage of this would be transaction fees?

When you're talking transaction, means what?

The POS terminal or card usage kind of fees.

These are very insignificant actually. The proportion, card related or acquiring related is actually very small related to the overall retail fees. It's pretty widely distributed at the moment.

Manish Karwa, Deutsche Bank.

So just on the balance sheet, your investment book has gone up very sharply during the quarter. Is it a quarter-end phenomenon, because last quarter it had declined and this quarter it has gone up very sharply?

The fact is that last quarter towards the quarter-end and I think I mentioned that last time as well, we had seen an almost artificial spike in some very short-term corporate assets and therefore, whatever excess liquidity that we or surplus liquidity that we hold had gone off because of those short-term assets, which, of course, would have run off.

Separately, as we -- to allude to the question which was asked by Mahrukh earlier, we're obviously building adequate liquidity to see through the transition of those FCNR deposits three or four months from now. So, we will -- we have ensured that between the deposit growth and some other funding that we've been raising, we are holding that slight excess or surplus liquidity, which is being parked in government securities or whatever short-term investments. So that's where you've seen that growth, it'll probably continue in some form or the other till you see those FCNR deposits go away.

Okay. And then does it also mean that given the rate movements that we have seen that we may see some better -- continued stronger treasury gains because the investment book has gone up, you put money into government securities, and as we see rates have actually come off on the government security side.

Well, the liquidity that you're looking, which has been parked, a lot of that is in relatively shorter duration instruments. So, I'm not sure whether that lends itself to too much of gains. But, separately -- generally speaking, the fact that yields have come off will certainly support some bond gains, but this extra liquidity of G-sec that I spoke about, a lot of it maybe even T-bills and so on. So, I can't say that all of this is in dated securities, which will give us a huge boost here.

Okay. And on that FCNR redemptions, when it happens, does it also give you a lot of forex opportunities, as in opportunity to get forex fees or is just a straight away payout to the customers?

None. Because it's been swapped with RBI, so we just get the -- there is no further FX conversion right now, when the remittance takes place. So the rate is already locked in with market swap, which was offered by RBI at that point of time.

Okay. And just a -- on the slippage that has happened this quarter, is it largely -- as you said on the media, is it largely to do with mid-market and the Business Banking segment?

Yes. In fact, not even mid-market, it was really just an account or two, which is not meaningfully. The largest piece was somewhere, as I said, between a third and 40%, somewhere between, it was essentially Business Banking, which is again, not something which is -- in the total scheme of things, if you look at the size of our portfolio, it's not something which is very large, but yes, that's what -- so if you look at the [roughly 9] basis points year-on-year, I would say that, four out of that would have come from Business Banking.

Okay. And on this topic itself, in terms of slippages, do we have any seasonality because, as we understand, on retail, 1Q is generally slightly elevated and 4Q is very good, so on our retail profile also, would you say a similar thing happens?

I think the seasonality we have seen a little more on Agri, for sure. We tend to have somehow every alternate quarter of slightly higher and then lower thing, which is probably because even the short duration crops, you probably have the flows coming in and so on. But on retail, in most products, I guess, the March quarter, I don't know whether everyone's efforts to sort of manage that portfolio in terms of collection effort and so on, is the strongest or -- but the fact is that usually you do tend to see a strong pullback in the quality of the portfolio, that is the -- the NPAs are being pulled back in March. Again, no sort of particular seasonality, although we've seen some variation across quarters in some parts of retail for sure.

Kashyap Jhaveri, Capital 72 Advisors.

Congratulations on the good set of numbers. I have three questions; one is, you mentioned about Business Banking NPL -- sorry, gross slippages being about a third of total, which would sit at about upwards of about INR550 crores odd. Now, if I look at as a percentage of your loan book in Business Banking, both let's say, in terms of RBI classification or internal specification, the annualized number works to about anywhere between 3.5% looking at your internal classification, about 7% plus, looking at your RBI based classification. So any particular reason why such high number?

No, I think then maybe, -- what I was talking about was of the increases that we saw, that is the net increase that we saw, that is where I said in this break up. So I was referring to the split of this INR570 crores.

Gross NPA movement between the two.

Okay.

Between the two quarters. And that is where -- because in the -- the slippage and the recoveries on the retail book tend to be much larger, because that is our ongoing flow. So ultimately, of what has slipped through into NPLs on a net basis, that is what I was breaking up roughly into the three categories that I spoke about. So I guess, the number that we're talking about are substantially different.

