Bandhan Bank Limited analyst Q&A

We will now begin the question and answer session. The first question is from the line of Aditi Nawal from RSPN Ventures. Please go ahead.

Sir, I just have one very small data-keeping question. So, in your results, this time you have not mentioned the net worth amount. So, if you could just let me know what the amount is.

The total net worth as of 30th June 2024 was Rs. 21,883 crores.

Thank you. The next question is from the line of Prabal from Ambit Capital. Please go ahead.

So, my first question was on margins. Was there any one-off in other interest income?

No, there were no one-offs in the other income. This represents the underlying growth that we've seen in the business, buoyed by increase in processing fee as well as the other elements of other income.

No one-offs in other interest income that sort of QoQ.

Yes, no one-offs.

And since our CASA ratio has dropped by 400 basis points, how do you think about cost of funds going ahead?

So, yes, I think as we had mentioned, while the CASA ratio we saw on a quarter-on-quarter basis a decline. On a year-on-year basis, it still represented a good growth. But as we have mentioned, the retail deposits overall, which is retail term deposits plus CASA, remains stable at about 69%. So, that represents overall sort of the focus on deposits. But on question on the cost of funds, as we have seen, I think in the market, there is some pressure building on the cost of funds. So, we will continue to ensure that why is the focus on the deposits happen. We will have to be cognizant of the pressures on cost of funds building in the market and accordingly calibrate our strategy.

Any context of that, how to think about margin going ahead?

So, as guided before, we will continue to maintain our NIM in the range of 7% to 7.5 % depending on how the overall interest rate looks like.

Sir on this diversification, so how to think about our exposure to the MFI segment, because on one side, we are reducing our share of direct lending. But at the same time, we are also increasing our lending to NBFC MFIs. So, last 4 or 5 quarters, our cumulative share has not changed. So, how are you thinking about diversification away from MFI segment?

Yes, so I think as we had mentio ned briefly, there is a clear focus in terms of driving product diversification as well as geographic diversification Within the products , we are looking to improve the share of our secured assets portfolio And that will be the direction where we are trying to increase that w hich would mean that whil st the asset growth will happen both in the microfinance book as well as the secured book, the growth percentage for the secured book will be faster compared to the microfinance. And that will drive the change in the share of the secured assets compared to the total assets. That is the strategic focus.

And we are okay with giving loans to NBFCs, MFI because our exposure to MFI segment will continue to stay high even though that could be a secured or secured by percentage?

As a strategic lever, our focus on secured percentage will go up, we will continue to balance our NIM at 7% and 7.5%. So, there is no embargo or a strategic limitation that we will not lend to a particular segment. We will continue to focus on overall diversification as a subject. That's the area. So, we don't have any specific limitation that we will not lend to MFI sector. How much we will grow into that particular sector will depend on the overall guardrails of ho w much secured that we want to do. That guidance we have already given. We will continue to grow our secured book. I will request my colleague, Satish who heads Wholesale Banking to also share in with a few points.

Yes, good afternoon. Satish Kumar here. I take care of the Wholesale Banking Business. So, as the MD said, I think the overall guiding factor is to increase the secured book. To that extent, I think we will maintain a stable outlook on NBFC MFI. So, the growth there would be like a muted kind of thing and not an aggressive growth. So, as of now, that is the strategy.

Thank you. The next question is from the line of Ja y Mundra from ICICI Securities. Please go ahead.

Couple of questions, sir. In the opening remarks, you mentioned that we have managed to reduce the cyclicality that we usually have in the first quarter in terms of QoQ decline in the AUM. So, if you can elaborate, is this a new normal wherein you have been managed to curb the seasonality or it could be just one quarter phenomena wherein you would have opportunity to dis burse a little bit higher or how did you manage to change this seasonality?

