HDFC Bank Ltd (HDB) 2018 Q2 法說會逐字稿

Ladies and gentlemen, good evening, and welcome to HDFC Bank Earnings Call on the financial results for the quarter and half-year ended 30 September 2017, presented by Mr. Paresh Sukthankar, Deputy Managing Director.

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 the brief commentary by the management.

(Operator Instructions) Please note that this conference is being recorded.

I would now like to hand the conference over to Mr. Sukthankar.

Thank you, and over to you, sir.

Good evening, everyone and welcome to this earnings call.

I have my colleagues with me here, but Sashi has unfortunately had to step out for some personal expediency.

So, I'll walk you through some of the key parameters for the results and then we'll quickly move on to the questions, which I'm sure you are eager to ask.

Very quickly on the quarter itself, our net revenue growth for this quarter was 22.6%.

This growth came both from net interest income, which grew at 22% and that net interest income was about 73% of our total net revenues.

The net interest income growth was driven by average asset growth of about just under 18% and the net interest margin at 4.3%.

The other 27% of net revenues, which is the other revenue or the other income, which constituted commissions, foreign exchange, profit from the sale of investments and recoveries and miscellaneous, that source, other income grew at 24% and touched INR 3,605 crores from INR 2,901 crores.

On the expense side, our operating expense growth was 13.8%.

Our core cost to income ratio was therefore at 42.6% as against 45.9% in the corresponding quarter of last year.

Our total provisions were up from INR 749 crores to INR 1,476 crores.

And after providing for taxation, our net profit growth was 20.1% with the net profit for the quarter being at INR 4,151 crores.

Moving on to the balance sheet numbers.

Our total balance sheet was at -- balance sheet size was at INR 9,33,000 crores which was a growth of 18.3% over INR 7,88,000 crores last year.

Deposits touched INR 6,89,000 crores, which was an increase of 16.5%.

Within that savings accounts at INR 1,97,000 crores and current accounts at INR 98,000 crores, each increased by 23.5%.

Time deposits, which were at INR 3,93,000 crores increased by 11.7% over the previous year.

Advances growth was strong.

Total advances grew by 22.3% and that growth came from wholesale loan growth at 23.6% and retail loan growth at 21.6% as per the Basel classification in terms of retail and wholesale segments.

Moving on from the balance sheet numbers, the branch network was more or less flat on a sequential basis.

Our distribution network was at 4,729 branches.

ATMs were at 12,259 ATMs and these were in 2,669 cities.

Of this branch network, 52% is semi-urban and rural and the rest is urban and metropolitan.

On the capital adequacy ratio, total capital adequacy was at 15.1%.

This is as against regulatory requirement of 10.25%, which includes the core 9.9% and 1.25% as a capital conservation buffer.

So, the requirement is 10.25% and we were at 15.1%.

Within that 15.1%, the Tier 1 CAR was at 13.3%.

During the quarter, the bank was designated as a domestic systemically important bank and a domestic SIB or domestic SIB and the bank will therefore be required to maintain a common equity capital of 0.15% higher from April 2018 and 0.20% from April 2019.

Of course, even adding these to the 10.25% that I spoke about earlier, the bank is well above those thresholds.

Moving on to asset quality.

Gross NPAs were at 1.26% and net NPAs were at 0.4%.

I'm sure all of you would have read the note or would have heard about the specific disclosure that we have made.

Let me walk you through that.

The position right now is that the bank had participated in a project loan, foreign account, which underwent a flexible structuring under what is popularly called the 5:25 framework.

This flexible structuring was approved by the Joint Lenders' Forum in February of 2016.

As typically this is done, the framework or the scheme is approved by the JLF and then each individual bank has to implement it on a bilateral basis, as we did.

Based on those observations that have been raised, the bank has made its submissions to the regulator and has been responding to queries in that regard.

Based on the dialog which is currently underway, we have yet to get a final decision from the regulator in this regard.

Pending this, we have nonetheless disclosed the fact that this regulatory correspondence is currently on, and while it has not reached finality and we don't have a final direction in this regard, the bank has made contingent provisions equivalent to what would have been the regulatory requirement of provisions had this -- had we received a mandate from the regulator to change asset classification.

So, this is what we have done; one is disclose and secondly to make provisions.

Obviously, we will continue to be in dialog with the regulator addressing whatever queries are raised and we'll finally abide by whatever is the final decision from the regulator.

But we haven't yet reached that stage and which is why we are counting for it as it is being done right now with the full disclosures as they are.

Pleased do, my only request, I'm sure you'll have some questions, which will be in this relation, I think the only point I would like to leave you with is that you'll have to sort of respect the fact that since this is an issue between a bank and a regulated entity and the regulator, there is a limited amount of what that I can share at this point of time.

While there is no desire or there's no intent of revealing anything less than what we could, I think it will be inappropriate for us to go into any details as regards the specifics of the correspondence or the issues, which are the subject of this regulatory dialog between us and the regulator.