Okay. So, in case of retail, there would be some grossing up in the slippages and some grossing up in recoveries also?

Absolutely, every quarter, because that's the way the DPDs move, right. So that's the --

Right. Sure, that's really helpful. Second question is on the loan growth, which is sort of held up material percentages upwards of what systemic loan growth is. Now we have some unwinding, which will happen in October 2016 on the domestic book also. So let's say on the full year basis, how would you put the loan growth's target?

I go back to what we've been saying over the years that we ideally look to grow by a few percentage points faster than the system and that few percentage points has traditionally been about whatever 5% or 6% or 4% to 7% and to the extent that we've been at a delta, which has been much higher than the 4% to 7%, partly because the system has been in single digits from what we used to be low double digits even a couple of quarters back, and of course the fact that we've seen some slightly faster growth rates in the last few quarters. So, there has obviously been that gap between us and the systems has widened.

Taking off the roughly $2 billion, which we just spoke about, will clearly bring down that growth rate, and I think what we ultimately land up with in terms of a number, I don't think we have a guidance to closing this year or a particular number that we are looking to sort of be fixated above. All we are saying is that we will grow a little faster than the system and I think the fact that we grow faster than the system will remain even after the contraction in the balance sheet that we (multiple speakers) the FCNR.

The reality, of course, is that whether the system loan growth remains at around 9% where it is now or in the rest of the year it picks up to 11%, 12%, I think that is really what will to a large extent determine where -- how much will we outpace the system by year-end.

Okay. And my third question is on the shareholding patent side, it's been a while that this foreign holding, FII holding issue has been handing in balance. Anything else that the Board is thinking in terms of doing which can sort of get us out of this deadlock?

(multiple speakers) that we can do at all from our side. So, I don't think there's anything that the Board can do or the Bank can do in terms of the shareholding piece. So, no, the short answer to your question is, at this point of time, nothing particular other than whatever we've been representing in terms of how we would believe that the more appropriate definition of foreign shareholding should be, but that's the same case that we've been sort of or that's the same rationale that we've been putting forth for the last few years now.

Okay. Can we do something like a sponsored ADS or something?

No, it doesn't. See, in our case, the issue is not of our busting a sub limit in terms of ADR or stuff like that. It's not a question of FDI and FII, which in any case now is a merged limit. Our overall foreign shareholding, when you include HDFC's shareholding, is at 73%. So unless either the HDFC shareholding is not treated anymore as foreign or unless the 74% foreign shareholding cap gets increased, there is really no difference in -- there is no other solution in terms of, like the one that you mentioned in terms of sponsor ADS and so on, which can address the overall foreign shareholding.

Vishal Goyal, UBS Securities.

So this -- I'm sorry to ask again on this Agri and Business Banking. So just to get some sense on how was it like previous year, because the annualized number, obviously, on gross or even on net basis is like 3.2% for Business Banking, and around the same I think for Agri, so how was like, how has this moved?

So it's may be marginally lower when you look at it, but let's say that -- and again, to annualize a particular quarter will then lead to some distortion, because like I said, it's not that every quarter we've seen a continuous trend of deterioration or a continuous flow. So, I think, the way to look at it is that, there is a certain NPL percentage or a certain loss percentage that would be fair for a SME business.

At this point of time, on an ongoing annual basis, not annualized of a particular quarter, but we look at the annual P&L, it's still a P&L which looks good for us. Again in both this and certainly in the case of Agri, there is also a certain appetite for risk linked to the fact that it qualifies for PSL and Agri, direct agri and so on.

Remember, if you look at the Agri portfolio, for instance, we've been one of the few banks which has been meeting our direct agri requirements now almost entirely or very largely ourselves. So we have not been dependent on having to buy out too many portfolios, which qualify for direct agri and so on. So, either if you have to buy out portfolios or if you have a shortfall and therefore you have to place deposits in RIDF, both of those in any case have a financial impact.

On the flip side, if you do some of the direct agri and you are managing it reasonably well, which we believe we are, even if it has slightly higher levels of losses as compared to some other portfolios, it is still an acceptable, bankable business to do and frankly, is also commercially more attractive than having a negative carry or a lower spread on the RIDF or on the buyouts of these portfolios.

