HDFC Bank Ltd (HDB) 2022 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to HDFC Bank Limited Q4 FY22 earnings conference call on the financial results presented by the management of HDFC Bank. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. Thank you, and over to you, sir.

Okay. Thank you, Rutuja. Good evening and a warm welcome to all the participants. Let's start by the COVID current state business dimension as we start. The saga as it permits, we can say is hopefully behind us, at least for now. We cannot forget the deeds of the people who dedicated their lives in the service of the bank during the year and thousands of others who single-mindedly were in the service of the customer through all this.

Same time last year, we were in unimaginable crisis. Most if not all of the restrictions are behind. Thanks to our team and, equally important, thanks to you all for being with us through this to get us here.

Let's start with providing the context on the environment and policies during the quarter which are manifesting signs of speedy recovery. We'll jump over this basic details of GST collections, PMI, et cetera, et cetera, that shows growth of INR 10 crores.

Around the mid-part of the current quarter -- the recent quarter, geopolitical tensions raised across the world, which have given raise to global uncertainties. This has impacted the global economies profoundly, which is evident from the surge in crude oil price, major commodity prices and then further global supply chain disruptions from recent period.

CPI inflation is on the rising trend due to higher put crude oil and LPG prices. The RBI kept its monetary stance unchanged. However, it is expected that this accommodative stance shall be fixed to a neutral stance in the next MPC. We also saw the introduction of SBS and the RBI reverting to a pre-pandemic policy corridor of 50 basis points, with a lower bound SBF and the upper bound MSF. We are confident that the policy measures are supportive and at this time provides us impetus for continued growth.

Let's go through 4 key themes at a high level. First thing is about the investment in capital, investment in human capital, branches aided with the best-in-class technology. During the quarter, we added 7,167 people. For the year, we added 21,486 people, which is an all-time high, to get the people added on the productivity curve as the economy accelerates.

During the quarter, we added 563 branches. For the year, we have added 734 branches, which is about 2 branch per day and further about 150 branches are in the pipeline to open within a short period of time. The bank is accelerating the technology and digital transformation agenda.

We continue to stay invested in creating seamless customer experience across digital touchpoints. Significant ingrowth are being made through initiatives such as customer experience hub, PayZapp, which is a revamped payments and wallet experience and refreshed offerings for MSME and wealth management customer base. Our focused digital and enterprise factory approach is enabling the building of our own capabilities to create -- to co-create tech IP.

Initiatives such as DR resiliency on our hybrid cloud strategy continue to fortify our IT infrastructure and architecture backbone. Our progress over the past year has resulted in lifting of the restrictions on the new card acquisitions in August '21, followed by the removal of the embargo on Digital 2.0 program in March '22. We have taken multiple steps to ensure a robust, scalable and secure technology setup to strengthen even further. We continue to rigorously monitor the progress and are now fully geared up to launch the programs under various digital umbrellas over the next few quarters.

In Q4, we received a total of 234 million visits on our website, averaging 29 million unique customers per month, with a year-on-year growth of around 8%. As per analysis, we had 35% to 75% more visits on our website than a public or private sector peer. Close to 57% of the visits were through mobile device, indicating the mobile simplicity of the footfall.

The second thing, let's talk about the business growth that continues to gain momentum across diverse products and segments driven through relationship management and enhanced digital offering.

Total advances were INR 13,68,821 crore, which grew by 8.6% sequentially and 20.8% over prior year. This is an addition of approximately INR 1,08,000 crores during the quarter and INR 2,36,000 crores since prior year. Commercial and rural banking businesses grew 10% over the prior quarter and 30% over prior year. As you know the segment is a significant contributor of PSL assets.

On retail, we witnessed a healthy growth on disbursals across product, resulting in asset growths of 5%, both prior quarter and 15% over prior year. This segment is gaining momentum. It could have done even better since the vehicle segment was not impacted due to supply chain issues. Wholesale business too showed a sharp rebound across sector, growing 11.6% over prior quarter and 17.4% over prior year.

Franchise building continues to remain robust with our persistent focus on granular deposits and bringing in new customer relationships, thereby further strengthening our position to gain market share. We opened about 2.4 million new liability relationships during the quarter and 8.7 million new liability relationships during the year, exhibiting a phenomenal growth of 25% over prior year, thus enabling the broad basing and deepening new relationships.

Total deposits amounted to INR 15,59,000 crore, which is up 16.8% over prior year. This is an addition of approximately INR 1,13,000 crores in the quarter and INR 2,24,000 crores since prior year.

CASA deposits recorded a strong growth of 22% year-on-year, ending the quarter at INR 7,51,000 crores with a CASA ratio of 48%. Retail constituted over 80% of total deposits. The bank had 16.5 million cards as of March '22. During the quarter, we have issued 8.2 lakh cards. Further, we've issued 21.8 lakh card since lifting of the embargo in the 7 month of this financial year. Card strength have grown by 28% over prior year.

The bank has 3 million acceptance points as of March with a year-on-year growth of 37%. Acquiring business volumes, including UPI and DirectPay grew 30% over prior year.

Now let's get on to the third one about the market share. Our market share and advances has improved from 10% to 11% during the year. Our incremental share of credit growth in the economy was at 24%. We have demonstrated in the past that our rate of growth is not inhibited by our market share. To further illustrate, over the past 5 years, despite the market share improving from 7% to 11%, we have sustained our advances growth to around an annual 20% rate. In deposit mobilization, our market share improved from 8.8% to 9.5% during the year.

