ICICI Bank Ltd (IBN) 2018 Q2 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the ICICI Bank Q2 FY '18 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Ms. Chanda Kochhar, Managing Director and CEO of ICICI Bank. Thank you, and over to you, ma'am.

Thank you, and good evening to all of you. Our board has approved the financial results for the quarter ended September 30, 2017. We continue to make good progress on the strategic priorities that we had outlined in our 4x4 Agenda, which basically covers [priorities] around our portfolio quality and around enhancing franchise.

Coming specifically to this quarter, a few things that I would like to highlight is that, first, we continue to maintain our focused approach to growth. So our domestic loan portfolio grew by 12.8% year-on-year basis. Within that, the retail portfolio grew by 18.6% year-on-year basis, and the growth in retail portfolio was strong across all the retail products.

During this Q2 2018, we also saw an uptick in the domestic corporate loan growth. So if we exclude the net NPAs, restructured loans and loans in the drill-down list, then the growth in the domestic corporate portfolio was actually 14%. Not just that, about 90% of the disbursements in the domestic corporate portfolio in H1 2018 were to corporate rated A- and above.

The net growth also came in the SME portfolio, which grew by about 6%. But as we saw the growth on all these portfolios, we also saw some reduction in some parts of our balance sheet minus the net NPAs, restructured loans and the loans in the drill-down list, which declined by 30.9% year-on-year basis.

And secondly, the loan portfolio in overseas branches declined by 21.6% on year-on-year basis. So therefore, the overall loan growth was 6.3%, and the overall domestic loan growth was 12.8%.

Coming to our funding profile. The funding profile remains healthy because the savings account deposits increased 21.5% year-on-year and current account deposits increased 17.2% year-on-year. The outstanding CASA ratio on September 30, 2017, was 49.5%.

Talking about the profitability, the net interest margin was at 3.27%, which was at a similar level as Q1 of 2018. And compared to Q2 of 2017, it was higher by 14 basis points.

Talking about asset quality, the gross additions to NPAs continue to decline, and they were INR 46.74 billion in Q2 2018 compared to INR 49.76 billion in Q1 of 2018 and, of course, INR 80.29 billion in Q2 of the previous year.

The net NPAs declined during the quarter in absolute terms from INR 253.06 billion on June 30 to INR 241.30 billion on September 30, 2017. The net NPA ratio also declined from 4.86% to 4.43%. There was also a sequential increase of 410 basis points in the provision cover ratio on the nonperforming loans to 59.3%, including the cumulative technical and prudential write-offs, which has further strengthened our balance sheet.

We are also happy to say that we made significant recoveries from nonperforming loans during this quarter. So the recoveries and upgrades from NPAs aggregated INR 10.29 billion in Q2 of 2018. The bank's capital position continues to be strong, with Tier 1 capital adequacy ratio of 14.85% on September 30, 2017, including profits of -- including the profits for H1 of 2018.

We also continue to be at the forefront of offering technology-enabled services to our customers, so the debit and the credit card transactions have continued to grow at a healthy rate. The number of debit card transactions at the POS terminals increased 64% year-on-year basis, and the number of credit card transactions increased 40% year-on-year basis. The number of mobile banking transactions increased 57% year-on-year. Over 5 million of UPI Virtual Payment Addresses have been created using the bank's mobile platform till September 30, 2017.

As regards artificial intelligence, the bank's AI-powered chatbot, iPal, now handles about 1 million queries or chats monthly on both the website and the mobile app and achieved nearly 90% resolution. And these services are around simple questions on financial transactions or helping customers to discover new features around products and services.

Coming to our subsidiaries, I think the most important point is that during Q2 of 2018, we saw the first IPO from a general insurance company in India, and this was by ICICI Lombard General Insurance Company. The transaction valued ICICI General at INR 300 billion, and its market capitalization on October 26, 2017 was around INR 311 billion.

The bank continues to own 55.9% shareholding in ICICI General. And in a way, this transaction again demonstrates the significant value that the group has created in our nonbanking subsidiaries.

With this, I will hand over the call to Kannan.

Good evening to all of you. I will first talk about our performance on growth and credit quality. I'll then talk about the P&L details, subsidiaries and, finally, capital.

First, on growth. The domestic loan growth was 12.8% year-on-year as of September 30, 2017. This has been driven by strong growth in the retail business. Within the retail portfolio, the mortgage and auto loan portfolios grew by 17% and 15% year-on-year, respectively.

Growth in the business banking and rural lending segments was 26% and 16% year-on-year. Commercial vehicles and equipment loans grew by 14% year-on-year. The unsecured credit card and personal loan portfolio grew by 39% year-on-year off, of course, a relatively small base to INR 249.55 billion, and they constituted about 5.2% of the overall loan book as of September 30. We continue to grow the unsecured credit card and personal loan portfolio, primarily driven by a focus on cross-sell to our existing customers. The SME portfolio constituted 4.3% of the total loans as of September 30, 2017.

The net advances of the overseas branches decreased by 21.6% year-on-year in rupee terms and 20% year-on-year in U.S. dollar terms as of September 30, 2017, reflecting our overall approach to corporate lending as well as the repayment of FCNR (B) deposit-linked loans in fiscal of 2017. The international loan portfolio has now reduced to 14.9% of our total loans.

Coming to the funding side, the total deposits grew by 11% year-on-year to INR 4.99 trillion as of September 30, 2017. On a daily average basis, current and savings account deposits grew by 24.2% year-on-year. On a daily average basis, the CASA ratio was 45.2% in the second quarter.

Moving on to credit quality. Gross NPA additions were INR 46.74 billion in Q2 of 2018. The retail portfolio had gross NPA additions of INR 6.6 billion in the second quarter, compared to INR 8.79 billion in the previous quarter. Additions to NPAs from restructured loans, loans to companies internally rated below investment grade in key sectors on our drill-down list, devolvement of non-fund-based exposure and increase in outstanding due to exchange rate movement related to accounts classified as nonperforming in the last few years and loans to a central PSU-owned power company, in respect of which we have been disclosing the net exposure as a footnote to the drill-down list disclosure in the aggregate were INR 17.27 billion.