So, again, to reiterate, this is something -- and we are talking about all of this, of course, on an overall bank basis of really, sort of slicing and dicing a 1.04% gross NPA number. So, while I fully appreciate that these are movements and therefore it's good for you to understand and for us to explain what these segments are, all I'm saying is that on an overall basis, it's just something which -- and within the product, if there are specific segments or if there are specific customers or there are specific regions which show a slightly higher delinquencies, we obviously take appropriate policy or collections focus on collecting those issues.

So I think -- but this Business Banking, like whatever numbers you're seeing -- these are like, I'm sure, are the geography-specific like, which comes from a particular, one or two, three states every quarter, could be a different state, or is it -- you told that it's not industry-specific, but there has to be some element of issue somewhere?

Frankly, when we saw -- first of all, remember, these are relatively smaller individual exposures, right, so they tend to be even in single-digit [grow] kind of sizes and when I mentioned industry, it's industry and geography, they are across a handful of states, so it's not coming out of a particular state. It ranges from everything from some ginning to trading to consumer durable, and they are different players of different industries and locations, no particular trend of deterioration.

And also, like I said, these are movements which we typically do have every quarter a few accounts. In some quarter, if you have more than a few, which we slip through in that quarter, that when you tend to have a little bit of a blip, which is why I'm not saying that you cannot have a blip for a couple of quarters sometimes, but I wouldn't really rush to annualize and therefore say, whether is this losing 2% or 1.5% or 3% because you'll have to actually look at on an ongoing basis what the loses in those products are.

Fair enough. So perfect. And there is one more question, which is particularly on the unsecured lending and I think we've been doing it very well over the years. Do you think, like because, I see lot of NBFCs, correct, kind of doing not similar, but unsecured business, maybe to your customer base or a different customer base, but do you think the risk building up there or I'm sure you are taking enough precautions but still portfolio especially on personal loans and two wheeler et cetera?

So, two parts, you're right that depending on which NBFCs and which FinTech-linked NBFCs and so on you're talking about, there are different players who are addressing different segments, some which -- some addressing segments which are really not accessing the banking system too much and certainly some who are accessing the self-employed or business segments more than the salaried.

In our case, while we do cater to multiple segments, the largest part of our PL book is essentially salaried and a large part of that again is salaried with salary accounts with us. And while it is always possible that the same customers could get funding from somewhere else, now with the bureaus and so on, I think the ability to track that primarily at the time of giving loans, but even other alerts and so on, is there for us to be able to scrub the portfolios and figure out whether there are any trends going there.

All I would say is that, of course, the only shift in terms of risk that can happen and that's not just true of the unsecured piece, but also true of, let's say, the secured products, let's say like auto loans and so on, is that, as we -- as a bank, as we go into deeper geographies, semi-urban, fringes of rural with our retail lending as well, although we don't change the basic minimum credit profile, the mix of the portfolio will be slightly different.

So, to just give an example, if you're looking at, let's say, a minimum income level of something, let's say, INR20,000 or INR25,000 per month, just as an example, the proportion of customers having that income levels vis-a-vis somebody having two or three times that will be different in urban areas and different is semi-urban and perhaps different in rural. And obviously therefore there is a slightly different risk level associated with each of these, although the basic threshold for what is acceptable and not acceptable has not been changed as you would change the market.

So those are, I think, the tradeoffs that you would do between looking at covering a larger geography, growing the business and some marginal differences in the loss percentage or the riskiness of that portfolio. But your point of many more players focusing on the same product and causing significantly higher riskiness and we haven't seen that as yet. If we tend to find that there are signs of that in some markets or some segments, we would need to react to that for sure.

Saurabh Das, Franklin Templeton.

My first question pertains to unsecured book again. Today, it's close to 13% of the overall book and if I look at your classification, it's somewhere around 20%, 21% of retail. While we do understand a lot of it is cross sold to our own customers, is there an upper threshold where you would like to cap this as a percentage and also if you can highlight couple of risk mitigation practices as it becomes larger part of your book?

So to be fair, at this point of time we haven't put a number as a cap where we would stop doing this simply because while we have had a few quarters of this growing maybe in the high 20s or slightly more than that, the overall book -- the difference between the growth rate for this product and the overall retail book or the overall bank book has not been so large. So, while it is growing in proportion, it is not growing at a very rapid pace. And these are relatively lower duration products as compared to some of the other retail lending products as well.