On the fourth item relating to be the strong balance sheet and set for capitalizing on market opportunities for growth. The balance sheet remains resilient. Capital adequacy ratio is at 18.9% with a CET1 of 16.7%. Liquidity is consistently strong. LCR average for the quarter was 112%.

GNPA ratio is at 1.17%. We continue to originate loans in conformity with our proven credit models. Floating and contingent provisions aggregating to INR 11,000 crores, such as de-risking the balance sheet and positioning it for growth.

Let's start with net revenues. Net revenues are INR 26,510 crore. Net revenues excluding trading income grew by 10.4% over prior year and 3.8% over prior quarter, driven by an advances growth of 20.8% and deposits growth of 16.8%. Net interest income for the quarter at INR 18,873 crores which is at 71% of net revenues, grew by 10.2% over prior year and 2.3% over prior quarter. For the quarter, the core net interest margin was at 4%. Based on interest selling assets, the NIM was at 4.2%. For the full year, core net interest margin was at 4.1% and based on interest earning assets, it was at 4.3%.

Our asset mix has shifted towards higher rated segments during the COVID period albeit at lower yields. As a result, the NII growth has been lower, but with the corresponding offset in credit card which are lower than the historical average. Further, looking through another lens, our NII to credit RWA, credit risk weighted assets, has improved over [pre-COVID] levels by approximately 20 basis points and is currently around 7%, representing our optimized pricing for higher rated segment volumes.

Moving on to details of other income. Total other income was at INR 7,637 crores. Excluding trading income, total other income grew by 10.6% over prior year and by 7.6% over prior quarter. Fees and commission income constituting 3/4 of other income was at INR 5,630 crore and grew by 12.1% over prior year and 10.9% over prior quarter. Retail constitutes approximately 94% of fees.

Bank retail branches delivered well on fees and commission income commensurate with the healthy assets growth that you saw during the quarter. Fees on payment products remained subdued due to lower risk-related fees, over limit fees, late payment fees, et cetera, reflective of our cautious approach to card-based lending, as well as customer preferences. However, card sales and interchange have come out robustly. In all, this had an impact of about 4% on fees.

The fixed and derivatives income was at INR 892 crores was higher by 1% compared to prior year of INR 879 crores. Trading was at negative INR 40 crores for the quarter. Prior year it was at INR 655 crores and prior quarter was at INR 1,046 crores, which were opportunistic gains from our investment portfolio.

Other miscellaneous income of INR 1,155 crore includes recoveries from written-off accounts and dividends from subsidiaries.

Moving on to operating expenses for the quarter were at INR 10,153 crore, an increase of 10.6% over prior year. During the quarter, I mentioned about the 563 branches that were added and for the year 734 branches and 2,043 ATMs, taking the total network strength to 6,342 branches, 18,130 ATMs and 15,046 business correspondents managed by common service centers. We are further expanding our distribution network through partnership with Airtel Payments Bank, India Post Payment Bank and Manipal Business Solutions were approximately 60 million, 50 million, 13 million customers under respectively and can provide access to that.

Cost-to-income ratio for the quarter was at 38%. With stepped up investments in technology and retail segment is continuing to pick-up, we anticipate the spend levels to increase driven the volumes, sales and promotional activities and discretionary expense.

Moving on to PPOP. Pre-provision operating profit was at INR 16,357 crores. Excluding trading income, PPOP grew by 10.2% year-on-year and 4.2% sequentially. Coming to the asset quality, the GNPA ratio was at 1.17% as compared to 1.26% in the prior quarter and 1.32% prior year. It is pertinent to note that this -- of this, about 19 basis points was standard. These are included by NPAs as one of the other facility of the borrower is NPA. Net NPA ratio was at 0.32%, preceding quarter was a 0.37%.

The annualized slippage ratio for the current quarter is at approximately 1.3%, about INR 4,000 crores as against 1.6% in the prior quarter. During the quarter, recoveries and upgrades were INR 2,100 crore or approximately 18 basis points. Write-offs in the quarter were INR 1,700 crores or approximately 16 basis points. These basis points I mentioned are annualized basis points.

The restructuring under the RBI resolution framework for COVID-19 as of March end stands at 114 basis points of INR 15,700 crores. This is at a borrower level and increase approximately 17 basis points of facilities of the same borrower, which are not restructured but included here. Of the total COVID restructured standard book, approximately 37% pertains to customers who have chosen to restructure only one of their facility. Of the remaining 63%, 41% is secured and 59% is unsecured. Of the unsecured portion, 84% have good CIBIL score or were not delinquent at the time of restructuring. This leaves us within manageable range with the maximum potential impact in our GNPA ratio of 10 to 20 basis points in any given quarter, as we have mentioned this previously.

Provisions: the core specific loan loss provision for the quarter were at INR 1,778 crores as against INR 1,821 crores during the prior quarter and INR 3,153 crore for the prior year. Total provisions reported were INR 3,312 crores as against INR 2,994 crore during the prior quarter and INR 4,694 crores for the prior year. Total provisions in the current quarter included additional contingent provision of approximately INR 1,000 crores. The specific provision coverage ratio was at 73%. There are no technical write-offs. Our head office and branch books are fully integrated.

