HDFC Bank Limited analyst Q&A

Thank you very much. We will now begin the question-and-answer session. First question is from Mahrukh Adajania from Nuvama. Please go ahead.

My first question is on margins. So of course, you've explained that is the ICRR and the excess liquidity on Limited book. But would there be any other adjustments in the NII while moving Classification - Internal from Ind AS to Ind GAAP for HDFC. Like for instance, HDFC's NII in Q2 FY'23 was around 45 billion, 46 billion, right? So, would that be restated significantly under Ind GAAP?

Mahrukh, maybe we will have a session about what the Indian GAAP and Ind AS would be. There are several differences that happen. I'll give you, for example, there's several of them: on the nonperforming loan s, in Ind AS, you accrue for interest. In IGAAP, you don't accrue for interest, if the loan is nonperforming. That is an example, actually, r ight? so there are several differences that happen -- and so -- and the time has elapsed and the profile of the balance sheet, including the interest rate structure of the balance sheet is different now versus what it was at that time. So they are not comp arable as such. They are different regulatory regime, different accounting standards, different regulatory regimes and the composition of the balance sheet is different.

Correct. But most of the margin decline from pro forma 3.7 to 3.4 is largely excess liquidity and ICRR or...?

See the way you think about it is that the balance sheet is funded with debt, right? There is a level of additional borrowing that has been exercised and that is debt borrowing that has c ome on. And debt borrowing comes in at a cost that is north of 8% or so. So that's part of how there is a transition post the merger, as part of the merger management, we carried additional, one way to describe this is additional liquidity. But if you think about what is there, where does it reflect? It reflects in the cost of funds. So that's where the cost of funds is higher.

Got it. Makes sense. Sir, my next question is on the tax rate. So, given that there were favourable decisions and that's why the tax rate fell, does it normalize to 25% next quarter or...?

Yes, there is this onetime effect if you take it out, whatever is the normal tax rate, if you look at last quarter of the past year, we've been around 25%, 24.9% 25%, thereabouts. That's where we have been. So, there's no difference from that, yes.

Okay. And sir, just one last question. Sir, so do you see margins -- how long would it take for margins to come back up to 3.6, 3.65%, like two to three quarters, would the exit margin for FY '24 be at that level? Or would it take longer?

Mahrukh, I think Sashi alluded to say that there are a few things, right? One is the utilization of this to a better mix of loan originations, particularly focused on the retail shift, is something that would bring this to a normal level over a period of time. Then there are other choices to make. But given that these are -- this funding is the longer-term funding that we've chosen, as part of the merger management, we need to get through by building assets which are of a better yield.

Got it. Thanks. Thank you.

Thank you.

Thank you. Next question is from the line of Kunal Shah from Citigroup. Please go ahead. Classification - Internal

Yes. Thanks for taking the question. Sir firstly, maybe what Sashi highlighted earlier that in terms of the rundown in the wholesale portfolio of erstwhile HDFC, is it more or less done? Or should we see it getting towards...?

Kunal, if I request you to slightly come closer to mic and speak up, I can hear, but not as great.

Yes sorry. Now if it's better. So I was just saying whethe r this rundown in wholesale portfolio, is it largely done? Because earlier we thought that it can come down to INR80,000 crores - INR90,000-odd crores from INR1.3 lakh crores. But in the opening remarks, you said like it should largely be done and now we sh ould see the growth coming through in the construction finance portfolio?

See, that is the kind of a direction. If you think about it, it (eHDFC Ltd wholesale book) has got three components. One component is to do with the construc tion finance, which from a bank positioning, and strategically, would feed into the retail, we want to grow this portfolio, right? We have the risk assessment framework - we want to grow within the framework that we have. The second component of the book is the LRD book, Lease Rental Discounting. That book is also a growth-oriented book and will be assessed and grown. The third component is a small component of a corporate loan book that will be assessed as part of the overall exposure to various corporates that we have, and we'll take a decision about, what is the overall exposure. Yes, the direction, what Sashi alluded to is on the construction finance. And it equally applies to LRD too, but all of this is in the context of overall exposure to corporates that we have.

Sure. Got that. And secondly, in terms of other income, was there any one-off maybe pertaining to IGAAP transitioning for HDFC or this is like now the overall fee income trajectory, which we should see, and there is no one-off in this line item now?

