IndusInd Bank Limited analyst Q&A

Thank you very much. We will now begin the question -and-answer session. The first question is from the line of Chintan Joshi from Autonomous. Please go ahead.

Yes, thank you. So, could you help us think about the asset quality risks around the upcoming election? If you could elaborate on the experience around the recent state elections or past elections and how we should think about any risks that might come forth in the coming months?

So, I think this is a much-debated topic that election creates delinquency. We've seen in our retail finance as well as in microfinance, that until and unless there is political activism, it does not create delinquencies to a large extent. And I think the state government s also don't promote to a large extent, a ny act resulting in increase of delinquencies. Having said that, we have diversified portfolio across geographies in these areas, and we have no concentration risk to be bothered about as we go along.

Okay. Fine. And then the second question is, could you help us think about the evolution of lending margins. So, if I compare lending yields to repo rate development, how have they developed in the different products and given the deposit competition, the funding pressures, do you think lending margins can increase over the coming months or quarters?

We've always said that our margins would be between 4.2% to 4.3%. And it's the mix of balance sheet, which makes our margins more stable. You should look at how we managed our margins. We've heard that our margins would go down. If you look at the last 4 to 6 quarters, we've been very steady between 4.2% and 4.3%. And we continue to believe that we'll remain steady.

That's the overall margin. I just wanted to get some colour on kind of the headline rates that you offer on different products. Do they have room to increase given the deposit competition?

I don't think so. The rates are market driven. I don't think you can define or increase the rates. Corporate rates are all EBLR linked and the margins are already fixed until & unless you see a deterioration in the risk profile of the client. On the fixed rate book, it's more competition driven. And we don't want to increase rates in microfinance unnecessarily just to increase the yield. So, I think as the interest rates are stabilizing on the deposit side as we are seeing in the last few quarters. Maybe one more quart er of increasing cost of deposit, I think you should not see increase in the lending rates in the markets right now.

Thank you. The next question is from the line of Kunal Shah from Citigroup.

Hi Sumant. Getting on to slippages, so quite a high run rate of 2.2 odd percent. You indicated vehicle finance. But again, that seems to be somewhere around INR 600-odd crores. So, what are the other segments? Maybe we were always targeting INR1,000 crores to INR1,200 crores of slippages, and this time, it's even more than INR1,700-odd crores. So, it seems there is further stress besides vehicle as well as corporate. And how should we look at it, yes?

So, in the corporate, the slippages of last quarter were INR 214 crores, they were INR 312 crores this quarter, INR 67 crores got upgraded within the quarter itself. It was a miss and it got upgraded, and we had to show it as slippage and then it got upgraded . INR140 crores came in from a stressed account, which we had said earlier that there were two accounts, one of them got into NPA last quarter, and this quarter, we took another INR 140 crores. So, I think that's largely the end of the corporate slippages. And INR 75 crores to INR 80 crores were the normal business as usual slippages in the business banking or in the SME business. On the other retail, we saw two slippages coming in. Agri business had an INR 25 crores of extra slippages. We saw a slippage in the LAP, where three accounts, which w ere seemingly large accounts, about INR 40 crores slipped into that. And the merchant acquiring business had an INR 30 crores extra slippages. So that was the reason for the other retail to go up. MFI remains steady. And CFD, of course, I told you the reasons. So, if you look at our businesses, I am very confident that we should come back to INR1,200 crores levels. I think CFD was a bit of a shocker. We were aware of the corporate. You should see corporate bank going back to about INR 50 crores to INR 75 crores is what we feel. I think other retail will remain steady at about INR300 crores to INR350 crores. And I think MFI should go down by another INR75 crores reaching to INR275 crores to INR300 crores. and CFD should be steady going forward adjusting for one-off for this quarter . So, what we gave as a commitment of INR1,100 crores to INR1,200 crores should come in the next few quarters.

Okay. But this LAP and agri, that doesn't seem to be more seasonal. So even in other retail assets, you are saying that run rate will continue?

No.

Besides the vehicle finance, there doesn't seem to be any one -offs because LAP, I don't know, maybe in terms of the quality of the portfolio, this might continue. This is just one-off.

On LAP, this is a one -off. We didn't want to negotiate with the customer. The customer was asking for a settlement. We have the properties. We didn't want to do a settlement at that point of time. We could have avoided the flow, but we did not want to do that. And so, I don't think this will come. Even the corporate is a one-off, which we knew that it will come and you'll see the corporate slippages going down.