Yes, Rajinder Babbar here. Basically as informed to all, we are working on a particular strategy. So, as part of this strategy, our main focus is how we can grow on this secured book as compared to the other book by keeping a proper product mix. So, as part of that strategy, this is the normal growth and we have taken beca use you will see our book, if you see the portfolio, the housing finance, the retail asset basically has grown steadily as compared to the E EB book. Simultaneously, we are keeping a close watch. So, it will be a regular g rowth, not a one -time activity.

I will just add a little more color to this. If you remember, we communicated in the last year similar quarter that we had adopted certain specific guardrails on credit quality improvement. Some of those, it took a little bit of time for the overall distribution channel to really understand and get adjusted to this. Given the fact that they now got adjusted and over the last 4 to 5 quarters we are seeing steady improvement, we would believe that this is a new normal. We won't say that we have beaten the cyclicality. It has not grown. Our Q3, Q4 will still be much better than Q1 and Q2. But yes, degrowth as a subject, I think we should be able to protect.

Usually, we had a very deep cyclicality in the sense that 5 % to 10% or even very high single digit degrowth would have happened in the microloans or EEB book, which is very stable this quarter. In the past, we have said that the underlying business has a seasonality, they draw down during the fourth quarter and then there is a monsoon, there is a rainy season, not too much activity and hence there is a drawdown. But that you have managed to address that, right? That is what the message is?

Right.

Secondly, sir, on this CET tier 1 reduction, is that the final decision by the Bank? Of course, in the sense that is there any chance that you still are having discussi on with the regulator or any final authority here and in the later quarters you may have an opportunity to change the risk weight again to 75% or this is now done as of now?

As we mentioned, we looked at the circular and we found certain specific exemptions and then we looked at saying that there are certain specific exemptions which are not available for the scheduled commercial banks and therefore we have deliberated and interpreted it to guidance of the board and the management and gone ahead and done that. How we go ahead and look at some of our product programs and internally look at all of those will be matter of future. But as of now, this is the finality to our decision and this is what we have done and moved ahead.

Right, so you're not disputing or you're not, let's say, discussing this any further, right? I me an, that is how the message is.

That's how the message is.

Okay, and because your risk weights have changed, so your risk adjusted profitability on capital employed would have deteriorated notionally. And you also seem to be one of the lowest rate banks in the MFI segment. Are you thinking of changing the rates to adjust for the risk-weighted capital yield?

Not as of now.

And lastly sir on SMA -0 1 plus 2 book and you had mentioned that credit cost of this quarter may not be an indicator of the full year credit cost and that is you are maintaining that guidance. But if I look at SMA -0 plus SMA-1 pl us SMA-2, that the number in absolute amount was declining for the last several quarters because we were se eing that trends were improving; however, in this quarter that 12.6 billion number has gone up to 14.4 billion. If you look at the bigger context, the lot of states, geographies have had some disruption/a tough weather. Would you believe that this number of SMA-0 plus SMA-1 plus SMA-2 in absolute amount should start reducing or you think that there is still some uncertainty with respect to the micro?

As you rightly said that our DPD pool SMA-0, SMA-1, SMA-2 put together has been coming down consistently over the last 4 quarters and as we stand today even on Y oY basis, we are almost 50% of what it used to be one year back. That's a good news. Having said that, Q1 has been marred with some heat waves and of course the general election has little bit of an impact in general. But we are optimistic of the fact that our recovery efficiency and the guardrails that we put in place, it should hold good for us going forward. We have work in hand for sure, and that I think management is fully conscious about, and teams are completely focused around it. Our recovery efficiencies are also overall improving. So, we will continue to focus on this area. Industry is seeing some bit of stress in some pockets, and we are extremely careful on some of these areas, and we will continue to focus in a very calibrated manner, as also spelled out by my colleague Rajinder.

That is right sir, but what I was trying to understand is if Rs. 890 crores of slippages as the SMA pool is also reducing, this should ideally stabilize or actually improve. Is that the understanding right?

Yes, it will improve. We have work in hand and we will continue to focus on improving that.

