IndusInd Bank Limited analyst Q&A

Thank you very much. We will now begin the question -and-answer session. The first question is from Rikin Shah from IIFL Capital. Please go ahead.

I have quite a few questions, but I'll try to restrict it to 3-4 and will come back. But firstly, in the opening remarks, there was a statement that there was interest on IT refund and interest recovery in one account. Would you be able to quantify the same and ex of both these factors, what would be the core NIM in this quarter? That's the first one.

Rikin, those two account for around 11 bps on the margins. So, you can calculate the quantum.

Got it. Secondly, it's on cost of fund. 12% of the CDs were run down. So, is it fair to say that a large proportion of the CDs that we raised in March are still being carried by the Bank? And if you could also help us with the cost of savings deposit currently, just trying to understand how the cost of fund trajectory evolves from the current quarter?

The CDs are still there, you're right. Because some of those CDs were for six months. They will come up for renewal in this quarter. We have not been actively issuing CDs given the rates that are there and the liquidity in the market that we are getting. So, over the period of time, you will see CDs coming down. We have always kept share of CDs at 3% to 4% of the overall deposit base. Today, it's slightly elevated and we will tone down as we progress. So, that's where we are on the CDs. On the savings account side, we don't publish cost of saving account deposits, as you know. It has come down versus last quarter. Our current SA rates are still lower than cost of SA deposits for the quarter . So, there is still some benefit of last quarter savings account rate cut s, and those are yet to be fully reflected into the cost of deposit. But you will have to wait for another quarter till you see it.

Maybe a qualitatively a way of thinking about how much cost of fund benefit kind of flows through in the next couple of quarters, given that there are multiple moving parts in addition to the steady state business?

Precisely because there are multiple parts, we won't be able to say by how much bps cost of funds is yet to come down. But if I have to give you some ballpark numbers on current SA rate s versus where we closed last quarter, there is another 40 -50bps reduction in cost of SA is possible. The rest of the cost of fund deposits, there are multiple moving parts. How much of that will in the end reflect into cost of fund reduction, that we will have to see as the quarter progresses.

Fair enough. The third one is on the fee income. Understandably due to the business degrowth, the fee income has been weak. But the growth has collapsed across the line items. So, adjusting f or any volume or business uptick that we see from here, should this be considered a new normal base for the fee income?

Last quarter's fee was not in a way comparable. You would have seen there were a lot of one-offs we had adjusted for. So, please don't compare that. There were a lot of transfers between NII to fee etc. This quarter's base is something which you have to start your benchmarking from. So, you're absolutely right. Whatever is this quarter's reported fee, that is the base from where we will start. Some of those fees are impacted because of the lower disbursements in vehicle, MFI etc. Corporate, if the book degrows by 10%, the consequent fees also go away. So, all those things are there. But there is no one off in that. I can say that.

Got it.

You also know that the Quarter 1 is obviously a soft quarter, and you would see from Quarter 2 onwards it should scale up.

Got it. The second last question is on the asset quality. The fresh flows in MFI have actually again inched up in this last three months. And even in other segments, on absolute and percentage basis, the NPAs have gone up. So, do we still expect elevated slippages in the coming quarters and this 200 plus basis point of credit cost? Is there any scope for meaningful improvement from the current levels?

See microfinance, we had said that it will take at least six months for things to normalize. We have come down from Rs.1,600crores of last quarter's slippage s towards around Rs.900crores this quarter. So, there is a meaningful reduction. But it's elevated versus the normalized run rate. And it will take maybe 3 to 6 months more before we can say that the stress is behind us. Sequential uptick is always there from Quarter 4 to Quarter 1. Plus, there were some additional changes in terms of MFIN guidelines getting implemented. Some of the state level issues were there and you would have seen other MFI results. So, it's a common phenomenon across the industry where overdue book has increased in June versus March. And we are no different. We continue to have that same belief that it will take another 3 to 6 months for microfinance before we can say that stress is behind us. Coming to other segments, as we said, there is a minor few basis points here or there increase in slippage s, which is par t for the BAU progress. I wouldn't read too much into it. For Bank as a whole, excluding microfinance, slippages are stable. Only thing is the GNP A number that you see is higher sequentially as well as year -on-year. We have not been selling to ARCs or writing it off given the limited operating profits that we have, the capacity to write off is also limited. Bulk of the write offs are assigned towards microfinance, unsecured etc. So, at some appropriate time, you will see the write offs also coming in. GNPA, as you know is not the best indicator in terms of the evaluating Bank’s asset quality. Slippages, the gross and net is what you should look at. Most of the businesses have shown stable gross and net slippage s.