At the end of current quarter, contingent provisions towards loans were approximately INR 9,700 crore. The bank's floating provisions remained at INR 1,450 crore and general provisions were at INR 6,600 crores. As on March end, total provisions comprising specific, floating, contingent and general provisions were 182% of gross non-performing loan. This is in addition to security held as collateral in several of the cases.

Looking at through another loan, floating and contingent and general provisions were 1.28% of gross advances as of March quarter-end.

Now coming to credit cost ratios, the core credit cost ratio that is the specific loan loss ratio is at 52 basis points for the quarter as against 57 basis points for prior quarter and 110 basis points for prior year. Recoveries which are recorded as miscellaneous income amount to 26 basis points of gross advances for the quarter as against 25 basis points for both prior quarter and prior year. The total annualized credit cost for the quarter was at 96 basis points, which includes the impact of contingent provision of approximately 30 basis points. Prior year was at 1.64% and prior quarter was at 0.94%.

The reported profit before tax at INR 13,045 crores grew by 20.3% over prior year. Net profit for the quarter at INR 10,055 crore grew by 22.8% over prior year. Net profit for the year ended March '22 was at INR 36,961 crore, up 18.8% over prior year.

Now on to some highlights of HDBFSL. This is on an IndAS basis. The total advances were INR 61,326 crores, of which 76% were secured. Disbursements have picked up in Q4, growing 11% quarter-on-quarter basis and 7% year-on-year basis. For the quarter ended March 31, HDBFSL net revenues were at INR 2,141 crore, a growth of 8%.

Provisions and contingency for the quarter were at INR 422 crores, including INR 223 crores of management overlay as against INR 429 crores for the quarter ended March '21, and INR 540 crores, including a INR 98 crores of contingent management overlay in the prior quarter, in the sequential quarter.

Growth Stage 3 stood at 4.9%, down from 6.05% from the sequential quarter comparison. This includes an impact of 1.27% on account of new RBI guidelines issued in November '21. 80% of the Stage 3 book is secure, carrying provision coverage of 44% as of March 31, '22 and fully collateralized. 20% of Stage 3 book, which is unsecured, had a provision coverage of 87%. Above all, HDB remains well capitalized with total capital adequacy ratio at 20.2% and Tier 1 capital adequacy at 15.2%. LCR was at 102%.

Profit after tax for the quarter ended March '22 was INR 427 crores. Earnings per share in the quarter was INR 5.41 and book value per share was at INR 120.69. As of March '22, HDBFSL had 1,374 branches across 989 cities and towns.

Now on to HSL. HDFC Securities has a wide network presence of 216 branches across 147 cities and towns. There has been a significant increase in its overall client base to over 3.8 million customers as of March end, an increase of 40% over prior year. 86% of HSL's revenues come from transaction done by customers on its digital properties. HSL's revenue aggregated to INR 510 crore for Q4 2022, an increase of 16% over corresponding period a year ago. Net profit after tax was at INR 236 crores for the quarter. Earnings per share in the quarter was INR 148.8 crore and book value per share was at INR 1,050.

In summary, we remain committed in offering our customers with comprehensive range of products and services while capitalizing on growth opportunities. We have delivered consistent performance for years together and remain pledged towards the culture of excellence.

The quarter results reflect advances growth of 21%, deposits growth of 17%, profit after tax increased by 23%, delivering a consistent profit growth rate and return on asset of over 2% and ROE of over 17%. Earnings per share in the quarter of INR 18.1, book value per share increase in the quarter by INR 18.6 to INR 433.

The economy is growing. Business are robust. Credit demand is high. Savings growth is strong. Customers have cash to spend and are spending. We are here to serve.

With that, may I request to operator, please open up the line for questions. Thank you.

(Operator Instructions) The first question is from the line of Mahrukh Adajania from Edelweiss.

Yes, so I had 2 questions. My first question is on margins. During the second quarter also, in the earnings call we had outlined that there could be margin improvements with a lag once retail loans pick up, and that could happen over -- 3 to 4 quarters maybe. And now in the fourth quarter, margins have declined further. So is the margin expansion on-track? How do we view margins from here on? That's my first question. And also connected to margin, if you could just give a rough indication of the commercial banking yield ex-agriculture?

Okay. Let's take these questions. Margins, see, I think I mentioned it a few minutes ago when I was presenting. Our asset mix has shifted significantly from unsecured to higher rated segments. And it has come -- all through the pandemic, you saw that the retail was going down in the rate of growth and it was picking up in wholesale and in commercial and rural.

If you go back to pre-pandemic, go back to 3 years, 2019, right, if you look at it, the Basel disclosures that we do -- I'm doing that Basel because we show that assets by type -- wholesale was 45%, retail was close to 55%. Now things have reversed, right. Now, retail is 45% and wholesale is 55%. In fact, in this quarter, the rate of growth in wholesale was even more, 10% sequential -- 11% sequential growth in wholesale in this quarter, right. And retail also grew very well at 5%, 5.1%. That's an annualized rate of little more than 20.5% on retail. So retail has grown well, but except that the wholesale has grown much faster, right. So that's one from a mix point of view.

What does this mix do, right? What has happened is that the higher rated segments tend to be low yielding. Basically, what has happened is we've traded off NIM to operating costs and credit costs to sustain -- to deliver sustained profitability on our -- that what has happened in this scenario.

