HDFC Bank Q1 23/24 Earnings Call Transcript

Quartr
Provided by Quartr
July 17, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen, good evening, and welcome to the HDFC Bank Limited Q1 FY 'twenty four Earnings Conference Call on the Financial Results presented by the management of HDFC Bank. As a reminder, all participant lines will be in the listen only mode. There will be an opportunity for you to ask questions after a brief commentary by the management. Please note that this conference is being recorded. I now hand the conference over to Mr.

Operator

Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. Thank you, and over to you, sir.

Speaker 1

Okay. Thank you, Dovin. Good evening and a warm welcome to all the participants. I want to briefly start and give a minute update on the merger. Effective July 1, as you all know, SG and A Limited has been merged into the bank.

Speaker 1

Consequently, all subsidiaries of SG and A Limited have become That's a brief of the bank. Earlier today with the support of BSE, NSE, NSDL, CDSL, all HDFC Limited shareholders As on the record, they have received shares of HCFC Bank, which concludes the 15 months journey for the bank and all the regulators involved, and we would like to take this opportunity to thank them for their continuous engagement and support. HSE brand built over 47 years will now be proudly owned by the bank. It is a privilege to add on and engage with the 6,000 institutional investors and 7 lakh Engagement shareholders. SG and A Limited has excelled in nurturing trust in their customer engagement over 4 decades of operation.

Speaker 1

We'd like to harness this bond with our home loan customers by leveraging our exhaustive distribution reach and comprehensive digital platform to upsell a complete bouquet of the banks and subsidies products across pay, save, invest, borrow, insure and trade like the savings account, personal account and so on, including the credit card and SAP. Seamless integration to aid the sustained and optimal execution is undertaken, involving merging products and processes expertise, creating learning opportunities by focusing on customer engagement and experience, onboarding 4,000,000 customers with over 506,000,000,000,000 portfolio, onboarding 4,150 talented professionals bringing in knowledge and culture. Now let's look at the key macro environment during the quarter before we review the earnings. Stronger than expected GDP growth In the March quarter, as boosted sentiment, various indicators suggest economic activity continues to be strong in the recent June quarter. GST collections have been reversed in the Q1 where it is 5 lakh crores grew by 12% year on year.

Speaker 1

Manufacturing PMI at 57.8 and services segment PMI standing at 58.5 all goes well and shows robustness. Again, the current account deficit narrowing to 7 quarter low adds more strength. Payment systems indicate business activity continues to be robust with 14% growth in RTGS and NAST transactions and 44% growth in VPI payments. On the consumption side, the passenger vehicle and 2 wheeler sales showed robust growth reflecting strong consumer demand. During the quarter, our retail issued car stands have shown robust growth of 30% year on year and 10% sequentially.

Speaker 1

The uneven distribution of monsoon has adversely impacted sowing, excessive rains in North India have inundated fields already shown, while lack of rainfall in East, Central and Southwestern regions has delayed zone. Overall, we continue to see healthy domestic demand conditions, Resilience in services exports and push from government through CapEx expenditure, these factors are estimated to result In India's year on year GDP growth rate of 7.7% in Q1 and greater than 6% in the full year 24 after a stronger than expected GDP growth of 7.2% in FY 2023. However, weather related uncertainty with the rising likelihood of LENA process risk to global recovery and inflation, which remains high. Let's go to the key themes. On the distribution, while we added 39 branches in the quarter, we added 1482 branches over the last 12 months, which now stands at 7,860 branches.

Speaker 1

On the payment acceptance points, we have 4,600,000 year over year on year growth of 37%. That includes 2,800,000 merchants accepted through the SmartHub Vyapar platform. On the CRB side, our SME business represented more than 90% of the district expanded to 1,700,000 villages reach and is on track to achieve the objective of over 2 lakh villages. Board loan processing is now offered in 4,336 branches, an increase over June 2022, a twofold increase over June 22. In the customer franchise building, we added 2,400,000 new liability relationships during the quarter.

Speaker 1

With now over 85,000,000 customers, it provides the best to engage, enabling us to broad base and deepen our relationships. In order to provide for this engagement, we've added 29,000 people over the last 12 months and 8,500 people during the quarter. On cards, we have issued 1,500,000 cards in the quarter. The total card stands at 18,400,000. Our website continues to receive Enormous traffic, we received on an average 109,000,000 visits per month with over 89,000,000 unique visitors over the quarter at a year on year growth of 42%.

Speaker 1

Focusing on the granular deposit which continues, deposits amounted to 19.1 lakh crores, an increase of 19.2% over prior year. On the back of a fantastic quarter in March 23, where we added INR 1,000,000, we further built on this enhanced base during the June quarter with an addition to deposits of INR 30,000 crores. Retail deposits added in the quarter was INR 38,000 crores. Retail, which has been anchor of our deposit growth, constitutes about 83.5% of our total deposits, getting more granular compared to 82% in prior year June. Retail deposits grew at the rate of 21.5% year on year and 2.4% sequentially.

Speaker 1

Wholesale deposits constitute 16.5% and these grew 9% year on year, but we have lowered 2.5% sequentially. On a pro form a merged basis, retail deposits grew by 20.6% year on year. This is pro form a merging on a pro form a basis merging the June deposits of HDLC Limited I'm and the retail constitutes 83% of the total pro form a. Now moving to advances, growth of IDTC advances grew 20% year on year. Net of IDPC advances at INR 16,300,000 crores grew by 13.7% versus prior year.