Got it. Fair enough. And the last question is, the notification of the fund raise. Was it just an enabling resolution? And what is the status of regulatory approval on increase in the promoter shareholding? Those are all my questions.

Every AGM, as you know, we take enabling resolution from the shareholders to raise both equity as well as debt capital. It doesn't mean we will raise. At appropriate time, the board management will evaluate what is the right time and quantum that need to be raised as capital. As you would have seen, ou r CET1 is now close to 15.5% and that too without counting profits of Quarter 1. So, we have enough capital available. Growth is, as you know, it's in single digits or almost flat for this year. We will have to see how the year goes. So, capital wise, I think we are now well placed. We don't need capital. But board and the incoming CEO as well as the management will evaluate when we want to raise capital. The shareholder resolution is just an enabling resolution which we take every year. It's nothing out of ordinary.

No, we have not yet heard anything from the RBI. There might be discussions between the promoter and the regulator directly. The Bank is not aware of any new development which we are required to disclose.

Perfect. Thank you so much for answering all the questions.

Thank you. Next question is from the line of Piran Engineer from CLSA India. Please go ahead.

Yes. Hi team. Thanks for taking my question. Just firstly on the NIM front or rather yield front, how much of the repo pass through is done?

So, different businesses are at different benchmarks. We have vehicle which is largely fixed MFI, which is fixed rate.

No, in the EBLR.

Difficult to give you at a Bank level how much EBLR is passed on. The large part of the external benchmarking happens in corporate side. And on the corporate side, the yields are down around 20 basis points this quarter versus last quarter. So, there is the bulk of EBLR repricing that you can see playing through in this quarter.

So, let's say the repo rate cut happened in early June. When does that really get passed on? Does it happen evenly over the quarter?

No. Whenever it comes for renewal, the re are different terms. Different loans have different terminologies on the corporate side. They have got various renewal processes. So, it gets passed on over a period of time. In the end, there could be some lead lag, but over 3 to 6 months, everything gets passed on.

Okay. Fair enough. Secondly, on the fees bit, so I understand a lot of re -statements last quarter and all. But even if I look at your card and distribution fee, and I understand there is seasonality in 4Q. But even on a YOY basis, it's like down 50 %- 60% whereas your book is kind of still growing on a YOY basis. So, how do I reconcile this?

On the insurance business, I think there is, you know, it's a seasonal business. So, Quarter 4 was the highest. And though there were events in Quarter 4 of last financial year, we didn't suffer that. We did our distribution fees that way. On the card side, you know, some part of the business, which is on the commercial side, we are letting go because it's not too efficient a business. But you will see that once we normalize this from Quarter 1, you will see the growth coming back from Quarter 2 onwards. But your profitability doesn't get affected because of this.

Okay. And just lastly, you all mentioned, you all are combining affluent and what was it, NR deposits? You mentioned something like that.

Yes. See, the clientele is practically similar. NR client is also a HNI client. So, we thought that, okay, the affluent and the NR, the client segment is the same. One is Indian, one is the NR. Because the product program can be actually offered better, so we have combined that for better client offerings.

Thank you. Next question is from Kunal Shah from Citigroup. Please go ahead.

Yes, thanks for taking the question. So, again, coming back on the core fee income side, if you look at fee to assets, that is now actually down to closer to like 1.1% on an average. Last quarter, you indicated like say 2,400 odd crores to be the normalized number. And now you are saying that we need to reset to this level. And then let's see in terms of the growth. So, where eventually will fee to assets settle? Because I think that's going to be the key driver to ROAs. And this time, again, it has reset at a much lower level.

No, Kunal, if you recall, we did not say that is the base last quarter. I still recall that the number reported was normalized. And we always said that number will go up and down depending on the business mix. So, this quarter, Quarter 1, as you know, is a seasonally weak quarter compared to Quarter 4 across the businesses, be it vehicle, microfinance, plus added impact of corporate. The retail side distribution fees are lower. Some of the credit card fees etc., we have let go of being selective. So, we are cognizant of how fees are important from the ROA perspective. And the businesses are not letting go the fee ambitions. And we will start rebuilding our growth journey, keeping in mind both NIM as well as fees. It is difficult to give you a guidance or target where we would like to.