If I can just add further to that, I think the slippage reduction that has happened, our endeavor would be to make sure that it remains stable and improves from here, but we have to be cognizant of some of the increases in the DPD pool and how exactly the flow of that could happen to the slippages. So, that would be an inherent risk or underlying risk that we need to continuously manage, and therefore there will be efforts in that regard, which is a space that we will continue to watch. And that's why the credit cost guidance we have given is a 1.8 % to 2%, which is slightly higher than what we have seen in this quarter.

Right. And sir, your comment on capital now post the adjustments that we have done. Of course, this is much higher than the regulatory floor. But how do you look at the capital position from a 12-month perspective?

Yes, so I think we are at about 15% excluding profit and about 15.7% if we i nclude the profit for the quarter, which still has sufficient headroom above the regulatory minimum and allows us to continue to grow the asset book. We will of course continue to look at how the asset book growth forecast and projections are there and acr oss which particular segments and capital monitoring will happen on a continuous basis. This is a significant change and that is how we have called it out. But where we stand right now, as Ratan had mentioned earlier, we remain well capitalized to be able to help foster our asset growth.

Sir, just this question again on this capital adequacy front. Given that you have a nomination from RBI right now at the board, has there been any conversation on this topic, on this issue? Because this instance of an increase in risk weight seems to be fairly isolated to the Bank. And we don't see a similar conversation across other lenders?

The decision was taken before the decision of RBI to put an Independent Director. Our decision is independent of that, number one. Number two , we wouldn't know exactly what has been the treatment taken by other banks. Maybe you have, we don't have that visibility.

But what is it that makes it that you need to make this under the 125% risk weights?

I will clarify one more time. The November circular was meant for consumer credit and we implemented that for the consumer credit portfolio. Then we looked at and we found that there is a specific exemption of MFI portfolio for NBFCs. It did not mention SCBs. So, we looked at saying that as a scheduled commercial Bank, if that exemption is not mentioned specifically, we might as well deliver it and discuss it internally. And that's what we have done. And then with approval of the management and in consultation with the board, we have taken a prudent and conservative approach. That's where it stands. And that's the decision. And our internal stress testing clearly says next three years we are pretty well protected in terms of capital.

I agree to that. I'm just kind of belaboring this point again, is that you could have had a conversation with the regulator on this topic as well, right? Because it s eems to be a little bit different in the way you seem to be looking at that circular as compared to every other player in the industry.

So, my conversation with regulator on multiple parameters is part and parcel of daily life, which we continue to do. As I said, this is a decision almost in line with the Bank's philosophy of being conservative and following the spirit rather than going by the l atter. And that is something that we thought we will take a call internally.

Just two other questions. One is just to answer the previous question, who was also asking on growth. In this year, is there any revisit to the loan growth assumptions given the changes that you've seen in the RWA or CT1?

No, not required to be done that way. Our stated strategy of growing secured book and a guidance of loan book growth of around 18 % to 20% and a deposit growth of higher than that will continue.

It is slightly weaker as Q1, but if you look at Q1 of the last financial year, it is significant growth from a YoY perspective. We had a great growth in Q4, but that's cyclical. We have sorted the problems in housing.

Thank you. The next question is from the line of Puneet from Macquarie. Please go ahead.

Just on this capital question, like not seeing any other Bank do this or put it like there is another Bank which has a MFI exposure, particularly smaller than you. But a) are there discussions with other banks as well? Or is there som ething specific to Bandhan because it seems pretty harsh. So, just on that part?

We expect some conversation to happen from tomorrow onwards. As of now, we haven't had.

And another point, and I don't know if you said this earlier, but in the near term, we are not looking at any capital raise, right? J ust asking this because our unsecured book is higher than other banks. So, and the Tier-1 has decreased substantially on the capital growth front.

So, Puneet, on a decision of this nature, obviously requires us to also go back and do stress testing and look at our internal models. And we have tested that. As I said, we are pretty comfortable for the next 3 years. As my colleague, Rajeev, said, we will continue to have capital monitoring to support the growth. As of now, we don't feel the need for it.

Thank you. The next question is from the line of Nitin Agarwal from Motilal Oswal. Please go ahead.