You will appreciate that NII or NIM is a function of risk and you've got to connect it with the credit too. And we have been -- we've chose to be risk-off all through the pandemic and it is not something that, that's why we told you last time that it could take 3, 4 quarters, 6 quarters to come back, right. And retail is coming back, but the wholesale is not relented, right. We need to get that opportunity. To the extent that this opportunity comes at a good quality, we are okay with that, to the extent that it delivers the profitability that is required, which is what is happening, both the top line in the form of volumes and the bottom line in terms of the returns that it provides. Because when that high-rated things come as I said, it comes to the lower cost and lower credit. So something I want to emphasize on that.

One other thing I want to mention is that, if you look at, I think I mentioned about the credit RWA, right. One other way to look at the margin is, are you pricing for your credit? So if you use credit RWA as a denominator, it is 7% now and it's 20 basis points more than what it was pre-pandemic, essentially trying to say that we have optimized -- we're optimizing on the margin. That's one way to look at it. And another way to look at it is, you look at net credit margin, which is net interest margin minus cost of credit represented by specific credit cost, right. If you do that, we are at 3.5% in this quarter, which means net interest margin less cost of credit 3.5%. And same time last year if you see, it's 3.1%, right. Again, try to show you that it is about pricing for the risk. And the same, we can talk -- think about full year, right. One quarter doesn't make a -- cannot set your trend and show you something that is consistently there, but I'll give you the same thing, net credit margin for the full year, right, full-year '22, 3.3%, which means including that high credit cost quarter that we had in Q1, include that too. Net interest margin less specific credit cost, right, is 3.3%.

The same metric last year, full year last year FY21, 3.1%. Again, tries to tell you that we are pricing well for what we need and so it is about the bottom. And if you look at the ROA, any time period. This quarter is a little more than 2%, 2.1%. And if you look at the full year it is 2%, last year 2%, the year before 2%, ROA. And if you look at ROE, same, around 17% or so return.

So what is this telling you, right? Margin is one of the metric and it is an important metric. And to the extent that the margin is reflecting the risk that you are taking under this burn out in the credit ratios, and that provides the right kind of a cover for you to give the returns that are required for shareholders.

I hope that answers in terms of what we're trying to give you on that.

Sure. So henceforth the focus will continue to be on in minus credit cost, is that the right way to look at it? Because if the macro remains volatile, then the risk-off could continue longer, correct?

Yes, in terms of how long -- see, the retail growth if you see, is at 5%, 5.1% growth is what we had sequentially, right? On a year-on-year basis if we see retail, it is about 15 odd percent. So it is lagging. That means the quarter growth is more than the year-on-year growth, because it was on a sliding scale. More paydowns were happening than bookings in the past several quarters around the COVID time period. And now the sequential is leading, right? You're seeing that it is beginning to go on an up curve. So the year-on-year will come and catch up soon, right? And that is one on retail. You need that to power.

And when the retail powers, I do want to mention to you, it does not come free. It comes with enormous cost. You can see the cost to income -- the full-year cost to income is at about 37% or so. The quarter cost to income is 38%, 38.3% to be more precise, right? It comes with cost. And when the retail powers to 6% and 7% and so on, you will see that the cost to income also goes up.

And again, on the credit, and the credit cost I'm talking about, that also goes up because retail comes with a higher credit cost as compared to wholesale. So at the end of the day, it is about getting the returns that you need. That is why I tried to focus on, I gave you the numbers on the return on asset, on the return on equity, which is what gives the shareholders value or RFPs, returns above the cost of capital, right, if you think about what the cost of capital is, whether there -- it is either any of these mix, whatever happens on the individual lines, is top line growing, is customer franchise growing, showing you how the retail, wholesale and the commercial is growing; 5% on retail, 10% on commercial, 11% on wholesale, right? That is the top line customer franchise growth that you're seeing. And what is that translating into the bottom line? Good return, 18%, 20% PBT or PAT with a 2% ROA, 17% ROE. So that's what at the top line and the bottom line from a franchise growth point of view gives you. In between that is the optimization tools that we deploy to get that.

Sir, any rough range you can give on yield on commercial banking loan?

Yield on commercial banking will be approximately about 8% or so. And you asked about what the agri could be, 9%-10% assortment offers the agri yield.

Sir, now moving onto the next question, what is the accounting policy associated with RSUs in terms of upfront cost and amortization?

Okay. See, first accounting policy on RSUs, first, let us take what is RSU, right, so that you will see whether it is any different from ESOPs or not from that cost point of view.

RSU, you can think about it as similar to ESOPs, except that it is at a deep discount. That's one thing, that's the exercise price is one. However, the way to understand this is, the number of RSUs will result in no different impact had the bank chosen to grant ESOPs, no different. What does that mean? For instance, if the bank was to grant 3 ESOPs, what's the fair value of 500 each, right? It will grant 1 RSU, right? That's all. That means fair value of 500, you grant 3, and employee gets 1,500.

Now when you grant RSU, you just grant 1 RSU. And what does it do? So that the total compensation is remaining at that 1,500 or so and it avoids the shareholder dilution to some extent, right, it mitigates the shareholder dilution. And what is it that we are trying to do with RSU? One, it is intended to be extended to mid and junior management or deeper in the organization for the staff, up to 10 levels below the Managing Director, that's one thing. And this will be part of the overall compensation structure. Whatever is the compensation structure, this is part of that overall structure. 75% of the RSUs are intended for personnel in level 6 to 10 below the CEO, right, 75% is intended for them. And what is it going to do? It is going to lower the attrition significantly, is going to bring up enormous amount of productivity at those levels. So this is something that we thought about it and we wanted to make a difference to those employees and make them shareowners and get them this, so that they can participate in these things, right? Just so that you have a context of what this will mean.