So the fee income that you saw, which is INR6,900 crores -- yes, INR6,936 crores, yes, that is a normal level of fees. And if you look at how we have in the past seen , the fee, which is a 65% of the other income is the fees, right? And this fee line has got multiple from asset origination fees to liability product fees to payment transaction type fees to wholesale banking fees to third- party distribution fees. There are seasonalities - up and down. It happens because there are certain quarters where you see for various considerations, it could be tax considerations, or for origination consideration, it goes up or down. But when you look at it over a period of time, historically, this has been in the mid- to high teens, right? That's where the fee component has moved. And that's where I will tell you to look at it, is if you look historically, that's the range of which had. This quarter, if it was 19% -odd, again, quarte r-to-quarter, there's seasonality. But when you look at a year, two years in the past, it's mid- to high teens.

Kunal Shah, sorry to interrupt you. May I request you to join in the queue again.

Sure. Classification - Internal

Thank you. Next question is from the line of Parag Thakkar from Anvil Wealth. Please go ahead.

Yes. So first of all, I would like to congratulate the entire team for bringing up the deposit number to such a good number, about INR1 lakh crores. I think it requires a lot of efforts and you all did it brilliantly, especially in the quarter when it was a merger quarter. And we had this onetime ICRR hit plus this liquidity hit. So overall, I'm very, very happy with the performance. First of all, I would like to congratulate you all. And second, let me say that 1.92% to 2.1% ROA is possible. The growth rate above 15% or 17%, 18% of the merged entity is also possible, right?

Parag, firstly, thank you for the recognition, and we appreciat e. These are the things that keeps us charged and ensures that we drive to the best potential both the market has to offer and the people here are capable of delivering. Thank you for those compliments. Now getting to the question that you asked in terms of the growth rate, see, more than thinking about the forward - looking growth rate, but growth rate is underpinned on two things: one, market rate of growth. Typically, in the past, we have seen the market rate of growth anywhere from 10% to 12%, depending on the year, you will see rate, the nominal rate of GDP times 1 or 1.1, 10% to 12% is what you will see. And what we have always endeavoured and that is what historically we have delivered is premium on that, right, 5%, 6% thereabouts - the premium on the market rate of growth is what we delivered. That is where the market share gains come from that additional growth rate over the market that we do. And so now take this to, what is the kind of a market share gain? If you see over a period of a three years, five years, if you see, it's about 400 basis points or thereabouts market share gain, either side of the balance sheet. That's a similar type of market share gain. And when you gain that, currently, if you look at the recent times, the share in the market -- market share gains is faster than what it was five years ago, meaning the larger distribution and the bigger the scale, the opportunity space for gaining more market share is available, and that is what in the recent times that we have done. So that's -- I want to leave the thought process there. This is how we think, and that's how we are capacitized to drive.

Got it. And sir, you have opened around 2,200 branches in the last two years. So when do they start showing productivity, your opex to asset ratio will -- should come down, right, logically because they will become more productive now in terms of gathering deposits as well as advances?

Yes, sir. It will come over time. But as we keep adding more and more new branches, one weighs the other. But if you look at two years ago branches, very important that you touched upon, if you look at what we opened about two years ago and look at that cohort. And when we look at that cohort of branches about how they are performing, right, our model shows that, it should be breakeven in two years' time and about 90% -plus, slightly above 90% of the branches have broken even in about 20 -21 months. We have another 10% of the branches to breakeven. And when that does, that's the average of, call it, 22 months to 24 months breakeven. So they are all following a scripted model in terms of how they deliver. Classification - Internal We are confident that, all of them start to pay back sooner. But we continue to add branches, right? That's why when you see a part of the cost is -- when there's a credit opportunity, credit costs as you heard, it's at about 49 basis points. And if you look bac k, what is the -- how does - - where does it revert to mean, right? At what level does it revert to mean at some point in time? Call it, 80, 90 basis points or in the pre -mortgage book, we would have said that it is 90, 100 basis points is the mean, where i t can revert over a period of time, whenever this normalizes, benign conditions normalize, maybe with the margin, it is more closer to the 80 basis points or something reversion to mean. But the point to mention to you is that, for every 10 basis points of credit cost opportunity that we take from a timing point of view, right, within the return framework, ROA framework, we take this opportunity on a timing to invest. It's about 1% to 2% of cost to income that gets invested there. And so that is what -- and we are trying to say, as we make those investments, it should start to pay back. So we can now look at those ones which are more than two years old, and those cohorts are performing well. And we're now starting to look at the last 12 months' cohorts, and we will keep tracking them as we go.