The exposure to the central PSU-owned power company is under resolution through a demerger process, which we expect will conclude in the coming months. As we await the demerger order, that account has been classified as nonperforming based on payment record and application of relevant RBI guidelines. The balance addition of INR 22.87 billion to NPAs includes 1 large exposure in the oil and gas sector.

The net standard restructured loans were at INR 20.29 billion, about 0.4% of net advances as of September 30, 2017, compared to INR 23.70 billion as of June 30, 2017. The bank has been reporting a further drill-down of its portfolio in the key sectors. Our approach to the drill-down list has been explained in Slide 33 of the investor presentation.

The aggregate fund-based limits and non-fund-based outstanding to companies that were internally rated below investment grade in the key sectors and the promoter entities decreased from INR 203.58 billion as of June 30, 2017, to INR 195.90 billion as of September 30, 2017.

On Slide 35 of the presentation, we have provided the movement in these exposures between June and September. There was a net decrease in exposure of INR 9.6 billion. This decrease was mainly due to a reduction in exposure to a promoter entity. There were rating downgrades of exposures aggregating to INR 4.48 billion to below investment grade during the quarter. The downgrades were largely from the power and iron and steel sectors. Of this, exposure to 1 account has reduced by INR 0.98 billion subsequent to September 30, 2017. And there are also reduction of INR 2.56 billion due to classification of certain borrowers as nonperforming.

The above amount of INR 195.90 billion includes non-fund-based outstanding in respect of accounts in this portfolio where the fund-based outstanding has been classified as nonperforming. Apart from this, the non-fund-based outstanding to borrowers classified as NPA was INR 21.19 billion as of September 30, 2017, compared to INR 21.35 billion as of June. The aggregate non-fund-based outstanding to companies in the restructured portfolio was INR 4.15 billion as of September compared to INR 5.15 billion as of June.

On Slide 27 of our presentation, we have provided the details of loans under various RBI resolution schemes as of September 30, 2017. And we have also indicated the amounts under each scheme, which are part of the drill-down list or the restructured portfolio. Comparative numbers as of June 30, 2017, have been provided on the linked Slide #61.

I would like to mention that of the outstanding performing loans of about INR 26 billion, where a change in management outside of SDR scheme is being implemented, loans of about INR 10 billion are a part of the drill-down exposure, and the balance, about INR 17 billion, largely represents 1 borrower in the sugar industry, where a binding agreement for change in management has been entered into, and we expect this to be resolved in the coming months.

I would also like to highlight the overlap of about INR 17 billion noted on Slide 27 between the loans for which the refinancing under 5/25 scheme has been implemented and loans under SDR or change in management outside of SDR.

At September 30, 2017, excluding NPAs, restructured loans, drill-down list, and the loans under RBI resolution schemes, the maximum single-party BB and below related exposure was about INR 6 billion.

During the first quarter of 2018, RBI had advised banks to initiate insolvency resolution process in respect of 12 accounts under the provisions of the Insolvency and Bankruptcy Code, 2016 and also required banks to make higher provisions for these accounts during the year. The bank was required to make an additional provision of INR 6.51 billion over the 3 quarters as advised by RBI, in addition to the provisions to be made as per the existing RBI guidelines. The entire amount of INR 6.51 billion was provided in the second quarter. At September 30, 2017, the bank held provisions of INR 35.42 billion on these loans, which amounted to a 56.5% provision coverage in respect of outstanding loans to these borrowers.

During the second quarter, RBI directed banks to initiate insolvency resolution process for additional accounts under the provisions of IBC by December 31, 2017, if a resolution plan, where the residual debt is not rated -- not investment grade by 2 external rating agencies, is not implemented by December 13, 2017. At September 30, 2017, the bank had outstanding loans and non-fund-based facilities to 18 borrowers amounting to INR 104.76 billion and INR 13.84 billion, respectively. 98.7% of the loans amounting to INR 103.37 billion were to borrowers already classified as nonperforming as of September 30, 2017. The bank at September 30, 2017, holds provisions of INR 32.99 billion against these outstanding loans, which amounted to 31.5% provision coverage in respect of outstanding loans to these borrowers, reflecting that these are more recent additions to NPA. As we have stated in our previous earning calls, we continue to expect the additions to gross NPA in FY '18 to be significantly lower than FY '17.

Moving on to the P&L details. The domestic net interest margin was at 3.57% in the second quarter of 2018 compared to 3.62% in the first quarter of 2018 and 3.41% in this -- for the second quarter of 2017. International margins were at 0.95% in the second quarter of 2018 compared to 0.73% in the first quarter of 2018 and 1.65% in the second quarter of 2017.

There was interest on income tax refund of INR 0.79 billion in the second quarter of 2018 compared to INR 1.77 billion in the first quarter of 2018 and INR 1.11 billion in the second quarter of 2017. Margins in the second quarter of 2018 were positively impacted by significant interest collection from nonperforming and other nonaccrual accounts.

Noninterest income for the quarter included gains of INR 20.12 billion relating to sale of shares of ICICI General in the IPO and dividend income of INR 2.76 billion from ICICI Life. Noninterest income in the second quarter of 2017 had included gains of INR 56.82 billion relating to sale of shares of ICICI Life.

Moving on to the other components of noninterest income. Fee income grew by 9.1% year-on-year in the second quarter of 2018, with retail fee income growth of 13.1% year-on-year. Growth in retail fees was driven by lending-linked fees, third-party fees as well as credit card fees. Retail fees constituted 70% of the overall fees in the second quarter of 2018.

Treasury recorded a profit of INR 21.93 billion in second quarter of 2018 compared to INR 64.12 billion in the corresponding quarter last year. Other income was INR 4.23 billion in the second quarter of 2018 compared to the INR 3.52 billion in the second quarter of last year. On costs, the bank's cost-to-income ratio was at 35.9% in the second quarter of 2018. Operating expenses increased by 4.6% year-on-year. The bank had 83,058 employees as of September 30, 2017.