But, do I, therefore in the medium term expect to go from that 21% that you referred to, even if it increases, it is unlikely to increase by 1%, by more than 1% or 2%, even if the current growth rate on a relative basis between this product and a lot of the other products grow continue. Remember also that if we look at a two-year, three-year, four-year period, it's quite likely that the wholesale book starts growing a little faster, as the CapEx cycle and the investment cycle picks up and therefore again the relative proportions might just come off a little as well.

As far as the risk mitigation measures are concerned, there are several -- I'll just mention a couple. One of course is the whole focus on the internal customer as against the external. There is always at least about 20 basis points to 40 basis points difference in the delinquencies for an internal and an external market portfolio, which is one part.

The other piece of course is that we're using a lot of analytics and lot of scores and I guess, the amount of data that we can get today, the level of discrimination in the portfolio that we can achieve based on the nature and the sheer richness of the data that we get, again helps us identify which customers we should be offering more to and which ones we should be that much more cautious to. We also have a pretty good focus on what's happening to check bounces and collections and so on.

So I think there are different pieces that we try and put together. I'm sure several banks who are in this try and do the same things and some of these might sound quite similar or logical, which everyone will do. But we'll keep a watch and I'm not saying that everything will be always perfect. If there is any part of any product which shows us any stress, we'll of course be reacting to that.

So just on personal loan and credit cards, what's the share of -- on the bank book, what's the share of internal customers who have already a liability (multiple speakers)?

On the PL side, it'll be about, 50% will be internal, 50% would be external. On cards, roughly 65% to 70% would be internal and 30%, 35% would be external.

And on sourcing, what's the share of DSA in the overall sourcing mix?

For which products?

Personal loans?

For personal loans, again it'll be roughly the same. 65%, 70% will be internal, branch and rest will be external.

On the micro finance book, what's the size and what's our origination methodology? Do we employ banking correspondents there?

No, we don't. Roughly a INR4,000 crore book and all our origination there is done by bank staff.

And what's the growth on the MSI portfolio on a year-on-year basis?

It's about 35%, 40%, but it's too -- it's such a small portfolio that frankly it's not going to move the needle on an overall basis.

Right. And in terms of ROA on this product, given that you do it a lot with your own banking staff, does it -- is it higher than your overall bank ROAs or it's lower than that?

Frankly, from our point of view, it's got an element of our looking at it to meet our weaker section lending as well as some part of what is our Board mandated strategy for, which has an element of CSR as well linked in it. So (multiple speakers) leave the ROE piece out for now.

And on the ESOP policy, with this March 2016 new ESOP plan, I think the total outstanding ESOPs as a percentage of shareholding has reached around 9.5%. Is there an upper cap on this number? And also, if you can highlight that while we have never touched overall grant rate limit of, I think 2.5%, if you can just talk a little bit on that?

This is an overall grant from the shareholders, the tap is really also controlled by the Compensation Committee of the Board and because these grants are done to a certain extent every year and then again vest over three years, and then are exercised after vesting over a certain number of years. So the sort of -- the decisions on how much will be granted and therefore what will be the total outstanding at that point of time is really something which is -- that there is no publicly stated cap that we're talking about, but that's something which the Compensation Committee sometimes with the -- if necessary with -- in consultation with the Board is what manages this.

But, can we see a departure from the past rates going forward? Can there be an acceleration?

I don't think there is anything which has been specifically articulated in that respect. So I don't want to preempt the committee, which is a Board Committee.

Nilanjan Karfa, Jefferies.

Sort of similar question on that unsecured book. So, is the duration, has some thought gone into the duration of the books that we are doing on the unsecured piece, has it got something to do with the way the liability is shaping up? Just some light on that.

No, the duration has got nothing to with the liability piece, because we don't look at the duration of individual products based on the liability piece. On an overall basis, the ALM of the bank is very well matched. Reason why unsecured loans and personal loans and so on tend to have a lower duration is because traditionally they are (inaudible) two-year, three-year products, monthly amortizing, while some of the other products tend to be a little longer than that.

Right. Help with the retail term deposits, how are they doing compared to let's say last year, last quarter?

Actually we had a very strong quarter in retail deposits, which is -- in fact, if you look at the, just the June over June growth that we've seen, we've seen almost 19% growth in the retail fixed deposits.

Right. And so how do you see the cost of funds going forward, given where we are, I think we are almost at the lower range probably?

I didn't get you. Lower range of what?

Of rates.

Well, I think you'll continue to see the repricing as existing deposits mature and come through at the new rates. I incidentally believe that, perhaps we still have some room to go in terms of deposit rates coming off by the way.