Okay. And lastly, in terms of contingency. So again, last quarter, we clearly sa id that we will not utilize contingency and in fact, start creating contingency from 4Q. That still doesn't seem to be happening. We have further utilized INR220 -odd crores. So, if we start creating contingency, how confident we are in terms of the guidanc e of 1.1% to 1.3% credit cost, given it's still running quite high?

No, you're right Kunal . This is one of the misses which we've had this quarter. We wanted to build the contingency, but there is some positive news also. The positive new s is that we had created contingent provisions for one big account. And we believe that we are going to get paid, hopefully, by February. So that provision may get released as a consequence and we will not use it and will keep it aside. And we will add to the contingency more as and when we think that it is required. We will not dither away from adding to contingency, and we continue to believe that even if we add INR 200 crores to INR 300 crores to contingency, we will still come between 110 to 130 basis points in our credit cost for the year.

Okay. So, any particular period when you would start creating, so it's in, like you said, as and when required.

I don't want to give any guidance. Because I tell you, I missed my guidance this quarter on this. So, I'm just waiting for the gross flows to go down. And gross flows is a big indicator that I want to see around INR1,100 crores to INR1,200 crores. Having said that, It’s a miss on our side this quarter. And I acknowledge it. But I also believe that this is temporary, and it will get back next quarter. You should see the improvement next quarter.

Okay. Thank you and all the best.

Thank you. The next question is from the line of Piran Engineer from CLSA. Please go ahead.

So, while I'll answer the question, I'll have Sriram to address the question on industry. But let me first address. If you look at our book, we de-risked ourselves by going in for diversification as a strategy. So, we are not dependent on the MHCV or any one category of vehicles to grow our book now. And if you look at the book split, you will see a very diversified book. In fact, we have almost doubled our auto loan book or car loan book over a period of last two years. So, a well-diversified book, not dependent on one single category of vehicle will help us achieve a 20% year-on-year growth. However, on the vehicle side, on how the market is behaving, I'll have Sriram to address this question.

Good evening. MHCV is not looking very strong. MHCV business is looking dull this quarter. But we are looking at the used commercial vehicle segment to balance it out. We are increasing our market share in auto/ passenger vehicle loans. And used cars is another area, we are focusing on. These are the three areas where we think we should be able to make up for the same overall numbers as the last quarter. Nearly INR14,000 crores is what we are expecting as disbursements. Our main growth will come from auto / passenger vehicle loans and used commercial vehicle. For industry, as the election is coming, there would be a bit of a dullness in both MHCV, LCV and tractor has been growing slow for the last two or three quarters. So, these segments are looking dull, but we should be able to make up with the auto/ passenger vehicle loans and used commercial vehicle.

Okay. Thanks for that. Secondly, just on microfinance NPL. And I know this quarter, we had the floods in Tamil Nadu. But in g eneral, our NPLs have been quite stubbornly high at 4%, 4.5%. So really, what are the remedial actions you are taking there to getting back to earlier levels of 2%?

It's related to the gross flows. But if you look at the net flows on the MFI business, you will see that the net flows of the MFI business are at INR189 crores versus INR182 crores last quarter. So, there is an upgrade process, which happens in the MFI business. I think the gross flow s are a bit higher, and we don't give top -up loans to stop the gross flow from coming in. We don't believe in giving top-up or any extra loans. And that is one of the reasons why I've said that our gross flows will be higher, but our credit cost will be between 2.5% to 3% in the microfinance business. I don't think a microfinance business can run at 100-120 basis points credit cost.

Okay. Thank you. Just the last question on World Cup spend, can you just quantify it? And you also mentioned you will be continuing cricket sponsorship this year?

As part of the deal we got, we've got the T20 World Cup as well as the Under -19 World Cup. I can't talk about the cost because it's a confidential matter. The agreement is confidential. But I can assure you that the benefit the bank is d eriving out of this project and sponsorship is much higher than the cost which we are incurring.

I think the good way to look at it is to see cost to income at 45% to 46% in quarter one going down to 45% in quarter three or four, and then we should stabilize. The bank should stabilize in year three at 41% to 43%.

Got it. Okay. Thanks for this and wish you all the best.

Thank you. Next question is from the line of Param from Nomura. Please go ahead.

Yes, hi. Thanks for taking my question. So, my first question is - Sumant, we've seen an improvement in LCR for the bank in this quarter. Obviously, we've been doing well on retail deposits. But on this between LCR and LDR, we are at about an 89% LDR. Is there any thought process on bringing that down or anything from the regulator in that aspect?