The bank's stand-alone profit before provisions and tax, excluding gain on sale of shares in the insurance subsidiaries, was INR 49.74 billion in the second quarter of 2018 compared to INR 51.84 billion in the preceding quarter and INR 49.54 billion in the corresponding quarter of last year.

Moving on to provisions. There was INR 45.03 billion in the second quarter of 2018 compared to INR 26.09 billion in the preceding quarter. There was a sequential increase of 410 basis points in the provision coverage ratio on nonperforming loans to 59.3%, including cumulative technical and prudential write-offs, further strengthening the balance sheet.

The bank's stand-alone profit before tax was INR 24.83 billion in the second quarter of 2018 compared to INR 25.75 billion in the preceding quarter and INR 35.53 billion in the corresponding quarter last year. The bank's stand-alone profit after tax was INR 20.58 billion in the second quarter of 2018 compared to INR 20.49 billion in the preceding quarter and INR 31.02 billion in the corresponding quarter last year.

Moving on to the subsidiaries. The profit after tax for ICICI Life for the second quarter of 2018 was INR 4.21 billion compared to INR 4.19 billion in the second quarter of last year. The new business margin has been continuously improving from 8% in financial year 2016 to 10.1% in fiscal 2017 and further to 11.7% in the first half of the current financial year.

In H1 of 2018, the company retained its market leadership among the private players based on retail weighted received premium, with an overall market share of 13.7% and a private sector market share of 24.6% in H1 of 2018. Our embedded value based on Indian embedded value methodology was INR 172.1 billion as of September 30 compared to INR 161.84 billion as of March.

The profit after tax of ICICI General increased by 19.3% from INR 1.71 billion in the second quarter of 2017 to INR 2.04 billion in the second quarter of the current financial year. The gross written premium of ICICI General grew by 17.5% on a year-on-year basis to INR 32.34 billion in the second quarter. The company continues to retain its market leadership among the private sector players and had an overall market share of about 8.9% in the first half.

The profit after tax of ICICI AMC increased by 20% year-on-year to INR 1.56 billion in the second quarter. With the average assets under management of about INR 2.8 trillion for the quarter, ICICI AMC continues to be the largest mutual fund in India.

The profit after tax of ICICI Securities increased by 32.3% year-on-year to INR 1.31 billion in the second quarter of 2018 compared to INR 0.99 billion in second quarter of 2017. The bank's total equity investments in ICICI Bank U.K. and ICICI Bank Canada has reduced from 11% of the net worth as of March 2010 to 4% as of September 2017.

ICICI Bank Canada had a profit after tax of CAD 12.8 million in the second quarter of 2018 compared to a loss of CAD 5.4 million in the last quarter of -- sorry, in the second quarter of the last year. ICICI Bank U.K. had a profit after tax of USD 2.4 million in Q2 of 2018 compared to USD 2.3 million in Q2 of 2017.

The consolidated profit after tax was INR 20.71 billion in Q2 of 2018 compared to INR 29.79 billion in corresponding quarter last year and INR 26.05 billion in the preceding quarter.

Now moving on to capital. The bank had a Tier 1 capital adequacy ratio of 14.85% and total stand-alone capital adequacy ratio of 17.89%, including profits for the half year of current fiscal. The bank's consolidated Tier 1 capital adequacy ratio and the total consolidated capital adequacy ratio, including the profit for H1 of 2018, were 14.67% and 17.5%, respectively. The capital ratios are significantly higher than the regulatory requirements.

So finally to sum up, during the second quarter of the current financial year, the bank has continued to unlock value in the subsidiaries, progressed on resolution recovery in the corporate segment, sustained growth in retail loans, maintained a healthy funding mix, continued to focus on selective lending opportunities and maintained focus on cost efficiency and capital efficiency. The bank's pre-provisioning earnings, capital position and value created in the subsidiaries give the bank the ability to absorb the impact of challenges in the operating and recovery environment for the corporate business while, at the same time, driving growth in identified areas of opportunity.

We'll now be happy to take your questions. Thank you.

(Operator Instructions) First question is from the line of Mahrukh Adajania from IDFC Securities.

(Multiple speakers) audit, the report of which will come out next quarter -- I mean, this quarter. There are a lot of means looking around for other banks whose audit is complete. So based on that, would there be any guidance on what would be the size of divulgence in the next quarter? Because that's one key figure that everyone is checking.

Yes. Mahrukh, we said earlier also that the final process of RBI supervisory review is not complete. So we await the final report. And in -- during that period, it's not appropriate for us to talk about any specific cases or any other bank's specific issues.

Okay. And just in terms of the watch list, of course you've clarified what slipped outside the watch list and there are details in the -- there are good enough details in the presentation. But over the last 2 quarters, the slippage from the watch list is low. So how do we view the watch list going ahead? And in that, do you expect -- so this question is not about slippages outside the watch list, this question is focused on the watch list. And has the asset quality on the watch list stabilized now? Or do you expect the slippage ratio from the watch list to be lower now than what you had expected, say, 5 months ago or 6 months ago?

Well, it's a drill-down list, but I'll tell Kannan to -- or Rakesh, yes.

Thank you, Mahrukh. In terms of the drill-down list that we have given across the sectors, one of the things is that indeed, some of those loans are under various RBI segmentation schemes. That is either an SDR is underway or a change in management outside SDR. So those things are there, and that is something where a differentiation is there. So in terms of a specific sector like steel, for example, indeed, the performance of the company has generally been improving over the last couple of years. But other sectors there clearly is stress, and we'll have to see how the classification moves over the coming quarters from the drill-down list.

Okay. And just in terms of margins, the margins have turned out to be better than what most people expected. How do you view margins going ahead? So would you be revising your guidance for the full year now? Or how do we view it?

In terms of -- we had said that we -- our margin should be more than 3% for the year. So clearly, the first half we have been at 3.27%. So for the year, we will definitely end up higher than the initial estimate that we had given. For the second half of the year, we would expect the margins to be above 3%. So for the full year, it will be an average of the 3.27% and what we see in the second half of the year. There has been some benefit that we got from the reduction in the savings deposit rate of 50 basis points. Partly, it came in the September quarter and part of it will come in the coming quarter. Kannan talked about some of the benefits that we got from the interest on the income tax refund in Q1 and Q2 as well.