Okay. And last question. How's the trend on the MCLR based lending? Could you help us, how do you see the competition shaping up on that side? Are we gaining because of our MCLRs?

Well, the top two, three, four banks who are active, actually tend to have MCLRs which are pretty close to each other, within 5 basis points or 10 basis points, in fact, typically 5 basis points of each other. And everybody seems to have a tenure or two, where they are lower than the other banks. So I think we are relatively equally valor, equally badly placed. So I don't see the MCLR being a tool for competitive positioning. It certainly has been more efficient in terms of the transmission of rates. In the last three months that we've been having the MCLR, we've had our MCLRs drop by roughly 5 basis points every month.

Right. Okay, thank you so much.

Okay. Before the next question, since we are already at just about 10 minutes or 12 minutes yet to go, may I request that, everybody just stick to a question and if somebody has already covered that broad topic, I would request you to, let's just move on, so that we actually cover any other subjects that some others might have.

Thank you. MB Mahesh, Kotak Securities.

I'll just stick to one question then. If I were to look at your retail growth of 25% and if I look at the slowdown that we have seen in numbers in 2014, is it a fair assumption to make today that the growth in disbursements have fallen sharply? And if yes, could we see the impact of it coming in subsequent quarters, because there could be a difference between EMI payment and volume growth which is happening currently?

We haven't seen actually a decline or a -- forget a sharp decline. In the first quarter of this year in every single product, the disbursements are not just higher, but higher at very healthy rates over the comparable quarter. So (technical difficulty).

(technical difficulty) disbursement growth also clocking like 15% to 20% kind of a number? That's it.

Yes, in most products, yes.

Sanket Chheda, ICICI Securities.

I just wanted a standard asset provisioning in bps, what would be it?

The standard asset provisioning on the stock would be about 40 basis points.

40 basis points for the quarter?

For the quarter, it wouldn't be much because the asset growth on a net basis was sequentially not high, but we did make a little bit of floating provision.

I was just trying to understand the improvement in margin, that 9 basis point to 10 basis point, despite that, CD ratio is declining, investment to deposit ratio is rising, exactly what -- and relatively higher delinquencies this quarter. So, is the falling margin alone is sufficient to cover all this? Where is this increase coming from?

So the margin increase of about 5 basis points, 6 basis points, because we're talking about going from -- in the second, it has gone up to 4.4 basis points, but it is already at 4.3 basis points something --

3.4 basis points.

3.4 basis points, so it's sort of gone up by whatever, 5 basis points, 6 basis points -- 6 basis points, 7 basis points. The change has come partly because of the slight change in asset mix, with retail slightly larger, which gives us a little (technical difficulty). And the fact that with whatever has been the deposit mix, which has been maintained, the decline in deposit cost has been almost equivalent to what has happened on the re-pricing part of the assets. So there is a change -- there is an improvement because of mix, there is a slight reduction because rates have been coming down and the deposit costs have also come off.

Just wanted to check, for margins, do we actually take cash into consideration as interest-bearing assets or no?

It's a non-interest bearing asset.

Did you hear that?

Sorry, I couldn't get that.

Cash is a non-interest bearing asset.

Okay. So, it's not taken while taking margins?

(multiple speakers) Margins take the entire total balance sheet.

Jahnvi Goradia, Motilal Oswal Asset Management.

Sir, since you do a lot of customer data analytics, would want to understand from you what percent of your customers would now be using wallets? And how many of them would be using say an HDFC wallet versus external wallets? So, and also how frequently do these customers refill their wallets and if the frequency has changed in last couple of months?

I'm sorry, I won't have that level of detail on this call, because as an earnings call we haven't sort of got that with us. We do track through an analytics the use of our channels, so we do certainly keep a track on the number of customers and the proportion of customers who are using our net channels, our mobile channels and for that matter our wallet and all of that, but which of them would have other products from other wallets or others and what is their usage with others is certainly not something that I have right now.

Okay. So if I take a longer-term view, say more and more customers start to use, say an external wallet, would that mean that we would lose some significant data about the spending pattern?

First of all, I'm not sure whether there is any major attractiveness for a customer to -- when you look at a competing say wallet, then the fact is that a bank wallet for bank customers tends to be a little more attractive, simply because the bank wallet is not a prepaid wallet. So the customer can actually use the wallet, so he gets a one click experience, at the same time, doesn't have to pre-load the wallet, because it's not a prepaid instrument. So it's only when the customer actually does a transaction, would that amount get pulled from whether it's a debit or a credit card or maybe the auto net banking and so on.

