ICICI Bank Ltd (IBN) 2014 Q3 法說會逐字稿

Ladies and gentlemen, good day and welcome to the ICICI Bank's Q3 and FY14 Earnings Conference Call. As a reminder, all participants' line will be in a listen-only mode and there will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions) Please note that this conference is being recorded.

I'd now hand over the conference over to Mr. N. S. Kannan, Executive Director of ICICI Bank. Thank you and over to you, sir.

Thank you. Good evening. Welcome to the conference call on the financial results of ICICI Bank for the third quarter of the current financial year. In my remarks this evening, I will cover the following five areas; first, the macroeconomic and monetary environment, followed by an explanation of the change in the deferred tax accounting on Special Reserve and its impact on our financial reporting; then we'll talk about our performance during the quarter, including our performance on the 5C strategy, then we'll move on to our consolidated results; and finally the outlook for the full financial year 2014.

Let me start with the first part on the macroeconomic and monetary environment during the third quarter. During Q3, economic activity continued to remain subdued with industrial growth as measured by the Index of Industrial Production, IIP, recorded a year-on-year decline of 1.6% in October and 2.1% in November 2013.While going forward, improvement in agriculture sector growth is expected, overall economic recovery is likely to remain slow.

While wholesale inflation increased from 5.9% in July 2013 to 7.5% year-on-year in November, it declined to 6.2% year-on-year in December driven by reduction in food inflation. Similar trends were seen in the Consumer Price Index, or CPI. However, CPI inflation continued to remain high at about 10% in December 2013. In view of this, after raising the repo rates by 25 basis points in October, the RBI further increased the repo rate by another 25 basis points in January policy to 8%.

After exceptional volatility in Q2, financial markets were relatively stable during the third quarter. As a result of the improvement in the current account deficit and mobilization of about $34 billion under the swap facilities introduced by RBI, the rupee stabilized during the quarter and in fact, appreciated by 1.4% from INR62.78 per US dollar on September 30 to INR61.90 per US dollar on December 31, 2013.

In view of the same, the RBI concluded the normalization of the policy rate structure and reduced the gap between the repo and the MSF rates to 1%, with the MSF rate being reduced by 75 basis points and the repo rate being increased by 25 basis points during October.

As a result, short-term interest rates on market instruments like commercial papers and certificate of deposits eased by about 50 to 100 basis points during the quarter as compared to the peak rates seen in the previous quarter.

The yields on the 10-year government securities remained volatile through the quarter, due to high inflation and increase in repo rate. The yields increased from 8.76% at end September 2013 to a high of 9.1% at November 22, 2013 before ending at 8.83% at end December 2013

During the quarter, there was a net inflow of FII funds into the equity market of about $6.6 billion, compared to the net outflows of [$144 million] in the second quarter.

The benchmark BSE Sensex rose by 9.2% to 21,171 at the end December 2013 from 19,380 at end September 2013. However, during January market indicators have seen some volatility on account of global developments, as well as domestic policy actions.

Now coming to the trends in the banking sector, non-food credit growth moderated to about 15% year-on-year by end December 2013 from about 18% at end September 2013, reflecting continued weakness in economic activity under normalization of non-bank funding channels.

Growth in total deposits increased to about 16% at end December, compared to a growth of about 14% at end September 2013, driven by an increase in term deposit growth to about 17% at end December, reflecting mobilization of FCNR deposits by banks. Demand deposits increased by about 8% on a year-on-year basis at the end December.

Trends in asset quality for the banking sector continued to remain challenging with the outstanding corporate debt restructuring referral for the system, currently standing at about INR720 billion. There were several regulatory developments in recent months. Apart from the changes in deferred tax accounting for Special Reserve, which I will discuss subsequently, RBI issued draft guidelines and discussion papers on capital surcharges for domestically systemic important banks and countercyclical capital buffers, a draft framework for early recognition of financial distress in borrower companies and revitalizing distressed assets. The report on the Committee of Comprehensive Financial Services for Small Business and Low Income Households, and final guidance applicable from April 1, 2014 on additional provisioning and capital requirements for exposure to companies with unhedged foreign currency exposures. The impact of these developments on the banking sector's business and profitability would have to be assessed over a period of time.

I now move to the explanation of the change in tax accounting. Section 36(1)(viii) of the Income Tax Act permits reduction from the taxable profits of amounts transferred to Special Reserve. The deduction is up to 20% of the profits derived from long-term lending business for the tenures exceeding five years.

The Bank has been making transfers to Special Reserve annually. No deferred tax liability was created on this reserve, since only a drawdown of the reserves could reverse the tax benefit and these reserves are not intended to be drawn down at all. The Special Reserve was, however, considered net of tax for the capital adequacy computation as per RBI requirements.

Banks are now required to create a deferred tax liability on a prudent basis for amounts transferred to Special Reserve as per RBI guidelines issued on December 20, 2013. The deferred tax liability up to financial year 2013 has been permitted to be adjusted from the reserves, while from financial year 2014 onwards, the same has to be charged to the P&L account. The Bank has accordingly netted off INR14.19 billion, representing deferred tax liability for Special Reserve up to financial year 2013 from general reserves.

We have provided for deferred tax liability of INR2.15 billion for the nine-month period ended December 31, 2013 in the Q3 2014 financials. A quarterly charge would be made in the fourth quarter as well. There is no adverse impact on capital adequacy for the Bank, as Special Reserve was already being considered net of tax while computing the Tier 1 capital. There is also no impact on current tax. That is the cash tax to be paid by the Bank will continue to get the benefit of Section 36(1)(viii). However, the increase in deferred tax will result in an increase of about 2% on the effective tax rate in the P&L.