Speaker 1

This is an addition of approximately INR 16,000 crores during the quarter and INR 2,022,000 crores in the year. Credit to deposit ratio as of June ended stood at 84%. Our retail advances growth was robust. Domestic retail advances grew 20% year on year and 4% quarter on quarter, primarily driven by strong performance in home loans and personal loans. Commercial and Rural Banking, which drives our MS and E PASL book, continued its momentum with an year on year growth of 29%.

Speaker 1

Wholesale segment grew 11% year on year, but we grew 1.2% sequentially. The bank's advances growth of IBPC grew by 20.1% year on year. When we include HDFC Limited's individual home book, The pro form a core loan growth for the merged entity is 18.7% year on year. Technology, we continue to focus on the technology agenda. HCFC Bank won the customer experience hub.

Speaker 1

Over 12,500,000 unique customers have interacted through the platform according to over 22,000,000 interactions. On the Payside, I've handled transactions volume of over $13,000,000 during the quarter with more than $1,600,000 monthly average logins and 1.5 times increase in customer spends. Express car loan volume now contributes 30% of our car loan volume. We continue to be focused on these investments and expanding both the distribution as well as the digital footprint and thereby driving the relationship management for growth. Balance sheet remains resilient.

Speaker 1

LCL for the quarter for the bank was at 126%, prior quarter was 116% and prior year was 108%. LCL on a pro form a basis that is including the estimated HDFC Limited book as of June 30 based on the merged entity was at 100 over 120 capital adequacy ratio is at 18.9 percent and CET1 is at 16.2%. Net revenues for the quarter, they were at INR 32,829 crores, grew by 26.9% over prior year, driven by gross advances growth of 20% and deposit growth 19%. Net interest income for the quarter at INR 23,599 crores, which is 72% of net revenues grew by 21% over prior year. The core net interest margin for the quarter was at 4.1%.

Speaker 1

On an interest earning asset basis, the core net interest margin was at 4.3%. Getting to the details of other income, which was at INR 9,230 crores, fees and commission that constitutes 2 thirds of the other income up at INR 6,290 crores and grew by 17% over prior year. Retail constitutes approximately 98% of fees and commission. FX and derivatives at INR 1309 crores was higher by 27% compared to prior year and net trading and mark to market income we're at INR552 crores for the quarter. Prior quarter was a negative INR38 crores.

Speaker 1

And prior year was also negative, slightly above INR 1,000 crores. Other miscellaneous income at INR10.79 crores includes the recoveries from return of accounts and dividends from subsidiaries. Operating expenses for the quarter were at INR 14,057 crores, an increase of 33.9% over prior year and an increase of 4.4% over prior quarter. In this context, it is pertinent to note that we added 1482 branches and 17 atm since last year. In the medium to long term, distribution reach is the key.

Speaker 1

This is what will provide funding through better engagement. Cost to income ratio for the quarter was at 42.8%, reflecting the cost of investments, which is cost of investments, which from a Timing point of view has been chosen during the benign credit environment to capture the market opportunity. This will moderate and revert to below previous levels after the breakeven and payback from the investment starts to flow through. PPOP for the quarter grew by 22%, our pre provision operating profit was at INR18772 crores. Coming to asset quality, the GNPA ratio was at 1.17% compared to 1.12% in prior quarter and 1.28% in prior year.

Speaker 1

Out of the 1.17 percent, about 14 basis points of standard, but the core GMP ratio is 1.03. GMP ratio excluding NPS in the Agriculture segment, because Agricultural segment has got the seasonality in June December. So excluding the agricultural segment, GMP ratio was at 0.94%. Prior quarter was also at 0.94% and prior year was 1.06 percent. Net NPE ratio was at 0.30 and net NPE ratio Excluding NPS and the agricultural segment was at 0.23, again same as prior quarter, which was also 0.23.

Speaker 1

The slippage ratio for the current quarter is at 35 basis points or about INR 5,800 crores. The slippage ratio for the current quarter excluding agricultural Segment was at 26 basis points, about INR 4200 crores. During the quarter, recoveries and upgrades were INR 2,650 crores or approximately 16 basis points write offs in the quarter were INR 2 INR 2,100 crores or approximately 14 basis points. There was no sale of any NPE accounts in the quarter. Restructuring under the RBA resumption COVID framework as of June 9 stands at 27 basis points, about INR 4,265 crores.

Speaker 1

In addition, certain facilities of the same borrowers which are not restructured is approximately 5 basis points or INR 800 crores. On the provisions reported were INR2850 crores against INR2,700 during the prior quarter and INR3,200 in the prior year. The portion coverage ratio was at 75%. At the end of current quarter, contingent portions and floating portions were approximately 11,000 INR150 crores, same as last quarter. General provisions were at INR7150 crores.

Speaker 1

Total provisions comprising Specific floating contingent and general provisions were 171 percent of the gross non performing loans. This is in addition to the security held as collateral in several of the cases. Floating contingent and general provisions were 1.12% of gross advances as of June end. Now Coming to credit cost ratio, the total annualized credit cost for the quarter was at 70 basis points, prior quarter was the prior year was 91 basis points. Recoveries which are recorded in miscellaneous income amounted to 19 basis points of gross advances for the quarter.

Speaker 1

The total credit cost ratio net of recoveries was at 51 basis points in the current quarter compared to 68 basis points in prior year and 44 basis points in prior quarter. The profit before tax was at INR 15,912 crores, grew by 30% over prior year. Net profit after tax for the quarter at INR11,952 grew by 30% over prior year. Some highlights on HDB Financial Services, this is on India's basis. The total loan book as of June end stood at INR73,568 crores, growing 5.1% sequentially and 19% year on year, secured loans comprises 72% of the total loan book.