So to that extent, and I think in fact that the basic product construct tends to be a little more convenient for a customer of a bank to use a bank wallet. Besides, I think we're always saying is that, the customer has multiple options to be able to pay. So, in any case, on let's say an e-commerce transaction, the customer could use net banking, could use his card or could use a wallet. And so I think frankly, we believe that we are reasonably well positioned. Obviously if there are special features that get added on by other players, if there are any, we are more than equipped to be able to offer those to our customers as well.

Sreesankar, Prabhudas Lilladher.

Quick question. What is the SMA-2 outstanding that we have as of the end of the quarter?

We haven't put that in public domain, but its pretty small.

It's pretty small. Have you seen any kind of an increase when compared to the previous quarter?

I don't think we really have that here, but I don't think we've seen any meaningful movement either down or up.

Okay. I'm not sure whether the next question was touch-based upon effectively, in your personal loans or unsecured loans like credit cards et cetera, are we seeing any kind of increased payment stress?

So if you look at both these products over the last several quarters, we've seen ups and downs in almost every quarter of a couple of basis -- a few basis points up and down. So there is no meaningful trend of increased stress and remember, in all of these products, in fact, in this entire cycle, the unsecured products have actually operated in terms of delinquencies and losses at much lesser than what these products normally do. So in that sense, we've been in a bit of a sweet spot and frankly, that's probably true of the industry as well. The industry has been in a bit of a sweet spot for unsecured portfolios.

So, even if there was some increase, it would really be to come back to levels which are what one would expect from these products. In some cases, you actually have some of the unsecured products experiencing losses, which are similar or even sometimes marginally lower than some of the secured products. So, I wouldn't be surprised if there was a little bit of increase here and then over a period of time, but right now there has been no major trend.

Alpesh Mehta, Motilal Oswal Securities.

First question is related to your subsidiary, HDB Financial Services. If you can -- because that has been growing quite fast, so if you can throw some light on the customer segment and what is the game plan over that over the next two to three years?

Well, the game plan is what it has been for a few years now, which is that they cater to a customer segment which is willing to pay a slightly higher rate and which is therefore slightly higher than what the Bank caters do. The products are essentially again somewhat similar to what the Bank does, which includes loans against property, would include commercial vehicle loans, business loans and so on.

The balance sheet size of the HDB Finance has been about INR26,000 crores now, INR25,000 crores, INR26,000 crores. So we still believe there is a great opportunity for us to grow that business, and we'll probably continue to do that.

But do you -- from a customer segmentation perspective, does the segmentation remains the same that this guys would be -- that subsidiary would be catering more towards the self-employed segment having a ticket size of less than [INR4 Lakhs]?

It would be either self-employed or other segments, but at a benchmark which is slightly lower in terms of credit profile to that of the Bank, which is why they would be willing to pay the slightly higher rate and of course, and it would carry a slightly higher risk. However, remember at every segment, we believe that appropriately managed, there is a very bankable proposition, banks and NBFCs have co-existed for the longest time and we just believe that there is this segment which we may not want to cater to in the bank, but which has room to grow.

And this subsidy has been growing at around 30% to 40% every year. Do we see the same kind of growth rate continuing or the base will start (multiple speakers)?

No, I don't think we have any particular number in mind in terms of growth. Of course the company is still relatively small, so growth rates tends to be a little more flattering than if you are, let's say the Bank size.

And the second question is, the movement of the floating provision, if you can throw some light on that?

So in this quarter we've used the floating provisions like in the last quarter for about INR130 crores for the food credit related issue and we've created a floating production of INR25 crores.

And that exposure has come down on a sequential basis. If you can throw some light?

That everyone's exposure increases and decreases in the same proportion, because both disbursements and repayments are equally proportioned to everyone.

Okay. And lastly, I missed the slippages break-up between SME, Agri -- SME, retail and the corporate segment, if you can?

I just said a third each in terms of the increase, the net increases in the NPLs are roughly a third each between the Business Banking, Agri and the rest of it put together.

And on a gross basis?

Gross basis, I don't have the break-up by function, but roughly these are the net increases.

And when I look at the Basel (multiple speakers).

If you don't mind, because we are running out of time, I had requested that we towards the end of the call, stick to one. So we can probably take your calls, I like to just try and cover a few more questions.