Let me now move to our performance during the quarter, including our progress on the pricing strategy. First, with respect to credit growth, the total advances of the Bank increased by 16% on a year-on-year basis, from INR2.87 trillion at December 31, 2012 to INR3.33 trillion at December 31, 2013. The growth in the domestic loan portfolio was 13.3% on a year-on-year basis. Growth in the retail portfolio continued to be strong, and improved to 22.3% on a year-on-year basis at December 31, 2013 compared to 19.6% at September 30, 2013.

Growth in the retail portfolio continues to be driven by secured products with the outstanding mortgage and auto loan portfolios growing by 23% and 35% respectively on a year-on-year basis at December 31, 2013. Commercial business loans declined by 17% on a year-on-year basis, reflecting both the slowdown in the segments as well as rundown of the bought-out portfolio in this segment. The unsecured credit card and personal loan portfolio at INR62.25 billion at December 31, 2013 continued to remain a small portion, about 1.9% of the overall loan book, though the growth rate is high due to the low base.

The Bank continues to adopt a calibrated approach to growth in the corporate and SME segments in view of the weak operating environment.

Growth in the domestic corporate portfolio moderated to 6.9% on a year-on-year basis at December 31, 2013 compared to 11% year-on-year growth at September 30, 2013. The SME portfolio declined by 5.5% on a year-on-year basis.

Net advances of the overseas branches increased by 10.3% on a year-on-year basis in US dollar terms, mainly due to lending against FCNR deposits which is classified under overseas branches during the quarter of about $1 billion. The net advances of the overseas branches increased by 23.9% on a year-on-year basis in rupee terms due to movement in the exchange rate. On a sequential basis, the growth was 9.7% in dollar terms and 8.3% in rupee terms.

Moving on now to the second C of CASA deposits; reflecting our strong retail franchise, we saw an addition of INR21.9 billion to our savings deposit in the third quarter. Current account deposits also increased by INR10.68 billion during the third quarter.

During the quarter, the Bank also raised an aggregate of about $2 billion of FCNR deposits, which reflected in the term deposit mobilization for the Bank. Even after including the FCNR deposits, I am happy to report that we maintained our period-end CASA ratio at 43.3% as of December 31, 2013, similar to the level at September. The average CASA ratio for the Bank was at 39.1% in Q3 compared to 40.3% in the previous quarter.

Now moving on to the third C on cost. For the third quarter, operating expenses, including DMA expenses was higher by 15.7% on a year-on-year basis. The increase in operating expenses was primarily due to an increase in non-employee expenses due to increase in the Bank's physical network and higher retail lending volumes. The employee expense was higher on a sequential basis as there was the benefit of lower valuation of retiral benefits in Q2 of 2014. The Bank's cost-to-income ratio was 37% in the third quarter of fiscal 2014.

Let me now move on to the fourth C on credit quality. During the third quarter, the Bank saw gross NPA addition of INR12.3 billion, primarily driven by slippages in the SME and mid-sized corporate loans. Deletions in the third quarter were INR3.56 billion. The Bank also wrote off INR5.04 billion of NPAs. The net NPA ratio as a result was 81 basis points at December 31, 2013 compared to 76 basis points at September 30, 2013.

During the third quarter, we restructured INR20.46 billion of loans. After taking into account deletions and the required specific provisioning, the net restructured loans for the Bank increased to INR86.02 billion at December 31, 2013 compared to INR68.26 billion at September 30, 2013. The CDR pipeline continues to remain elevated and the Bank currently has loans aggregating about INR30 billion referred to CDR.

Provisions for the third quarter were at INR6.95 billion as compared to INR3.69 billion in Q3 of 2013 and INR6.25 billion in Q2 of 2014. As a result, credit cost as a percentage of average advances was at 85 basis points on an annualized basis for the third quarter and for the nine-month period ended December 31, 2013, the credit cost as a percentage of average advances was at 83 basis points on an annualized basis. The provisioning coverage ratio on non-performing loans was 70% at December 31, 2013.

Now to the fifth C on customer centricity; the Bank continues to focus on enhancing customer service capability and leveraging on its increased branch network to cater to the customer base.

During the quarter, we added 81 branches and 117 ATMs to our network. With this, we have a branch network of 3,588 branches and 11,215 ATMs as of December 31, 2013.

The Bank also continues to strengthen its technology channels for increasing customer convenience. In one such initiative, the Bank has facilitated opening of savings account through its Tab Banking platform. The Bank's Facebook page continues to be appreciated by customers with about 2.7 million fans. ICICI Bank continues to have the largest fan base on Facebook among the Indian banks.

Having talked about the progress on 5Cs, let me move onto the key financial performance highlights for the quarter. The net interest income increased by 21.6% year-on-year from INR34.99 billion in Q3 of 2013 to INR42.55 billion in the third quarter of current fiscal. The net interest margin increased from 3.07% in Q3 of 2013 and 3.31% in the previous quarter to 3.32% in the third quarter. The domestic net interest margin was marginally higher at 3.67% compared to 3.65% in the previous quarter.

International margins were at 1.7% in the third quarter compared to 1.31% in the Q3 of the previous year and 1.8% in the second quarter of this financial year. The sequential decrease in international margins by 10 basis points was primarily on account of issue expenses related to the bond issuance of $750 million we made in the third quarter.

The total non-interest income increased by 26.5%, from INR22.15 billion in Q3 of 2013 to INR28.01 billion in Q3 of 2014.