Speaker 1

Disbursements for the quarter were higher by 42% over prior year. Customer franchise grew to 12,800,000 with 7.3% additions during the quarter and an increase of 29% year on year. Distribution network was augmented by 89 branches in the quarter, taking it to 1581 branches spread across 1100 cities and towns. Net interest income for the quarter was INR 1501 crores, an increase of 5% quarter on quarter and 13% year on year. Positions and contingencies for the quarter was it is INR 267 crores against INR398 crores for the quarter ended last year June.

Speaker 1

Quality of the book continued to see sustained improvement. Growth Stage 3 as of June end improved to 2.5% against 2.7% as of March 23 and 4.9% as of last year June, reflecting sustained healthy collections, frozen coverage on the Stage 3 books stood at 66%. The profit after tax for the quarter ended June increased to INR 5.67 crores against INR 5.45 crores for the last quarter and INR 4.41 crores for last year's same quarter. ROA and ROE for the quarter stood respectively at 3.2% and 19.4%. Earnings per share in HDB was at INR 7.16 and book value per share in HDB is at and 50.5 percent.

Speaker 1

HCB remains well capitalized with a total capital adequacy ratio of 19.8% as of June end. And a few sentences on HCB on HSL, our securities company that has added nearly 600,000 clients in the last 12 months, taking the client base to $4,600,000 HSL has a network of 2 0 7 branches across 147 cities and towns. Digital offerings continues to enjoy good traction in the market. Around 93% of active clients utilize the services during the which lies the digital platforms of the company. SHC Securities has introduced SHC Sky, a low cost booking platform, which is targeted at all kinds of customers, millennials, investors, traders, providing easy do it yourself seamless execution with a high use and competitive flat pricing policy.

Speaker 1

The total reported revenue for the quarter was at INR497 crores against INR432 crores in prior year. And the net profit after tax was at INR189 crores, almost flat to prior year. Earnings per share in the quarter in HSL was book is $119,000,000 and the book value per share at HSL is at $11.53,000,000 In summary, our results reflect consistency of delivery, diligently executed to result in continued momentum in deposit growth of 19% and retail deposit growth within that, which is 21%, 21.5%, growth advances growth of 20% and the net advances growth net of IBCC of 16%. Profit after tax increased by 30%, The leading return on assets in the quarter over 2% and ROE of about 17.3%. Earnings per share reported in the quarter is at rupees 21 point 4 at the standalone bank level and it is 22.2 at the consolidated bank level.

Speaker 1

Book value per share Standalone bank is at RMB525.4 and at the consolidated bank level is at RMB 542.7. With that, may I request the operator to please open up the line for questions, please?

Operator

Thank you very much. We will now begin the question and answer

Speaker 2

Sprint.

Operator

The first question is from the line of Suresh Ganapathy from Macquarie. Please go ahead.

Speaker 3

Yes. Hi. I have two questions, Srini. One is on credit growth and deposit growth. Yes, there is a merged company profitability.

Speaker 3

So let me first touch the deposit growth aspect. So I know quarterly there can be fluctuations, but Your Q o Q standalone deposit growth was about INR 30,000 crores, right, 1.6%. But I'm looking at the system number. Apparently, the system seems to have added INR9 1,000,000,000,000 of deposits of 5% Q o Q. So somehow I see on an incremental basis for the quarter, you might So a lot amount of market share, anything specific which affected this quarter's deposit mobilization?

Speaker 1

So, Suresh, there is nothing specific as such. Typically, Q1 is of all the quarters, it's a slow quarter, right? Across various parameters, it's a slow quarter. From branches to deposits to loans to if you go back historically and see, The Q1 contribution is mid single digit, typically on an average, if you see, but it will be sometimes where it is in double digit, but typically single digit is what it contributes. That's 1.

Speaker 1

And 2, I know that if I take you back a quarter or 2 ago that it's not about 1 quarter, if you look at how Extraordinarily got built in March and then we sustained it. That means we did not lose that over And then we built on top of that because it was not a small feat and at least INR 50,000 crores came through In March quarter, more than what one would have envisaged and we kept that and we built on top of that. And particularly, the retail, if you see, It is 38,000 in retail. Typically, the Q1, you see the current account going down and savings account, to some extent, moderates due to spend. We've seen 30% increase in spends, right?

Speaker 1

Our issuing card customer spending increased 30% And 10% up sequentially on spends, car spends, on the retail costs. So some of these factors typically contribute, but then More important is that we are confident that the building blocks that we put in place for that such Enormous growth remain and confident of getting that to fruition over the next few quarters.

Speaker 3

Okay. The other question is in advance is, you reported in the 3Q update, merge gross number excluding wholesale of HDFC Limited to be growing at 15%. But apparently in the call, this time you said it's actually grown at 18.5%, that is if I just take the retail At DSP and at the gross advances of the standalone entity, the number is 18.5%. What number to go by? Because Because what is then the 3Q is 15.5%, merge growth excluding on sale, yes.

Speaker 1

Yes. See the gross Bank, we put that up on Page 23 of the earnings deck that we published earlier today to be helpful on that. The bank's growth of IBPC grew by 20%. Correct. And STLC's individual loans, The mortgage individual loans grew by 14% year on year.

Speaker 1

So combined just the bank loan and the individual loans because that's These are the categories of loans that are managed for significant opportunities on growth. That's grown at 19%, 18.7%, Right. That's the growth. The HDFC is non individual loans. They grew by 18% year on year, 18% did grow year on year and which we know that there have been management actions driving that big growth.

Speaker 1

And we will evaluate over the next two quarters in terms of what is the stable level before we start to build, right? We expect to understand it better before we get that to be building. That's down 18%. So that's why including that it is a 16% growth. All loans On a gross basis, it's 16%.

