ICICI Bank Ltd (IBN) 2014 Q2 法說會逐字稿

Ladies and gentlemen, good day and welcome to the ICICI Bank's Q2 FY14 earnings conference call. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. N. S. Kannan, Executive Director of ICICI Bank. Thank you and over to you, sir.

Thank you. Good evening to all of you. Welcome to the conference call on the financial results of ICICI Bank for the quarter ended September 30, 2013, which is the second quarter of the current fiscal year 2014. As always, my remarks this evening would revolve around four key themes. First on the macroeconomic and monetary environment; followed by our performance during the quarter, including performance on our 5Cs strategy; then our consolidated results; and finally, we will talk about the outlook for the full financial year 2014.

Let me start with the first part on the macroeconomic and monetary environment during the second quarter. The operating environment in the second quarter was challenging marked by significant volatility in the financial markets, several policy changes, and also continued weakness in economic growth. During July, August 2013, concerns on tapering of quantitative easing in the US as well as India's high current account deficit resulted in significant capital outflows from India, particularly in the debt segment, resulting in sharp depreciation of the rupee we saw with the US dollar.

With a view to managing this volatility in the exchange rates, RBI announced certain measures in mid-July, including an increase in the marginal standing facility rate from 8.25% to 10.25% limiting bank borrowing under the Liquidity Adjustment Facility or LAF to 0.5% of the net demand and time liabilities of banks and increasing the minimum daily cash reserve ratio balance required to be maintained by banks to 99% from 70% earlier. These measures led to a sharp increase in the short-term market rates by about 200 basis points.

In view of the impact of the above developments on bank's treasury positions; in August 2013, RBI announced certain dispensations; including increase in the held to maturity or HTM holding limit for government securities to 24.5% of the net demand and time liabilities, one-time transfer of government securities from available for sale or AFS category and from HFT category to HTM category up to 24.5% at July 15, 2013 prices, and also the amortization of mark-to-market losses on the fixed income AFS and HFT book in equal installments over the remaining part of the year.

The RBI also announced Open Market Operations of INR80 billion of long dated government securities in order to ease the pressure on long-term yields. In September 2013, positive developments such as the deferral of quantitative easing in the US as well as RBI measures to attract foreign currency inflows, the measures on FCNR(B) deposits and increasing bank's foreign currency borrowing limits resulted in stability and appreciation of the exchange rate.

Consequently in its mid-quarter monetary statement on September 20, 2013; RBI reversed some of the exceptional measures by reducing MSF rates to 9.5% and the minimum daily cash reserve ratio requirement to 95% of the fortnightly requirement. The MSF was further reduced to 9% on October 7, 2013. However, with the emergence of upside risk inflation; in its monetary policy statement, RBI increased the repo rate by 25 basis points to 7.5%. RBI also indicated its intent of normalizing monetary policy operations with the repo rate resuming as the effective policy rate. So overall, financial markets remained volatile during the quarter. The rupee depreciated from INR59.7 per US dollar on June 30, 2013 to a low of INR68.36 per US dollar on August 28, 2013 and thereafter appreciated to INR62.8 per US dollar by end September.

Similar sinks were seen in equity and bond markets. The Sensex declined by 4% till end August 2013 before recovering in September 2013. Yields on 10-year government securities reached 9.2% as on August 19, 2013 compared to 7.5% at end June 2013 before subsequently easing to 8.8% by end September. So the policy focus has been on managing the volatility in exchange rate, which resulted in volatility across all the markets, specifically the money markets. Looking at real economic activity, growth continued to remain subdued during the quarter. The Index of Industrial Production remained weak recording a growth of 0.6% in August 2013. Growth during April to August 2013 was 0.1% even on a low base of 0.2% increase year-on-year in April to August of 2012.

At the same time, inflationary concerns re-emerged during Q2 of 2014 with the Wholesale Price Index increasing from 5.2% in June 2013 to 6.5% in September 2013. The increase was largely due to rise in food prices, which went up 18% year-on-year in August and September 2013. Retail inflation measured by consumer price index were also high at 9.8% in September 2013. Having said this, there were positive developments during the second quarter on the external front. Exports revived recording an increase of 11.2% during the quarter compared to a decline of 1.6% in Q1 of 2014. Imports declined by 8.6% during the second quarter primarily due to a decline in gold imports. As a result, India's trade deficit reduce from around $50 billion during Q1 of 2014 to $30 billion during Q2 easing concerns on the current account deficit.

With respect to trends in the banking sector, non-food credit growth actually improved to about 18% by end September 2013 from 13.9% at June 2013 and 15.4% at September 2012. Some of this growth is likely to have been driven by a shift of borrowing from non-bank funding market to bank borrowing following the sharp increase in short-term market interest rates during the quarter. Deposit growth continued to remain muted with total deposits recording a growth of around 14% with some marginal improvement towards the end of the quarter. Demand deposits growth increased to about 18% during the quarter before reverting to 11% growth levels. With this background, I now move to part two of the performance of the bank during the quarter so let me begin with the progress on our 5Cs strategy.

First with respect to credit growth. Total advances of the Bank increased by 15.5% on a year-on-year basis from INR2.75 trillion at September 30, 2012 to INR3.15 trillion at September 30, 2013. The growth in the domestic loan portfolio was 14.4% on a year-on-year basis. The domestic loan growth was driven by retail loans with the rate of corporate loan growth declining substantially. The retail loan portfolio grew by 19.6% year-on-year as of September 30, 2013 compared to 12.6% at June-end 2013. The organic retail loan portfolio that is excluding the bought out portfolios grew by 27.8% at September 20, 2013 compared to 26.6% at June 30, 2013.

We continued to see strong traction in this business with mortgages and auto loan disbursements increasing year-on-year by 35% and 45% respectively during the quarter. The outstanding mortgage and auto loan portfolios grew by 23% and 27% respectively on a year-on-year basis at September 30, 2013. Commercial business loans declined by 16% on a year-on-year basis at September 30, 2013 reflecting both the slowdown in the segment as well as a rundown of the bought-out portfolio in the segment.