Looking at the components of this non-interest income, the fee income grew by 12.8% from INR17.71 billion in Q3 of 2013 to INR19.97 billion in Q3 of 2014, driven by healthy growth in retail banking fees. The Bank's retail fees including remittances contribute to about 55% to 60% of the overall fees.

Other income was INR3.57 billion in Q3, of this fiscal compared to INR1.93 billion in Q3 of 2013 and INR2.51 billion in Q2 of 2014. The increase was primarily due to higher dividend from the subsidiaries. During the quarter, ICICI Life Insurance Company paid a special dividend to the shareholders based on an assessment of capital requirements and high solvency levels.

Accordingly, the Bank received an additional dividend of about INR1.2 billion from ICICI Life, compared to the previous quarter. ICICI Life has also announced a special dividend out of its Q3 of 2014 profit, which would accrue to the Bank in Q4 of current fiscal.

During the third quarter, treasury recorded a profit of INR4.47 billion compared to a profit of INR2.51 billion in Q3 of 2013 and a loss of INR0.79 billion in Q2 of 2014. The improvement in the treasury income, primarily on account of reversal of mark-to-market losses on fixed income portfolio as well as realized gains and mark-to-market reversals on the equity portfolio. I have already spoken about the trends in operating expenses and provisions while speaking about our 5C strategy.

As a result of this performance, the Bank's standalone profit before tax increased by 21.4% from INR30.84 billion in Q3 of 2013 to INR37.44 billion in Q3 of 2014. The tax charge for the Bank has increased on account of the deferred tax accounting impact that I'd mentioned earlier.

As a result that Bank's standalone profit after-tax increased by 12.5% from INR22.5 billion in Q3 of 2013 to INR25.32 billion in the third quarter of current fiscal. This translates into an annualized return on average assets of 1.75% for Q3 of 2014 compared to 1.7% for the previous quarter. For the nine months ended December 31, 2013, the profit after-tax increased by 18.9% to INR71.58 billion from INR60.21 billion for the nine months ended December 31, 2012.

Excluding the impact of DTL on Special Reserve, the growth in profit after-tax would have been higher at about 22% for both Q3 of 2014 and nine months on a year-on-year basis. The Bank's capital adequacy as per RBI's guidelines on Basel III norms continues to remain strong at 16.81% overall capital adequacy ratio, at 11.53% Tier 1 ratio as of December 31, 2013.

In line with the applicable guidelines, the Basel III capital ratios reported by the Bank for the quarter ended quarter December 31, 2013, do not include the profits for the nine-month period ended December 31, 2013. Including the profits for the nine-month period, the capital adequacy ratio for the Bank as per Basel III norms would have been 17.94% and the Tier 1 ratio would have been 12.66%.

I will now move on to the consolidated results. The profit after-tax for the Life Insurance Company in Q3 of 2014 was INR4.28 billion compared to INR3.97 billion in Q3 of 2013. The new business annualized premium equivalent for ICICI Life was INR8.68 billion in Q3 2014 compared to INR9.04 billion in Q3 of 2013. The retail weighted received premium for ICICI Life increased by 6.7% on a year-on-year basis during April to December 2013. While the IRDA numbers for the industry are not available, we understand that the Company has retained its market leadership among the private players.

Following the implementation of regulatory changes with respect to traditional products, ICIC Life has seen a change in its product mix, with unit linked products forming about 68% of the new business during the quarter compared to about 60% in the previous quarter. As a result of this change in business mix as well as regulatory changes in the charge structure for products, the new business margins for the Company were lower at 10.9% in Q3 of 2014. We will continue to assess how the business evolves and take steps to optimize margins and profits going forward.

The profit after-tax for the General Insurance Company in Q3 of 2014 was INR0.76 billion as compared to INR0.95 billion in Q3 of 2013 and INR1.56 billion in the second quarter. The profits were lower on a sequential basis, primarily on account of higher claims and provisions during the quarter. The Company maintained its leadership position in the private sector with overall market share of 9.6% during April to November 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 Q3 2014 was CAD10 million as compared to CAD8.3 million for Q3 2013.

The total assets for ICICI Bank Canada were CAD5.28 billion at December 31, 2013, compared to CAD5.27 billion at September 30, 2013. Loans and advances were CAD4.7 billion at December 31, 2013. The capital adequacy ratio for ICICI Bank Canada was healthy at 31.6% at December 31, 2013 compared to 31.2% at September 30, 2013.

ICICI Bank U.K.'s total assets were $4.37 billion at December 31, 2013, compared to $4.21 billion at September. Total loans increased from $2.61 billion at September 30, 2013 to $2.94 billion at December 31, 2013, primarily on account of lending against FCNR(B) deposit.

ICICI Bank U.K. is also focusing on selective 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 U.K. and Europe.

The profit after tax for ICICI Bank U.K. for Q3 of 2014 was $8.5 million compared to $5.4 million in Q3 2013. The capital adequacy ratio was 24.4% at December 31, 2013, compared to 26.1% at September 30, 2013.

Let me now talk about the overall consolidated profits. The consolidated profits for the Q3 of 2014 increased by 8.6% to INR28.72 billion compared to INR26.45 billion in Q3 of 2013. The annualized consolidated return on average equity based on the level of profits for Q3 2014 was 15%.

Our outlook for the full year fiscal 2014 continues to be broadly in line with what we had indicated on our call following the Q2 earnings. We continue to see strong core operating trends, continued momentum in retail lending, healthy deposit growth and the deposit mix, improved margins and fee income growth relative to the previous year and healthy cost ratios.

While the pace of restructuring of loans is expected to continue to increase in the coming quarter, these healthy core operating trends give us the ability to absorb the higher level of provisioning arising out of the credit cycle.