Speaker 3

Okay. So yes, there's some confusion with the pre Q. Okay, no problem. And finally, are you confident that on a merged basis, when you deliver the September quarter results, you can Sustained the current levels of ROA reported, I mean you exited of course this quarter with 2.1%. Last year also full year the number was 2.1%, how confident you are based on your initial assessment?

Speaker 1

Yes. The level of confidence is pretty high. Typically, I think, Sashi had alluded to in some other context that we're looking at 1.9 to 2.1. That's the range at which we'll oscillate. Quarter to quarter, if there is a timing on certain things, particularly if there is anything that we do, will be timing.

Speaker 1

But otherwise, Broadly, it is the 1.9 to 2.1 that we alluded to before. That is where we are confident of driving to deliver.

Speaker 3

Okay. Thank you so much.

Speaker 1

Thank you.

Operator

Thank you. We have the next question from the line of Maruk Adhajanya from Nomura. Please go ahead.

Speaker 4

Yes, hi. So my first question is on OpEx. Basically, this happened even in the last Your first quarter, so the OpEx growth in the 1st two quarters on a sequential basis is 4% to 5%. And then as branch adds pick up, Now basically, the OpEx ratio or the OpEx growth, not the ratio, but the OpEx growth Scale is up to 7% QoQ, 8% QoQ. And that's last year this happened because the branch adds were Significantly high in the second half, right, 600 to 700 branches in each quarter of the second half.

Speaker 4

So how do you look at the standalone OpEx going ahead? ADFG's business moves at a steady state OpEx, but your own OpEx, As you go on adding branches, do you see the 8% sequential growth coming back? I'm not talking Not in terms of cost to income, but the QoQ growth because yes.

Speaker 1

No, no, that's not The 8% Q2 is essentially the buildup of the branches that happened there. And so the way We tried to pace it in such a way, if you think about what happened there, we started the quarter and our goal was to start building the distribution. So we created a lot of capability to build branches. And then as we were confident Because think about it what we mentioned, which is we're trying to take the benign credit environment as an opportunity to see how we invest and during this time period Run through the maturity and try to get that when credit normalizes, when the credit reverts to mean, which is historical mean, call it 90, 100, 110, somewhere around that basis points. That's the kind of credit reverse before the credit reverse to mean We need the maturity cycle to come to fruition.

Speaker 1

So we are waiting for that to see. And as we saw, we started to accelerate and go. And then as time goes by, you'll see that the base comparison starts to lap. And then after that, you'll see a moderate level, right? So we have still not seen the lapping of the growth from a base comparison point of view because we started to some extent in the September quarter to a large extent in the December quarter.

Speaker 1

And as we saw the credit bending further down, because if you look at the credit cost last year, June quarter was 91 basis points. This quarter is 60 basis points, right? So as we saw that coming in, we started to implement that. That's essentially in fact not all of the credit cost is getting reinvested, but we are taking that opportunity and enrollment to do that.

Speaker 4

Got it. And my next question is on loan growth and incremental deposit growth. So just in terms of loan growth, we had kind of indicated doubling of the book. Do we see that starting FY 2024 because the run rate is a bit softer in the Q1. So the merged balance sheet has grown 13% after including everything and if you exclude IBPC, then it's grown 16%.

Speaker 4

So do we can we see a 17%, 18% growth as we end the year? Would that be a fair estimate?

Speaker 1

Yes, Madhu, clear. So if you think about any time period, a 3 year period or a 5 year period typically, which We look at 2.3 times, 2.4 times, it moves up, which indicates about 17%, 18% kind of a growth. And that's over a period of a longer term, right, 5 years time period. But over a shorter time period, somewhere we have done 'fifteen, Somewhere we have done 2018, 2019, but 2017, 2018 is the kind of our capacities are built And that is how we are gaining traction to be at that level from a consistency of growth product. Quarter to quarter, it differs.

Speaker 1

But yes, when you're asking about the full year, our that's the kind of level at which the non wholesale The non retail book in HDFC Limited will receive evaluation. And as you see and as we deem fit in terms of growth rate, Whether it takes a quarter or 2 before we start to pump in with that, we will see. But at least, yes, on an overall basis, The confidence that there is enough credit demand, it is for us to see which one we want and what time we will start to build in. And at the right price, I want to mention that. Even during this quarter, there were several opportunities on loans.

Speaker 1

If you look at our wholesale loans, 11% year on year or minus 1.61 or close to minus 2% quarter on quarter. We were not shy of not participating in certain loans. The price is not to our liking. We don't need it. And but we need the relationship, right?

Speaker 1

We keep it because around which we build several other segment relationships. But yes, but broadly, that's where we are operating.

Speaker 4

Okay. Got it. And so what would we do? Would you be able to Quantify the CRR and SLR of Limited, HDFC Limited, at the end of June. Would that be possible?

Speaker 1

No, see, it starts to kick in, I think, in the next fortnight. It will start to kick in. And then we provided you the high level in terms of how we're carrying liquidity to both to support the growth and support all the results that are required. The bank standalone LCR is 126% on a combined basis, which was 116% last quarter, 126% now On a combined basis, pro form a combined, little more than 120% as accounting for what is required for CRR and so on. So yes, quite comfortable with the position there to meet the regulatory requirements.

Speaker 4

Okay. Thank you so much.

Operator

Thank you. The next question is from the line of Kunal Shah from Citi. Please go ahead.

Speaker 2

Yes. Thanks for taking the question. So firstly, on say on the retail deposit side, so last time it was quite encouraging of 1,000,000,000,000 and We have highlighted that on a quarterly basis, we would want to add that kind of a number. Obviously, Q1 has some kind of a seasonality, but Given the capacities which are being built and the investment in franchise which is being done, what is the average kind of retail deposit accretion which we can see over the next 6 to 8 other quarters.