And as I mentioned, we also had a decent collection from the nonaccrual loans during the second quarter.

Next question is from the line of Kunal Shah from Edelweiss Securities.

So particularly with respect to the RBI's second list and the provisioning which we are covering today, so the names are out. And looking at the assessment of what could be the sustainable debt in, say, and in exposure of '18 borrowers, when do we think of, say, providing that? It sounds like we'll be waiting for the admission and to the final resolution under NCLT or maybe till December. So how would be the overall provisioning on almost like INR 10,000-odd crores?

Yes. As I mentioned in my remarks, we do have a provision cover of about 31.5% currently. And the time has been given till the December 13 to work out a resolution plan. So we are working on that resolution plan, and failing this, we'll have to refer to NCLT by December 31, and the provisions will have to be taken before March 31. So we will continue to work on these cases and see how it develops.

Okay. So in terms of this...

And also in the meanwhile, in some of the cases, depending on the budgeting, normally I think provisions also will happen.

Yes. So if it gets referred to NCLT and given that that will be 180-day deadlines, so would it get pushed to the next fiscal in terms of the further provisioning? Or it will have to be taken prior to the March in this particular period?

No, RBI guidelines are very clear that, that 50% provisioning will have to be taken in this financial year.

Even on the second list?

Even on the second list. So that is quite clear, that the resolution process is a separate one, and that will take 180 to 270 days depending on how the -- how will the progress (inaudible) NCLT.

Okay. And in terms of the expression of interest which are coming for, say, first 12 cases, what is our assessment in terms of maybe the fair value which we would have estimated for a particular entity and now the expression of interest and the supply of maybe the assets which will be available? Is that a huge scope of bid down under the NCLT regime for this and the recoverability could be lower?

Well, this -- as we have said earlier also, that the steel companies in the first list, they have been showing a good EBITDA and the industry prospects are much better today. So we do believe that now that there could be a good amount of sustainable debt in that portfolio. So if you really remember earlier when we discussed about some of these assets, we said that 50%-plus debt toll have been sustainable even under the S4A process. So things have stabilized there. So in the operating plans, we are very confident of getting a decent amount of sustainable debt. So I think that outlook even now continues. Things have only gotten better from there.

But apart from steel, maybe the other 7 maybe EPC and also, I think, the -- given the underlying assets are not much, so they're...

Right. It depends on a case by case. We'll have to really look at it. So there's -- as I said, we have increased the provisioning cover by taking the entire case up front in this quarter itself. So that will really help us in terms of having a good provision coverage ratio in respect of those debts also.

Okay. And lastly, in terms of -- for the MCLR, how much has transitioned to MCL -- MCLR from 56% in the last quarter?

So it is 62% of domestic floating rate loans are now linked to MCLR.

62% as compared to 56% last quarter. Okay. Yes.

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

I just want to shift gears and talk a little bit about the retail side of things. So the progress on CASA is obviously quite impressive. I was just wondering, when I look at the asset side of the book, it looks like it's a very conservatively constructed book. I was just wondering, given the CASA you've gathered, given the scale and franchise you have and given the investments you're making in technology, is there room to do more in terms of the kinds of things some of your peers are doing with deeper penetration on unsecured loans, on credit cards, on really the high-yielding portion of book? Because plain vanilla retail is already intensely competitive and may even get more so depending on how PFC were to react to the recapitalization. And in a similar vein, the fee income growth has been fairly sluggish. So I was hoping to get your perspective on what the retail strategy is likely to look like over the next few years. Is that a scope of going at a higher margin, better fee-generating retail products? Or is it likely to be a very conservatively constructed book and you're willing to forgo margins and fees for lower risk?

Yes. So if you look at the retail growth over the last several quarters, it has been extremely robust. And even now, we have -- expect a number of about 18% growth. And we said that for the full year, we'll do anything between 18% to 20% growth. So given the kind of environment we have seen, we believe that it's a very good, robust growth we have seen. And within that, if you look at some of the high-margin businesses, we have indeed seen a much higher growth, although, as you said, the base is a little small there. But as a proportion, it is increasing.

So to -- our own strategy is clearly good growth not at the cost of quality. That is something which we are very clear about. We have pushed many levers. If you really look at the kind of things we have done in the last few quarters, the branch-based sorting has increased a lot. We have also mined our data to look at prequalified offers for our existing customers. And thirdly, we have deployed technology and big data to make sure that we will do the analytics and then expand our business in this area. So from our side, we are not really holding back, but we just wanted to make sure that as we grow the portfolio, the quality is intact, which is what has happened. We will continue to grow this portfolio going forward.

Fee income growth, yes, it is about 13.5% today in the retail segment, which we think is good. And of course, as you said, as we move along, there is an opportunity to further increase the fee income growth in the retail area. So I clearly want to give a message saying that we are growing and we are growing quite a robust manner. Even the recent indicators of growth are showing a very robust growth in this portfolio. Within the quality parameters, we'll be very happy to grow this business further.

And given all you said, is it reasonable to expect that on a 2-, 3-year horizon, your metrics on the retail front in terms of penetration of the higher-margin products, the overall retail name, et cetera, will converge with the best-in-class private sector peers that you have?

Well, I don't want to make any interbank comparison with best-in-class or otherwise. But what I feel is that as a proportion, clearly, like you said, it will go up from here. And we believe that we have looked at the portfolio quality. It is growing with a very good quality. So as a proportion, it will definitely increase from here.

(Operator Instructions) We move to the next question. That's from the line of [Ravikant Bhat] from Emkay Global.

So just I was referring to your comments post the fourth quarter results when you had said that for the year as a whole, that your overall slippages will be significantly lower compared to FY '17. So, I mean, looking at your performance in H1, would you still be reasonably confident that this performance can be repeated in H2 on the slippages part?

Yes. We are absolutely confident that the slippages for this current financial year is going to be significantly lower than last year.