Aseem Pant, HSBC.

Can you just give me the breakup of provisions?

The total provisions -- INR829 crores was specific provisions, floating provisions was INR25 crores and the others are INR7 crores net.

And general would be within this?

General was about INR4 crores.

Well, it's actually INR4 crores and minus INR8 crores, so there is roughly a couple of crores released and then there is a contingent provision of INR6 crores. But all of that put together is the net amount is what I gave you of INR4 crores.

[Vibha Batra, Fairconnect].

My question is on this new insurance, agri insurance scheme that government had launched. So are there new disbursements in Agri segment and whenever accounts come for renewals, are they covered by this insurance scheme?

At this point of time, I have no idea yet whether these are customers who are eligible for that insurance scheme, so I'm sorry, I don't have that answer. Maybe you can separately be in touch with Bhavin and he'll try and get you that information.

Sure. My second question is, what percentage of your, say PAT would be from international operations?

What percentage of my --

PAT, profit after tax?

The international operations are minuscule because in terms of the balance sheet itself, it is effectively 7%, 8%, but most of that was the FCNR linked lending, which had a very small spread of 50 basis points to 75 basis points. So, as a percentage of the PAT, it would be low-single digits.

There are interesting emerging markets, which are investment-grade, apart from India, and if we talk about the domestic market, HDFC Bank is the benchmark for anything and everything. So why is HDFC Bank only India-focused? Why aren't you looking at international operations?

We actually believe that there is a large opportunity still in India and we don't think we are so smart or so well equipped to try and do things in other markets. So we really believe that there is a large opportunity here and a long way to go --

But, if not either or a situation, you have the capital, you have the people, so --

No, I think we have enough -- I think the capital that we have and the bandwidth that we have. So at this point of time, our strategy is to remain very much India-focused and our international business is either linked to the non-resident Indian diaspora or to the extent that our customers are moving overseas in terms of our wholesale customers.

Sanjay Parekh, Reliance Mutual Fund.

Yes. So as covered in your annual report, what is the experience and the adoption in wholesale banking and in the Agri on the digital products? So in terms of -- yes, please.

In fact, wholesale banking has been very good, both in terms of the -- well, it's largely transactional and it was largely in the area of cash management and straight to on the cash management side. The trade product has taken off well. And this is still early, but less than a month back, we launched a full range of digital offerings for the SME customers as well. So -- but wherever we've launched it and wherever it's been adopted, we've seen the proportion of transactions.

Once customers have taken to a particular digital offering, the adoption is much faster in terms of the proportion of transactions than perhaps on the retail side, because you need to cover those many more hundreds of thousands of customers to get that shift happening. So we're delighted with the -- obviously, the number of transactions or the number of offerings tend to be a little more limited, because on the wholesale side there aren't such -- there isn't such a wide range of transactions that they would do on the digital side. But what they do, they do much more intensively.

Right. And on the -- even we have products on the Agri side, which is [Tej or Kisan Turant].

So that is essentially to couple of things, one is in terms of the top-ups for customers who already have agri loans for us, and therefore, when there is a need for an incremental loan, so that processing of that happens that much faster, because a lot of the processing and the documentation and creation of security and so on, a lot of that would have been done earlier. And on the basis of the experience and the information that we have, we may be able to -- in fact, we typically offer much quicker turnaround times. And the whole idea there is essentially to cut turnaround times for the customer, so that the customer experience is different. We've obviously launched it in certain markets, and in those markets we've had a good experience so far.

Digant Haria, Antique Stock Broking.

A question on a very small part of your portfolio, I'm seeing that gold loan has seen some bit of revival, so is that something to do with the revival in prices or are we changing some strategy like introducing the products in more branches or putting a little more focus on this product?

A little bit of both. We -- it still remains, as you rightly said, around -- somewhere just shy of INR5,000 crores, INR4,800 crores, INR4,900 crores. Again, I think this is a product which we've been having in a certain number of branches, but we went through a phase where we were holding back a little, given the volatility that one had seen in the gold prices. For the last few months now, again, it's sort of back in terms of what an RM would look to offer to the customers. So it's a bit of both. It is, I guess, a little more being put across to customers and maybe a few more branches might have been added as well.

So how many branches would we be doing this? Any rough numbers?

About 600 to 700 branches.

Hiral Desai, Anived Portfolio Management.