The unsecured credit card and personal loan portfolio at INR54.45 billion at September 30, 2013 continued to remain a small portion, about 1.7% of the overall loan book though the growth rate is high due to low base. We have calibrated growth in the domestic corporate portfolio to 11% year-on-year at September 30, 2013 given the operating environment. Net advances of the overseas branches increased by 18.9% on a year-on-year basis in rupee terms primarily due to the movement in the exchange rate. In dollar terms, the net advances of the overseas branches remained stable on a sequential as well as on a year-on-year basis at September 30, 2013.

Moving on now to the second C on CASA deposits. Reflecting our strong retail franchise, we saw an addition of INR46.82 billion to our savings deposits in the second quarter. Current account deposits also increased by INR33.91 billion during the second quarter. As a result, we maintained our period-end CASA ratio at 43.3% at September 30, 2013 similar to the level at June 30, 2013. The average CASA ratio of the Bank improved from 39% in Q1 to 40.3% in the second quarter.

Now on the third C on costs. For the second quarter, operating costs including DMA expenses were higher by 4.5% on a year-on-year basis. The Bank's cost-to-income ratio declined to 37.3% in the second quarter of fiscal 2014 compared to 39.4% in the first quarter. This moderation in operating expenses was primarily due to a year-on-year decline in the variable employee expenses such as the positive impact of the movement of government securities yields on the retiral benefits.

Let me now move on to the fourth C on credit quality. During the second quarter, the Bank saw gross NPA additions of INR11.45 billion primarily driven by slippages in the SME and mid-size corporate loan portfolios. Deletions in the second quarter were INR5.66 billion. The Bank had also written off INR5.58 billion of NPAs. The net NPA ratio as a result was 73 basis points at September 30, 2013 compared to 69 basis points at June 30, 2013. During the quarter, we restructured INR10.76 billion of loans. After taking into account deletions and the required specific provisioning, the net restructured loans for the Bank increased to INR68.26 billion at September 30 compared to INR59.15 billion at June 2013. Provisions for second quarter were at INR6.25 billion, as compared to INR5.08 billion in Q2 of 2013 and INR5.93 billion in Q1 of 2014. As a result, credit cost as a percentage of average advances were at 81 basis points on an annualized basis for Q2 of 2014. The provisioning coverage ratio on non-performing loans continues to remain healthy at 73.1% at September 30, 2013.

Now to the fifth C on customer centricity. The Bank continues to focus on enhancing its customer service capability and leveraging on its increased branch network to cater to its customer base. During the quarter, we added 157 branches and 196 ATMs to the network. With this, we have a branch network of 3,507 branches and 11,098 ATMs at September 30, 2013. We also continue to strengthen our technology channel for increasing customer convenience. During the quarter, we launched Pockets by ICICI Bank, a first of its kind app on Facebook, which offers the Bank's customers the convenience of banking while they are on Facebook.

Pockets by ICICI Bank offers a variety of unique features such as spilt-and-share, which allows the customers to split and track group expenses and share that with friends on Facebook and pay a friend facility, which allows customers to transfer funds to their friends without knowing their bank account details. Pockets by ICICI Bank has been developed with robust security features. The Bank's Facebook page continues to be appreciated by the customers with about 2.5 million fan base. ICICI Bank continues to be the largest fan base on Facebook among the Indian banks.

Having talked about the progress on 5Cs, let me move on to the key financial performance highlights for the quarter. The net interest income increased by 20% on a year-on-year basis from INR33.71 billion in Q2 of 2013 to INR40.44 billion in Q2 of 2014. The net interest margin increased from 3% in Q2 of 2013 and 3.27% in Q1 of 2014 to 3.31% in the second quarter. On a sequential basis, the international margins increased from 1.6% in the previous quarter to 1.8% in the second quarter on account of higher yields on incremental lending and a reduction in cost of funds. The domestic net interest margin was stable at 3.65% in the second quarter compared to 3.63% in the first quarter reflecting the Bank's relatively lower reliance on wholesale deposits as well as the 25 basis point increase in the base rate.

Moving to the non-interest income, it increased by 6% from INR20.43 billion in Q2 of 2013 to INR21.66 billion in Q2 of 2014. We have seen an improvement in fee income growth from about 3% for the full financial year 2013 and 8.9% in the previous quarter that is the first quarter of the current fiscal year to 16.7% on a year-on-year basis in the second quarter. This improvement in fee income growth was primarily driven by growth in the retail banking fees, commercial banking fees, and ForEx and derivatives income. The Bank's retail fees including remittances contribute about 55% of the overall fees.

Moving on to other income, it was INR2.51 billion in Q2 of 2014 compared to INR1.62 billion in Q2 of 2013 and INR2.88 billion in the previous quarter. During the second quarter, treasury recorded a loss of INR0.79 billion compared to a profit of INR1.73 billion in Q2 of 2013 and a profit of INR4.03 billion in the first quarter. As you are aware, this quarter saw significant volatility in market rates following the policy measures announced on curbing the volatility in the exchange rate. The Bank has fully recognized the mark-to-market provisions of INR2.79 billion primarily on its investment portfolio and has not availed of the option permitted by RBI of recognizing it over the three quarters. Had the Bank amortized the same over the three quarters, the treasury income for the second quarter would have been higher by INR1.86 billion.

During Q2 of 2014, the Bank also transferred SLR securities with a face value of INR23.11 billion from AFS and HFT categories to HTM category and has recognized a loss of INR0.1 billion resulting from the said transfer on account of the movement of yields till July 15, 2013. If the transfer had not been affected, the treasury income during the second quarter would have been lower by INR0.71 billion. Going forward, the treasury performance would depend on market developments including the impact of the policy measures. I have already spoken about the trends in operating expenses and provisions while speaking about the 5C strategy.

As a result of the above metrics, the Bank's operating profit excluding treasury increased by 31.3% from INR30.22 billion in Q2 of 2013 to INR39.67 billion in Q2 of 2014. The Bank's standalone profit before tax increased by 21.5% from INR26.86 billion in Q2 of 2013 to INR32.63 billion in Q2 of 2014. The Bank's standalone profit after-tax increased by 20.2% from INR19.56 billion in Q2 of 2013 to INR23.52 billion in Q2 of 2014. This translates into an annualized return on average assets of 1.7% for Q2 of 2014 compared to 1.54% for Q2 of 2013.