Correct. Sir, just one last question because everybody is concerned, now that you have gathered deposits of more than INR1 lakh crores, that concern is gone. But till last quarter, everybody was concerned about how we'll fund. And as Mr. Sashi rightly pointed out in the beginning that, we are not concerned about the funding part now. But going ahead, so for example, we have Credila, we have a stake in HDB Financial Services. Anyway, we have mandated to list right by FY '25. And that will also unlock some value. And of course, that will provide us some funding also. So just -- can you just throw some light on direction of monetizing the stakes in various entities which we have in order to fund our g rowth. Because that much pressure will be lesser on the deposit engine, right?

Yes. Your points are well taken, and appropriate timing, those will be considered for either, but of course, at the right kind of value. Yes, your thought process are right and from a timing point of view and from a consideration point of view, it will all depend upon the appropriate valuation.

Thank you.

Thanks, sir.

Thanks you.

Next Question is from the line of Atul Mehra from Motilal Oswal. Please go ahead.

Yes. Hi, good evening and thanks for the opportunity. Sir, I have just one simple question. In terms of the non-retail NPA for HDFC Limited, how much of this was unanticipated at the time of the merger? And how much of it is in terms of already anticipated and built for the -- in the swap ratio that we had. Maybe if you can throw some color on that? Thank you, sir. Classification - Internal

Okay. Yes. See if you lo ok at the book and look at this book over a period of six quarters, at least now, it has been on a decline, right, which is -- this book has been assessed from a bank risk assessment perspective. And it has been -- there has been a degrowth that has been happening. So go back to the June '22 quarter, it was flat. And then from then on, there was a minus 4% or a 5%, then a minus 6% and a minus 7% and so on. And the recent quarter is a minus 6%. So the risk assessment, we want that book. Sashi mentioned it, we want to grow that book. But before you grow the book, we have to assess in terms of the exposure for kind of facility and so on, so that you are balancing the risk over a period of time. And that's what has happened. And we are at a stage where we feel c omfortable with the quality of the book as we see now with the provisions of approximately what we described, we had provision coverage ratio at 74% or the contingent provisions we have at 66 basis points and it's all post -merger, it's not just premerger, encompassed well. And we are looking at a book that is strongly positioned.

Right. Got it, sir. Just one clarification on the same point. Did any of -- in terms of the incremental stress come as a surprise to the internal management like to the bank management? Or this was something that you had already anticipated while you had worked out the numbers at the time of the merger?

See, the risk assessment is a dynamic risk assessment. That is why on every quarter basis, you see certain things slips and certain things recover and upgrade. And it is a continuous process. What is true at a point in time is not true at every point in time. It keeps changing.

Right. Got it, sir. Thank you and all the best. Thanks.

Thank you.

Thank you. Next question is from the line of Suresh Ganapathy from Macquarie. Please go ahead.

Yes, hi. I had Just two questions. One is Sashi said, 83% to 85% of that INR1.1 trillion is retail deposits, right? So it's about INR85,000 crores is what you mobilize out of INR1.1 trillion. Is that right?

That is right, 83% is retail, yes.

Yes. So seen it as INR85,000 crores, which is the effective number absolute, what would be the Basel III LCR quarter -on-quarter addition? The reason why I'm asking is last quarter, it was INR66,000 crores. I want a like -for-like quarter -on-quarter addition for the Basel III retail deposits because this number seems to be way different from this INR85,000 crores. Is it possible to share that number?

I don't have it offhand; we'll look at it and share, but Suresh, just to say that the Basel classification is different, right? And there are different factors that apply in that classification. Classification - Internal So there is no one -for-one mapping. The point I'm trying to say is that the retail, which is the branch-managed deposits that we have is not one-for-one retail definition as per Basel.