Speaker 1

Kunal, what we do, we don't give on forward looking statement, but at least I want to indicate what we have previously said, which is, yes, we have built capacities to be at that kind of a level. And that is where that is when you look at it over a period of time, yes, there has been a quarter where it is lower. Again, there are seasonality, it is low because there are times in this April to June quarter where typically it is low because people are away, customers are away, schools are out, many things happen in this quarter, right? And, Bapat, our goal and our drive is to be at that kind of a level that we previously indicated. And This will come back up and where we try to drive that, Paul.

Speaker 2

Okay. So $1,000,000,000,000 was the indication. So we should drive that back to $1,000,000,000,000 not level.

Speaker 1

Thereabouts that's what we had indicated that that's the level at which we'd like to operate.

Operator

Sure. And in

Speaker 2

terms of credit growth, What you highlighted 17% to 18 percent that is again maybe not taking into effect IBPC. So Is that a fair or maybe this 13%, which is there post IBPC is what you are indicating to be like 17% to 18% sustainable one?

Speaker 1

See, IBPC is typically a very transient book, right? And the transient means It comes in it goes out and comes in back in, right? IDPC is not a full sale. We manage it quarter to quarter. There are a few objectives that we achieve from a private sector obligations point of view or from a liquidity point of view.

Speaker 1

There are several considerations that go into doing that. But when we think about the loan 17%, 18% are historical that we have done, 2.3x, 2.4x, doubling every 4 years to 5 years. It is on a total basis, right?

Speaker 2

So when do we actually expect this number to moderate? Maybe obviously this will move out, it's a transit one. But what is the kind of number which we can look at in terms of the IBPC because that also exactly is the overall balance sheet number?

Speaker 1

We don't have a target for IBPC. It is opportunistic. Yes. And as I told you, the purpose not only opportunistic from a balance sheet point of view and the market demand, there are There was a good amount of demand in the market, right? There are certain other institutions which are wanting to put assets on.

Speaker 1

And we get a good price, we pass it on, right? That's what I am and the second thing is that if there are When we look at the priority sector requirements and our ability to what we need to do and if it's an opportunity to let that go with somebody else, That is also something. So there is no particular target we have. It completely depends on it is opportunistic. It depends on what the market is on pricing And try to set up pricing opportunities.

Speaker 2

Sure. And one last question in terms of any integration cost that would be incurred once there is a merger or there is no integration costs.

Speaker 1

Look, there will be integration costs in the form of stand duties and in the form of just not in cost So that we will have, but they are, as we said, within reason, nothing substantial, but within reason it will be. We'll call that out separately after we complete it.

Speaker 3

Okay. But that's not a meaningful one, which will happen in the year. It's not a big move of the overall financials.

Speaker 2

Thanks. Okay. Thanks. Thanks a lot and all the rest, yes.

Speaker 1

Thank you.

Operator

Thank you. We have the next question from the line of Saurabh Kumar from JPMorgan. Please go ahead.

Speaker 1

Hi, good evening, Sheehy.

Speaker 5

Just two questions. One is on deposit repricing. So this quarter on quarter, your interest cost is up quite sharply 15%. So can Can you help us understand where you are in terms of your term deposit rates on balance sheet versus incremental? And the second is basically on this on the HDFC mortgage book.

Speaker 5

So fair

Speaker 1

to assume that in 6 months this book completely moves out, moves into EPLR?

Speaker 5

Yes, 2 1. Thank you.

Speaker 1

The second question, I didn't understand. Mortgage book 1 This will all be repo lane now. This is all Okay. I got the question. Okay.

Speaker 1

First, the deposit pricing. Yes, if you look at the deposit pricing Over a period of time, the FAR deposits haven't moved, as you know, not just for us in the entire market it is what it is. It is the time deposit. Our deposit cost that you are seeing is simply a function of the mix that has happened, which is rightfully we are targeting to get the holistic Customer relationship or deeper customer engagement, that is why the time deposits last year grew 29%, this quarter grew 26.5% time deposits. So it's a function.

Speaker 1

So then the next question is, if you're growing the time deposits at what rate, right? It's just a market rate. If you look at our deposit pricing, It is more or less at or slightly below some of the competitive pricing level, right? So We are not pricing to gain any deposits. We are trying to price it at or slightly below competitors level.

Speaker 1

We want that engagement. So we are not shy of that, that it is a cost, but because it gives better engagement and it gives a little more duration on deposits and we are okay with that. So that's how you think about it is not the lead pricing to get deposits. That's not what we are after. If you see any table at any point in time when you refer across various tenants, that's what you will see that, right?

Speaker 1

And of course, we have pitched Slightly above State Bank for most of the tenants except for some short end where I think State Bank could be priced higher for whatever reason. But other than that, more or less in the private sector side, the top 2 or 3 or 4 banks were more less there on pricing. On the mortgages, you asked about the EBLR. Yes, it will move to repo based pricing. But when it starts off, It starts off with no difference to the customer because at the end of the day, customer whatever is the benchmark in which you do Even today, yesterday or last year, the customer had a choice to finance anywhere the customer wants.

Speaker 1

So the price is to be pitched at a level, which is again like the tender process that I spoke about, competitively priced and with something differentiator in terms of Engagement and better relationship to the customer, that is how we are approaching it. So yes, it will move to EBLR repo based loans. Sir, why I

Speaker 5

asked this is basically in future will HDFC's NIMs will have slightly higher volatility than what it had in the past because now you have a large

Speaker 1

Okay. Yes. See, if you look at how HDFC Limited Managed and that is the same book that we are taking over along with the same people and with the similar kind of risk, philosophy and structure. The margins were moving in a narrow bank, right? It was moving in narrow bank because From a duration point of view, they were fairly hedged on the duration from an interest rate risk.