The Bank's capital adequacy as per RBI's guidelines on Basel III norms continues to remain strong at 16.5% overall capital adequacy ratio and 11.33% Tier 1 ratio at September 30, 2013 giving us the ability to grow our business further. In line with applicable guidelines, the Basel III capital ratios reported by the Bank for the quarter ended September 30 do not include the profits for the half year ended September 30. Including the profits for H1, the capital adequacy ratio for the Bank as per Basel III norms would have been 17.21% and the Tier 1 ratio would have been 12.04%.

I now move on to the consolidated results. The profit after-tax for the life insurance company in the second quarter was INR3.87 billion as compared to INR3.96 billion in Q2 of 2013. This level of net profits reflects an annualized rate of about 30% of the Bank's invested capital. The year-on-year decrease in profits was due to a decline in renewal premiums coupled with higher new business strain in Q2 of 2014 compared to Q2 of 2013. The decline in total premium was mainly on account of degrowth in the renewal premium given the slowdown in business growth following September 2010. However, the Company has seen a healthy growth in new business premiums on a year-on-year basis.

The new business annualized premium equivalent for ICICI Life was INR9.54 billion in Q2 of this year compared to INR7.81 billion in Q2 of last year. The new business margin for Q2 2014 was 14.1%. During the quarter, the Company has made changes to its products with the intent of smoothening the transition to the new product regime. Accordingly, this led to higher sales of ULIP products, which have relatively lower margins with the proportion of ULIPs in the business mix increasing to about 60% levels in Q2 compared to about 53% levels previously.

The retail weighted received premium for ICICI Life increased by 10.9% on a year-on-year during April to September 2013. While IRDA numbers for the industry are not available, we understand that the company has retained its market leadership among the private players. The profit after-tax for the general insurance company in Q2 2014 was INR1.56 billion as compared to INR1.01 billion in Q2 of 2013 and INR2.03 billion in Q1 of 2014. The profits were lower on a sequential basis primarily on account of lower investment income following the volatility in markets during the quarter. The company maintained its leadership position in the private sector with an overall market share of 9.5% during April to August 2013.

Let me now move on to the performance of our overseas banking subsidiaries. As per IFRS financials, ICICI Bank Canada's profit after-tax for the second quarter was CAD12.9 million as compared to CAD12.2 million for Q2 of 2013. The total assets for ICICI Bank Canada were CAD5.27 billion at September 30, 2013 compared to CAD5.23 billion at June 30, 2013. ICICI Bank Canada will continue to work towards further optimization of capital and selective portfolio growth in order to improve its profitability and return ratios. The capital adequacy ratio was healthy at 31.2% at September 30, 2013 compared to 31% at June 30, 2013.

ICICI Bank UK's total assets was $4.21 billion at September 30, 2013 compared to $3.75 billion at June 30, 2013. ICICI Bank UK is focusing selectively on lending opportunities to highly rated entities, including trade and transaction banking products and short-term loans to multinational corporations and subsidiaries of Indian companies in UK and Europe. The profit after-tax for ICICI Bank UK for Q2 2014 was $6.1 million compared to $4.3 million for Q2 2013. The capital adequacy ratio was comfortable at 26.1% at September 30, 2013 compared to 26.6% at June 30, 2013.

Let me now talk about the overall consolidated profits. The consolidated profits for the second quarter for this year increased by 12.9% to INR26.98 billion compared to INR23.9 billion in Q2 of 2013. The consolidated profit growth was lower on account of the impact of market volatility primarily on the Bank's primary dealership subsidiary. The annualized consolidated return on average equity was 14.6% for Q2 of 2014.

Let me now come to our outlook for the full financial year 2014. Given that half the year has elapsed, we thought it appropriate to take stock of actual trends vis-a-vis our expectations and targets at the beginning of the year. Looking at the environment, while the turbulence in financial markets that we saw in July, August have substantially abated, overall the economic outlook is more challenging than envisaged at the beginning of the year. Full-year GDP growth is likely to be lower as compared to the expectations of a pickup and the anticipated easing of monetary policy and consequent reduction in market rates has been impacted by inflationary concerns.

Coming to ICICI Bank. On the loan growth front, retail loan growth trends are very robust and we have achieved a 20% year-on-year loan growth at the end of the first half, which was our full-year target. We have calibrated corporate loan growth substantially reflecting the environment and our cautious approach to incremental lending. We expect sustainable credit growth for the banking system to be around 15% and would target to grow 2% to 3% higher than that level for us. Growth would continue to be driven by retail at around 22% to 23%. Growth in the loan portfolio of overseas branches will continue to be calibrated to conditions in the overseas funding markets.

On the deposit side, the trends have been very strong and we would target an increase in average CASA ratio of 39% to 40% as against 38% to 39% estimated earlier so we are very hopeful of getting to 39% to 40% on an average level basis on CASA. Trends in margins have also been better than our original expectations aided by better margins in the overseas branches book and stability in domestic margins given the retail deposit franchise. Against our initial target of 10 basis point improvement in the full-year NIM over 3.11% level in financial year 2013, we believe that we can target around 20 basis point expansion in NIM on a full-year basis compared to last year.

Fee income growth trends have also been better than our original expectation with the growth for the first half at 12.8%. We would target a fee growth of around 14% to 15% for the full year. Treasury income has been volatile reflecting market conditions contrary to the general initial expectations of profit opportunities in treasury from declining yields. However, based on the current market conditions, we expect to recoup a significant part of the mark-to-market provisions taken in Q2. Other non-interest income trends have been strong aided by continuing dividend streams from the subsidiaries. We expect this trend to sustain. The trend in the cost income ratio has also been positive with the ratio at 38.4% in the first half. We would continue to target to contain this ratio at a level below 40%.