We do not expect the full-year provisioning as a percentage of average loans to exceed 90 basis points to 100 basis points as we mentioned earlier, our growth continues to be supported by capital position that is well above the current regulatory norms.

With these opening comments, my team and I will be happy to take your questions. Thank you.

(Operator Instructions) Mahrukh Adajania, Standard Chartered.

Hi. Just had a couple of questions, firstly on the restructuring pipeline. Is it all CDR? And if you see the last few years, then there has been a huge rush on CDR referrals in March. So is this INR30 billion likely to grow as we move ahead in the quarter? So that's my first question.

So the pipeline that we talked about, the INR30 billion is largely cases already referred to CDR. So, you are right, it's mostly CDR. The rush towards March, I'm not sure if it's more a function of the state of the economy and how things are working. It's very difficult to project any kind of seasonality on that.

In terms of these unhedged exposures, those guidelines, have you been able to estimate any cost impact or is it still too early?

No, it actually is quite onerous to do that computations. I guess, it will take us some time to kind of put that in place and that will be true for all the banks. It is effective from 1 of April, so there is some time that banks have to kind of put all the data requirements and the computations in place. So, I guess, over the next few weeks, we'll have a better sense of how those numbers would look.

And all these draft guidelines are forming repositories and having a very quick resolution to stress loans. Do you think that is going -- that could likely put pressure on the capital ratios even of large private banks? Because currently as a segment, private banks appear to be very well capitalized, so do you think that's likely to put any pressure on the capital ratios of private banks including yours in the next one year or so?

The way those guidelines have been -- the draft guidelines there, it will kind of ensure that banks look at early resolution of cases, so I am not sure that it will have direct impact on the capital itself of banks. So, yes, initially there may be operational things of -- in the current state of economy, there will be maybe a number of cases, which are 60 days plus overdue and you'll have to form that joint lending forum and all those things. So banks have given some feedback to RBI and our expectation is that these guidelines will come out pretty soon, and they will in the long run be beneficial for the system and may not have any immediate direct capital impact. Of course, there are other guidelines which are there, which will have in the medium term definitely capital implications for both private sector and PSU banks. But those other guidelines are more in medium term over the next, I would say, maybe two to three years.

The other question I wanted to ask is that in terms of slippages any lumpy account in the corporate sector or --?

It depends on the definition of lumpy, generally when we -- the additions as Kannan mentioned were on the corporate and SME side and they would be reasonably large-sized NPLs around that.

Mid-sized cases.

Sorry?

Mid-sized cases.

Mid-sized, okay. Okay, thank you.

Jatin Mamtani, Barclays.

Hi. Thanks for taking my question. I just had a couple of questions on the restructured loans this quarter. Just wanted to understand the chunkiness of this, so would you be able to share what would be the concentration or the share of the, let's say, the three largest loans or the four largest loans within the [INR20.46 crores] and maybe if you could talk about which sectors it belong to?

As Kannan mentioned, these are mid-sized corporates that have got into restructuring. So while we don't give any specific concentration on these exposures, but from your understanding perspective, these are mid-sized corporates which have got into restructuring and most of them are cases that have referred to CDR.

In the pipeline of INR3,000 crores, is it a similar composition or are there any chunky accounts there?

We have not separately talked about which cases and all. But you would have seen from the public announcements that would have happened by these companies that there are a couple of cases, which have got referred like which have been slightly on the higher side in terms of exposure. That's why the pipeline is at INR30 billion compared to the lower pipeline which we had earlier.

Understand, understand. That's very helpful. Than you.

(Operator Instructions) Suruchi Jain, Morningstar.

Hi. This is Suruchi Jain here. I had two questions. One is, on the fee income growth, it seems that you're doing something differently to get a really robust fee income growth. Could you tell us more about how that's growing so robustly?

The fee income growth of 13% has been largely coming from a robust growth on the retail assets and retail liability side. Several decisions that we have taken in the past, including ForEx and other transactions at the retail liability branches is helping. Of course, on our retail assets we've seen a growth over the last three, four quarters. On the corporate side, I would say that the transaction banking side of corporate, that's the commercial banking revenue streams are growing at around the same average growth level of fee income for the Bank as a whole.

And if you look at SME type of activities, there has been a decline in the fee income growth. That is the general color on the fee income. So as we said earlier, we expect this kind of trend to continue in the coming months as well. And I would broadly say that, given the kind of projects and the corporate lending credit environment and our approach to this segment, the fee income has got much more granularized to-date, that is the kind of general color I can give you on the fee income.

Okay. And just my second question on overall year NIM guidance and tax guidance, given the changes in taxation as well as the FCNR deposits coming into play, as your guidance -- what's your latest guidance?

Yes. So we had talked about our own expectations in terms of the net interest margin expansion which was 3.11% for the last year. We said for this financial year, we'll expand it by 20 basis points. That pretty much continues. So that is a number we would be looking at for this fiscal as a whole.

On the tax issue, as I mentioned earlier, this change in accounting on a prudent basis does not impact our tax outgo in terms of payment of tax to the government. So that is not the issue at all. The issue is that we have to on a prudent basis provide for DTL as if the tax benefit available to us is a temporary benefit. So to that extent what it will do is that about 2% additional impact it will have in the P&L account in terms of our effective tax rate. That is something we are budgeting for going forward. So our effective tax rate from a P&L perspective, you can look at more like a 30% number going forward compared to a lower number we would have seen in the past.

Okay. Thank you so much.

Manish Ostwal, KR Choksey.

My question one is provision side. We had reported INR695 crores of provision. So could you break this provision into [transitional] provision and [NP] provision and the provision on account of restructured [shares]?