Okay. And just, again, rewinding a bit, if it's possible for you to give some color on what kind of common boxes would the accounts identified earlier as divergent would have checked? Like, for example, what is SMA-2 accounts or they were delinquent (inaudible), but not delinquent in your books or belonging to particular segments. What kind of common boxes would you have checked?

They would not really be such a common element to be identified. I think that it's more of a case-specific, borrower-specific kind of an issue which is there. So if you look at our portfolio, I think we have, in addition to the NPA and the restructuring loans, talked about the drill-down list also and some of the loans which are under RBI segmentation schemes. So that is the broad overall portfolio which is there.

Yes. And our aim at this time has been to give you a full sense of the residual portfolio. As I mentioned, specifically a particular sugar asset, which we believe will get sorted out over the next few months because of the binding agreement that has been entered into for a change in management. That is on the order of about INR 17 billion. And also, we thought we should give you color on the residual portfolio. When we look at the BB and below internally rated portfolio, the maximum exposure to a single borrower was INR 6 billion. So we believe that apart from all the disclosures you have seen from us in terms of NPA, restructured and other drill-down, et cetera, the residual portfolio on the corporate side, which is below investment grade, is quite a granular portfolio. That's the sense we want to give you.

Next question is from the line of Nitin Aggarwal from Motilal Oswal.

Sir, my question is over the past 2 quarters, you have had downgrades amounting to nearly almost INR 2,000-odd cores, which has been hampering the reduction in the watch list. So is it possible to get a sense of assets which are under rating watch and thus potentially can get added to the watch list going in?

We did talk about in the last quarter that there was a particular development in a power sector company, because of which it got downgraded from investment grade to below investment grade for us. So these are actually based on ongoing developments which happen. So it's not that there is an immediate list of accounts, which can potentially be downgraded which is available. In a large portfolio, as you would appreciate, there could be some downgrades and upgrades which happen on the overall portfolio. And then the last we have said, there should -- we do not expect any lumpy kind of thing to come up in terms of the downgrade on the portfolio. But beyond that, it's very difficult to say.

Okay. And the other thing is like -- do you think that -- is this possible that ICICI Bank can report, sort of lower negligible divergence with the RBI? Or you think it is very difficult for banks with good corporate portfolio to have that in the current environment?

I think we should note there is that -- the -- you already asked that...

(inaudible). We'll have to wait for the final report to -- yes, to get...

No, I'm not asking. Just in respect to this year [versus] probably the following year. Any -- can you like assure that we will not have any bigger divergence in the thousands of crores, say, even for the next fiscal?

It's very difficult to give you assurance on a go-forward basis. But in general, yes, when there's a divergence, one also looks at internal processes and fees, what the regulator is expecting on some of these accounts. But beyond that, it's an evolving thing which is there. The regulator also has been changing its approach, so we have to see that. We can't give really -- and I don't think any bank can give an assurance on that on a go-forward basis. But as we said, that for the current year, our assessment is that our NPA additions for the year will be significantly lower than the last year.

Right. And one small thing also, if I may ask. Does the RBI break the entire portfolio? Or is it some proportion of the portfolio, which gets better by it and like in a divergence?

What -- it's like any supervisory process or an inspection process wherein you would look -- you won't really go account-by-account across the entire portfolio for banks. You would look at -- you would have your own criteria as to which accounts you would want to review. And also, there would be some kind of a sampling which would be there across all the banks.

And it is a risk-based supervision, which is RBI adopting. So based on that, they have -- they will look at files, whatever they're appropriate internally in the bank. And at the same time, they also have the information with them of a systemwide conduct of these accounts. With that information, they choose to pick whatever they want to pick, and we always give them all the information required for them to complete the assessment.

Next question is from the line of Manish Karwa from Deutsche Bank.

My question is on SDR. Now in this quarter, the increase in SDR is just because of one sugar account or there are other cases as well?

One second.

So the increase in the -- that's a change in management outside...

Yes, outside SDR. Okay.

Yes. Thanks. But -- the sugar account. And then there is one indeed from the drill-down list, which is there.

Okay, there are 2 accounts. And in the sugar account, do we expect a full recovery? Or there will be a haircut that we may have to take?

So there is a binding agreement, which is there. We will have to see how that kind of plays out if there would be any sacrifice involved or not. As of now, it's very difficult to comment on that.

Okay. And the -- on the mining account that -- wherein we have implemented the change in management, what's the update there? Because it's been almost 3 quarters since this has happened. When do we expect that to get concluded?

Yes. It is part of the RBI scheme, which is the change of management outside of SDR. The mine is operating, and beyond that, we'll continue to dialogue for a management change. Nothing specific further to update during the quarter on that.

Okay. But how long can you keep that as a standard asset?

There are fixed time frames within RBI. The -- so that time line has to be followed in respect of this account also.

Okay. And just one data point. What was the oil and gas account that's left -- I mean, what was the quantum of that account?

It could be a very large part of the slippage that you have seen from outside the identified set of accounts, but we have not given a specific number for that.

Okay. And then lastly, what was the retail and SME slippage during the quarter?

Retail slippage was about INR 6.6 billion compared to about INR 8.79 billion in the previous quarter.

SME and corporate, we gave the combined numbers.

Okay. The INR 6.6 billion is SME and retail put together.

That's retail only.

That's only retail, which was INR 8.79 billion last quarter, only retail.

Next question is from the line of [Deepak Sharma] from AllianceBernstein.

I just wanted to ask if we have plans to issue offshore bonds during the second half of this fiscal year.

As of now, there are no firm plans around that, but that's an ongoing activity that we do to fund our overseas business. So depending on the loan demand that we see and the funding opportunities, we would look at it.

Okay. Okay. And also, sir, with respect to the divergence for the credit cost and the NPA additions, do you see any major change for the year end of fiscal '18 from the current levels?

As we have said on the credit cost, we expect it to continue to be elevated. And on the NPAs, we would expect the additions for the year to be significantly lower than last year. These are the 2 things that we have said. On the credit cost in the second half of the year, could there be some impact which could come in from the second list of accounts which RBI has asked banks to resolve before December 13, failing which it has to be referred to NCLT.