Speaker 1

That is why When the repo rates went up, you did not see an HDFC limited spread as a NIM jumping out of page because The risk management was keeping it in a very narrow bank. So in the up cycle or down cycle, it's a narrow change that will happen, but Cannot go off. That's part of how the duration is managed, and that will be how it will continue to be managed that way.

Speaker 5

Got it. Thank you, sir.

Speaker 1

Thank you.

Operator

Thank you. We have the next question from the line of Rahul Jain from Goldman Sachs. Please go ahead.

Speaker 5

Yes. Hi. Good evening, Srini.

Speaker 1

Just first question going back to one

Speaker 5

of your statements that You are sort of making use of declining credit cost in investing in capacity buildup. So how long can this Again, this trend continues. We've seen structural decline in credit costs so far along. Is there any more leg room available out there to bring the credit costs down From here

Speaker 3

or how do you see that play out?

Speaker 1

Okay. It's a very good question. Thank you. Right. There's no crystal ball When the credit reverts to mean, right?

Speaker 1

But there will be reversion to mean. When does reverts to mean? Is that part of the risk management Our credit will tell us few quarters ahead of time, which is what happened, right, When we started to build those branches somewhere November, December 21, We were looking at how our risk management was viewing, how the cycle is coming along, and then we started to get on to those branches. March 22, we added little more than 500 branches. And then from then on, we've been on that cycle of building.

Speaker 1

So we will our risk management will Evolv and tell us in terms of how the cycle is going to turn out when. I mean,

Speaker 2

it is nothing but it's

Speaker 1

a function of maturity. It's Not about the quality of the book. The quality of the book is sound now. It was sound then and it will be sound in times to come. It's a question of maturity cycle of the product and of the credit.

Speaker 1

And when that reversion begins, that's when we start. But still, By the time the reversion begins, we are confident that we will lap the base effect to comparison cycle, right? That's where we want to get this through So that the base effect starts to kick in, the maturity cycle starts to come in 18, 24 months breakeven and it starts to contribute to the top line. And then hopefully, the reversion to meet stops, right? So that's the kind of process that we are going through on that.

Speaker 1

I hope it helps for you to think through how long it can, right? Yes. So just to paraphrase, I think we've got sufficient degree

Speaker 5

of visibility, at least for this year, that credit cost can keep compensating for enhanced investment and capacity build up. That's a fair understanding, right?

Speaker 1

Yes. That's a fair understanding. And normally 18, 24 months Break even to payback. So if you started this in December 21, January 22, that's where we started, 18 months' time that you see and by the time the base effect is also in.

Speaker 5

Makes sense. That's very helpful, Srini. Thanks. The second is on the segmental growth. So we saw PL quarter on quarter growing, I think had a pretty slow sequential Quarter, whereas home loans have picked up.

Speaker 5

Is this because of your calibrated risk stance that PL has to slow down and the secured It has to grow up or it is just a quarterly phenomenon?

Speaker 1

It is simply a quarterly, Rahul. I think in some other place I alluded to. Q1 is typically a very slow quarter. If you look at 3, 5 years' time period at an aggregate level on loans too, Little more than mid single digit to somewhere little mid to low double digit. That's the Kind of Q1 contribution to the full year, right?

Speaker 1

So it is normally slow, but we still see a good amount of underlying demand, which And even as we speak, right, you've been asked about this, but as we speak now as this quarter has begun and moving on, the mortgages now post merger, What we get anecdotally from various sources within our bank and as we see some of the logins, right, it has to translate into fully loan disburses. The mortgage logins are 20% on a combined basis, 20% more than what we have seen before. So we have seen good amount of traction build up there. So it's a cushion of timing when it realizes into the balance sheet, But there is good demand that is coming through. Yes, actually I was quite curious about personal loans in Because the YY growth also

Speaker 5

for the last few quarters have been under indexing versus the broader systems PL growth. So I was quite curious, is this more of a conscious strategy that you're not trying to grow this portfolio or came in share or?

Speaker 1

Good. Thanks for asking that, right? People sometimes have asked us the market grows personal loan at 30% or 35% or whatever high 20s So on and why we are not growing here at 18% or 20% or 22% kind of rate, what's going on, right? See, that's the level at which Our risk management looks at how to calibrate and get that growth across. There are opportunities to do 2x that from a growth rate point of view, but I leave that respectfully to our credit to determine at what pace because Every growth gets monitored, evaluated post the disbursals into the Bureau to see, learnings are incorporated.

Speaker 1

There are several processes they follow to calibrate it and go. And I wouldn't second guess them in terms of demanding far higher growth than what they allow.

Speaker 5

That's helpful. Just one last question on the PSL and RIDF, any incremental color, Did we have to buy any more R and D of this quarter or were we self sufficient for the full year? Can you just put some color on that, please?

Speaker 1

See, I wish I could tell you how much we will buy, but I want to be careful about the price in the market and not spook up or down. But at the same time, we are conscious of the requirement. We are at an aggregate level more than what is required. We always look for subcategories that we want to build. And over a long period of time, we want to be self sufficient.

Speaker 1

That is the reason for our geographical expansion, going into deep villages and so on. That's over a period of time, right, that we need to be self sufficient ourselves. But in the short term, yes, all of those activities, which is buying PSLC, RDF as a compensatory where we think that the price is not appropriate in the market. IBCC that provides PSL On the security session, which is the pass through certificates that give qualifying assets, we are in addition to organically building, we are in the market for all of those all the time. Got it.