Another thing that you need to think about RSU, it is granted with whatever approval we have sought from shareholders, is expected to be granted over the next 4 years. So it's not a 1-year grant or something. It's expected to be done over 4-year period.

The second, which is what normally we do, even ESOPs we take approvals that is expected to be at the 4-year, 5-year period or something. Then, the next thing on the RSU, we need to -- the vesting period is 5 years, so which means 4 years to grant, right, every year 1, year 2, year 3, year 4. 5 years to vest. So this can go all the way to 9 years from now. And whatever cost needs to go in the P&L, will go over that longer period of time, that's one thing.

The second thing that you touched upon what is the accounting, right? The current accounting is like it was for ESOPs, which is -- it doesn't need to go through P&L, other than for material risk takers and executive directors and CEOs and so on, right. But ESOPs, we as a bank chose to have that on the P&L for all of them, we have that. And for RSUs, we will decide what we need to do whether it is from a shareholder point of view, it mitigates the dilution -- that's what I want to leave you there -- Compared to ESOPs. It doesn't change anything different. That means -- as an example I gave you, an employee got 3 ESOPs and equivalent compensation of 3 ESOPs of 1,500, will get 1 RSU for the same compensation value of 1,500.

The next question is from the line of Rahul Jain from Goldman Sachs.

So 2 or 3 questions, Srini. First of all on the liquidity coverage ratio, dropped quite a bit in this quarter, seems like you utilize the excess liquidity that you're sitting on. So how long, I mean, how much more scope is there to rationalize this? And if I were to tie it in with the deposit mobilization that you also intend to do in light of the merger, what would be the strategy out there? So that is the first question from me.

Okay. Let's get on to that one. The first thing is as it relates to the -- yes, we've continuously optimized on the liquidity available, as you know. And the context for this quarter if you see, we had loans growing -- in this quarter, loans growing INR 1,08,000 crores. In 1 quarter, we had that kind of a growth, right, INR 1,08,000 crores. And in this quarter, the deposits also grew INR 1,13,000 crores. So we did consume. In instance, the deposit growth from an amount point of view, exceeds the loan from how we are deployed. But from an LCR value point of view, it will come down because there are certain things that you'll have to have the liquidity assumptions, the run down assumptions and so on and so forth. So we use that.

And how much more we can optimize this, I don't think we can optimize this any further, right, we have come to 112, probably -- see, we run it with a floor of about 110, right, that's the kind of a floor we think that we'll run. At 110, we will get on to doing certain things in terms of mobilizing more. We love to run it between 110 to 115 optimized. But I do expect, I think in some other context we did talk about the branch vintage model and the deposit that it should generate.

Think about the branches that we have opened. The 0-to-3-year vintage branches, call it provides the value of X, and that branch -- those branches migrate to 3 to 5 and 5 to 10 years, give you a value, which is 3x and 5x from a branch productivity point of view. The branch productivity that we have as a bank is INR 250 crores per branch. That's the productivity that we have. And that's one of the best-in-class in the industry.

And if you look at certain branches that are new vintage branches, we are progressing towards that high productivity. And that's -- I think some other context somewhere we published in terms of what the branch productivity model is and how the branches are progressing through that vintage model, right. So that's one that will bring the deposits more.

The deposits gathering is less about the merger combination or whatever we talked about, right? That's something that we need to work on and think about to fund. And that's part of various branches that we are opening anyway. We opened 563 branches in this quarter, 700 odd branches. And we have said that, we want to open order of magnitude, 700 to 1,000 branches. During the COVID period also, last year we opened 353 branches, FY'21.

So we continue to do this, because we believe that the radius around which the customers can be serviced, currently, call it 4, 5 kilometers of radius, needs to come down to 1 to 2 kilometers radius, from where a branch in the catchment area can effectively manage the customers relationship better.

So let me -- part of that we open and it is also about getting the sales force to sit in those branches and do. So essentially, yes, deposit gathering is a prime kind of an activity, branch opening is that -- branch vintage model monitoring and driving through that is another kind of a dimension to look at it. Yes, we will keep driving that.

Got it. Srini, just one more question on retail. Various segments in retail has shown now continued momentum. So fair to assume that all the credit facilities have normalized and this can be sustained over the next few quarters, next few years?

You mean the retail lending -- retail loans?

Lending growth, yes, yes, yes. Like credit cards, PL, et cetera picked up, yes.

Yes, we believe so. So even in this quarter, if you look at it, the retail grew by about 5% or so, sequentially, right, that's the kind of quote. Now supply chain issues were impacting the vehicle type of businesses. That grew lower than the average. And the payments business, I alluded to the card spending growing at about 28% or so, but the payment business grew -- the cards business on the loan side is about 14% or so and sequentially slightly under 5%, rounds to 5% -- under 5%. So slightly under the average.

Now if you look at the total outside of the vehicle segment and the cards, the retail currently is powering at about the sequential momentum of about 6% or so. And we do believe that the vehicle should come back, once the supply constraints abate which is somewhat for a good part it is slowly coming back. The rate of growth this quarter we had on vehicles was better than the last quarter, is coming back. And same with payments too, right. Last quarter, we had a spend -- credit card spend of 24% and a loan growth of 9%. This quarter credit card spend is growing at 28% and the loan growth of 14%. This is all year-on-year numbers. So you're seeing the momentum also picking up there. So that's something I want to bring your attention to.