And these provisions will end up increasing the provisioning coverage ratio.

Okay, okay. And sir, for the loan growth and deposit growth, will it be similar to what we have achieved in the first half?

Loan growth, we would expect to see some improvement on the -- on both the domestic and the overseas book. Domestic, because last year, if you remember, the third and fourth quarters had a relatively lower growth because of demonetization, so we would expect some improvement because of that on a y-o-y basis. On the overseas book, as we have said in the earlier quarters also, because last year there was a large repayment which happened on the loans against the (inaudible) deposits, so the portfolio had come down in the December quarter. So again, on a y-o-y basis from December, you will see a lesser decline on the overseas book. So overall, the growth will improve on domestic. We would expect the growth to get to around 15% or slightly higher, with retail continuing to be 18% to 20%.

Next question is from the line of Vishal Goyal from UBS Securities.

So I think in the residual slippage, which is around INR 22 billion, was that from below investment grade book overall? Like what is -- what was like rated below BBB?

Yes, it will generally be -- almost like (inaudible), yes.

I think that's fair. Second, I think on the NCLT 2 list -- the second list, now -- I mean, what is the stage from -- like I'm sure there is one month left. But how much of you -- of this you think would basically go into a resolution scheme? Any sense on that resolution without, I'm saying, NCLT?

No, it's difficult to call just now because some of these cases are consortium cases, and we'll have to work with the other banks to complete the resolution. So we'll have to really wait and see how it develops.

Okay. And the last question on the drill-down list. So almost 60% of all drill-down list is part of some RBI scheme now already, roughly, like 5/25 or SDR or something around that. Now if you were to think of mortality from here into, let's say, NPL, you think all these are kind of safe now? And then the schemes are already being in place, so there is a very high probability of them staying standard?

So it would be a mix, Vishal, in the sense that like the -- in the case that we added in the current quarter for change in management outside SDR, there is a binding element already which is there. In some of the cases, which are there in the drill-down list and within RBI scheme, it's under SDR. The change in management still has to happen on those cases. So it's not that if it is under an RBI scheme, one can assume that the solution is already kind of done and complete. So it will be a mix. So that's why it's difficult to kind of say how much could slip and how much will be standard.

Okay. And then one last question under the scope, mainly the IFRS. What do you think is the status now? Like is RBI interested in IFRS for this year? Or -- because I -- we are hearing that the final rules are not out and there is only like 3 months or 4 months left.

So RBI in September had asked banks to submit their financials for the June quarter under NDS, and the submission has to be done in the coming days. To that extent, RBI is clearly working on the NDS migration from April 1, 2018. Of course, banks have been expecting that maybe some of the draft guidelines, because there will be changes in prudential and regulatory guidelines as well. Those are kind of still awaited. But otherwise, NDS, the standard itself is quite comprehensive. You don't really require too much of accounting guidelines. But some of the regulatory guidelines would require a change, and those draft guidelines have not come out. But otherwise, from our understanding, RBI is working on it, and that's why they have asked banks to submit their financials for the first quarter based on the NDS numbers.

Next question is from the line of [Praveen Madura] from (inaudible) Securities.

Sir, I -- most of the questions are answered so just one question. On the cases which are -- which maybe you're seeing initial signs of stress, and these are obviously not the cases which RBI has wanted to be reported, i.e., which is, how comfortable would we be to refer these cases to IBC for, let's say, some form of resolution? And like how do we see ICICI Bank or any other bank within IBCC 2 to 3 years down the line? So how would we be approaching the -- do you have a method of (inaudible) in terms of resolution? I want to understand that.

So even before this RBI list came, because the first bank to use NCLT where we thought that, that's the best way to move forward. You would have -- it is not just this list one case. We also have several other cases which are in NCLT. So our approach to that would be that we will look at in the banks and say what are the best resolution mechanism possible given the environment, given the asset and given our interest. So we will just go by that. And it has to be a case-to-case approach. And that means we would -- I mean, whenever we think that this is the optimal way of arriving at a solution, we will not hesitate to go to NCLT.

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

Could we have the total -- this interest, the cash interest received from basically the NPL accounts in the first half?

We actually have -- no, we don't disclose that separately.

Okay. But is the quality and maybe quantum going up on a year-by-year basis?

The quantum is actually reasonably volatile to the extent that Q4, if you recollect, we had reported that that's one reason for the much higher margin was the increased collection from the nonaccrual accounts. Q1 was a bit -- clearly, a bit lower. Q2, again, was higher because these are non-accrual accounts wherein we get cash collections. So there is no consistency in our accounts. But it has been volatile in the last few quarters. And we would expect the same to be the case going forward as well.

Okay. And related to -- I mean, probably a stupid question to ask, but how do you distinguish whether it is an interest or a principal payment?

In terms of -- so...

I mean, it could be very, very easily be classified under other income, right, and...

In terms of the accounts, it is indeed principal repayment also that we get in cash on these accounts. In some of them, we get it as interest based on the -- so if you look at quarter -- for the quarter, if you look at the overall recoveries and upgrades that we had of INR 10 billion, that would be reflecting collections that we have brought in cash against the principal. And overall, to give you a sense in terms of the interest collection and all, the holdings that I've already talked about, it would not impact the margin by, say, more than 10 basis points on a quarter-on-quarter basis. So it's not such a large number as well.

Okay. Okay. That's fair. Second, all through this call so far, we are sounding very, very confident on a couple of things, which is like margins are still good in H2, slippages will still be lower versus last year. So would that mean that you are -- why don't you qualify it also, saying that I don't know what the divergences will be next quarter? Or do you believe, based on your past experiences, this is probably not going to move the needle so much and, therefore, you are that much confident?

See, we have said very clearly that we cannot comment on the RBI divergence or otherwise report. What we have clearly said is that the final report is still awaited. Beyond that, we can't say anything on the RBI process as a divergence.

So would you -- should you not qualify, saying that, subject to that report received next quarter, our guidances might actually change?