Speaker 1

Srini, just one last question, if

Speaker 5

I can squeeze in on the merger related costs. I mean, is there going to be any one off that we should expect any qualitative color that you can give around as you move to consolidate the numbers between you and HDFC Limited for the Q2 during the year. Anything that you can compare off?

Speaker 1

Yes. There will be some margin related The cost, I think in the previous sometime 1 or 2 call questions ago, I think you hear from Kunal asking The same in terms of the merger cost, there will be it would be something within the range and manage There are given reason and nothing out of the page in a big manner.

Speaker 5

And apart from calls, there is nothing much that can spring up

Speaker 1

No, apart from cost, there could be some capital assets that we will put in from an infrastructure And then over a period of time, we depreciate such an asset for capacity building. But other than that, Some costs will be incurred, but they are within reason and range.

Speaker 5

Fair enough. Very helpful. Thank you so much all for the questions.

Speaker 1

Thank you.

Operator

Thank you. We have the next line of Abhishek from HSBC. Please go ahead. Yes.

Speaker 6

Hello. Good evening and thanks for taking my question. So, Srini, the first question is on this wholesale book of 1,100,000 crores, which you are running down, the HDFC non individual loan book, what part of that book remains to be run down still? Or now is it at a steady state and you're probably looking to build from here?

Speaker 1

Okay. Good point. See, it has come down 18% or so over the last 12 months, It is part of the management action in terms of how as we entered into the merger, lot of rationalization and we came down 18. It will receive I don't have one number where we will settle and start to grow, but that's part of how our businesses evaluate, Look at those relationships because you know that in our wholesale book that we have, which is the 4 odd That's our $4,000,000,000,000 something that we have. Our wholesale book, it is simply not a lending based value proposition.

Speaker 1

It is a full relationship based value proposition, which is lending with cash management, with the trade and FX and with the salary accounts and with the supply chain distribution accounts. So it's intricately connected across all the business segments we operate. Again, here, we are evaluating all of those things And we would like to grow this book at some point in time, but at this moment, it is getting evaluated for what is the kind of a positioning across various segments

Speaker 6

So Srini, the reason I'm asking this is this obviously affects your headline growth, And there would be part of this which you may have earmarked that this is not the kind of business we want So if we can get a sense of that, then we know, except that, how much we can grow?

Speaker 1

Yes. It's not that we don't want to be in the business. We Very much want to be in those businesses. The construction financing is very intricately connected to mortgage lending. We will be there.

Speaker 1

We'll be nurturing and growing that. It's a question of evaluation and it's a question of picking up the right kind of relationship for a broad based across various segments by diversification, and then we need to go. So there is some level of that review that needs to happen. So there is not a chance that we are thinking of that we will not be in this segment. We will be It's like it's the auto dealer financing, which we are very, very well embedded in, very similar in the Mortgage business, we have to be in the construction business to get that insight into the development.

Speaker 1

So we are able to finance the mortgage through that process. We will be there. The other book is the LRD book. LRD book, we do that And the bank already grows that and we this will add on to that and we will continue to grow on that. So the only thing that we would not be doing is Land financing types, which we will not be doing or some of the project financing that doesn't meet the regulatory requirements, we will not Other than that, very much part of the growth.

Speaker 1

So I don't want you to take away saying that this is a rundown book. It is not it is a core part of the book to grow the Other retail mortgage loans.

Speaker 6

Right. And the part that you do want to do the land financing and the project financing bid, does that run into, let's say, north of INR 10,000 crores or it's within that?

Speaker 1

1st, we take it and come, but it could be INR 5,000, INR 10,000 crores or whatever. We are evaluating that in terms of what is it what part of that we cannot as we shouldn't want to be there.

Speaker 6

Got it. Got it. The second question, Srini, is on deposits. Now the reason or the point I'm trying to get to is Your incremental deposit market share requirement is roughly 25%. And if I look at a longer period acquisition rate, you're going at 20% incremental market So there's still a 5% gap.

Speaker 6

Now incrementally, would you have to raise rates because you've kept your rates at or below competition mostly, but now you have this incremental requirement, right? And it can't just be fulfilled through your investments in branches. So how do you think about your rates on the TD side versus, let's say, or going forward? And will that lead to stickier rates on your cost of funds and therefore some more pressure on How do you think about that?

Speaker 1

Yes. Okay. Yes. No, good things. 2 things alluded to, right?

Speaker 1

1 is the market share. So we don't drive a business targeting a market share. So I want you to get out the thought process saying that internally we are thinking of what Should be the market share and drive that. We don't look at that at all. We look at what is our funding requirement and how do we use the building blocks to get that.

Speaker 1

So I just wanted to keep in mind. So there is no particular mindset target of what we need to go there from a market share point of view. But coming to the second aspect, which is more important, If you need time deposit, what sort of a pricing? We have stated in the past and that's how not just in the last 1 to 2 years, but for a longer period of time, the bank has demonstrated discipline in pricing. We never lead by we never lead by pricing to get any volumes, and it is simply based on relationship.

Speaker 1

And this comes by few things, right? We have built a brand over a period of time. We need to reach the customer. We need to be closer to the customer. That is the thought process we have and not just in the last 1 year, 2 years.

Speaker 1

Over a period of time, if you see, That's how the branch got built. We had 2,500 branches in 2013, 4,500, 4,700 branches in 2018, that went to 7,000, 7,800 and growing, right? So the brand strategy is not something that we decided recently. We're accelerating to some On that, but it is about the distribution of the reach that is required, which is what we are building. But 3rd, once you have all this, you need to get the customers in, right.