Okay, fine. And last question is on the synergy itself, right? Of course, these are very early days. We have seen pickup -- slight pickup in mortgage growth and also what your subsidiary reported numbers and apparently, the counter share has gone to 70% in your bank branches, HDFC Life. So just wanted to understand on the qualitative aspects, what are the things where you have already started seeing, not in terms of, as I said, quantifiable, but better traction. It could be anything like cross-selling of loans or products? Anything that you can give us would be great?

Suresh, we are focused on a few things. One, they are our subsidiaries, and we work very closely. And the engagement level has gone up significantly before the merger and certai nly after the merger. And one is about the sales process itself, right, in terms of -- so customer comes in into a branch and works with an RM or an RM visits a customer for various sales processes. The sales support has significantly enhanced, in terms o f making the product features and the product kind of dynamics much more articulative to the customers. So that is the process. And not only at the -- when you go into one of the metro regions, you will find that it is at a top notch. But the process has to be broad-based across the country, which is bigger very well. That's one, right, in terms of getting that. The second is also getting the -- closing it out from an immediate turnaround time point of view. That has also been a great deal of a focus to ens ure that a customer doesn't need to wait to get the product consummated, you're able to turn around quite fast. That gives enormous confidence to the RMs to pitch a product to a customer. Because you know that it gets -- the turnaround time is pretty soon, pretty fast, and the product will be in the hands of the customer that we could consummate. So there have been some of these qualitative or kind of a relationship process that is enhanced and it will pay results as we go along.

Thank you. Next question is from the line of Abhishek from HSBC. Please go ahead.

So the first one is, can you just quantify the LCR now on a merged basis. And also how much of the HDFC Limited deposits were retail as per the LCR classification, if you can share that number, it will be useful?

I did give out, the LCR was at an average 121% after absorbing the ICRR for most of the quarter. Your second aspect of the question was to do with the retail component?

Of the HDFC Limited deposits that came in.

I think the retail component was slightly above two third, it's merged into the total organization, there is no particular special tracking that we look at as -- this is HDFC Limited, and this is HDFC Bank kind of thing, it's all part of one. Classification - Internal

Got it. And in terms of conversion of HDFC Limited loans from the current PLR to repo-linked, what percentage has been done? And yes, what's the progress on that?

Abhishek, all of that has done -- has been done, right? And it's available for the customers who are in the bank -- bank customer could view it in the system on the screen when you log in, you can see -- but yes, it has been done.

I think we had a December deadline for it, right? So we should be -- like the entire book would be on repo now or by December anyway, it would be on repo, the most of it?

Well, no, it is -- the December deadline is for various customer communicati on and customer assertion and so on and so forth, which we are working through various alternatives to accomplish.

Thank you. The next question is from the line of Rajiv Pathak from GeeCee Holdings. Please go ahead.

So I think in the opening remarks, you alluded to like a 25-bps hit on the margins because of the ICRR and the excess liquidity. So you would have taken approximately say INR1,900 crores a quarter of this hit. So now this will, from next quarter start getting normalized, right? So next quarter, we should be tracking a median of 3.85% and then maybe inch up to 4% over the next 3, 4 quarters? And on the loan growth, do you think a 4.5%, 5% quarterly run rate is possible going forward?

Yes. Rajiv, we don't give forward-looking guidance in terms of what we will grow, but we can point to past and give the kind of how we have done and how we are capacitized to repeat what we have done. But in terms of the margin s that you talked about, we did allude to t hat there is an impact due to the merger management and thereby, funding certain liquidity requirement to transition and come and it has been debt funded. And so it's not a short-term debt funded to enter and exit. And so that's -- it will take some time. And even Sashi alluded to that in terms of how we grow it in the form of better mix, higher yielding retail products to grow. And I also mentioned abo ut that and which is how we will approach to get that.

Next question is from the line of Saurabh Kumar from JPMorgan. Please go ahead.

Sir the excess liquidity that you're referring to sir, this will be the difference between LCR and organized...

I'm sorry, we again lost your audio.

Will that be the excess liquidity you will referring to?

Saurabh, we lost you, man. If you come back again, we'll hear you.

The next question is from the line of Piran Engineer from CLSA. Classification - Internal

Sir, firstly, could you quantify your SLR ratios as of quarter end?

No, we don't say what it is, but we can tell you we carry more than what is required. So there is a mandatory SLR of 18%. We carry more than that. That's part of the -- that's not something that we talk about.