The guidance that we have given for the year is that our gross NPA additions will be significantly lower than last year. We have really not gone ahead and given a much more precise guidance on the NPA ratio number or in the addition number. And we believe that in our assessment, the -- we should be on track to end up the year with a significantly lower NPA addition compared to last year. So that is what we believe. Of course, the RBI process is not complete as we speak. Similarly, on the margins, we ended up the first half with 3.27%. What we are saying is that for the second half, we expect the margin to be above 3%. So clearly, there is some pressure which would be there because, as you know, the incremental lending stress are under pressure. There will be some offsets because of the full impact of the 50 basis point savings deposit rate cut that we are factoring in. There will be some negatives because in the first half, we have got a very good amount of interest on the income tax refund, which may not repeat in the second half of the year. So taking that into account, we have said that the margin will be above 3%. It's not that we are saying that the margin will be maintained or it will improve in the second half, but that will be above 3%. We are quite confident given the trends that we are seeing.

Sure. Okay. And at the risk of being pushed out, would you want to disclose what the total BB and below is at this stage? I understand you said on a per-account basis it is INR 6 billion, but what is it as a...

On an account basis, the maximum is INR 6 billion.

Yes. But what is it in totality or a percentage?

So if you look at -- in the last couple of quarters, we had talked a few of the lumpy accounts on the below investment grade outside the drill-down list. Those have actually either slipped into NPA or got resolved. Or one of them is in the change in management outside SDR. Beyond that, if you look at the BB and below portfolio outside of drill-down list and the various RBI dispensation schemes that we anyway disclosed separately, the largest exposure is INR 6 billion. And overall, the kind of addition in terms of absolute numbers that you have seen coming in from -- outside all of this in the last couple of quarters, given that the larger exposure now is INR 6 billion, we would not expect that to be the case. So it should not be that much of an issue going forward.

Next question is from the line of Amey Sathe from TATA Mutual Fund.

Two questions from my side. One on the SME loan book. You talked about around 20% growth -- 15%, 20% growth last quarter. But this quarter, it seems that slowed down a little bit. So anything on that side?

Well, for the year, we still believe that we should end up in that region of around 15% to 20% growth on the SME portfolio. For the quarter, you are right. On a year-on-year basis, the growth was lower than what we were expecting. The market is extremely competitive in terms of pricing as well. Plus with the GST and all, there would have been some impact which could have been there. But for the year, given what we are looking at, we should be relatively confident of getting to a growth of 15% to 20% on the SME portfolio. The other smaller business portfolio that we have, which is a part of our retail business which we disclose as the business banking portfolio, that has been -- that has grown at 20%-plus for the year.

Okay. And a second question on the margin. You talked about it will remain about 3% for FY '18. But for the 2018 as a year, as we enter and with the PSU bank getting the recapital, do you think that government might ask them to lower the rate further, which can impact our margin?

That is a possibility. You know what? (inaudible) for what reason that could have. But the fact that banks could compete away the current margins, that's something which could happen, especially given the kind of limited credit demand which is there and the surplus liquidity which is there in the system. So that is -- to some extent, we are factoring in that when we say that the second half margin will be above 3% while we are running at 3.2%-plus currently. But you are right that, that's -- it's a risk in terms of the competitive market which could play out. And second, of course, there is a working group report from RBI which talks about linking the floating-rate loans to market benchmark and other such steps. So as and when that gets finalized and implemented, one will have to see what is the impact of that as well.

And how much headroom is there for us to improve our cost of deposits from current levels?

If you look at it in terms of the...

5%.

We are already below 5%. So of course, if you look at -- for example, when one of the banks still has lower fixed deposit rates compared to our rates, there is some probability of rates coming down, but I would not be certain of that. So I think at the current level of cost of deposits, it is already pretty low.

I just want to supplement by saying that, I guess, all our funding strategies over the last few years, we are happy to say that after 2005, it is the first time when our cost of deposits have come down below 5%. And on the deposit side, we are seeing very good momentum, and we are very happy about our cost of funds, what we have been able to achieve in that aspect.

Next question is from the line of from Mayank Bukrediwala from Goldman Sachs.

This is Rahul here. Well, most of my questions have been answered, but I just wanted to get some more color on this resolution pertaining to the second list of NCLT accounts. So when RBI says resolution, what exactly does this mean? Does this mean implementation of any RBI dispensation scheme or seeing satisfactory performance on these accounts? And so can you just throw some color as to what does this really imply?

RBI has said that the resolution would mean that if banks have residual debt to the borrower, that debt should be rated investment grade by 2 rating agencies. So that is how they are defined. The...

So it's going to -- actually, we aren't under any scheme or it can be just be a simple restructuring. It's not that...

Okay. Okay. And since then, have you seen any resolution across the industry within these 28, 30-odd accounts?

GLS have taken -- they've discussed -- some GLS have taken place. They have discussed, but I don't think so quickly they will decide on resolution. But it can be any form of resolution provided it meets that caveat to what Rakesh said, that the residual, there should be investment grade rated by 2 rating agencies.

Got it. Secondly, is it possible to get the below investment-grade book for the consolidated entity, the number that we share as part of our 20th filing?

So we disclose it on an annual basis as part of the filing.

Okay. The other question was on -- so we made some more provisions against the first NCLT list. So just want to understand, what would be the ideal PCR that you would like to hold on these 12 cases?

Provisions that we are making now, as you know, is essentially based on the RBI guidelines of the aging of the loan plus the amount of loan, which is secured or unsecured. In addition, of course, for the cases that RBI has directed banks to refer to NCLT, they have given certain minimum provisions to be made. So these provisions are being made on that basis and not really from any other context.

So this -- the current provisions that we hold, is that sufficient? Or we might need to make something more?

So we will need to make something more because as the aging happens, so depending on when the loan moves from substandard to doubtful 1, doubtful 2, there will be an increase in provision in some of those cases, which would happen over the next couple of quarters itself.

All right. Just one last question. This SR that we hold, security receipts, what would be from the steel sector there? And how much -- or how much provisions or haircut have we taken on those? That's about it from my side.