No. If you look at our LDR or CD ratio, we are in line with the banking industry. In fact, some people are at 95% -96%. We've alwa ys said that we will be between 86% to 90%. And we've maintained our stance at that level. So, we've not got any nudge from the regulator on this. The bank is highly liquid and we've been able to manage its CD ratio between 86% to 90%, and we do not aim to burst the 90%.

Perfect. That's very clear. My second question is on the credit card portfolio. So, if I look at the data, so it's almost doubled over the last two years. So, what are we seeing in terms of trends in write-offs here? Are we seeing any increase or anything to be worried about?

Not really. The credit card business should run at 250 to 300 basis points of credit cost. Because we have an overall earning s of about 28% to 30% in credit card s, including the fees , we are comfortable with the way we run and manage our business. Of course, there is a little bit of elevation in the flows, which is happening, but it does get moderated at 90 DPD to some extent. And if you see our data and compare it wi th the TransUnion bureau data, I think we are in line with the competition. And I think we are plus/minus 10% at all points of time in the credit cost as far as the industry is concerned.

Okay. One more question, if I can squeeze in. You mentioned the net slippages in microfinance and vehicle finance about 0.5% and 0.7%. So, these are not annualized numbers, right?

No, these are quarterly numbers.

Okay, got it. So, these are the bulk of the n et slippages in the consumer finance business. Excluding this, it's marginal?

I think the consumer finance business saw slippages in the microfinance side and in the vehicle side and some in the other retail side, specifically in the merchan t acquiring business, we saw some slippages.

Okay, perfect. Thanks, Sumant, and all the best. Thank you.

Hi, everyone. Good evening. Thanks for the opportunity. One question on the liability franchise. Just wanted your thoughts as to how do you really see the sensitivity of deposit inflow to the premium deposit rates that the bank offer? Like how much of correlation is there? And hypothetically so to increase the premium of it, do you expect the inflows to improve significantly?

See, it's very difficult to say. So, there are some mid-sized banks or smaller banks, which have given a higher deposit rat e and have increased their deposit base. So, I think there is some sensitivity which clients put to higher deposit rates. But it happens in the very high end of the business, which is about INR10 crores and above. In my opinion, I think it is better to continue to push client acquisitions and do it. Of course, we play it in certain specific segments to offer the higher deposit rates. NRI segment, for example, you offer a little bit more in the U.S. dollar deposit but you get the savings account at a very attractive rate and then you hedge the whole thing, the cost of deposit is exactly the same. So, there is some sensitivity to rates at the higher end or in the top end. But I don't think that's the only way to run the deposit franchise, because these are th e type of guys unless you lock them in, they will also take the money out at any point of time.

Okay. So, the bank has been benefiting like every quarter from the improvement in lending yields and asset mix is getting better with rising mix of retail. So, do you plan to like flow back these gains into the building of the deposit franchise? Or will you let it pass on to the margins in the coming years?

I'm not able to understand the question.

The question is like the benefit from the lending yield improvement, which has been continuously happening at the bank and the asset mix is getting better with the rising mix of retail. Will you let that pass down the benefit be pass on to the deposit premium and increase that or compete there? Or will you let the benefits flow down to the margins?

So, the way to look at i t is, are we enough competitive in the liability market? And are we compromising on the granularization journey? We will not compromise on the granularization journey irrespective of the margins. So let me be very candid about it. And we want to continue progress on our granularization journey, and we want to be competitive, which mean that we will always have deposit rates 45bps to 75bps higher than the large players in industry. And that's what we've been doing. Will you see a margin uptick from here? I said that we are at 4.2% to 4.3%, and we will continue to remain at that level for some time till the time we achieve a certain level of granularization. We can then say that we can increase our margins. And I think that should happen when the interest rat e down cycle starts and that should be from the second half of next year, not before that.

Yes.

Yes, right. Thanks Sumant those are really helpful. Thank you so much. And wish you all the best.

Thank you. Next question is from the line of Jai from ICICI Securities. Please go ahead.

Yes, hi Sumant. Thank for the opportunity. Two data keeping question, and then one question is, if you can tell the net security receipts for the bank or the gross in the provisions thereof?

Net security receipt is 37bps. The gross number is INR 2,378 crores, and net is INR1,211 crores.

Second question, sir, on cost to income, right? So earlier, you were operating in a very tight range. And in the last two quarters, I think it has increased a little bit. So, assuming the margins remain flat or flattish and the growth remains more or less here, how should one look at cost-to- income from a near-term perspective? Thank you.

So, in the long-term perspective, we said that next year, we should be between 45% and 46% run rate and going down to 41% to 43% in the following two years. Because we believe that the operating leverage of all our investments will come through at that point of time.