With those opening remarks, I'll now be happy to take your questions.

Thank you very much, sir.

Sorry, I have just one of the request that just so that we can accommodate as many of you who have questions, I would request you to try and limit your questions to one or maximum two.

If we do have time at the end, you can always come back and ask questions again because otherwise we've seen sometimes that some of you have three or four questions and that effectively means that we run out of time and some of you can't get to ask your questions.

So, if you can, please restrict your questions, that will be appreciated.

Thank you, sir.

(Operator Instructions)

First question is from the line of Mahrukh Adajania from IDFC Securities.

Please go ahead.

I just have two questions.

One is on savings deposits.

Some banks are talking about aggressively tapping government deposits, which they have probably done aggressively in the second quarter.

So, your thoughts on that and if at all you could quantify the contribution of government savings to your total savings and if you think that's our growth area even going ahead?

And second is that your contingency provision would be in specific credit cost or in the general one?

Sure.

So, the -- catering to the government segment is certainly a focus area for us, in particular as the government is digitizing its own payments, whether it is the payments that go from central government entities to various entities of the government or under various schemes, as well as for their purchases which they are doing through electronic mechanisms.

All of these involve payment solutions and the bank has been -- has one, put in place appropriate system solutions to provide the convenience for these linkages, as well as has been reaching out to customers.

So, it is an area of focus for us.

I wouldn't want to put out any numbers because that's not in the public domain about what specific deposits have come from this segment, but we do believe that we have a role to play and are well positioned to take care of the needs of those who interact with the government in this entire payment chain and it has been a growth area for us as well.

As regards the contingent provisions, the contingent provisions, which we have made are part of the general and other provisions.

However, of the total, when you look at it from a P&L perspective, the provisions that you see there, which we have -- because you've seen we have broken up the total provisions into specific and general and others, that's the amount which has been roughly INR 400 crores, which has been made, almost that entire piece is in respect of contingent provisions for the note that we have made.

In addition, we would have utilized roughly INR 300 crores of floating provisions, which is a total contingent provision that we have made.

So, the provisions that we have made for contingent -- for this contingency include what you can see in the P&L and roughly a utilization of just under INR 300 crores from contingent.

That's very helpful.

Thank you so much.

From the floating...

Sorry, I am sorry.

From the floating -- I am sorry.

Yes.

Sure, understood, understood.

Yes.

I am sorry.

The next question is from the line from Agastya Dave from CAO Capital.

Please go ahead.

Thank you for the opportunity, sir.

Sir my question.

I am sorry, sir.

The audio is not really clear.

May I request you to please come closer to the phone?

Is it better now?

Yes.

Thank you.

My question is slightly crude.

There is a big surprise on cost to income this time.

And I know it's very unpredictable over a period of three years to five years to ask you for a guidance what it will be down the line.

I'm just wondering, sir, what are the trends?

I mean, you're investing so much in digital technologies, the way the day-to-day operations, any bank -- that is definitely going to change over the next three years to five years.

So how do we view the operating leverage, which is now inbuilt in a bank like yours, which is making so many investments, has very decent geographical presence and is going?

So how do I model this over a period of three years to five years?

What's your sense here?

So, I think putting any sort of a number or a range in terms of the expense growth is a little tough in terms of the absolute rates of growth, but let me give you the direction and what we're trying to achieve.

The reason why we've been focused on improving our cost to income ratio in the last couple of years, and we believe that we have some way to go further in this journey, is that we're not just looking at slash and chop in terms of expenses, but we're looking at improving productivity, improving efficiency by changing processes, by reducing touch points in terms of how we process, whether it's a loan, whether it's opening an account or any activity.

The idea being that if we can change the process and make it as straight through as possible end-to-end, that not just reduces cost but it also more importantly, changes the customer experience.

In doing this, as we have moved increasingly to digital, we have been able to improve productivity on the sales side, as well as in operations and credit.

That obviously means that, for instance, the time it takes to process a correct file or a time it takes to make some other decision from a retail lending perspective, that has changed and that with some lag, results in a cost saving.

It also resulted in our being able to optimize our manpower, which reduced for a couple of quarters, although with the growth that has then come.

In this quarter, we actually landed up increasing on a sequential basis almost 2,700 employees.

So, I'm not able to make this easier for you to model, that's -- your models are your own, but all I can tell you is that, we still believe that our revenue growth will continue to outpace our expense growth, such that over the next couple of years, that maybe be the next two, three, four years, we should continue to improve our cost to income ratio in baby steps.

I mean that is our internal aspiration.

We don't have a guidance on any ratio or on any number, but that's what we would like to strive for and we believe there is room for us to go down that path.

So, can it fall as substantially as let's 300 basis points, 400 basis points over the next another couple of years?

I mean can you end up seeing a 38%, 39% number?

I will not be able to guide you to any particular number, but we are just above 40%, in the low 40%.