Sir, couple of questions. Firstly, like any update on the CEO succession, has the board submitted the names to the RBI?

As I mentioned in my opening remarks, the process is very much on and it is on track as expected. We will continue to update you on any fresh dev elopment that comes on this. As of now, I am not in a position to communicate whether we have sent any names to RBI. It's being handled by the Board and the Search Committee.

And secondly, sir, like in this quarter, the CD ratio, which is like seemingly a weak quarter and it inches up, but now we are watching CD ratio very closely and we are around 90 % plus. So, any particular level you would like to operate at, any engagement with RBI on this?

Yes, so maybe I can take that. So, CD ratio on a year-on-year basis has still seen an improvement from 95% to almost 94%. Yes, on a sequential basis, it's been a bit of an increase. But this is a key focus area. I think from a Bank's perspective; we have been reducing it. If you look at the last many years or so, we have been bringing it down from circa 120% down to 100% down to almost 92% as at the end of March this financial year. And then that's the direction of travel in terms of ensuring that we continue to operate within this range and even improve it further from here. So, that's the endeavor that we are working on. And as you have seen, our deposit growth has been generally higher year-on-year basis compared to the advances growth. So, the liability first approach or the strategic prerogative that we have is an important one and the entire team is clearly aligned to making sure that that happens.

Right, and lastly, any thoughts on how do we plan to use the audit c laim as and w hen it gets passed now that the capitalization levels are also low after this change that we have taken and earlier we had thoughts to make some additional provisions, so what will our approach be now?

So, first of all, we will wait for the audit outcome to come through, and we will as eagerly wait as all of you as to how soon it comes. We are confident that we will get an outcome. When it comes, we will take a decision how we should account for it.

Thank you. The next question is from the line of Ayushi, who's an individual analyst. Please go ahead.

So, I wanted to ask, how are we doing with the hiring front? Are our employee numbers increasing right now? Are we actively hiring?

Our employee numbers have been going up. However, given the fact that the Bank has finished its core migration and is focused around digitization and technology upgrade, going forward the incremental addition of employees will depend on the technology and digitization drive and therefore it may be slightly lesser in percentage terms compared to the previous 3 years. Our hiring continues to support the growth across multiple products and geographies.

Does this mean our branches will also be moderated going forward?

We mentioned that in the past that over the last 18 months we have added up to around 500 odd branches. Going forward, number of new additional branches will be much lesser.

Thank you. The next question is from the line of Yuvraj Choudhary from Anand Rati. Please go ahead.

Sir, we have increased risk weights for EE B book as we were being conservative. Sir, just one question. Why have we taken a risk weight route? And why have we not made provision buffers since we had a good quarter? Some color on it would be helpful.

So, it's not about provision cover either or. We looked at the regulatory guideline, we interpreted and we wanted to go by the spirit of it and therefore we took a conservative approach. Provision cover again we have already guided that we will continue to increase our PCR over a period of time and then take it to a higher number and that grows. If you see this quarter itself, our PCR has gone up, even though our portfolio quality has been significantly better.

Yes, Yuvraj, if you see the numbers, our PCR increased from 71.8% in March quarter to 73.7% in this quarter. We have already increased our provision coverage ratio, and the numbers that you see is after that increase.

Thank you. The next question is from the line of Vatsal Shah from Knightstone Capital. Please go ahead.

Most of my questions have been answered. Just wanted to understand that in the SM A-0 and SMA-1 book, you mentioned that there have been some pockets of stress. Can you just mention which are those areas which are experiencing less stress?

Okay see, in the last quarter the stress is coming from Punjab and Maharashtra primarily though there have been talks of Bihar as well, but Bihar has been doing well across thus far. But definitely Punjab and Maharashtra are two states which are giving little bit of a stress. Though in our portfolio, we don't see that stress in the last quarter, there has been a little bit of an uptick only in the recent last couple of weeks itself. But that's manageable because the portfolio is not so big in both these states.

