HDFC Bank Limited

Ladies and gentlemen, good evening and welcome to the HDFC Bank Q2F520 earnings conference call on the financial results presented by Mr. Srinivasan Vaidyanathan, Chief Financial Officer. As a reminder, all participant lines will be in the listen only mode and there will be an opportunity for you to ask questions after the brief commentary by the management. Should you need assistance during the conference call, Please signal an operator by pressing star then zero on your attached own phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Srinivasan Vaidyanathan. Thank you and over to you, sir.

Okay, thank you. I appreciate the participants calling in today. We'll get to the results highlights for the quarter and also the off-year end date, September 30th, 2019. Let's start with the net revenues. Net revenues grew by 21.1%, driven by advances growth of 19.5%, and deposit growth of 22.6%, and other income growth of 39.2%. Getting to the details underneath this, net interest income for the quarter was 13,515 crore. The margin remained in the historical range of 4.2%. The bank's average liquidity coverage ratio for the quarter was at 133%. The current ALCO strategy is to maintain a stronger than usual liquidity position to cater to loan demand in the quarters to come. The consequent impact to NEM was around 10 to 15 basis points. Adjusted for the same, the core NEM would be around 4.3%. The bank offset the drag by monetizing the investment in the form of trading gains. If we had reduced the LCR to 115%, the net interest income would have grown approximately by 19%. Now getting to the details of other income. Fees and commission income, constituting 72.5% of other income, grew by 23% over the previous year to reach Rs. 4,054 crore, of which retail constitutes approximately 91% and wholesale constitutes 9%. Mutual funds income remained impacted by changes in regulations that came in the preceding quarters. Excluding income from mutual funds, total fee and commission grew by 26.4% over the corresponding quarter of the previous year. Effects and derivatives income grew by 31.4% over the previous year to reach rupees 552 crore. The growth was primarily granular in nature, being driven by retail customers who contributed around two-thirds of the total. Trading income was 481 crore. As mentioned before, this represents the current ALCO strategy of monetizing some portion of the gain from excess liquidity investments. Other miscellaneous income, including recoveries, was 502 crores. Now moving to operating expenses. Expenses for the quarter were 7,406 crores, an increase of 17.6% over the corresponding quarter of the previous year. Year on year, we added 489 branches. 184 branches added during the quarter. Year on year we added 496 ATMs and 206 cash deposit withdrawal machines. The staff count also increased by 16,301 during the last 12 months and that included 7,054 added during the quarter. Cost to income ratio for the quarter ended September 30, 2019 was 38.8% as against 39.9% for the corresponding quarter ended September 30, 2018. Moving to PPOP. Pre-provision operating profit grew by 23.4% from 9,480 crores in the quarter ended September 30, 2018 to 11,698 crores in the current quarter. Now moving to asset quality. GNPA ratio was at 1.38% of gross advances as on September 30, 2019 as against 1.4% as on June 30, 2019 and 1.33% as on September 30, 2018. GNPA ratio as on September 30, 2018 excluding NPAs in the agricultural segment was 1.2% in the current quarter as well as June quarter and 1.1% in the September quarter of the previous year. Annualized core slippage ratio during the current September quarter was at 1.7% as against 2% in the June quarter and 1.8% in the previous September quarter. The coverage ratio at 70% and net NPA at 0.4% were stable across the current and prior quarter as well as previous year comparable period. The bank continued to hold floating provisions of Rs. 1,451 as on as on September 30, 2019. Total provisions comprising specific general floating provisions were 114% of the gross non-performing loans as on September 30, 2019. Now getting to the details of the provisions. Total provisions were, it was 2,701 crore for the current September quarter as against 2,614 during the June quarter. and rupees 1,820 crores for the September quarter in the previous year. Specific loan loss provisions were rupees 2,038 crores for the current September quarter as against 2,246 during the June quarter and rupees 1,573 crores for the September quarter in the previous year. In addition, given the current macro environment and in order to make the balance sheet more resilient, the bank has made contingent and general