I think, you know, as an initial milestone, I think let us see whether we can come down closer to 40%.

We have come down from 49% to 46% and then from 46% to 43%.

So, we will take this in baby steps.

I'm sure you feel -- touch a particular level where we keep striving for better, I'm sure we will.

But right now, no specific guidance, but we're still at about 43%, 42.6%.

So, I guess next milestone, I am not guiding to that, will be to try and come closer to 40%.

Cool, sir.

And if I can squeeze another question, sir, in terms of capital raising, the rate at which you're consuming your capital today and the additional 20 bps required, what is your sense?

What are we looking at in terms of probable deadlines?

Because you have a better sense on how your [respective] assets are moving, if you can give some sort of -- I'm not saying guidance, but some sort of an indication, when does the event happen?

That is it from my side, sir.

Thank you very much.

So, on capital, I think again it's not something where it's on our radar for a fixed timing or a fixed level.

The point is that, even with the increase of 15 basis points or 20 basis points in relation to our being a systemically important bank, even with that our capital currently, even Tier 1 at 13.3% is adequate.

We had, in the first quarter of the year, raised some AT1 and a little bit of Tier 2 as well.

Having said that, I think you rightly pointed out that we are consuming capital at a certain pace and we would obviously, as part of our own ICAP process and our own capital planning process, will ensure that well before we believe we would need that capital, we start taking steps in that direction.

At this point of time, we have not yet put anything in motion at all.

Next question is from the line of Veekesh Gandhi from Bank of America.

Congratulations, Paresh.

Good set of numbers.

I just had one question is, any update on the last quarter, you had recognized farm loan waiver related NPLs from agri.

Is it -- any update, I mean on that?

Yes.

So, we've seen -- we've of course continued to focus on collections in that respect.

But honestly, there's not been any meaningful improvement nor any deterioration.

So, our NPA levels for the crop loan or what we call the Kisan Gold Card lending is more or less similar to what it was in the June quarter.

The good news is it hasn't deteriorated.

Having said that, the crop loan related repayments tend to be based on our crop cycle.

So, they don't sort of -- you don't have these loans falling due every month or every quarter.

So, the next bunching of repayments would really be more relevant from the next quarter's point of view.

But relative to the period when there was that uncertainty relating to the waivers, we've seen a little bit of improvement in collections, but not enough to meaningfully move the NPA levels as yet.

Fair enough.

And one just sort of housekeeping question.

So what's your contingent provision stock as of now?

Overall stock?

Because we have got contingent provisions...

What I mean was the floating provisions, yes.

From the floating side.

The floating provisions right now after utilization, would be about INR 1,000 crores.

INR 1,000 crores?

Fair enough.

Thank you.

All the best.

Next question is from the line of Pavan Ahluwalia from Laburnum Capital.

You have been guiding to some level of normalization over the last several quarters.

Obviously, each quarter rolls on and that isn't happening.

I'm curious why and over what period that normalization would happen.

Especially since this quarter, we actually saw that your yields were holding up -- your yields and advances were holding up really well, which is a bit strange given that loan growth is being driven by the wholesale segment.

So just curious if you could give us some insights on why the yields are holding up so well and over what period you expect the normalization to happen?

And the second question is on credit quality on the retail side.

So, penetration of credit cards, unsecured personal loans, et cetera, industrywide or countrywide has increased substantially over the last few years.

Are you worried at this point that you may be finding your way to more marginal credits in this segment?

Are you confident of your ability to monitor overall leverage at the borrower level?

And given the increasing volatility in white-collar employment, are you confident that historic default ratios, et cetera, which are available over a limited time period just given how long CIBIL has been around, are a good guide to future quality?

So, any comments you have on both these issues would be appreciated.

Sure.

Okay, thank you.

So, on the first one, well, overall yields have come down, partly driven by what you just said, which is a higher proportion of corporate in the total loan book and the actual pressure on yields on corporate loans, given by the very comfortable liquidity conditions and therefore the loading yields in the market on instruments like commercial paper and debt instruments.

The reason why the margin has still held up although it's come down by 10 basis points sequentially, is because our CASA growth has still been healthy, and of course there is a marginal reduction in the -- we had the 50 basis points reduction in the savings account.

So, whether this is because of the competitive pressures on the retail book or it's the higher proportion of corporate and the impact of market rates on the corporate loans, especially the short-term loans, we've seen therefore, about 10, 15 basis points roughly reduction in the average yields that we have been achieving, we have been experiencing.

And we've obviously, some part of that has been offset by the lower deposit cost.

At 4.3%, therefore we are still within our range of well, 4.1% to 4.3% kind of NIMs.

Although in the June quarter, we had marginally exceeded that range by 4.4%.

On the retail penetration of -- but overall, as well as in particular personal and credit cards, actually the -- certainly on credit cards, the penetration levels are still very low, in personal loans as well while it has been gradually increasing.