So the breakup that we gave in every quarter is basically the provision on standard assets, that is the general provision that we made is about INR1 billion and the balance is against NPLs and restructured loans.

Okay. And secondly, in retail portfolio during the quarter, [have there] any buyout, which shows a higher growth in retail [or it's] original organic growth entirely?

It is organic growth actually, most of the buyouts that we do incrementally for priority sectors, anyway now happens more in the form of investment, so that shows up in the investment book in the form of PTC. The growth that you are seeing is all of it is organic.

And lastly, the fee income breakup could you just break this into corporate, retail? What broadly proportion of corporate and fee income -- the corporate and retail fee income?

The retail fees overall is slightly above 55% of total fee income, the balance is corporate.

Okay. Thank you so much.

Amit Premchandani, UTI Mutual Fund.

Thanks for the opportunity. If you look at the [fresh stressed] addition trajectory of ICICI, it has moved from INR12 billion to INR15 billion every quarter if you include slippage plus restructuring added every quarter. Till last quarter, it had moved to INR20 billion, now it is INR32 billion and you are saying that most of it is coming from mid corporate so the large corporate is still not started restructuring themselves. So just wanted to have your view on what will be your guidance on this trajectory moving fresh stressed addition of slippage plus restructuring?

As we have been saying that it is indeed quite difficult to have any specific guidance on the quantum of restructuring and NPLs in a particular period. What we have been giving is in terms of the cases that have got referred to CDR, which gives broadly a quite a fair indicator of the expectations of restructuring in the coming quarters. Of course that pipeline can increase if some other cases do come up in the interim, but that has been a reasonably good estimate of the restructuring in the coming quarter.

In terms of the overall numbers, as we have mentioned that the pipeline for Q4 is about INR30 billion, so that will mean that we will have a higher rate of addition to NPL and restructure in the Q4. But overall, in terms of the credit cost, we indeed mentioned during the previous quarter that we are seeing that as an addition to restructuring in particular and somewhat addition to NPLs, have been running higher than what we estimated at the beginning of the year. So that said, we had increased our guidance on the credit cost itself.

So I would suggest that if you go by the credit cost estimate, we had talked about that we don't expect it to cross about 90 basis points to 100 basis points we are comfortable with that estimate that we have given out. Yes, in the interim, in the next two, three quarters, I think it is reasonable to expect that the addition to restructured loans will relatively be on the higher side compared to the previous periods.

That previous period benchmarks be Q1 and Q2 of this quarter and Q3 of this year, sorry, or the last financial year?

This year itself you have seen that the numbers have gone up. We did about INR10 billion in Q2 and about INR20 billion in Q3, and Q4 will be -- INR30 billion is the pipeline that we have.

So that should be the run rate for the next two, three quarters, that is what you are trying to -- ?

As I said, it's very difficult for us to have a run rate on that number, because we don't have, for example, today a list of cases which will definitely [be going into] restructuring (multiple speakers). It's not there, so from what we see today, we are giving you the estimate of that INR30 billion which are referred to CDR.

Going forward, as I said, compared to a normalized run rate, will credit cost be higher on the corporate side in the next few quarters, that will be the case. And for us it is on an overall basis, it continues to get offset by the fact that on the retail side, we are seeing the credit quality to be extremely good. So, overall, the credit cost numbers should still be within overall comfort levels in terms of the contribution to the return on assets.

And it will also -- more in line with your assessment of what is the credit quality in the large corporate space because till now they have not yet hit the CDR. So how comfortable are you with the large corporate portfolio that you have?

In terms of large corporate, again, if you look at how would you define the large corporate, indeed in terms of the cases that have got referred to CDR, which you would be knowing by name, indeed there are some of the cases which are large corporates or large borrower groups which are there.

It's also reflected on the INR30 billion of --

Yes, so some of those larger cases are definitely there. In a few of them, we have somewhat lesser exposure, in some of them we have a higher exposure as well. So it's not that the large corporates have kind of completely been away from the restructuring in itself. In general, for some of the larger borrower groups that we normally talk about, we don't want to go name by name, but indeed in many of them our level of comfort would be relatively more than what maybe your comfort could be. That is possible. But as I said that in the restructuring pipeline and actually what we have done, in general, there would be some large cases as well.

And given the fact that [stress] addition will go up, any guidance on the coverage ratio, because you have given guidance of [1,900] basis point on credit cost, but coverage ratio has already hit 70%. I know that RBI has no requirement of 70% as of now, but internally what is your target that you will not let it go beyond or below this?

I think what does happen on the coverage ratio, which you will be seeing across all banks, whether public or private sector banks is that the incremental NPA provision requirement is indeed closer to maybe 15%, 20% or at most 25% if a case gets added to NPL. So by definition, when there are additions to NPLs, the coverage ratio does come off and with some lag that will again catch up. So it's not that we have any specific comfort level on a particular ratio. For us, the ratio has declined over the last few quarters like for most other banks. A part of the decline also has been because we have been writing off loans on a continuous basis over the last three or four quarters, about INR4 billion to INR5 billion, which itself takes away close to 1 percentage point of coverage ratio in every quarter.

So it's not that we have any minimum number in our mind or any threshold which is there. So we will make provisions as we believe are appropriate. So it's not that we also stick to the very minimum which is required. So we do indeed do somewhat more than that and that's why we are still at 70% despite the additions that we have seen this year.

Just on the FCNR front, maybe I missed it. How much money have you raised and how much money have you lent against it?

We raised about INR2 billion of FCNR(B) deposit and we had lent from our overseas branches just over [$1 billion] against these deposits.