Over a longer period of time, that's what you should expect that there is an enormous opportunity, demand far outstripping supply and the credit penetration in the country is low and we are there, capturing that.

Okay. Can I just squeeze in one small question on the fee income as well. It picked up this quarter nicely, 12% year-over-year. Can you just break it down between payments and the other usual fee income that you on, how the momentum has been there in those segments?

Okay, got it. Yes. See, the 12% is partly aided by the payments doing a little better also. But still, payments is not at the business as usual type of growth that we have seen in the past, right, it is not there. But from a mix point of view, if you see what the mix is, the total 12%, the payment is 10%, 11% or so now. It was very single -- small single digit last quarter. And excluding the payments, we are at about 14%, 15% or so on the fees. And if you think about the mix that you asked about, the retail -- the assets and the liabilities on the retail, let’s call it about say 40%, you should look at an annual rather than quarter because quarter-to-quarter there will be variation. Some point in time you will see some third-party products, customer preference. And some point in time, you will see some festival spend and other things happening. So quarter-to-quarter variations, but if you look at the mix of various fees over a year kind of a time period, retail assets and liabilities, about 40% of the total, about 20:20 each. And if you look at the third-party product, you can call it close to a quarter of the total fees and card, call it about under 1/3, call it, 30% or so, right? And the wholesale is anywhere between 5% to 7%. So that's the kind of how the fees set up in terms of what are the contributing factors, what are the products that contribute into the fee mix.

Got it. So the payment grew 10% to 11% Y-o-Y in this quarter, just wanted to clarify that.

That is correct, yes. Still it is -- it is lagging what used to.

The next question is from the line of Aditya Jain from Citigroup.

On the branch slide which you have provided some time back and you reiterated recently, just thoughts on the link between the historical deposit connectivity and branch linkage as it’s in the chart. Could it be different now versus the historical experience, given that the earliest branches would have been the largest cities. Frequent ones would have gone into smaller location for growth. So the multiplier effect that you are seeing, could it be lowered, and your sense on how much could that in fact be with historical experience?

Okay. Aditya, if I understand your question, historical location of the branches versus the current location of the branches, give the same kind of a branch maturity model, branch productivity model, that is the question I assume, that's what you're asking. And the answer is, yes, given the current model, this is how we test and this is how we establish what is the best-in-class. And we drive the branches to those best-in-class, and that's part of the current model that we have.

Okay. Understood. And then secondly, on that view on depositor behavior based on experience in past trade cycles. So, one, as term deposit rates rise, will you expect some idle amount in saving deposits to start getting deployed in term deposit and would that be a material amount? And second --

Aditya, if I ask your pardon, as you are talking, there is lot of background noise that was coming, if you can patiently repeat, I'll appreciate.

Okay. Let me try again, sorry. So I was asking, depositor behavior in a rising rate cycle. So existing saving deposits and term deposits, would you expect the move of saving deposits to term deposit and how -- what sort of quantum that would be, is there a way to look at that? And secondly, your experience on how often or what proportion of term deposit investors would do an early break of their term deposit to get into higher rate deposits as rates rise? I don't know if it is easy to answer this, but just behaviorally from your observation if you could give us a sense.

Okay, a couple of questions you had. One is, what will happen to the mix of products between savings and time deposits as the rate starts to go up. So if you think about our regional mix of CASA ratio, currently at 48%. 48% is high, last quarter it was 46%, right. But if you look at overall longer period of time, the CASA ratio, anywhere between 40%-42%, that is the kind of rate at which we will see that. We are not shy of that, and I will tell you this. The time deposit penetration in our customer base is at just high teens. We would expect the time deposit penetration in our customer base to be in the 80s and 90s, because the part of the customers asset allocation you would expect, every customer would be having some amount in some liquid funds, some in savings, some in time deposit and so on so forth. So you would expect that the customer would have. And our penetration, we have a long way to go, to get the penetration up. So that's one thing. And we are not shy of that and that's part of the narrative our RMs have, conversations in the relationship management with the customer, is to engage to deepen that relationship, and if it is time deposit deepening, so be it.

Over a longer period, if you go back 5 years ago -- 3 years ago, 5 years ago, 40%-42%, that's the kind of range that we had. Recent times it has gone up. But even now, a rational customer will go to time deposit if it's required. If he wants 50 basis points more, the customer will go to bank deposit. And as the rate starts to go up, it may go and we are okay with that, because that's how you price the assets too. You price the assets also as the rates go up, time deposit goes up, asset price also will be repriced up.

Got it. So there could be some more movement towards time deposit. And the second part of my question, if you could touch upon that behavior of time depositors, would they -- you know fact, sort of breaking current deposit in a higher rate term deposits?

It depends on the customer at what rate. It depends customer to customer. It depends there is -- I'm sure there is a breakeven analysis that everybody does in terms of when you break a time deposit and you pay the breakage fee. And because there is a penalty for prepayment, and when you do and pay the prepayment penalty, and we book it into the new rate, what is the yield pick-up that you get and for what tenure. So there is a math to be done, and I'm sure the customers do. But we don't see that as a rampant issue that this is not something that bothers. And there is always somebody who may have booked it at very low rate who wants to come and change it.

The next question is from the line of Manish Shukla from Axis Capital.

Srini, could you give some color about the wholesale growth during the quarter in terms of PSU versus private mixed or short-term versus long-term lending, the incremental lending done during the March quarter?