And this is, even you would keep moving towards retail, right?

Yes. But we will not have loan book of more than 55% to 57% retail at any point of time.

Understood. Thank you, sir.

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

Good evening and thank you for the opportunity. NBFC is one of our large segments. Any change in strategy thereafter the risk -weight assets changes done by RBI guidelines in this space?

So, we've always said that our unsecured business, specifically on credit card and personal loans will not be more than 5% to 5.5%, it's an internal guideline. And in NBFC, we've always been lower than the industry at 5%-5.5% of loan book when the industry is at ~8%. So, we've always been very cautious about our lending to NBFCs, and we've never had an issue . Within NBFC portfolio, 95% of them are A rated papers and above.

Essentially, what I was trying to understand is compared to how you were doing the business till end of October and how you do it today.

And there has been some impact on capital at 16% CET1 is still comfortable. But just wanted to get your thoughts around how you're thinking about capital and where you would like the minimum thresholds to be?

So, we said that we will raise capital before we touch 14% CET1. And I think we said that three quarters ago that we are comfortable for six to eight quarters. So, I think in the mid of next financial year we will assess whether we need it. W e are not in a hurry. Our risk -weight assets are falling. Our internal accruals are enough to manage our growth right now.

Yes. Thank you, those are my questions.

Thank you. Next question is from the line of Saurabh Kumar from JPMorgan.

Yes. Just two questions. One is, what will be the 30 -plus overdue book in the microfinance business? That's first. And second, on your balance sheet, we have this trend that your loans are growing 20%, assets are only growing 10%, how long do you think this trend sustains. Do you think that's normalized when your asset growth starts mirroring loan growth or the other way?

MFI 30 to 90 DPD is 1.7%.

And Gobind, do you want to answer? Asset growth and lo an growth, when does it normalize? Gobind is our CFO. He'll answer that question.

Yes. So, it's like we have a mix of investment s, loans and other assets. So, it's kind of a mix which we have to maintain, depending on the liquidity we have to maintain and the investment book, the SLR requirement and the loan growth opportunities.

Yes. So, to answer your question, loan growth will be higher than our investments growth. If that's what your quest ion is because those are the two major contributors of your asset side of the balance sheet.

Okay. Thank you.

Thank you. Next question is from the line of Shubhranshu Mishra from Phil lip Capital. Please go ahead.

So, sir, my first question is around the vehicle finance book. I just wanted to understand how many people we deploy here in terms of sales, credit and collections, specifically for vehicle finance? And what would be a ballpark ROA for booked on a steady -state basis? The second question is on Slide 37, we give out the sourcing of credit cards and other products. Specifically, about the credit cards, so just wanted to understand what is the actual cost of acquisition when we do a remote digital versus an assisted digital, the actual cost of acquisition per cards?

So, if you look at the remote digital, where a customer does it directly, there is no cost associated with the cost of acquisition. It's about INR150 to 200, whatever we spend on the a dvertising, and that's what it is. However, if you do a partnership -based model, on the card, which is also directly remote digital, you have a cost of ~INR 2,500 for the card. And if you look at a DSA or a DSA-based physical model, you will have a cost of ~INR3,000 for the card.

Understood. Thanks that was helpful. And on the vehicle finance part?

So, on the vehicle finance, we don't give ROAs by segment. Headcount of ~11,000 is deployed in the bank to do the business.

Understood. Sir, and we expect to maintain the same level of disbursements going forward in FY 25 as well, at the same run rate?

So, what we said is for the next quarter, we should do INR 14,000 crores of disbursements. And let's see how the next year goes. We said that we want to grow the vehicle book by ~20% YoY and to maintain it, the disbursements may have to increase by 5% to 10%.

Understood sir, that was very helpful. Thank you, so much.

Ladies and gentlemen, we'll take that as our last question. I will now hand the conference over to Mr. Sumant Kathpalia for closing comments.

Thank you for attending the call. If there are any questions which are unanswered, or you have specific queries, you can contact Indrajit and me at any point of time, and we will be able to assist or guide you towards any clarification which you may require. Thank you once again.

 Gross Slippages Details:

BU (Rs.cr)

Gross Slippages (Standard Book) Gross Slippages (Restructured) Gross Slippages (Total)

Q3FY24 Q2FY24 Q3FY24 Q2FY24 Q3FY24 Q2FY24

CFD 554 443 44 56 598 500 MFI 355 335 8 9 363 345 Other Retail 483 397 8 10 492 406 Corporate 304 206 8 8 312 214 Total 1,696 1,382 68 83 1,765 1,465

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