So just to understand from my perspective, how does the NPV benefit of these FCNR loan change, because if you lend it and you are using your capitals for the ROE of that capital we use is going down because of the low-spread business. So how do you look at it raising FCNR without giving -- without lending and raising FCNR after lending?

So we'll just take it as a last question, because there are other people in the queue. So in terms of lending, which banks have done, it is against the FD itself. It's actually in that sense completely risk-free. So there is, in that sense, whatever margin you make on the loan, it actually has an extremely high ROE. There is no real capital which is required, because it's a loan against a deposit. So the way banks have looked at it is that if you look at the overall cost for raising the FCNR(B) deposit at the swap cost, which RBI was offering at 3.5% and with no SLR and CRR, it was coming out to be lower than the domestic term deposit cost. In addition, the benefit of PSL was there. So in terms of economics, it was pretty clear that it makes sense.

Sure. Thank you.

Thank you.

Manish Karwa, Deutsche Bank.

Hi. Just wanted to check, your Tier 1 capital has actually increased in this quarter compared to the previous quarter. What is the reason for that?

In terms of as -- in the Tier 1 capital we reduce the deferred tax asset from the overall Tier 1 capital to -- from the total capital to reach to the Tier 1 capital. So this quarter, the net deferred tax asset has come down for us by about INR11 billion or INR12 billion. That is because we have created the deferred tax liability on the Special Reserve. So to that extent, we have got a benefit on our Tier 1 capital for the quarter.

So you mean to say the deferred tax liability is set off against deferred tax assets?

Yes, the net deferred tax asset is reduced from the total capital to reach the Tier 1 capital.

But as you said, then this should not make any difference to your Tier 1, right, because incrementally if you create deferred tax liabilities, that impacts your Tier 1 capital?

It is a function of whether you have deferred tax assets in the books. So the deferred tax -- because we had a lot of deferred tax assets. So that is why we got the benefit of creation of this deferred tax liability. Otherwise you're right that --

What we said was we do not have any adverse impact on the capital adequacy ratio, because reduction was always a net of tax is what we mentioned.

Okay. So, incrementally now you do not have any deferred tax asset?

We still have some deferred tax asset which gets netted off from the total capital.

Okay. So incrementally when -- every quarter now you will be creating some deferred tax liability to the tune of like 2% of your tax rate?

Correct.

[That gets set off]?

Yes.

And just on the DTL thing that you will have a DTL on -- mainly on mortgages and infrastructure loan right?

Yes.

So as the book of your mortgages continue to grow, the proportion of DTL can be higher as we move forward?

Meaning, if you look at overall for the last few years, the numbers have kind of stabilized, not that the overall proportion is going up substantially. We also do a lot more of working capital compared to the longer-term lending that we were doing earlier. So I don't think that that those numbers will really increase from where we are.

Right. And just for my understanding, let's assume two years down the line you have a reasonably large deferred tax liability book, how can you use it for your capital? Can you use it actually?

No.

So that just becomes a provisioning line item or a current liability item for you?

Yes, it becomes a provision item. So of course, over time, because this is something which has just come up in the previous quarter. So as Kannan mentioned, as per statute, actually if you don't utilize the Special Reserve, it is not taxable at all, but given this ruling, I guess, banks will again kind of ask for some maybe changes in the tax rule itself, which may actually allow Special Reserve to be utilized after a long period of time or something of that sort. So we'll have to just evaluate what to do on this, but otherwise there is no cash flow impact which is there, it's only a notional deferred tax impact which is there.

Okay. And lastly how much commissions do you pay on a quarter on your retail loans as of now?

We don't disclose that --

Some rough indication? Is that the thing that is increasing your other expenses on a sequential basis sharply?

It would also have contributed to some increase there, but typically in the third quarter, we do have some higher expenses on, especially on advertisements and sales promotion. You also may have festive season, some expenses are indeed there. The sourcing cost would have gone up but that would not be the only or the major driver there.

Okay. Thanks, Rakesh.

Abhishek Kothari, Networth Stock Broking.

Thanks for taking my questions. Just wanted to know what's your overall NPL from the restructured portfolio?

It's about -- if you look at all the loans that we have restructured over the last few years, the slippage from that has been about 10% or so.

10%. And, sir, I missed this opening remark regarding NBP coming down, could you just explain that?

What we said was that the new business margins for the third quarter were lower at 10.9%, because of two reasons. One, the new product guidelines related to the non-linked product came into effect from October 1 and similar to the earlier guidelines of ULIP, have a bit reduced the charges and so on and so forth, which reduces the margins on those products. And second, because it is a transition phase to these new product structures, the proportions of ULIPs, which are in the current framework of regulation, in general, lower margin than the non-linked products. The proportion of ULIPs in the business has increased in this quarter, so it was about 60% last quarter, it's about 68% this quarter. Due to these two factors, the margins have some down to just below 11% from where they were a quarter ago. But we'll wait to see how this evolves based on -- as the regulations -- the companies get more time for adjust to the regulations, what is the kind of final stable product mix that we arrive at and that will kind of determine what the long-term margin trend will be.

Okay. That's it from my side. Thank you.

Anand Vasudevan, Franklin Templeton.

Hi. Good evening. We now have a clear visibility on the regulatory capital requirements over the next few years. So how do you assess your capital adequacy in this framework? So what I'd like to understand is what is your threshold comfort level for Tier 1 below which you'll want to raise fresh equity based on the new glide path?

Indeed there are now a set of draft and final guidelines which are in place. Most of those guidelines, we can kind of compute what the impact is. Some of them is still like migration to advanced approaches for credit, market and operational risk. I think that still the full clarity in terms of what the impact could be there, would work out over the next 12 or 18 months.