Okay. See, it is all of the above. For example, if you see there are -- the sectors if you see which are the sectors, telecom sectors are there where the loan -- there was a loan demand in the quarter. PSUs were there, where it is. There were some manufacturing we saw picking-up -- but not a big thing -- and some NBFCs also came in. So these -- I would say the 3, 4 things that came in to give.

From a utilization, see what has happened is, we had a tremendous amount of prepayments happening at the beginning of the financial year, right. Corporates were prepaying. The prepayment in this financial year was to the order of about call it INR 60,000 crore, INR 65,000 crores or so prepayment happened, paydowns happened. Then this quarter we did not see as much of prepayment or paydowns happening. This quarter was something different. We didn't see it, right?

So the 2 things contributed. Some new demand, they gave you some sectors that there was some credit demand. And the other thing is that the prepayment didn't happen as it was seen in the prior quarter. So these 2 contributed to higher wholesale and we are pretty okay because we are very interested in a relationship. We don't measure the profitability only on the loans, which again by the way the cost to income on the corporate side is in single-digit. The cost to income is single-digit, the expected credit loss is virtually nothing, right. So highly profitable or equally profitable as any other product that you would imagine, and so we're quite comfortable with that. As apart from that, it provides the kind of entry to deepen our relationship on the retail side through the salary relationships and the products that we do on the retail side with them.

Sure. In terms of overall wholesale mix, how would the PSU mix today versus let's say a year or 2 back, share of PSU in overall wholesale?

We do not put the PSU out. We have not separately called PSU, but if you look at the sectoral deployment, I think we publish that periodically. You will see that somewhere. It is so far not published. It will be published later today, I think, the sectoral deployment.

Okay. Sure. Last question, in terms of your overall loan book, how much is floating rate and, within that, how much is linked to repo?

Floating rate and fixed rate is, call it -- okay, 46% was fixed and 54% is floating.

Okay. And repo linked would be?

Repo linked is about -- you have to look at repo along with the [T-Bill], repo and T-Bill about 38% or so.

No, the only reason I'm asking repo separately is because repo is dependent on regulatory action, it will be market-driven, which is why I'm trying -- more interested in repo separately.

Yes. I think it was about -- 29%, 30% was the repo, about 10% was T-Bill.

The next question is from the line of [Sagar Doshi], an individual investor.

Srini, my question is regarding the treasury income. So as I could see, quarter-on-quarter and year-on-year, treasury segment income has reduced. I understand that it might be due to the bond lease et cetera. But could you give any view on that, how it would go going ahead?

Okay. See on the -- you are talking about the trading income, right?

Right.

So that alluded to -- okay, last year same quarter was about INR 655 crores. Last quarter was little more than INR 1,000 crores. And this quarter was close to nothing or actually negative INR 40 crores. So that's what you're talking about, I guess.

Yes.

Right. Those were, as I alluded to several minutes ago, those were more opportunistic gains that we harvested from whatever was possible, the timing and so on whatever we could, we harvested. And in this quarter when the rates are rising, we haven't harvested and the opportunities to harvest is also less, right, in a raising scenario -- rate scenario. So going forward, how you should think about it, we should think about it that it is minimalistic.

The second thing also you would need to think about it is, is the -- when we have excess liquidity, too much of the excess liquidity -- we do have always excess liquidity. When we have too much of that, we deploy it in such a way that we don't mind harvesting gains on those excess, right, so that the drag, that can come from securities that are lower kind of a coupon is offset in some of other form. But we are at an LCR of 112%, call it to around between 100 to 115 kind of percent a range. So you should not expect the treasury trading income to sustain at any big levels for the time being.

The next question is from the line of Adarsh Parasrampuria from CLSA.

Srini and team, I had a couple of questions. One is from (technical difficulty)

Sorry to interrupt you, Mr. Adarsh, but your voice is breaking. Can you please check?

Yes, let me try again. So from a -- next 12 to 18 months perspective, how do you prepare the balance sheet for the -- you are already ramping up on branches and deposit mobilization. What's the implication both from how the balance sheet liability side would look? Would you gloat it up a little bit as you get closer to the merger? And from your OpEx perspective, because you ramp up distribution a little more front-ended, does that cause a drag on P&L for the next 12 to 18 months till the merger?

Okay. A couple of good points you are raising, but it's very important we address this, so you can think about it. It is not about preparing or merger or anything. But what is our normal strategy, right, that's a good thing to keep the moat off. We do want to ramp the branches. We do want to bring in new liability relationships. We do want to get the branch productivity from a deposit gathering point of view to be the best-in-class, right. And as I mentioned, to your point the branches are best-in-class and we are trying to deepen even further from a productivity point of view on that. So we will keep going on that, that's one.

So what -- irrespective of what it is we do, and that is part of what's the branch growth that we have embarked on, right. There was a modest 350 odd branches in FY '21. This year, we have taken it to more than 700, and we have a plan to sustain significant amount of branch growth. 150 branches are in the pipeline, to open anytime soon. And so we are going to do that to mobilize the relationship.