Still overall, there have not been as many players and it's still a segment or a product where penetration levels have been not anything which would cause concern.

As far as the quality of the data in the bureaus now, the bureaus have been around for, well I guess over 10 years now, and therefore the coverage of that as well as the ability to not just get the raw data, but reasonably good scores and other analytics based on that, I think that has been improving.

On our side, we have typically focused for both personal loans and credit cards, a little more on our deposit customer base.

So, we're not just dependent on external bureau information, but we can supplement that with behavioral data on their savings accounts or their current accounts with us.

So, combination of external data as well as application rated information when the customer applies for these loans or cards, as well as behavioral score cards that we developed internally based on his liability relationships with us, we're this still comfortable with the way that portfolio is behaving.

Having said that both personal loans and credit cards are intrinsically slightly higher yield and higher risk and there is a higher expected loss that is priced in.

The next question is from the line of Krishnan ASV from SBICAP Securities.

Please go ahead.

Just one question around -- there has been a tangible increase in your risk weights over a period of time.

Just wanted to understand what kind of risks are building upon your loan book, especially on the corporate side?

And is there a threshold beyond which you may not want this mix to probably move towards the corporate lending?

Well, the corporate -- when you say risk weighted (inaudible) total risk weighted assets because that has more or less in line with the overall loan growth and the asset mix.

I mean, the change in asset mix towards -- in terms of the retail corporate mix has not been very drastic with -- currently, if you look at the retail book is about 55% and the wholesale piece is at 45%.

The higher risk weights in fact typically are attached to various retail loans, because from a regulatory perspective, other than home loans, most of the other retail loans that we extend tend to have a risk weight of 125% or even 150%.

The better rated corporate loans typically, in fact tend to have even lower risk weights.

So, of course when you look at our total corporate or our wholesale loan growth, it's been between all three segments, which is the corporate banking segment, which is at the top end, the emerging corporate segment, which is the middle market and of course the wholesale part of business banking, if you look at from a regulatory segmentation point of view.

So, I would say overall the portfolio still remains diversified and there isn't any specific trend, which would result in a higher risk weight for an equivalent amount of balance sheet growth.

Great.

And so since you are seeing this personal loan growth or unsecured lending, which is becoming a slightly larger piece within your retail, that's not why the risk weights are inching up?

Am I correct?

No, between for instance a personal loan or a credit card, from a risk weight point of view, it's the same between those and for instance an auto loan or other retail loan which is given from a risk weight perspective.

The higher riskiness of an unsecured personal loan or credit card, which is what I referred to a little earlier in terms of the higher expected loss, that is certainly something which is baked into the yield for those loans and the NIM.

Besides that, I think when you look at the mix, especially within retail, while we've seen an increase in the personal loans and credit cards, we've also seen an increase in, for instance, home loans, which is now about maybe close to 15% of our retail loan book.

And that is obviously at the other extreme low risk end of the retail loan spectrum.

So, there are sort of countervailing kind of changes in the overall mix where you have some low risk products, which are also growing as a proportion of the total loan book and some slightly higher yielding and higher risk elements which we spoke about.

But those are not necessarily reflected in the risk weights because there are different categories of risk weights, which are not always aligned only to the underlying expected loss.

Great.

Just one other question on how you look at these MCLR norms or loan pricing norms in terms of being almost at the higher end of your own margin guidance.

Is that something that could be a risk to how you probably guide markets henceforth?

Well, as I've said for years now, our NIM range is 4.1% to 4.3% and we have in the last five, six quarters have touched 4.1%, 4.2% and we have also not touched 4.4%.

So, I think we have really moved within a range of about 30 basis points in both directions.

But as far as MCLR is concerned, I think we have been one of the bank, which has a fairly competitive MCLR and we also have a higher proportion of our floating rate loans already linked to MCLR.

How the MCLR sort of moves to a market-driven benchmark if that happens, obviously in an environment where liquidity is plentiful that could have some impact on yields, which even today is an impact that we are seeing at least at the top end of corporates and especially for shorter tenors.

But our basic competitive advantage in terms of having a strong deposit franchise, which gives us a more stable and slightly lower cost of deposits, I think that still helps us and will continue to help us maintain, we believe a NIM which is superior to the industry average.

The next question is from the line of Rajesh Kothari from AlfAccurate Advisors.

Please go ahead.

Just wanted to know that in terms of overall competitive environment, (inaudible) probably less competition and also in terms of the yield?

I'm sorry, I missed the first part of your sentence -- question could you please repeat it?

My question is in terms of the competitive environment.

Can you give us some color on where do you see the highest competition and where probably the growth can be a challenge compared to the other segments where growth might be a little bit higher?

Sure.

So, right now, clearly the competitive intensity is high in almost anything that is bankable because as you know, the system loan growth has been well, languishing in single digits, and even if we include the commercial paper and overall credit growth, that's probably still be in somewhere closer to maybe 12% or 13%.