And just a last question on the CASA rate. So, you mentioned that the retail portion of the liability side is growing on a year -on-year basis. But on quarter -on-quarter, the CASA was shifted down from 36 to 33. So, can you just mention what was the reason for this CASA de - growth not on the retail term deposits, but just the CASA?

Sujoy Roy, our colleague who heads our Liability and Branch Banking.

For CASA degrowth on a quarter-on-quarter basis was on the counter, anyway cyclical reasons. The March year end, there w ere large inflows in the last 10 -11 days. And since then like the industry, that growth is evidence even in the last quarter for the industry as well. So, the decline per se is on account of the current account flows, some current account flows moving o n. But on a stable CA, if I look at the individual components of CASA, savings and all that, there we have seen a reasonable increase. And most of the monies that have moved on have moved on to retail term deposits, where we have seen significant growth of 25%.

So, in summary, some money has moved from the savings/current deposit to retail term deposit. Number two, the stable CA and stable SA both have grown YoY.

So, is there any numbers for the CASA range like around 35% or something like that?

I think our endeavor is to look at growth of the CASA ratio. I think from the current level what we are trying to do is build some further capabilities within the Bank which will help us in terms of further generation of the current accounts, such as cash management capabilities. We are also looking at targeted customer value propositions for our savings book portfolio in terms of looking at how do we create unique customer value proposition for different segments of the depositors, s alary class, senior citizens , etc., and also for women. As a result of all of these capabilities being looked at, customer value proposition being looked at, and also the emphasis on the digital channels like Rajinder mentioned, and also in terms of growth of improvement or some reenergizing of our branches, we will see focus on the mobilization of the current account and savings account as a result of all of this. So, we don't have a particular percentage or a number in place, but we will certainly continue to look at the increase of the CASA ratios from this level based on all these initiatives.

So, Rajinder here, we have a clear-cut strategy on the CASA because the main, the regular contributor to the CASA is the more and more savings and the retail current accounts. And you see when I said the Bharat QR Code, this is one of the steps. So, accordingly we are taking a step to ensure that month-on-month basis, our CASA number, the fresh acquisition is improving as compared to the previous month. And that is our clear focus. We are now sourcing the CASA through our digital channel, and we are able to see a growth of 20% to 30% in the CASA number. So, definitely all the steps will result into a better CASA ratio.

Got it. And just the last question, I don't know if you would have the data handy or not. If you can give me the percentage like breakup of the fixed versus variable loans, if that's possible.

Sorry, we don't have that handy.

Thank you. The next question is from the line of Pranuj Shah from J.P. Morgan. Please go ahead.

Thank you for the presentation. Just a couple of questions. One on your non -interest income, you have a release of provision on redemption of SR of Rs. 60 crores and also bad debt recovery of Rs. 46 crores. So, what is the full year guidance on the trend that you can give out over here? And second question was a 10 basis point increase in yield on advances for this quarter sequentially, how’s that?

So, let me take that. I think within the other income, as you rightly sa id, that there is a n redemption of the security receipts for the ARC of about Rs. 60 crores. We are expecting on a quarterly basis a range of Rs. 60 to Rs. 70 crores of steady numbers to come through on this particular line. So, I think that will continue to happen. I think your second part.

How many quarters?

At least for this year, for this financial year, we expect that number to continue. I think your second part of the question was on yield on advances. So, on yield on advances, we are at around 16% on yield on advances and we expect the yields to be impacted in the following manner. So, whilst there is growth, as we have said, there is going to be a shift towards a higher mix of the secured assets. As a result of which, ther e would be some pressure naturally on the yields on advances. But we are expecting that to be offset in some portion through continued focus on reducing our slippages, which will help in terms of offsetting some of this decline that may happen. And I think overall, whilst we expect some stabilization or some impact coming through, it will be range bound. So, we do expect the yields to be between overall around 15 % to 16%, that kind of a range.

Thank you. Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to the management for closing comments.

I want to thank everyone of you for participating on this call. Look forward to communicating any future developments and engaging with you in the future. Thank you so much.

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