How far can we optimize? Ye s, because it's at 1.1. So, can we even optimize to 1.5, 1.7? How would that be?

No, Kunal, we would be not in a position to give you any guidance on the specific numbers.

Okay. Sure. And secondly, on maybe cost side, you mentioned that I think a part of it is because of the credit card, because maybe it's not coming in the fee as well as it's not there in the OPEX. So, if we add that, okay and maybe the loss in the card fee income and maybe the overall overhead cost, then it seems to be like almost a flattish number, while employee cost has gone up quite significantly. So, what would have been the reason for this kind of a jump in the employee cost in particular?

So, there is no increase in the OPEX as such, but there was a certain expenditure pertaining to employee that we have regrouped for the year, and we have restated that. So, that would be basically permanent from now onwards.

Kunal, it's just a change which we did. I think the accounting, the line wise, we have put it into the employee cost line. That's it.

And then quantum would be?

For this quarter, it was Rs.145crores. So, that has been done.

It's a reclassification which we have done. So, overall OPEX doesn't go up. But I think we have put in the right line, which is under the employee expense line. So, because of reclassification, you're seeing a jump.

Yes. Thank you for the opportunity. I wanted to ask, are we seeing any signs of stress in the CV segment, especially the retail CV? Are there any signs of stress there?

I don't see any stress in the CV segment. Our net slippages have been lower than last year’s Q1. And we continue to believe it should be better than last year.

Okay. And in terms of loan growth, should we expect positive loan growth on a QOQ basis from 2Q onwards?

Bank as a whole, we'll wait and watch. We will not give you any quarter specific or the year specific guidance. As our Chairman sir said in his initial opening remarks, our ambition is to show you improvement quarter -on-quarter on every metric. But we will not be in a position to give you any specific guidance. As he said, we are focused on secured businesses like vehicle, retail, mid and small corporates. We are cautious on microfinance. So, all that philosophy continues, but we will not be able to give you any quarter specific or year specific guidance.

Okay. Thank you. Those are my questions.

Thank you. Next question is from the line of Jai Mundhra from ICICI Securities, please go ahead.

Thanks for the opportunity. The first question on, I see that the standalone PAT and the console PAT, there is a difference of some Rs.80crores something. What would explain that?

So, that's the loss of the subsidiary, the BFIL, which is 100% subsidiary, it has reported a loss. So, consolidated, it's been adjusted in the numbers.

Okay. So, but that is like 100% subsidiary, right? So, that will not come in the standalone numbers also?

That's why when we have talked about the opening remarks, you would see the Rs. 604 crores is what we have talked about as a consolidated profit. Standalone profit is higher. If you net off the subsidiary loss, then we come down to Rs. 604 crores as the consolidated profit.

Right. No, that I can see. But I thought, while it is 100% subsidiary, but the entire business and it works the way that, it's like a department of the Bank. So, I thought maybe the financials are there in the standalone Bank also.

Jai, we can take you through maybe offline, there are certain expenses which we have to reimburse. It's not directly that every line item gets reimbursed for. So, there are some regulatory guidelines which are there and even though it's 100% subsidiary, there has to be a proper arm's length reimbursement guidelines. So, given the way the book has declined as well, and the expenses that they already have and compared to the whatever reimbursement that we can provide for, the subsidiary has reported a loss. So, that's where it is. But I can take you through in detail how the operating mechanism works separately.

Yes, we have done around Rs.6,000 crores of microfinance disbursements this quarter in BFIL. Last quarter, if I'm not wrong, we are disbursed around Rs.9,300 crores. On disbursement run rate, it will be difficult to give you a quantum. As I said, we don't give guidance on any specific numbers. We are watchful about how the situation is. First half is always seasonally weak. Plus, there are certain states going into election. And industry has shown some uptick in sequential overdue book. So, let's wait and watch how things go. But I would rather be more cautious on saying that the book has maybe a little bit chance of declining rather than growing. But let's wait and watch how things go. And then we will again come back in quarter to take a call.