Speaker 1

And we have built so far getting in 85,000,000 customers and the out of the 4,000,000 customers from HDFC Limited, we have opportunity to operate with More than $2,500,000 of them to bring liability relationship. This quarter, we added $2,400,000 new liability relationships. So you need customers. And then we work on the customers both the new accounts value as we bring in customers, we get in certain balances. And then the change in balances of the existing customers, We worked through engagement to see how do we deepen that to get more balances.

Speaker 1

And one of the ways in which we have recently got Change in balances of the deposit from customers is time deposit. We have seen that our penetration has been low at 14%. We moved that needle to 14.5% right now, but the denominator has also changed, right? We have more customers now. So while we have grown 29% last year, 20 In the recent quarter, still it has made a difference of only 50 basis points higher from a penetration.

Speaker 1

We have a long way to go. And if you look at the pricing, which is where you started this question, how far pricing is influenced by this? You can do any point in time if you look at the pricing, Our deposit time deposit pricing versus some of the clear benchmarks, if you see, they're pretty closely aligned. We don't lead by price, I want to leave the talk there. This is part of the ALCO discussion in terms of how we engage with the customer and how Pricing is not the least consideration for getting any deposits.

Speaker 6

Got it. Got it. Thanks. And just squeezing in one quick question on your calculation actually. So the ROA that you show in your PPT, that's 2.1%, is that calculated on Quarterly average balances, because when I calculated, it comes to 1.9%.

Speaker 6

So just trying to reconcile that difference.

Speaker 1

No, I don't know how you calculate, no? Daily. Daily, I'll just whatever daily are there, but you cannot get on point 9. We send you a numerator and denominator, we will tell you where there is an Sure.

Speaker 6

Okay, okay. I'll take it offline.

Speaker 1

Yes, please.

Operator

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

Speaker 5

Good evening and thank you for the opportunity. Firstly, Shneur, are you able to quantify the crystallized liabilities of SBA Silicon Limited at the time of

Speaker 1

Yes. The liabilities that get crystallized about INR 6,036,000 crores is what moved to the bank. The SEK6.36 includes the deposits, right, which is on Page 23 of the earnings deck that we showed, but includes the deposits, but 6/36 is what was moved along with the assets.

Speaker 5

Sure. That's helpful. Secondly, on the merged basis, the loan to deposit ratio is at about 109%, how and when do you think you can get down to 100%? And basically, I'm saying that in terms of your incremental Funding requirements, how do you think we're doing about that?

Operator

Sorry to interrupt, but the line for you is not very clear. I request you to please use handset while you're speaking.

Speaker 1

Okay. I'll get to Manish, right? Manish, I'll get to that. See, on the you asked about the deposits, credit to deposit. Yes, instantly because of the merger it goes up.

Speaker 1

On an incremental basis, if you see, Last year, it was 72% incremental credit to deposit. This quarter is 50 something incremental deposit. But the way we think about and operate is that on a pre merger on an average it was 84%, 84%, 85% credit deposit. We are operating at about 80% or so. That is the kind of a thought process from our credit to deposit ratio.

Speaker 1

So even if you want, instantly, it cannot be brought down because there's a maturity profile for the borrowings that we have. So it will take 3, 4 years for that to come down to a level at which the bank has historically operated. And so we have to wait for the maturity profile to go and get replaced with deposits.

Speaker 5

So this gap Essentially be funded via affordable housing bonds or other kind of, right?

Speaker 1

Because maturity profile, no, it will both run down. On an incremental basis is what you need to look at. And then it will play out where it comes back in 3, 4 years down to normal.

Speaker 5

Got it. Understood. Thank you. Thank

Operator

you. The next question is from the line of Pranav from Bernstein. Please go ahead.

Speaker 1

Hey, good evening, Srin. Thanks for the discussion. I'll just go back to the IBPC issue, Srin. The question is, If you had instead of going down the IBPC route, if you had kept the loans on the balance sheet, what could have been the loss in terms of numbers? Is it ROA which have been impacted?

Speaker 1

Or is it your LCR? Or is it your PSR management? Or in other words, what did you Or what would you have to sacrifice to report a better headline number? No, it's like this, right? When you do IDTC So in which case, which is what we have done, we've taken the loans off the balance sheet.

Speaker 1

And so the baseline for Priority Sector Lending goes down. So you are reducing the obligations on which you need to have the directed lending at some point in time in future. So that's something, right, very important on that front. Then the second thing is that From a pricing point of view, if there is some better pricing and there is a demand there, it gives you certain pickup in the spread on that. So these are couple of and then liquidity, of course, right?

Speaker 1

You get some cash and you can deploy it. You can Essentially, it's leveraged again, right? You got the money, you can get more loans that you want and you're able to leverage further. So that's the kind of thought process we deployed into this. Perfect.

Speaker 1

Thanks, Harshini. That's very helpful. Thank you. Thank you.

Operator

Thank you. 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.

Speaker 1

Okay. Thank you, Dalvin. Thank you all the participants for participating. It was good and So quite a dialogue that happened. Further questions and those of you who could not complete questions are, Rohit had that I think you don't get on the line due to time constraint.

Speaker 1

We'll be open to having a conversation at some point in time. Please get in touch with our Investor Relations, sir, Bajan or anybody else with whom you have previously connected. I will be happy to have him dialogue. Thank you. Bye bye.

Operator

Thank you. On behalf of HDFC Bank Limited. That concludes this conference. Thank you for joining us. You may now disconnect your line.

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Earnings Conference Call
HDFC Bank Q1 23/24
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