So, there is intense competition on the corporate side, in the emerging corporate side and that competition manifests itself both in terms of the sort of compression of assets yields as well as the way customers are being protected by their incumbent banks.

On the retail side clearly, there has been a lot of focus across banks and since corporate loan demand has been somewhat muted, most banks have certainly increased their focus on retail.

The competitive intensity, I guess is the highest, initially was the highest in home loans and auto loans, but it is now gradually increased in personal loans and credit cards as well.

And of course, products like commercial vehicles and construction equipment as well as business banking and SME has also been fairly intense.

You also of course seen the growth of NBFCs' which have also been participating in some of these segments.

So, if you ask me, when you look at our growth, it's not from having been able to gain market share, because a particular business or a segment that we operate in is seeing extremely high growth or where competitive intensity is low.

I think we have been able to maintain or improve our growth rates in various products based on what we have been changing and what we have been offering better in terms of our service levels, our turnaround times, our structures, and this is equally true on the retail as it is on the wholesale side.

And a lot of that competitive advantage that we're delivering today is on the back of our digital platforms.

So, I would say that there is competitive intensity across virtually the whole range of products.

We still believe we are well positioned in terms of brand, distribution, product, technology, service levels, to be able to grow at a healthy enough pace.

My second follow-up question is, with the GST coming in, there's a whole (inaudible) need to come to the main channel and therefore that may lead to significant expansion in the banking credit, organized banking credit.

Do you subscribe to that view and if you are, then do you think it's going to be really huge opportunity, probably which will come over next -- for the 18, 24 months itself?

Yes.

I do believe that there is merit in that hypothesis, because clearly as you know, banks ultimately do lend based on documents, and to the extent that the unorganized sector does not reflect their activity or their financials don't reflect their revenues or their cash flows, banks are constrained.

It's not that they don't try and lend and make some educated assessment of how much they can try and lend.

But clearly there are some segments which perhaps are not as easily catered to by banks and maybe they remain in the informal sector or maybe some NBFCs can take care of them.

So, as you have either some players who are not in the formal sector coming into the -- reflecting their businesses in the formal -- in their books, as well as SMEs who perhaps were not reflecting their entire level of activity in their books, as you have more and more coming into the formal books, I think it improves the ability of banks to cater to their financial needs.

How big this opportunity will be is tough to try and estimate, but the fact that it will be there I think is a given.

The timeframes again, I think if this entire transition happens over the next year or two, I think there's no reason to believe why at least the moment you have the first tax return or the first income statement which reflects this more comprehensive coverage of their financials coming in which may be sometime a year from now, I think we should start seeing that shift.

And also, aspirationally for those entities, they would themselves, once they have reflected their true financials on their books or at least closer to their true financial standing on their books, they would want to reach out to the formal banking system because that will give them better sort of services and at a more affordable price point.

My last question, if I may, can you really go through examples like, for example, next two to three years, what are your specific targets or milestone which can differentiate your bank in such a highly competitive environment, and it can help you to keep gaining the market share?

Like for example, turnaround time or overall, within 24 hours or 12 hours something like that.

So, any such few important things which are (inaudible) in nature which you are trying hard to make sure that the market share keeps moving up or at least to maintain your current market share?

So, I think there are frankly dozens of such initiatives and I'm not saying that all of them will be successful.

But at any point of time, in almost each of our businesses, we would have and we do have multiple such initiatives, projects which are either focused on enabling us to understand our customer that much better, so that we can take quicker decisions or the ability to use whether it's machine learning or artificial intelligence and for instance, the way that we look at analyzing a bank statement or a set of customer financials.

The way that you would respond to a customer using bots, I think there will be multiple such projects which at the end of it make it more convenient for the customer to deal with us, enable us to give a -- to offer a product to the customer which is much better suited to that customer and the right point of time when the customers looking for that.

It gives us a better view of how to price the product on a proper risk-adjusted and relationship basis.

So, frankly on a call like this, it will be hard for me to mention just a few that we believe will be more or more successful or it should be more meaningful, but clearly there will be dozens of these in almost each of our businesses.

Like for example, last two years, three years, any such (inaudible) like to share something of that?

I mentioned our 10-second loan, for instance, which we had done.

I mean, and here we are yet to launch, I am not exactly going to tell you till we are ready to launch those.

The next question is from the line of Monica Agarwal from (inaudible).

Good evening, sir.

Sir, my question is on the overseas advances.

So what is the proportion of overseas advances out of the total advances?

(inaudible)?

So our overseas advances is roughly INR 21,000 crores in our total INR 6 lakh or INR 1,000 crores of gross advances.

Okay.

And just one another question is on the -- on guidance that you would like to give on the (inaudible) impact on the fee income, considering that it's going to kick out next year, so do you -- would you like to give some guidance on that?

No, I sort of refrain from giving a guidance even in the current GAAP, so I'm not going to change it (inaudible).