In terms of the minimum Tier 1, Anand, we also have been kind of discussing what that level should be. So it clearly seems that in the, say, six or seven years back, the minimum Tier 1 was more like 7.5% or 8% below which if you went, you would raise capital. It does look like right now that number should be closer to 10% over the next two years. That is the threshold that will become what the market expects. So we have kind of not yet -- because given the level where we are, we were not close to those levels yet. So we are still kind of finalizing in our mind as to what level should trigger us to look at raising capital. But it could be in the region of 9.5%, 10% depending on how investors look at this. So given our current capital level, clearly over the next couple of years, we would be comfortable with the capital adequacy, Tier 1 ratio in specific. Beyond that also, depending on how things go, how the migration path is and what are the expectations on capital, whether we can do some hybrid beyond that. So we'll have to see how it works and whether we have any monetization of the subsidiaries or repatriation from overseas subsidiaries. I guess two years for sure, beyond that we will see how things [plan out].

Okay. My second question is on asset quality. So you've given your guidance for the year. But do you anticipate any additional negative impact on portfolio quality looking into FY15 from the further clamp down on government expenditure in the immediate quarter?

Anand, as we were saying in response to an earlier question that given the sharp slowdown that the overall economy has seen along with other challenges, clearly on the corporate side that impact has been showing [over the] last few quarters. And while we believe that on a macro front, maybe things have kind of bottomed out and we should see slow recovery from here, but just the impact on the corporate SME portfolio, there is some lag which is there. So over the next two, three quarters there would still be some incremental pain, which is there for banks.

Okay. Thank you.

Rajeev Varma, Bank of America Merrill Lynch.

Hi, Rakesh. (inaudible) Just one question I wanted to know on the repatriation of capital, any color on that because you've somewhere mentioned, I just was focusing on that?

Yes, the discussions with the regulators continue. We do believe that some kind of -- some amount of dividend from the overseas subsidiaries and some repatriation can happen over a period of time. We continue to believe that the capital adequacy ratios, which I mentioned in the opening remarks, have been much, much higher than the regulatory requirements in those geographies. So our approach would be a calibrated growth and the continued discussions with the regulators for both capital rationalization, as well as for getting some dividend approvals. The only thing is that since there is a regulatory approvals involved, we won't be able to exactly determine the timing and the amount, but all the efforts will be there from our side. That is very much on as we speak.

Thanks. And just one other thing, in terms of the loan mix, you've highlighted that most of your slippages have been coming from the SME and the mid-corporate. Do you have some -- SME is about 4.5% as you have disclosed, do you have some idea how much would be the mid-corporate constitute of your loan mix?

Loan mix, we've not broken it out into mid and large corporates. The domestic corporates would be about 27% of our -- sorry, 31% of our --

Right, of your total loans.

That is something we have not broken it down. And we have in the past talked about what is our total infrastructure exposure, which was about 12% or so. So those are the only two numbers we have (inaudible).

All right. Fair enough. Okay, thanks a lot.

Saikiran Pulavarthi, Espirito Santo.

Hi. Just a quick comment on the cost. So, I just wanted to understand actually the cost growth have been much lower than the income growth for quite some time, almost like seven to eight quarters. Do you think this trend to continue going forward, or is there any scope for further improvements here?

Our endeavor would be to keep the cost-to-income ratio below 40%. That is the kind of medium-term goal where we would work towards. So, I mean, all the steps we've taken, including the technology initiatives are really meant towards achieving the operating productivity. So that will continue. So you could take it as below 30% or something which we want to -- sorry, below 40% is what we want to target as a cost-to-income ratio.

Understand the cost to income but if I look at absolute basis the costs -- employee costs have been trending much smaller that too when you're growing your retail book, which is a little bit counterintuitive, just want to understand your thoughts there?

In terms of -- if you look at the general environment in terms of the job growth in the economy or the kind of overall economic growth they are not, the cost -- the wage or other cost pressures associated with the 2007 type of an environment is not there today. So to that extent, we are able to plan, we are able to determine the salary increases and so on. So to that extent given the overall economic condition, the cost pressures are also that much muted, so that is also reflecting somewhere on the overall growth of the employee expenses in our book.

And as we have mentioned in the previous quarter, if you look at the previous quarter and maybe nine months in aggregate as well, there would be some benefit that we'd have got this year, especially when compared to last year, because the interest rates have gone up and the provisions on retirals would be lower this year compared to the last year. So that would have given some benefit on the employee expenses as well.

Okay. And last question from my side, if you look at your vintages on the SME book or the retail book, how does it see versus last cycle? Do you think individual vintages have peaked out or what is the sense over there?

On which portfolio?

SME and retail?

Retail, actually the performance that we're seeing based on the vintage [currency] is quite good and we believe that there really is no worsening in trends that we have seen in any of those products. We did see some increase in delays in payments on the commercial vehicle portfolio, which we talked about the last quarter. But even in terms of that portfolio, NPL additions have not really been significant. So retail portfolio, we are extremely comfortable.

SME, we have been talking about that for the last five or six quarters and the stress has continued on that portfolio and we have seen addition to NPLs and restructure coming in from that portfolio. Incrementally, of course, we have been extremely cautious. We have seen that our portfolio actually has come off now -- actually declined in the most recent quarter. So, hopefully, now it should pretty much on the SME portfolio, in terms of the stress thing should be kind of peeking out.