Okay. Fair enough. And sir, just secondly, on the branch opening. Just wanted to understand, last 2 quarters have be en a bit weaker than expected. Why is it that branch opening is always back ended?

Very, very important and good. See, what happens in the branch process. So it's very important -- you asked a very important thing. For opening up a branch, there are a few things that go into it. One is our marketing team. Second is our credit analytics team : scans the geography in the country to determine our presence and certain other banks presence in the vicinity and maps it with the potential, potential not just of deposits, but potential of even advances. There's a third, marketing looks at what is our market share. That means if you look at our distribution market sha re -- is about 4.5%, which means our branches are 4.5% of country's branches close to getting to be -- close to 5%, but still 4.5% of countries branches. And our deposit market share is slightly above 10%. So we have a 2x of deposits to distribution market share. So we look at see where we are more, where we are less and what is the vicinity of the catchment area where we can get the deposit concentration into our bank. So this analysis is done. And then there are two other constit uents that enter at this stage. One is our infrastructure team that tries to scout around to see, is there a property available? Our credit analytics both from a liability and asset analytics have given something. Our marketing is proposing a particular location to go for it, our infrastructure team will come and say whether they can get it or not get it. Because it’s the availability space, which is the biggest constraint. So I'm able to articulate that it is not about we know where we want to open the branches. It is the right kind of property of the branch space, that is availability, that is a constraint. Now once that is done, enters our legal to ensure that the landlord who is leasing the property to us has got the title and it's a ppropriately there so that we keep up our image that it's a property that somebody is appropriately owning and we are able to lease it. So these are several of these that go in. And when we go through this process and get there, it gets bunched up in the second half than the first half. That's what we have seen over the last 2 years, that we have seen too. As much as we would like it to be even through the year, there are other constraints of availability, and that makes it tough for us to get there. Classification - Internal And this is a machine, as you know, that's right, it's opening not 100, 200, it's a machine that needs to run and so when we are opening 500 branches in a quarter, the preparation, and the legwork for that is a pretty long lead into getting there.

Okay. Just lastly, in terms of personal loans last couple of quarters, especially this quarter has been a slowdown. Just wanted to understand how much of it is deliberate versus market -led competition?

Yes. I be lieve the market is quite good and underpenetrated. We have enormous, I think, the preapproved base, and we published that in the May month also where our pre-approved personal loan base is pretty high. And the demand is quite good. So no question about th at. In terms of the growth rate, we have about 15%, 15.5% year-on-year growth rate. We expect that -- yes, it has been in the -- sometimes it's been in the 20s, sometimes it has been in the high teens. But in the recent times, it has been in that 15%, 16% range. But we are confident that this is a strategic growth area for us. And the more customers we bring in and more they go through the seasoning process and monitoring process, we get the canvas even more opened up for an opportunity on personal loan.

Next question is from the line of Manish Shukla from Axis Capital. Please go ahead.

Srini, you acquired about INR6.35 lakh crores of liabilities from HDFC Limited. What would be the average cost of those liabilities?

That includes the borrowing you're talking about, right?

Yes, borrowings plus deposits, it was INR6.35 lakh crores.

Manish, I will direct you to what we have published. The cost of funds is u p by about 80 basis points at an aggregate level. Most of that is driven through the incoming, you'll be able to see that. You'll be able to deduce and work it out. We have published the cost of funds at an aggregate level.

Understood. And of these liabilities, roughly, if you can give an approximation of the maturity over either the next 6 months or 12 months, if you, have it? What proportion of these liabilities will mature?

That also, I think HDFC Limited has publi shed as of May or June -- the team can point you to the right place where it is.

No, no, we have it as of March, but during June quarter, they added a significant amount of liabilities, which is why I wanted to know as of June. We have it as of March?

They are longer term, Manish.

Thank you very much. Ladies and gentlemen, we have come to an end of the time allotted for the call. I would now like to hand the conference over to Mr. Vaidyanathan for closing comments. Over to you, sir. Classification - Internal

Okay. Thank you, Neerav. We appreciate all the participants dialling in today and spending time with us. We are available through the week or through the next week, whenever you all need any other clarifications we can provide, we'd be happy to. You know the contact of our Investor Relations team, Bhavin Lakhpatwala or others. Please stay in touch and get to us whenever you need to. Thank you. Bye-bye.

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