Thus we expect to improve on the core trend seen in the first half in the operating profit and subject to market conditions, improve the treasury performance relative to the second quarter. Given the economic scenario I mentioned earlier and issues of profitability challenges, longer working capital cycles, and liquidity constraints faced by companies; corporate asset quality continues to be impacted across the system particularly among medium and smaller companies. We had estimated provisions as a percentage of average loans of about 75 basis points to 80 basis points for the full year. The first half experience has been around 82 basis points. During the first half, we have had gross additions to NPLs of about INR23 billion. We currently expect a similar trend in the second half.

With respect to restructured assets, we have seen gross additions to restructured loans of about INR20 billion and also currently have loans aggregating to about INR20 billion referred to CDR mechanism. Given the environment, the CDR pipeline is expected to increase and we could also see some restructuring outside CDR resulting in a higher amount of restructuring in the second half. While given the operating environment and the provisioning cost for this year may be higher than our initial estimates, we do not expect them to exceed 90 basis to 100 basis points of the average loans.

In summary, we are seeing strong core operating trends, loan growth driven by retail, healthy deposit growth, improved average CASA ratio, improving fee income growth and sustained cost efficiency. These healthy core operating trends would give us the ability to absorb the higher level of provisioning arising out of the credit cycle. Our growth continues to be supported by a capital position that is well above the regulatory norms. Before I end, I'm happy to say that as you would have seen in the press release, my colleague Rakesh Jha has been designated as Chief Financial Officer. I'm sure all of you know him well and will join me in wishing him all the best. Rakesh has been the Deputy CFO since 2007 and has played a critical role in finance, planning, and strategies for much longer. He's well qualified and deserving of this position.

Rakesh will continue to report to me and I'll also continue with my other existing responsibilities for Risk Management, Corporate Communications and Branding, Markets and Commercial Banking, and day-to-day oversight of the compliance and internal audit functions; which report to the CEO and the Audit Committee. With these opening comments, my team and I will be happy to take your questions. Thank you.

Thank you very much, sir. (Operator Instructions) Mahrukh Adajania, Standard Chartered.

Congratulations on a good set of numbers. Just wanted to clarify a few things. Firstly, you said that the restructuring pipeline was INR20 billion, is that correct?

Our share of the restructuring cases referred to CDR mechanism is currently INR20 billion, yes.

And the slippage for the second quarter is INR10 billion or INR11 billion?

INR11.45 billion of NPA addition gross.

Okay, got it. As you explained, lower employee expenses are largely due to retirement benefits only or is there something else as well?

Largely it is because of the retirement benefits. Of course, these yields have resulted in the treasury loss, but correspondingly they have given us a benefit on valuation of retirement liabilities. But as I said, we are very confident on a full-year basis to keep the cost-to-income ratio below 40%.

What would drive that? Because this time the employee expenses look very, very low because of -- or you're saying strength in operating income would help?

Yes, strengthen operating income plus generally, Mahrukh, the pressure on cost is not there so much. If you really look at either the attrition rates or the employee cost increase expectations or if you look at any of the other operating expenses including the rentals for premises and so on, generally the cost pressures are not much and plus, of course, we always believe that we have something more to cut. So given this, we are quite confident of keeping it below 40%.

Okay. And just one last question. In terms of your fee income, there is a very strong revival so is there any lumpiness, any huge ForEx income which may not repeat next quarter or any such thing? Any lumpiness in any segment at all?

There's no lumpiness at all in any of the segments and we do believe that our strategy of granualarizing it has really helped. And when I look at the growth across segments, I see the growth across all segments whether it is transaction-based or commercial banking or ForEx or retail assets or on the corporate side. Generally the fee income growth has been robust across all segments. So I don't expect any sort of blip because of any bulky income not coming through next quarter. That is not the case.

Okay. Thank you so much.

Vishal Goyal, UBS Securities.

Actually, my question is on some color if you can give on the fresh NPL formation in terms of whether retail, wholesale and whether in wholesale industry, et cetera?

Retail, absolutely no concerns and we continue to see a very robust asset quality on the retail side. We are not expecting anything. On the corporate side, yes; given the operating environment, there continued to be stress and we do see development of NPLs on the SME side also. So, those are the type of thing. There is no any sectorial distribution or anything and typically wherever there are sales growth issues or there are gearing issues and working capital cycle getting extended inordinately, those are the kind of cases where we are seeing slippages. I think it really depends on the Company's finance structure and the sales growth rather than that being specific to any particular industry segment. So as I mentioned similar to the number we have seen in the first half, that is what we expect to see going forward as well.

And can you say the same for even restructuring or that will be different for restructuring?

Restructuring, as I mentioned, the current pipeline of CDR cases, our share is INR20 billion. And as I said, given the environment, the CDR pipeline is expected to increase as well and we would also see some restructuring outside CDR resulting in a higher amount of restructuring in the second half.

And all this is coming from same infra metals or something new also?

So far we have not seen any development of NPLs or restructuring. As I said earlier, this is largely the mid-corporate portfolios where we are seeing the restructuring developing and that is also not a specific industry as I mentioned. It will be company specific issues and we are very careful about restructuring. What is capable of being revived is where restructuring happens and we are quite comfortable with the kind of experience we have seen of our past restructuring as well.

Okay. Can you give number for savings bank account open in the quarter, new savings bank account?

We don't actually separately give on a quarterly basis the new accounts opened.

Okay. And on this retiral benefit so this thing can remain volatile, correct, like with the [bonding]? I mean any sense on what is the number like the swing factor purely because of retiral benefit?

It is a function of the yields because depending on what is the residual payment period, that is the discount rate which is used for computing the present obligation. So it will indeed be a volatile number and normally in a quarter, the interest in movement is not as sharp as it was in this quarter so that it really never comes up as a separate item for us to highlight. But given that this quarter the movement was pretty high, that's why the number is also on the higher side.

Yes. Some volatility in that line item will be there, but that is why I also talked about the first half number in terms of the operating expenses growth and that is something which you can go by. And as I said earlier, again just to reiterate, we are very confident of keeping the cost-to-income ratio below 40%. That is something we are working towards.