Sure. And lastly, if you have this number for how much is your loan book is fixed, EBLR, MCLR, etc. And on corporate, I think you mentioned that it happens with the respective reset date. But I don't think you have too much of retail floating rate loan book. But still, what is the EBLR mechanism for retail loans?

So, what used to be around 50% fixed has now gone up to maybe around 55 %-58% given that corporate book has shrunk in the last six months. Vehicle, MFI, they are all on the fixed rate. Some parts of retail is also fixed rate. The 40% corporate book is on a floating rate basis. Of that, two thirds is on external benchmark and one third is on the MCLR.

Thank you. Next question is from the line of Harsh Modi from JP Morgan. Please go ahead.

Hi, I had two questions. First is, if you had, let's say, enough operating profits, what is the stock of NPLs that you would have written off if it was possible? And I have a follow up.

See, way higher than my pay grade, but if I can just take a call. The Bank has historically operated at around 50 to 60 basis points of net NPA. Today, our net NPAs are running at around 110 basis points. So, that extra 50 to 60 basis points of net NPA is something which is the accumulated net NPA over the last 6 months or 12 months. If we have enough profit pools, ideally, we should write it off. Obviously, you should have actually zero net NPA. But given the way things are, I think 50, 60 basis points of net NPA is where I think the Bank like us should operate. Also, comparing where the rest of the market is, I think that's where we should have 50 to 60 basis points of net NPA while maintaining 70% to 75% provision coverage ratio.

Thank you. One more. Are you targeting a particular PAT or P BT, profit before tax number, in a bid to, as in, what is adequate PPOP and when, if I do write off 50, 60 odd basis point, is there a particular profit number, particular return number that you are targeting? I just want to understand how should I think about the timing of this 50, 60 basis point write-off for the next few quarters? Thank you.

There is no profit number in our mind. We want to be profitable. And there are certain other stakeholders which are also looking at the profit, such as depositors and others. So, we need to balance aspirations of all the stakeholders. You guys are more savvy than maybe a retail depositor on the ground , who can net off all those things from networth and say what is my adjusted book value. But from other stakeholders perspective, we need to have some decent profitability. So, there is no particular profit number in our mind. No particular RO E in our mind. We are cognizant of cleaning up whatever accumulated stress in the balance sheet is. If you noticed, outside of net NPA, all other forms of stress, be it in terms of SRs or SMA-1, SMA-2 or restructured book, all those are now coming down to almost negligible levels. The only residual point is net NPA. That also will come down over a period of time. But at this point in time, I think it will be premature to say what is our expectation of this year's profits and when and how we will write it off the net NPAs.

Great. Thank you.

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

Thank you for the opportunity. Sir, my first question is on microfinance book. This is probably given that you run a large book , and we are hearing across the board 1Q numbers have been elevated for the industry. What is your read -through for the second quarter or maybe for the rest of the year? Is there any grip if this problem has peaked out or not? That is the first question.

Again, we are coming to the same question. I think let's wait for another 3 to 6 months. Things are a little bit in flux. Whatever we say today may not hold a month later. So, let's wait and watch. We are cautious on disbursement. You have seen our book coming down from Rs. 40,000 crores at the peak in last March towards almost now Rs. 28,000 crores. So, we have been running down. A large part of the book is now built in the last 6 to 9 months. However, that too is showing some stress. So, let's see, wait, and watch for another 6 months an d then we take a call. At this point in time, calling out whether things have peaked or not peaked, is too difficult for anybody I think in the industry.

Again, you said the new book that has built up in the last 6 to 9 months also has some stress showing up, not just for us but for the industry?

Yes, correct.

The second question is on the deposits. If you can talk about the customer behavior on deposits after the large cuts that you have taken. What are the retention rates like? And just to follow up on that, given that your net headline loan growth number is probably going to be muted for a while, does that give you some more ammunition to shed higher cost deposits over the next 1 or 2 quarters?

As of today, we are in liquidity excess. We are holding more than Rs. 45,000 crores- to Rs. 48,000 crores of excess liquidity . So, what we are doing is that the less profitable accounts on the liability side which is high cost, financial segment deposits etc., those kinds of things we are letting go. The segment which we are looking at is the retail. And you have seen that though overall book has de-grown, our retail book is steady. And you will see from Quarter 2, the accretion will start because whatever had to happen has happened. So, the focus definitely is on individual deposits, and we will grow that. And obviously till the time we have liquidity, we will try to prune and right-size the balance sheet so that it becomes more stable and sustainable.