The reason for the depositor, we have equally from an asset appetite point of view, if you look at the last 5 years, right, we have grown assets CAGR, call it, 20 plus percent. That's what historically. I cannot give you an outlook of how asset growth -- what is asset growth we are doing. But I can only point you to the past effect. If you look at any kind of a 2 blocks of 5 year period or something, think about the 2017 to 2022 or 2016 to 2021 or 2011 to 2016, whatever kind of a time period if you see, high teens to 20%, right. That's the kind of rate of growth at which we have gone. And we have done that irrespective of what the market share at the respective time periods were, right, market share of 6%, 7% or 11% whatever it is, that is a kind of rate of growth we have. And so the machinery is tuned at that kind of speed and that kind of infrastructure that we have set for growth. So we do need more liabilities to support this.

Now if -- we'll have excess liabilities, possible, we will have -- it is quite possible that we could have, and we had it over the last 2, 3 years and we'll have it in future is quite possible. But the last aspect of your question is what is even more important. The liability -- excess liability not necessarily translate into kind of a inhibiting growth rate or drag or anything.

If you get a deposit and put it in a security at the current yield curve, you still have an opportunity to make a 2% ROA. You need to get the right mix of deposits between CASA and time deposit, and you need to have them at the right quality, granular [retail]. So you will have an opportunity to invest in any kind of security and provide returns equal to the average of what the bank does. So that's how I would urge to think about.

Again, if you think about margin -- if you have high deposits, will you have a margin factors? Of course. Because we have 0 risk-weighted assets. If you have excess deposits and put in securities with zero risk weighted assets, you earn -for the risk that you take. You don't take any risk, you'll earn for that. But still, you optimize for the return on assets -- return on equity at the end. So that's how I'll urge you to think that. If we do get more deposits because we are ramping it up, but it is supposed to provide good results.

And Srini, can you refer to the point that you mentioned that cost income you are spending that will go up in preparation for some of this, like what's the kind of spike you would expect in the near-term?

The cost to income whether it will go -- cost to income, Adarsh, as I told you will go up as we have more retail activity coming -- retail lending activity coming, retail liability activity is coming in, you will see the cost to income go up. But this is we -- normally, as we said, we don't give an outlook or a projection of what we'll do. But cost to income is something that we have consistently said over a period of time that is, well, it will go up now. We do think in the medium term, 3 years, 5 years term, it will come down back to mid-30s. And that is purely driven through scale and driven through various digital initiatives that we are running, right. So while it will go up, it will come back down due to the scale operating on that.

One more thing, just to follow-up on the margin queries that were there earlier. Just from the perspective that given that you did have a mix change over the last couple of years where retail activity was a little slower through COVID, we did have a material drop in margins from the peak. Given the things are opening up and everything and given that you will get to normal mix, normal activity, is it safe to say that margins now stabilize to start going up? Because in a normal circumstance, one would think that the corporate growth now shouldn't like materially keep exceeding retail and SME growth for very long periods of time.

See, as I said, I don't want to project the future. We don't give an outlook of what the growth can be or how it will be. I can tell you what we drive to. Our strategic drivers, retail is back on the drive. That means we are back to the pre-COVID level in terms of the credit policy, opening up the business across product lines. Other than the supply chain issues that we had in vehicles, other than that, we had on the cards with the customer behavior, right. Spends are happening. Customer behavior will have to catch up. Other than that, we are in that. So in this quarter, we did see higher demand on wholesale and we entertain that because it provides good returns.

The next question is from the line of Saurabh from JPMorgan.

My question is on credit card. So one is, when do you expect your market share to come back your earlier 30% levels? It's been 7 months since the ban has gone, so what's your outlook on that? And second is, how much of your revolve rates now versus pre-pandemic? Thank you.

You're talking about the market share, means you're talking about --

Spend in market share.

Okay. So I do want to tell you one thing that we don't -- as a target, we don't have a market share because market share doesn't mean anything. Particularly spend market share doesn't do anything from a profitability and return point of view. So that's one thing. Because there are -- if you are looking at it, I would urge you to look at the retail funds versus commercial card spend. If you look at it, bifurcate and look at retail/commercial. We like retail. We are okay with commercial, but it's retail. Why? The propensity for the customer to do the other things, both from a relationship value, as well as from a card product value itself, is much more on retail, so that's where we'll focus, right. So chasing market share on the spend is not a target that we have. So I would not be able to tell you how much it will go. It's a function of optimization of the P&L, optimization of the customer relationship on the product that we are able to do with the customer.

And the second part of your question was in terms of the revolve. We are still at about 70% to 80% of the pre-COVID levels on revolve rate. Last quarter, I mentioned that. Last quarter to this quarter, marginal improvement, 1 percentage point improvement in revolve. So that's also part what you're seeing in the card balances going from year-on-year growth to 9% to 14%. It's going in the right direction, but then that has to do the magic of paying interest rate as that starts to go up. It's a question of customer behavior and it will have follow through the lag.

The spend happens and we are seeing the spend happening. The build-up on the ANR must happen. You are seeing that the buildup on ANR is slowly coming. The third aspect of this is the buildup of ANR happening, the customer needs to start to revolve. I can see that it is turning the corner 1 percentage point better, but some way to go.

Got it, Srini. And just one final question. When is PayZapp launching?

PayZapp launch is probably a quarter away, I would say. We have several clients on that from a close user group to making to selective customers and then getting to broad base, maybe a quarter away I would say.

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. Vaidyanathan for closing comments.

Okay. Thank you. Thank you all for joining us today. We appreciate your time and we had a good conversation. If anything more that you have, we will -- you can connect with Ajit Shetty in the Investor Relations. We shall be happy to engage with you. Thank you.

Thank you. On behalf of HDFC Bank Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.