Okay. But basically what it means is that it is a valuation of the liabilities which led to such a sharp decline, correct? So you don't expect similar experience like for example if the yield remains at let's say 8.5%?

So it's a quarterly valuation that we do so if the yield remains at the same level as it was on September 30, then there should not be any incremental impact because of the yield movement. Separately because of an actuarial valuation, there would always be some impact which is there in the normal run rate which is there. This is only because of the yield movement impact which came in.

Then you go back to the normal run rate salary cost, correct, if the yield remains here. (multiple speakers)

That's why if you look at H1 as a whole, it gets somewhat sorted out.

Okay, sir. All the best. Thank you.

(Operator Instructions) Jignesh Shial, IDBI Capital.

Just wanted to check, have you sold any portfolios to ARCs during this quarter?

We have sold some of our NPLs to ARC. Basically if you look at the number that we gave in the presentation, there has been about INR500 million of increase in the SRs. That is what reflects the sale that we would have done in terms of the quarter.

Delta security receipts has been on INR500 million.

That could be the recoveries I mean what you received, right, or that could be the amount that you sold?

That will be the [restriction] to security receipts.

Okay. And any portfolios that we bought out this time or nothing has been bought?

In terms of portfolio that we buy, from a priority sector lending perspective, we do buy on a quarterly basis. But most of the purchases are in the form of PTCs that shows up in the investment portfolio, a much smaller amount is there on the loan portfolio side. So if you look at the overall buyout portfolio within the retail segment between June and September, that would still have declined somewhat.

Okay. And secondly, what could be the quantum of our wholesale deposit right now, I mean any just ad hoc numbers on that?

It will be just under 30% of the total deposits.

30% right.

Yes, that's right.

Okay. And just reconfirming, our additions during the quarter had been INR11.45 billion, right?

Of NPLs.

NPLs, yes. And the write-offs have been INR5.58 billion?

That's correct.

Okay, sir. Thanks a lot, sir.

Manish Karwa, Deutsche Bank.

Congratulations. I just wanted to take an outlook on margins especially on the overseas margins, do you think this trend can sustain for some time?

See 1.8% is just about the highest level we have achieved so I would say that you should budget for about 1.7%, 1.8%, around that range. Increasing it from here on looks to be difficult, but we are working towards sustaining it around this levels. So that is the way we would like to operate there.

And what's the reason for this 1.8%, is it you're getting better spreads on your lending side on the international front?

That's correct plus also some liquidity we had. We continued a deployment of excess liquidities happening over a period and there is no real yield pressures or any competitive pressures on the asset yield so we are able to get that thing and then costs have also been down. So, it's a combination of all the three factors.

Okay. And on your UK subsidiary, your total assets have actually gone up pretty sharply on a sequential basis. Is it a one-off thing as a quarter-end number or is it a reasonably good business that you're writing there?

Right now you would not have seen increase in the loan book which was there as much so the balance sheet in terms of the deposit base has increased. And so going forward, we do expect some amount of loan growths to be there. So it's more of a quarterly kind of thing which is there. So some of this liquidity which is there currently would get deployed [if there are] opportunities in the second half of the year.

Okay. And lastly on your PD business, the loss is largely because of the way interest rates have moved. And over here also, all the losses have been taken through the P&L, right, there is no deferment of any loss?

Yes. On the PD business, there was no option.

On PD business, there was no option available to them. This option was given only to the banks.

Okay. So over here, everything has been accounted for as of September 30?

That's correct.

Okay. Thank you.

Sachin Shah, Emkay.

My question was more on the broader side on the corporate loan book. When we see the corporate world today, we are broadly seeing two sides of it; one is where a lot of corporates are extremely overleveraged and on the other side we see quite a few corporates almost zero debt balance sheet. So obviously your exposure is to companies having extremely overleverage so does that really worry you with the overall environment right now? And going ahead, do you see the environment is getting much more tougher for them more on the slippages side for the NPAs?

Yes. First of all, it will be incorrect to say that our exposure is only to corporates having overleverage, that's absolutely untrue. We are a broader corporate bank and then we will have exposure across the corporate sector of the Indian economy. Second, this issue of corporate leverage has been talked about for about 18 months now and we continue to monitor the portfolio and in our case, it has indeed got reflected in the incremental addition to restructured loans. And our experience of slippages from restructured NPLs has been quite satisfactory. Yes, environment is tough and obviously corporates with a higher leverage, it will have an impact. But we do believe that given our ability to select projects and corporates at the first instance in terms of giving loans and subsequent monitoring should hold us in good stead across the cycle. So the numbers I'm saying in terms of the provisions or restructuring or NPL slippages pretty reflect the work we have done around this and should economy revive, things can only get much better from here.

Right. But just in case if the economy remains where it is for say another few quarters, do you see that because of your whole legacy book, do you see this getting more worse or we are now kind of bottoming out as far as the intense pressure is concerned on that kind of scenario?

Yes. In this kind of environment, it is indeed very difficult to predict too much into the future. But if you look at the kind of numbers I talk about for the second quarter, really saying that our operating performance has been far better than what we expected at the beginning of the year. To the extent that we are able to increase the outlook on the NIM expansion from 10 basis points to 20 basis points, the cost income ratio we are now saying that we will reduce it below 40%. And we are also saying that in terms of fee income growth, which we thought will be a growth of just about double-digit growth, we are now saying that it's going to be 14% to 15% growth and of course, we already have talked about the provisions. And really the better core operating performance than what was thought at the beginning of the year will come to help us in terms of managing whatever little increase can be there in the provision. So we are quite the cognizant of it and we are quite the comfortable about the year as a whole outlook. Which or what happens, one will have to wait and see and I'm sure that we will have enough calibration and management intervention to manage the situation.

Perfect. Thank you so much and congratulations, sir.

Suruchi Jain, Morningstar.

My first question is about the insurance business. You mentioned that the profits were lower on account of lower renewals. Could you give us some sense of what's the breakup of renewal plans versus new clients? And could you also comment on the fact that your premiums have actually risen, but the profits have fallen?