Again, how much are we expecting?

We've not given a sectoral breakup of the SRs.

Okay. But any particular sector -- I mean, any mix that you can share? I mean, like, I guess, most of it could be...

A really large number also in the context of the overall packaged loan book, right. So the loan portfolio.

I just wanted to -- because we have seen performance improvement in the steel sector, so I just wanted to get some sense of the...

We don't have a breakup that we use to...

(Operator Instructions) We take the next question from the line of from Adarsh Parasrampuria from Nomura.

Just a question on power side on the watch list. Do you all expect more additions? Because steel is a very defined watch list and few companies. So I just wanted -- and then that's the place where it looks like there could be further slippages, so I just wanted to understand that part.

As we've said, it's an ongoing internal rating exercise that we had. So then, a couple of cases that get downgraded, it's a possibility which is there. But as I've said, there's really nothing lumpy exposure that we have which we think would kind of get downgraded. But it's an ongoing exercise that we do on a regular basis. So it can be always abnormal.

And that INR 6 billion number that you said was single -- exposure applies to even these 5 sectors that you have?

No. So that is for us below investment grade outside of the sectors covered in the drill-down list. Outside of these cases, which are already under any kind of an RBI dispensation, so we are excluding the SDR, S4A, change in management outside SDR, 5/25, refinancing, because that is already disclosed separately by the bank. So outside of all of this, the residual exposure, which is below investment grade, the maximum is about INR 6 billion.

Okay. Understood. And yes -- and again, getting back to that -- the other sectors below investment grade. I'm just saying that you obviously had 2, 3 names that -- or accounts you had specified earlier, and those have kind of materialized. Now could there be chances, at least the way you all see your portfolio, that maybe these individual accounts are like INR 5 billion each, but you have 2, 3 of them coming for a long time every quarter? Or that's not something that you would expect?

I hate to think -- see that. So we'll have to see how it goes. Of course, in the near term, there is general stress which is there on the corporate portfolio for banks. So if you say that will it come for a long time, for sure it will not come for a long time. Look -- can it come for the next couple of quarters? It could.

Next question is from the line of Veekesh Gandhi from Bank of America. Veekesh Gandhi, your line has been unmuted. Please go ahead with your question.

As there's no response, we move to the next question. That's from the line of M. B. Mahesh from Kotak Securities.

Four very simple questions. One is, you had some -- a very large transaction on the oil sector last quarter. There doesn't seem to be a material change in the watch list. Just trying to understand, was there any other place where it was reflected? Or do we see that this is going to be the running number for the next few quarters? The second question is, the rating downgrade exercises -- the rating exercises which you do will include the financials which a company gives you, I guess, once a year. And most of these companies should be giving you the financials for FY '17 probably in the first half of this year? Or was this exercise already completed? And the third one, is the oversight committee actually any relevant anymore in the current scheme of things where most of them as moving through the IBC process?

So on the first question regarding the transaction in the oil sector, so we -- you saw that reduction in the exposure to the promoter entities relative in the drill-down list. And if you recollect, the exposure in the past was about INR 60 billion or so. And in the past also, we have said that some of the money was received earlier as well, and that led to the reduction in terms of the exposure. So this is reflecting the payment that we got during the September quarter, which was the residual payment that came in. On the ratings, it's an ongoing exercise. And of course, at the time that you get a new set of financials, you do a comprehensive rating exercise. But in addition to that, depending on the rating category of the exposure, you would also do a kind of periodic review of the ratings. For example, if there are interim period accounts that come out, whether, say, it was quarterly or half yearly, or if any specific development for the borrower or for the sector. So it's just like any rating agency would do. That is one thing internal risk department for the bank does. So it's an on -- continuous kind of a process which is there.

No. Actually, the reason I'm asking is typically, the downgrades in the second half tends to be higher -- or in the September to December quarter tends to be higher because that's when the unlisted companies start giving their financials, right. So that's the key worry out here.

I know, but I'm just saying that you -- and if you would also get from our borrowers -- we do get their quarterly financials and all of that on a regular basis. So it's not that it will be a complete surprise, which will come in the financial results. Can it happen in a few accounts that the financial on the full year are somewhat different from you were expecting? That's possible. But it's not a (inaudible) something which should be there.

No. On the first question, if the customer has paid possibly whatever the due is to be received at that particular point in time, why was it not kind of changed back to -- is it now -- really moves back to a standard? What is balance to be paid? Or it's been fully settled and it's over once and for all?

So this will be the balance amount which is there.

So why is it still part of the watch list is the question? Because either he has paid his outstanding dues or the account gets moved to a standard, right?

So the drill-down list is a list of all below-investment-grade exposures across the sectors. So because the -- it would continue to be a below-investment-grade exposure. While we have got payments on that, it is still a below-investment-grade exposure, and it's included in the drill-down list accordingly.

And the question is why it's still below investment grade even after the transaction has been completed?

The balance had...

This is the balance exposure which is still there, which we -- which needs to be repaid by the borrower.

Fair point. I'll just take it offline. And the oversight committee question.

So in terms of the oversight committee, of course, given that RBI is kind of directing banks to take a number of these accounts to NCLT, so to that extent, it is not -- those cases will not get referred to OC. But there could still be resolutions for some other borrowers which happened as per, say, the S4A scheme or so, then it has to get referred to OC.

Okay. So just one clarification. The oil and gas account that was reported this quarter, does it also have any linkage to the engineering firm which you reported in the previous quarter?

So we don't talk about that specifically in terms of the borrower accounts.

Ladies and gentlemen, with this, I hand over the floor back to the management for their closing comments. Over to you.

Well, I think as we have said, that if you look at during the quarter, we've seen NIM being quite comfortable. We've seen growth in fee income. We have seen asset quality trends improving, the additions or the level of additions to NPAs. So given all that, we'll keep, of course, watching the environment. We'll keep working with the developments in the ecosystem as far as resolution is concerned, but then also growth opportunities that we are capitalizing on. And given our overall position on capital, on distribution network, on technology leadership and so on, I think we are quite poised to participate in the growth opportunity.

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