I think if you look at the growth numbers of -- relative growth numbers of each of these portfolios, that pretty much reflects our approach to this lending and our estimate of credit stress in each of these portfolios. Just to illustrate while we are very happy to overall grow the retail book and within that retail secured loan, we have brought down the growth of commercial vehicles by 17% on a year-on-year basis. If you look at the SME, again, 5.5% decline has been there on a year-on-year basis. As a result, SMEs just account for about 4.3% of our overall loan growth. So our relative growth and the comfort we have on passenger cars and mortgages reflect in the strong growth we have seen in retail secured book, somewhat of a discomfort we have on the CV portfolio and also the demand for CV itself going down reflects our CV loan book degrowing by (technical difficulty). And SME, we have consistently said that last few quarters we have seen slippages and as a result, we have brought down the book systematically from the peak level of about 7.5% to 4.3% currently. So I would say that, our actions is after reflection on the relative credit quality of these segments.

Great. That's useful. Thank you.

Bajrang Bafna, Sunidhi Securities.

Thanks for the opportunity. We've seen lot of CCI clearances over -- in last three or four months. Could you provide some sense that have you seen some sort of ground level activity in terms of the corporates coming to you and asking for loans in the coming period? Some sense on that.

I think the CCI clearances are mainly to do with the existing project that are stuck or where there is some approval pending. So I think those will help in clearing out the issues in existing projects, so that they can start -- get completed and start generating cash flows, but I think that they are not really creating new loan demand in that sense.

Okay. And one sense on the -- whatever guidance that you are giving on the restructuring side is purely based on CDR cases. Are we seeing some sort of stress on the bilateral side also in coming quarters?

Look, just in terms of guidance, what we have said is that currently the pipeline of -- our pipeline of cases that have been referred to CDR is about INR30 billion and there could be additions to that. And I guess that even last quarter we would have had some bilaterals, but largely the cases being restructured are cases referred to CDR.

But bilateral side we are not seeing much of the pain as of now?

No, the pain is there in the corporate sector, now whether it's reflected in a -- it depends on the number of lenders and the size of each lender, whether it happens through a bilateral or a CDR is not that relevant.

Okay. Thank you.

Alpesh Mehta, Motilal Oswal Securities.

Thanks for the opportunity. First of all, what is our outstanding provisions on the restructured loans that we have done so far?

It's about slightly below INR10 million.

And while reporting numbers do we net of this INR10 million while reporting or it is gross of that amount?

It is net.

We write -- it is net restructured.

Net restructured outstanding is net of this.

So net of -- so our gross number would be roughly INR96 billion or so?

Yes, that's correct.

Okay. Secondly, in the retail portfolio, the others category has grown on a YoY basis even on a sequential basis quite sharply. Is it to do with the agri-related lending (multiple speakers).

That's primarily the rural products.

Okay. And for the housing loan portfolio, what is the lag proportion within the housing loans?

We have 20%, less than 20%.

Okay. And lastly, in this quarter, our ICICI Home Finance book has also grown, so incrementally are we booking loans in the HFC or it's still happening through Bank?

It's largely been happening through the bank, the HFC also does some business on [its side].

Okay. Thanks a lot.

Surendra Shetty, UBS.

Hi. Thanks for taking my question. I would like to understand are there any funding plans through USD bond issuance in the near future?

No, we just concluded on fund raising in the third quarter and we do look at it based on the client demand for foreign currency funds and the market conditions that are prevailing at any point of time. We have no immediate plan as such.

Okay. Thank you.

[Puneet Maheshwari, ICRA Limited].

Thank you for taking my question. Sir, if you can share what is average cost of FCNR deposit mobilized under RBI's window?

I don't think we have -- I don't have that number separately, but that was a mandated rate which was there.

Okay. Thank you.

LIBOR plus 400.

Adarsh B, Prabhudas Lilladher.

Hi. My question was on the structuring that we did 20 and the 30 pipeline, I think I believe at least media reports indicate that there is a lot of construction companies, probably some shipbuilding as well and the nature of the business also requires a lot of non-fund based exposure to these companies. So I just wanted to understand, when we give the pipeline or what we've restructured, what is the associated risk or once these non-fund based limits crystallize, does this get added to the restructured loans, if you can kind of throw some light on that?

If it gets converted into a funded exposure, it gets crystallized and included in the restructure.

Any kind of quantification on -- it seems there are a lot of these entities that have got reported or concluded have a lot of non-fund based limits outstanding, would it be possible to kind of indicate as to versus the INR50 billion, how much of non-fund based exposure still is there, which could get crystallized over the next one to two years?

See whatever the -- it is not that it is going to get crystallized over the next one to two years to the extent that there are sort of evolvements or invocations up to the point of restructuring, those also get factored into the restructuring. Thereafter, as long as the Company is a going concern and performs its obligation the evolvements normally should not be there or should not be material.

The idea of CDR is also to put in a structure so that (multiple speakers) company functions, so that performance guarantees are not invoked at all. I mean, that is where CDR kind of mechanism is helpful in making sure that Company does the performance activity while financial aspects are being restructured. So that such evolvement of performance guarantees does not take place at all. That is being the endeavor of the lenders.

And would it will safe that you will have a reasonable large exposures on the non-fund base to some of the four, five large restructuring that have been done or are in the pipeline?

That has always been in there. So in the construction sector for instance, restructurings that we would have done two years ago or one-and-a-half years ago, also wouldn't had a large non-fund (inaudible). That has not led to a bloating up of the outstanding restructured assets if you look at the trend of restructured assets.

Understand. That's about it. Thanks.

Thank you. Participants, that was your last question. I now hand the floor back to Mr. N. S. Kannan for closing comments. Thank you and over to you, sir.

Yes. Thank you again for joining this call and any further questions, please contact us, Rakesh and I are available for that. Thank you. Bye.

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