So first of all if you look at it on a year-on-year basis, the profit is INR387 crores versus INR395 crores so it's essentially flat. A difference of INR7 crores on a INR400 crore approaching number is not material in that sense. And secondly, the point that we made was that if you look at the way the industry has evolved post the changes in ULIP guidelines in September 2010. Following that, there was a fairly extended period of very low growth or actually degrowth, which obviously means that the book which can come up for renewals now is lower. So the lower level of renewal premiums today reflects the lower new business done in 2010-2011, 2011-2012, and so on. And obviously at the same time, we continue to maintain some cost base to run the new business. So this economics will kind of adjust over time as the new business streams pickup.

To your second question on the premiums going up, but the profits coming down. That in a way does happen to some extent in the insurance business because costs are expensed upfront. So whenever you have robust growth in new business premium, you do see what is called the new business strain as well. So those are really the factors impacting profit, but I think if you look at it for the quarter on a year-on-year basis, profits are essentially flat for the first half as well and we expect that kind of profitability to be maintained.

Okay. And just a quick follow up on that before I ask my second question. Was the lower renewal the same for like all the industry participants and what do you see as the five-year growth horizon for your insurance business?

So I would say to varying degrees, the lower renewals is seen across the industry; some companies may be doing a little better, some may be doing a little worse. A part of it is also to do with the regency of the book in the sense that as you know the policies are surrenderable after a certain minimum period so as more of your book becomes eligible for surrender, the possibility of renewals being lower is higher. To your second question on the five-year growth horizon, I mean given the underpenetration of insurance in India whether you look at it in terms of premiums per capita or sum assured per capita, etcetera or the number of people who have taken out insurance and the adequacy of that insurance. We believe that a sustainable growth rate for this business should be around 15%.

Okay. Thank you for that. Moving to my next question, it's just a follow-up from what Mahrukh asked earlier. What is really driving down your costs? I understand you have the largest branch network amongst the private sector banks in the country. But at an operational level apart from the one-time changes in pension liabilities, what are you doing to bring down your cost? Because the way I look at it, the costs are pretty high compared to a lot of other banks.

I'm not sure how one would say that the costs are high compared to other banks. I think both on a cost-to-income basis and on a cost-to-asset basis, we would be among the most if not the most efficient among Indian banks. And we have been operating at between I would say 38% and 42%, 43% cost-to-income on a sustained basis for the last several quarters. As Kannan mentioned, while we are not really seeing any cost pressure in terms of the fixed wage costs rising or anything of that sort, we continue to control and optimize and tighten all other forms of costs be it travel or any of the other line items. And at the same time, we continue also to invest in our franchise in terms of branches and so on and so forth because we create the room for that by sort of optimizing the recurring costs.

So to give a short answer, I think we have been operating at as I said high 30%s to low 40%s kind of cost-to-income ratio for a sustained period of time and that is what we expect to sustain. Also when you look at that ratio, one of course is the numerator. The other thing that is helping that ratio is the fact that the denominator; whether when we look at the improvement in margins and the improvement in the levels of fee income growth, the denominator also kind of helps that ratio.

Okay, alright. Thank you so much.

(Operator Instructions) Umang Shah, CIMB Securities.

This is Jatinder. Just one question. On your cost of funds, can we have a broad sense how they have behaved year-on-year? And if you could break that into domestic and overseas or sequentially also actually better?

Sequentially I said the cost of deposits have come down. 6.13% was the cost of deposits for the quarter.

And the previous quarter?

If you look at the overall cost of funds for the total book, that is 6.13% for the quarter and the previous quarter was about 6.3% meaning the Q1 was 6.3%.

Okay. And can we get some broad sense as to how is it behaving differently between domestic and overseas?

Actually the numbers are different, but the trend line is pretty much similar. So domestic also would have come down by about 13 basis point during the quarter and overseas have come down by about 15 basis points or so in terms of the cost of funds. The level of course is different so the domestic cost will be close at 6.8%, oversees will be closer to about 3.1%.

And can we have some more granular mix of the term deposits? What is leading to it other than the CASA at least on the domestic side?

You want in terms of the cost. See between Q1 and Q2, the daily average CASA balance has gone up. That has also helped in terms of the overall deposit cost coming down.

Okay. And can we have the term deposit mix in terms of how much is retail and how much is corporate and what you clearly define as wholesale?

About 60% of the term deposits will be retail and 40% would be wholesale.

That is useful. Thank you, sir.

Ashwini Agarwal, BOB Pioneer Mutual fund.

Just a broader question. In last three years if you see, you have lent round about INR1.1 trillion to the corporate sector and out of that, round about 40% constitutes the infra construction, metals, and mining. Can you tell me how much would be term loan and how much would be working capital loan?

In terms of what we have lent incrementally over last three years? We would not readily have that immediately available with us.

Okay. And how many of projects would be coming onstream in the next two years?

If you look at the next two years, I think substantially all of the projects, if you look at the power side and so on, would get. Our main project under implementation exposure is in power, I think all of that over the next two years would start operation.

And do you see any problems coming in those sectors because power and construction, those are the main areas which can create problems in the next two years?

If you look at construction, I think the problem is already evident and I think you have seen right from last year, the construction and by construction, I mean the EPC type of companies, getting into CDR because their topline is challenged and they also have liquidity issues because payments to them particularly from the public sector entities are delayed. And you have seen more than one construction company going into restructuring and we see that going forward as well and that is kind of factored into some of the outlook that Kannan spoke of. As far as power is concerned, of our total power exposure which is a little over 6% of our total exposure, half is in any case to operating companies and the balance half is to projects under implementation. In the projects under implementation, we don't have any of the gas based plans or the UMPPs so we have mainly thermal exposure. And I think that given the current regulatory framework around restructuring, we don't see too much of a challenge in that sector. In any case, these are all 10 to 12 year loans funding 25-year assets so there would be sufficient tail in the cash flow to take care of any repayment elongation. So we don't, as we've always said, see ourselves taking any significant economic loss on these projects.

Okay. What about metal sector because even in metals you have a substantial exposure, RM steel and metals put together, it's round about INR20,000 crore plus.