But I think across there are different lines and you are asking specifically for fee incomes, which obviously depending on which product they are related to might get amortized.

There will be also expenses that we incurred for instance, our origination -- loan origination cost which you would get amortized.

So, I would refrain from even trying to -- forget the quantification of any of these impacts, but when you look at impact of Ind AS, you would necessarily need to look at it on a holistic basis.

There will be some which will result in a sort of higher income level or a lower income level if it gets amortized and likewise an amortization of certain expenses to align themselves with the average loan outstandings and so on based on -- similarly there is the cost of ESOPs, which comes in, because you move to valuing these on a fair value basis rather than intrinsic value basis as is done right now.

So, on an overall basis, I guess we don't believe there will be a material difference, but it's too premature because some of the final guidelines in respect of Ind AS are also still awaited from the regulator.

Next question is from the line of Nilanjan Karfa from Jefferies.

Hi Paresh.

Straight on this divergence or possible divergence question, since this is pointed to what JLF, CAP basically right, and the particular company has maintained that they are fully compliant and there is no overdues.

Just wanted to understand, is it -- could you help us understand what is it then if it is not related to an overdue or anything of that sort?

And if you can help us understand the loan that we had, for example, to this particular project, is this project domestic or outside India, just some pointers (inaudible) kind of quite amazing in the way this has come up.

So, let me just put it this way, that when you have a particular -- I just said that the JLF approves a particular flexible structuring scheme, there are obviously certain guidelines within which the scheme has to put together and there is the process to be followed.

JLF naturally is to ensure that that is done.

And thereafter each bank would implement the scheme, and of course, this would be fact based.

So, each bank might have some nuances which might therefore result in some differences in which the -- in the manner in which this is implemented by each bank within the overall framework that is approved or the overall scheme that is approved.

Now, what technical issues each bank might have in respect of the implementation of this scheme and so on, it's impossible for us to try and conjecture.

But this has got nothing to do, as you rightly said, with these servicing of the loan.

Obviously if any loan remains irregular or is not serviced within 90 days, that would be recognized as a non-performing asset and that is a clear-cut definition and any different interpretation of that would clearly be untenable and would be a divergence in respect to recognition of a 90-day overdue loan as NPA.

Certainly, as we have indicated the -- we are still in a dialog with the regulator.

In this case, as we have said in the note itself, the conduct of the account is standard, which means it is never ever crossed the threshold of 90 days.

And therefore, the scheme itself and the implementation of the scheme is the question that would be the -- any issues, concerns and correspondence would be in relation to that.

Beyond this frankly, it would be inappropriate for me to go into any other detail, and you asked about domestic or international, in our case, this is a domestic project that we have financed, a project that has been completed and incidentally in any case, it's only a project that -- a project loan in respect of projects, which have been commissioned, which are eligible for the flexible structuring as per the guidelines and that is this -- the loan that we are talking about is certainly part of that.

Okay.

Let me ask it differently, what will need to be done to upgrade this loan, if assuming this becomes an NPA?

So, I think you're now going two steps too forward.

I think at this point of time, if we have given our submissions and responded to queries and we are in that dialogue, I think it would be almost speculative or certainly perfect for us to first try and conjecture whether this would -- whether our contention would be accepted or not.

Obviously, for once there is a final decision from the regulator, we'd obviously have to comply by it -- comply with it.

Depending on whether such a thing happens and what would be the factor, how it would be upgraded is at this point of time, again conjecture and difficult for us to make a call on.

But more importantly, what we are saying is that even if it was to be, if there was such an adverse requirement from an asset classification perspective, the regulatory provisions that would be need to be made for an account would -- are what we have currently made as a contingent provision.

So because -- and obviously, because this -- the issues as we have mentioned are in relation to a flexible structuring, which was done in February, which is approved in February 2016, your question on what would be required if it became and so on, we haven't even yet sort (inaudible) hopefully, we will not need to but difficult for us to comment at this point of time.

Sure.

And if I heard you right, for the amount of provisions that we made is roughly, let's say, about INR 250 odd crores that we took out of the floating provision buffer and you're saying almost the entirety of INR 400 crores is also bond towards that provision?

So (inaudible)?

That is right.

So about INR 650 crores is what you're saying ?

Maybe a little more than that.

I think closer to about INR 700 crores.

One data (inaudible) question, could you help with the movement of the NPLs at about standalone and console level, please?

Yes, we won't have the consolidated numbers but the quarter two, the opening balance was INR 7,243 crores.

The additions during the quarter were INR 2,473 crores.

Reductions during the quarter were INR 2,013 crores and there were some upgradations and write-offs.

So, the closing balance is INR 7,700 crores.

Paresh, what was the write-off number?

About INR 761 crores.

INR 761 crores?

Yes.

Okay.

All right, thank you very much.

Next question is from the line of Rahul Maheshwary from IDBI Asset Management.