On the personal loan and credit cards, just wanted to check what would be the current rejection ratio. So, let's say, if we get 100 applications, how many would be rejected as of now?

This will (technical difficulty) for segment to segment. So I don't want to give a particular number because we have -- we start from an area where we have pre-approved customers. Obviously, therefore, effectively 100% of those who apply will get it, some where the reject rates could be as high as 50%.

But qualitatively, has the number gone up or come down?

Sorry?

Qualitatively, has the number gone up or come down?

Hasn't really changed. In some markets, if the proportion of salaried is a little different, it will obviously -- the approval rates might be a little lower, but in similar markets, I don't think it would have changed.

And within the FX revenues that you have, what percentage of retail out of the FX number?

[Well, about 60%].

Priyanka Agnihotri, Brown Advisory.

My question is around fee income. I'm just wondering if you could shed some light on the fund management business. How much of fee income comes from there and any recent trends, what we have seen over the quarter?

We don't do any direct fund management ourselves, certainly not in the Bank and, so our fees linked to the fund management piece would at all -- if at all would be our distribution of mutual funds, which would be amongst the top 4 or 5 fee incomes, because we distribute mutual funds and insurance and then we have other transactional fees. But directly, fund management is not a fee revenue stream for us.

So on the fee based -- so on the distribution was my question, in terms of what are the trends for this quarter, if you can?

There we've had a decent quarter actually. The last three quarters or four quarters has seen a bit of an uptick in terms of mutual fund distribution on the back of primarily a pickup in volumes.

[Krishnan Iyer], Motilal Oswal Securities.

So I just got one question. Starting this quarter, September quarter, you will be reporting to the Reserve Bank of India in terms of internally submitting to them under [NDS]. And given what you just mentioned around the actual credit losses in the unsecured portfolio being significantly lower than the expected credit losses or the historical credit losses in that portfolio, do you expect that hence the higher proportion of unsecured book will essentially mean a drag in terms of the provisioning estimates, in terms of the credit cost estimates that you need to bear as we move forward?

So I think you make an interesting point, but whether the actual losses embedded in those portfolios will have to or what is more reflective of the actual losses is what were used to be the historical experience or is there a slightly new normal on new expected loss is something which we have to see, because in the last two years, three years, the losses had been lower. They're off their bottom from where they had hit in terms of the lowest losses in unsecured and they've gone up from there, maybe in some cases by 10 basis points, 15 basis points, but they're still way lower than what they used to be.

So I think, when you're looking at what a fair value of those portfolios would be, one will have to see what is the expected loss taking into account the cycle, including what has happened lately, because some improvements and some reduced losses could also be a function of the bureaus and the improved fraud control processes and the better segmentation and discrimination between portfolios that has been achieved through scores and so on.

So on the face of it, I think somewhere between probably where the sweet spot and losses were and where the earlier slightly heightened losses have been, is probably where the provisioning might ultimately stabilize if there is some sort of a mean reversion.

Could I just ask one more question?

Sure.

Just wanted to understand, given your internal metrics that you have been looking at the unsecured or the retail portfolio for such a long time, you've been a retail bank for such a long time, just wanted to understand how is the leverage in the personal loan segment looking right now compared to say maybe about five years back, so 2011 to 2016?

So I think there are some segments who might have a slightly higher leverage than what they used to -- what happened is from where it was, it came off a little because many players stepped out of this business, and from that bottom, I think the leverage might have gone up just a little, because more players have come back in the system in the last couple of years. But also what has happened is that the product offering has got extended to a wider geography. So you actually have customers across different segments, which are now being serviced by banks like us or by other players, where therefore -- it's not exactly -- directly comparable or similar to what the segments were some years back.

My only query is regarding the fact that income levels across -- no matter which income strata that you tend to look at, income levels aren't quite growing at the pace at which the personal loan segments across the system are growing, right?

Yes, but a lot of these are customers who are coming into this for the first time, so a lot of them are those who don't have -- so they would be sort of those who the Bureau shows that don't have currently borrowings from the system as well. So I'm not -- there will be of course segments of existing borrowers who may be getting a little more loans based on their repayment track records, but there are also new customers coming to the fold, which is supporting the -- because the penetration levels of products like personal loans and credit cards is still very low. So you'll actually have a mix of new customers and some higher borrowings by existing customers.

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

Thank you so much and I'm not going to prolong this anymore. Glad that we could have this call and sorry to have kept you all awake so late. Thank you once again. Bye.

Thank you, 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.