Yes. So we have INR300,000 crore loan book so in that sense it is 6%, 7% of the loan book to give one kind of sense of perspective. And I think in metals if you look at iron and steel, our exposure is mainly to the larger players and we have not seen any sort of NPL or restructuring issues in those exposures and we don't anticipate any either.

Okay. Coming back to power, of the INR10,000 crore exposure which is to the thermal category which is non-operating, how many of them would be having backward linkages?

At the time of financing, about 40% to 50% of the exposure would have been financed with based on captive minds and the balance would have largely been based on linkages. Given the way the whole sector has evolved since these loans were approved, which was probably more like 2010, that mix may change a little bit. But based on our sensitivities of what is the breakeven PLS, et cetera, we don't see that as a big issue.

Okay. Thanks a lot, sir.

Rakesh Kumar, Elara Capital

Just coming back to this employee expenses thing like if supposing like from March 2013 to March 2014, there is no change in the yield so what would have been our internal estimate on the increase in the employee expenses?

So other variables are also there. So as Kannan mentioned, I think if you take the first half numbers in aggregate as the base and kind of ignore that Q2 was clearly somewhat lower than the trend line because of this impact, then that would give you an appropriate sense of going forward the numbers.

Because seeing the previous year number like we had an employee increase of around 8%, 2.3% and 8% in 2012 and 2013 and employee cost increase was around 25% and 11%. So just coming from that, how many employees you are adding and what is the increase in the cost for the employee expenses you're going to have? So that number was not falling in line.

So broadly for example, we would have an annual increase in salaries that we have every April that would typically be in the region of about 8% to 10%. And then in terms of the increase in employees, you can assume that would be a further 10% or 12% that would happen for the year. Of course, that will happen though the year so the impact on the salaries would not be the full impact, but through the year there will be an increase in the number of employees as well. That is what would give you an estimate of the number and then further we have the impact of the retirals where it's going to be a function of interest rate and then the other variable expenses which are there.

Okay. Just one last question. Looking at the change in the total capital adequacy for the Basel II and Basel III on the sequential basis for Q2, the change in Basel II number is relatively larger so anything we can understand from here? Any insight we can get from here?

Which number? If you can just tell me which number?

Like the CAR on the Basel II it is 17.63%, which has come down from 18.35% and if you compare the same number on the Basel III so that has not fallen so much. So just I was trying to understand that what is the reason for the larger fall under the Basel II?

They were same actually. So if you look at under Basel II, the CAR has come down from 18.97% to 18.33%, which is about 60 basis points and Basel III is 17.63% to 17.15%, which is a little bit lower. So I don't think it's a very significant difference.

So, if you look at under Basel II, the CAR has come down from by above 18.97% to 18.33% which is about 60 basis points and Basel III 17.63% to 17.15% which is a little bit lower. So, I don't think it's a very significant difference.

No, from June to September number if you look at for Basel III, the drop is around 50 bps. But if you look at Basel II number, Basel II number the decrease is much larger, it is around 70 bps, 80 bps. So the decrease in the Basel II number is slightly higher than the Basel III number for the CAR.

Basel II is about --.

So any change or like any difference?

I think the difference is about maybe 10 or 15 basis points. That kind of difference will kind of come in because the methodology of computation is really different between the two. So that kind of difference will indeed come in on a quarter-on-quarter basis.

Okay. Thanks a lot, sir.

Sapna Naik, Bajaj Finserv.

Can you quantify the amount of variable profit you have got on the employees? The employee expenses, what was the benefit you've received this quarter due to the change in needs?

We have talked about the employee expenses being lower on a year-on-year basis. The primary reason for that is the fact that the retiral benefits have to be valued on a quarterly basis and therefore the provisioning requirement moves down or up based upon whether interest rates go up or down.

I just want to know what was the benefit you have received.

No, beyond that --.

Because this is based on an actuarial report where all the variables come in. So in fact, it would be very difficult to even just point out because of the interest rate what is the movement because actuarial valuation is based on various inputs.

As Kannan explained, if one wants to look at how this will trend, one should look at the first half number for employee expenses to kind of smoothen out this impact. If one to look at a cost-to-income type of metric and then one could also adjust the denominator for the fact that you had a one-time treasury loss this time, which will again get reversed if the yield is reversed and the OpEx is higher.

Sir, I want to clarify one thing, that you have shifted INR2,300 crore from SLR portfolio on which you have recorded a loss of INR10 crores. So if that portfolio was not shifted, the treasury income would have been lower by how much you said?

INR70 crores.

INR70 crores. Okay. Thank you, sir.

And the bulk of that would have got recouped in the current quarter.

Okay, fine. Thank you, sir.

Nitin Kumar, Quant Capital.

Congratulation for the good results, sir. How was the margin trajectory in the domestic business between the retail and corporate verticals? And I mean did one segment do much better over the other?

No, not really.

Okay. So you were able to pass on the costs equally like --.

We have done the increase in base rate, which is applicable both on the corporate side and on the retail side, it is mainly on the mortgage book where we see the impact.

And overall average cost of funds did not increase.

Okay. And secondly like the overseas borrowings have shown a good growth this quarter so to what extent have you utilized our FCB limits that are revised by the RBI and is there any more to come?

Overseas borrowing growth, dollar terms is not there. It is definitely because of the exchange rate.

Okay. So given the relaxation RBI has given, are we looking to raise more over there?

We are looking at raising both in terms of the FCNR(B) deposits as well as on the Tier 1 limit which is there. So I guess some of those numbers will reflect more in the December quarter.

Okay. And lastly, the growth in the personal loans has been quite sharp this quarter so what is the outlook there?

That is because of the base effect because we have not been very heavy on that segment. The outlook continues to be that, yes, the growth percentages maybe high, but overall basis it will be around 2% of the loan book. So I don't think that we will exit that by much. But the percentage growth can be high because of the very low base and we have practically shut out some out of that segment in the past and we have increasingly started doing such loans for our own customers.

Okay. Thanks a lot, sir.

Saikiran Pulavarthi, Espirito Santo.

Just a few bookkeeping questions. What is the dividend income this quarter and then corresponding quarter last year?