Please go ahead.

I have just one question, what is actually driving the business banking as it (inaudible).

So what other segment and where you are finding the growth traction because on a sequential basis also 13% growth and again can you clarify your [RWA] grew on a sequential basis is at 7% and on your loan growth basis we look at it's at 4%.

So, this additional 3% is (inaudible) because of the unsecured lending of credit has been more during this quarter, that is why?

Can you give these two clarifications?

So, as far as the business banking growth is concerned, it's not specific to any few industries.

The model there is that because we have a large branch network and we tend to have customers who have accounts with us, they have opened current accounts so they have smaller businesses in the catchment area of around a branch.

So, we actively go and acquire new customers.

These are usually customers who probably have existing banking relationships with others and who would move to us because they believe we can provide better service or because it's much more convenient to deal with us on the digital platform.

So, it's not really a sector specific sort of strategy at the business banking level because these are smaller businesses across various manufacturing sectors as well as services sectors.

It's much more of a distribution led branch, led acquisition strategy.

So what can be the average ticket size and yield in this segment and business banking?

W ell, we-- we have again different sort of ...

No, on a blended basis across if we go for a INR 45,000 crores is the book size in business?

This will typically be in single-digit crores, would be the we do have a range of products, which is slightly lower, but most of these would be typically in single-digit grower kind of ticket sizes.

And what are the yields?

Some of the large amounts will go up higher.

And what are the yields, which you are making?

Again, it would be a range, I wouldn't because within business banking, we have a business banking working capital piece, we have a lap piece, we have a rental discounting piece.

So, the different products would have a different range of rates.

But that's where it was.

On the -- I know there was a similar question earlier on the risk weights and frankly, the difference is not so much on the change in loan mix and what my colleague is saying is that to the extent that we have given our liquidity, we had some amounts in debt mutual funds, unfortunately from a risk weightage point of view, even any investment that we might had in mutual funds tends to get the same risk weight of equity and therefore there have certainly been some few basis points change in the risk weights relating to debt mutual funds, but which carry equity risk weights.

So, in a breakup of risk-weighted assets we look at, so it wasn't -- the reason was not more towards the credit risk, it was more towards the market risk in terms of the investments, which we have made towards the debt mutual funds and all those things.

Is it right?

In the last quarter the movement seems to be more to do that because actually in the last quarter the growth in the corporate book has been a little higher than the retail book.

So, the unsecured retail piece is -- which has been happening over the last two years, would not have moved the needle in the last quarter at least.

Thank you.

We have sort of actually got just a couple of minutes.

So if you can maybe take three more questions.

Just one question each, please.

Sure sir.

Next question is from the line of Pankaj Agarwal from Ambit Capital.

Please go ahead.

Sir, given high CASA base of last year, do you think you'll be able to maintain current CASA growth in second half of this year?

Well, to the extent that the CASA growth rate got a bit of a boost from demonetization, that boost will obviously not be there, but we see very strong momentum otherwise in terms of our retail customer acquisition, which we believe will continue to grow.

There are also some segments, including on the government areas, which we spoke about a little earlier, which are also driving some growth on the CASA side.

And finally, depending on how the markets do, as a large transactional banking player, there are some opportunities there as well.

But in relation to last year, given the base whether there is a same momentum, which will be build up, I think we will have to wait and watch.

The next question is from the line of MB Mahesh from Kotak Securities.

Please go ahead.

I have just two questions.

Loan growth and NPL growth are showing reasonably high amount of variance today.

If you could just probably kind of comment on that, and if possible in your NPL portfolios, which is the one which is driving the largest share of growth today?

Second question is on the sales commission, which is growing at about 25%.

Any comments given the fact that a higher share of origination is now happening through sources where the commission rates are far lower.

Thanks.

I'm not sure whether I've understood both your questions well, but let me take a shot quickly.

As far as our overall NPL growth is concerned, the year-on-year growth really saw a spike in the June quarter, which we have explained in the last call which is more relating to the agri segment.

Other than that, across the rest of the retail portfolio, there is no disproportionate increase in a particular product.

We've seen 10, 15 basis points increase somewhere, there have been a 10 basis points or 10, 15 basis point reduction in some.

So, when you look at most products, whether it was the auto, commercial vehicle, construction equipment, two wheelers and so on, I think most of these have been in a range, haven't changed too much.

Within that, I guess the agri piece which we spoke about earlier or tractors and so on had seen some strain.

Business banking or SME had seen some strain, but we still are comfortable with the overall asset quality there.

Your question on commissions, sales commissions, I didn't quite understand.

I think this quarter you have kind of given this INR 600 crores of commissions to sales agents as a footnote as compared to about INR 475 crores last year.

So, the growth is about 25%.

Just trying to understand has the commission rates in the system gone up or down, because it seems to be reasonably high given the fact that the business is kind of moving mostly in-source, it is kind of moving mostly through its channels like digital where the origination cost should have been lower.