Does that mean margins can move up again from here in Q2?

As I have been saying, we will not be able to give you guidance on margins. All we can give you is the drivers. On the positive side, savings accounts rate cuts are yet to fully reflect to the cost of deposits. The growth being slower on the corporate side results into positive margins. The liquidity getting deployed is positive for the margins. But on the negative side, repo/ EBL rate cuts getting transferred impacting the loan yields, as well as low growth in microfinance, credit card etc., are negative. So, all we can give is you the drivers of margins. But where they will end, we will not be able to guide you on.

Thank you, sir. Best of luck.

Thank you. Next question is from Anand Dama from Emkay Global. Please go ahead.

Thank you for the opportunity and great set of results. My first question is on your opening remarks where you said that OPEX growth here on will be almost about single-digit. So, what is that basically going to drive the OPEX growth into single-digit? Because I think we want to invest into tech, you also invest into compliances, liabilities franchise as well seems to be relatively weaker on the retail front. So, why are you saying that OPEX growth will be single -digit or basically this is going to ch ange once the new MD & CEO takes the position? So, You are saying that OPEX growth will be single digit going ahead. Why is that so? Would that impact the OPEX?

No, it is not about cutting. Given the environment of low growth, a lot of our variable costs come down. So, vehicle, MFI, if they are not growing, then the disbursement related expenses come down. Secondly, a lot of investments in technology have already happened in the last 2-3 years. You have seen the opex growth rates that we have done. So, those are not recurring, whatever the maintenance costs are there, those are coming in. We have grown our opex at around 20-25% compounded. So, all those investments that have happened in the past. Operating leverage is coming from that. We are just waiting out a little bit more. We have been more cautious about all the spends. Some of the maybe too forward -looking investments, we will have to push out a little bit. We have to also get revenues first before we can start investing. So, it is just a bit of a tighter control over opex, rather than anything else.

And secondly, recently our HR Head has resigned. And we have seen senior management moving out. If the MD & CEO is not in, so how do you plan to hire the senior management, one? And, I think there was another call that we might be also hiring Executive Director. Any update over there?

So, let me respond to this. So, as far as the CEO hire, that is progressing as per schedule. As we have committed to the regulator, the submissions have been made to the regulator as of June 30th and we await regulatory approvals. As far as the senior management is concerned, since we did lose the former CEO, the deputy CEO, and the CFO, it is quite natural for us to revisit our current management leadership team. And there were some that were also superannuating as part of the natural progress in the Bank. So, wherever there were any open gaps, we are looking at both int ernal and external candidates a nd sort of filling that up. And I think all the building blocks from a management leadership team are being looked at very closely. And we are hopeful that a lot of these positions will get filled up in due course.

Could you provide some clarity on Executive Director position?

So, we lost the last CEO and of course the Whole Time Director, which was the Deputy CEO. So, as we sort of move towards building the leadership team, after we have the MD & CEO in place, we will also look at creating two Whole Time Directors in due course.

Thank you. Ladies and gentlemen, we will take that as the last question. And I'll hand the conference over to the management for closing comments.

Thank you. I just want to thank all the analysts and everybody who participated in this analyst call. Greatly appreciate and thank you for all the questions that were asked. It puts us on our toes and certainly sort of we are mindful of whatever has been stated. But I just want to conclude by saying that we did go through, as I said earlier, we did go through a difficult period in the prior quarter. It has been very challenging. But when you are in a crisis situation, it's the team that gets together and works as a cohesive team. I feel that whatever we have witnessed over the last 3 to 4 months, it should have never happened. But since it did happen, we have learnt a lot of lessons from the same. We are making good progress in addressing all those issues of the past and certainly looking forward in building the Bank of the future. And the entire team is working towards this one common objective and rebuilding the trust and integrity and the highest governance standards from this Bank as we move forward. And I can assure you that the efforts that h ave been put in have been extraordinary by the entire team, the leadership team and all the employees of the Bank. So, I'll stop here and thank all of you for participating in this session.

Thank you.

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

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