Total non-interest income was INR252 crores in Q2 and INR288 crores in Q1 and INR161 crores in Q2 of last year and dividends would be the primary contributor to that.

Okay. That's it. Thanks a lot.

Nilanjan Karfa, Jefferies.

Congrats for that good set of numbers. Quickly, understandably the environment is challenged so you're focused on FY14. Would you hazard a guess or some kind of guidance for FY15?

Too early really to talk about that. So I would rather confine it to this year and then take it as it comes. From our perspective, as I said earlier, the franchise is going strong and the operating metrics are doing well. We think that as and when the situations revise, we should be in a better position to take advantage of the situations. General sense we get talking to people and our own belief is that things may be bottoming out and things should be better in FY15, but one has to calibrate it depending on what happens in the general economic scenario, we'll have to wait for that

But if I get it right, you upped your credit cost guidance to 90 bps to 100 bps this year from 75 bps to 80 bps, is that right?

Yes. We said that we will not expect it to exceed that number that is what we mentioned. Because we are seeing a little bit of upward movement because if you remember at the beginning of the year we said 75 basis points, the number we achieved for the first half is more like 82 basis points and there is continued addition to NPLs and restructured will warrant additional provisions. And as you know, the restructuring provision requirements have been increased by RBI. Given all that, generally directionally there is an upward pressure on that number. That's why we said that we will have a goal of not exceeding 90 basis points to 100 basis points. But again the good news is that on almost all of the other metrics we are predicting something which is better than what we have predicted at the beginning of the year. That's should provide a decent amount of cushion against this. So we just wanted to make sure that we recognize the reality and plan accordingly. That is why I made that statement.

Maybe a last question. On the international book, what is the rough the ALM structure like, if you specify on a interest rate basis that has given us this kind of yield improvements?

Interest rate basis, actually the book is we maintained the assets and liabilities both on a floating rate basis into LIBOR. So even if we raise fixed rate bonds or other borrowings which are longer than one-year maturity, we would swap that into LIBOR linked funding. So interest rate mismatch is really not much.

Okay. Because clearly if you look at the US Treasuries, between 6 month to 1 year, the movement has been pretty negligible. The movement have definitely come in the two to three-year maturities and hence this question. So I understand you mentioned earlier that you had excess liquidity, but was it just the excess liquidity which got deployed or --?

Bulk of it was excess liquidity and we also saw about 10 basis point reduction in funding costs, which was there. But the bulk of the improvement that you have seen on the overseas margin in the last I would say three quarters, it is more of the excess liquidity which has come down. So if you go back last year September-December quarter is where we were at a peak in terms of the liquidity that we are carrying. We had a large bond repayment in October 2012 because of which we are carrying a large amount of liquidity and that was there through December. So this is more of benefit in terms of the liquidity getting deployed. And we also get the benefit that overall the balance sheet has not really increased in dollar terms so that gives you ability to some extent to optimize costs as well, which are not going in the balance sheet.

Any guidance on your overseas? The ROEs of the overseas subsidiaries are obviously in low single digits. What is the target plan for those subsidiaries maybe this year and next year?

We have said that in the medium term the first target is to kind of getting to a double-digit ROE. But given the kind of excess capital which is still there, especially in Canada where the total capital adequacy continues to be 30% plus and UK is still close to 20%, so it will take us two to three years to get that kind of a level. And we would also look at some more capital getting repatriated from Canada during this period. We are kind of not rushing into ROE expansion more there and it will take some time to get that.

Thank you, Rakesh, and congratulations. Thanks.

M.B. Mahesh, Kotak Securities.

Sir, my first question is on the cost of deposits again. You had indicated initially that the cost of deposit is down on a Q-o-Q basis. Now if interest rates were to remain at where it is today, do you see cost of deposits increasing in your portfolio. And correspondingly given the fact that you've seen a fairly large repricing already on the advances side, that should lead to a downward pressure on margins, one. Second one is as your assets are increasingly shifting towards retail, is there a fair chance that incrementally you'll start seeing pressure because of the shift in loan book between retail and corporate in your underlying book?

In terms of cost of deposit because we have been doing fairly well on the CASA front and in terms of the wholesale deposits, our reliance is now that much lesser. So we are not really expecting to see the cost of fund increase substantially going into the third quarter. Of course, there will be some impact which will come in because of the higher deposit cost which was there in the month of August. But things have kind of cooled down and the rates have come off quite a bit. Even from the planning perspective, when the rates were high, we kind of kept away from the market or tried to borrow on the shorter end so which will not really impact the cost through the second half. So that gives us some comfort that overall on a margin basis we should be able to broadly remain at the level where we are in this quarter.

And the impact of the shift in the loan portfolio? Is it a fair assumption to make that today the corporate margins are probably lot higher than what the average domestic margin is made by the Bank?

Not really because if you look at the mortgage yields are still from the passbook which is there, it's relatively high. So overall the corporate book will have somewhat higher yield, but it will not be a substantial difference which will be there.

Okay. Is it possible for you to also say what is the outstanding loans in the mortgage book? The mortgage not the housing loan portfolio.

Now we give actually the builder loan separately so the portfolio that we give in the retail is indeed the --.

But there would be a difference between housing and mortgage, right? The new housing loans which you give and also the loans against mortgage.

So we use housing and mortgage interchangeably. What you are asking is what is LAP basically, which is included in the housing loan portfolio. That will be between 15% to 20% of the loan book.

My second question is there has been a drop in the general insurance business in terms of profitability. Any specific reasons attributed to it?

It's investment income sequentially which has come down, but year-on-year if you look at the profitability, it has grown by 55%.

Okay. Thanks a lot.

Kashyap Jhaveri, Emkay Global.

Actually all my questions have been answered. Just congratulations for a good set of numbers. Thank you.

Ladies and gentlemen, due to time constraints, that was the last question. I would now like to hand the floor back to Mr. N. S. Kannan for closing comments.

Thank you. If there are more of you who want any clarifications, any questions to ask my team and I, we are there to take your questions. Thank you so much and thank you for participating in the call. Bye, bye.

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