No, so, clearly the reason why I've mentioned of course is when there is any particular line which is more than 10% of the OpEx, we have to spin it out, so that was the disclosure part of it.

But to your point, in terms of the increase, well, most of these are in relation to the auto commercial vehicle businesses where these are still much more external dealer and sales driven, the products which are much more internally focused tend to be the products like personal loans and credit cards and so on which you tend to have a higher proportion of digital which is internal sourcing.

We've seen strong volume growth, so obviously the payouts are in relation to the higher disbursement volumes that we have seen.

If you notice the actual growth in some of these lines in terms of some of these loan growth numbers that you can see year-on-year or even sequentially, you see for instance, commercial vehicle loan growth year-on-year, has been, well, almost 20.3% and auto loan growth has been 22.6% and clearly that's the loan book.

So, as you can imagine, the disbursement would have been even higher because this is net of what runs off.

Next question is from the line of Hiral Desai from Anived PMS.

Please go ahead.

Hi, Paresh, I just had one question on personal loan and credit cards.

Currently we offer them in how many cities and what was this number, let's say, about two years back?

I am sorry.

I don't have the number of the cards, but...

I was just trying to understand what proportion of this growth is coming purely because of distribution and offering them in larger number of cities.

So credit cards, we may not have grown the number of cities too much, but personal loans, I guess, in most locations where we, at least most urban and semi-urban locations, we would have it may not be in all rural locations.

So it's not just a question of having added new cities, it's a question that as we have grown our customer base in some of these locations, we would be having a larger customer base to actually cross-sell some of these products.

(inaudible) ticket sizes have not gone up, right?

No, ticket sizes have not really gone up.

And the other is actually I just wanted a qualitative input on the competition in the semi-urban and rural space.

We hear a lot of these private banks and NBFCs talk about semi-urban and rural as a big growth driver.

So just wanted to get your sense on that.

There is a level of under-penetration in these markets, which is attractive for almost everyone.

From our own point of you, having been a slightly earlier mover in these markets and our positioning also is that rather than take a very product-centric approach that sometimes some players need to take, because they are in one or the other products.

When we have a much more customer-centric model where once we are in a semi-urban area, we are taking -- we are getting customers in on the back of our deposit franchise, as well as the complete range of retail loan products.

And in those markets, in particular, even much more than in an urban market where sometimes customers will pick and choose a product from different players, in those markets, the customer looks for a holistic -- a bank which provides a holistic solution across the liability and asset products.

Next question is from line of Ravikant Bhat from Emkay Global.

Please go ahead.

Okay, I think this will be the last question we'll take, because we've already crossed the time, but, yes, we take this question, go ahead.

Ravikant, go ahead.

Mr. Ravikant Bhat, we are unable to hear you.

Sir, there seems to be no response.

Can we take the next question, sir, as a last question?

Okay, since we didn't take one last question.

It's from the line of Cyrus Dadabhoy from Anand Rathi.

Please go ahead.

Just wanted to understand the loan growth in the corporate and retail books and your product mix going forward.

So frankly, much of this is coming on the corporate side from gaining market share and we see that the emerging corporate businesses has been growing a little faster than the others.

It's across various industries.

But it's a mid-market segment there where these are customers who are either shifting a larger share of their business or shifting their relationship to us.

On the retail side, almost every product has grown either in the high-teens or 20's or even at a higher pace and at this point of time, we do believe that at least four these products, which includes products like auto, personal, credit cards, business banking, home loans are driving growth and will continue to drive growth.

I Just wanted to understand basically your -- the impact on the RWA, say over the next one year or 18 months or so just broad ballpark.

If say a loan growth is say, about 20% to 22% guidance or thereabout, then what kind of RWA ballpark growth would you expect?

So one, of course, I have no guidance on the first number that you mentioned in terms of loan growth, but whatever is the loan growth, if we have the retail business going marginally higher than the corporate business, then risk asset growth will be -- from a risk-weighted asset perspective, it will be marginally higher than the loan growth, because many of our retail loan products have more than a 100% risk weight.

Coupled to that you mentioned earlier that even if you invest in debt mutual fund that will be risk weighted the same as an equity investments basically, so that the market risk would...

That is not something which we do strategically.

It's more sort of temporary, but, you're right.

If it happens that we do have...

It is opportunistic, but yes.

Yes.

It's opportunistic.

Thank you, ladies and gentlemen, that was the last question.

I would now like to hand the conference over to Mr. Sukthankar for his closing comments.

Well, I just want to thank all of you for having been on the call.

I do hope we've been able to address your sort of queries and concerns, if any.

Once again, thank you and best wishes for the festive season, at least the rest of it.

Bye.

Thank you very much, members of the management.

Ladies and gentlemen, on behalf of HDFC Bank Limited, that concludes this conference call.

Thank you for joining us and you may now disconnect your lines.