provisions. Total contingent and general provisions amounted to Rs. 663 crore for the current September quarter as against Rs. 367 crore in the June quarter and Rs. 247 crore in the September quarter in the previous year. Total credit cost ratio, which includes general and contingent provision, was 1.19% for the current September quarter as against 1.24 for the June quarter and 0.96% for the September quarter in the previous year. The core credit cost ratio represented by specific loan loss provisions were 0.9% of advances for the current September quarter as against 1.07% for the June quarter and 0.83% for the September quarter in the previous year. excluding agree, the ratio was 0.92, 0.93, and 0.82 for the respective quarters. As you are aware, recoveries are recorded as miscellaneous income. Therefore, core credit cost ratio net of recoveries was 0.68% as compared to 0.88% in the quarter ending June 30, 2019, and 0.66 in the quarter ending September 30, 2018. Now getting on to profit before tax for the quarter ended September 30, 2018 was up 17.5% to Rs. 8,997 crores. Core profit before tax, that is PBT excluding contingent and general provisions, grew by approximately Rs. 1,753 crores or 22.2%. During the quarter, the results incorporated the impact of new tax rate. Year-to-date impact of reduced tax rate was approximately Rs. 1,650 crore. The deferred tax asset was reassessed at the current tax rate and approximately Rs. 1,200 crore was written down representing the full impact of the change in tax rate. This resulted in a net tax benefit of approximately Rs. 450 crore in the quarter. Net profit for the quarter grew by 26.8% to Rs. 6,345 crore. Net profit for the half-year index September 30, 2019 was Rs. 11,913 crore, up by 24% over the corresponding half-year index September 30, 2018. Some balance sheet items now. The bank's balance sheet size as on September 30, 2019 was Rs. 13,2572 crore, as against Rs. 11,69898 crore as of September 30, 2018. An increase in size, overall size, of 13.3%. Total deposits as of September 30, 2019 amounted to Rs. 10,21,615 crore, an increase of 22.6% over the September 30, 2018 and 7% over June 30, 2019. Retail, which constituted 77% of total deposits, increased by 24% over the previous year as a result of our focus on granular deposits. CASA deposits at Rs. 4,1235 crore grew by 14.7% with savings account deposits at Rs. 264,445 crore and current account deposits at Rs. 136,791 crore. Time deposits at Rs. 620,380 crore grew by 28.3% over previous year. CASA deposits comprised 39.3% of total deposits as on September 30, 2019. Total advances as of September 30, 2019 were 8,96,984, an increase of 19.5% over September 30, 2018, and 18, and 8.1% over June 30, 2019. Advances to the vehicle loan segment, which has seen continued moderation in sales volumes, constituted 17% of total advances. and grew by 2.3% over previous year. Advances X vehicle segment grew by 23.8% over the previous year. Moving on to capital, with regard to capital adequacy, the total capital adequacy ratio as per Basel III guidelines stood at 17.5% as against a regulatory requirement of 11.075%. June capital adequacy ratio was 16.9% and September of previous year was at 17.1%. Tier one capital adequacy ratio was 16.2% in the current September quarter as compared to 15.6% in the June quarter. The reduction in risk weights of certain retail loans had an impact of around 80 to 90 basis points, beneficial impact of 80 to 90 basis points on the capital adequacy ratio. CET1 capital stood at 15.3% as of September 30, 2019. compared to 14.7% as on September 30, 2018. Some business updates. During the year, we added 211 banking outlets, taking our total network to 5,314 banking outlets. 52% of the branches are in semi-urban and rural areas. As of September 30, 2019, we have signed up approximately one lakh common service centers, village-level entrepreneurs, of which 32,242 are onboarded as business facilitators. Of these, around 40% are actively sourcing now. Year to date, we have acquired 3.2 million new liability relationship, an increase of 53% over the corresponding period of prior year, driven through our strategy of increasing brand sales and semi-urban and rural momentum. As on September 30, 2019, we have 10 million relationship-managed customers, of which 6 million are virtually managed. As of September 30, 2019, we have 13.3 million credit card base and 1.3 million merchant acceptance points. In conclusion, in conclusion of remarks, it will be fair to say that our people have raised to the occasion to keep great engagement with our existing customers, bring in tremendous new relationships, all within our standard credit and process architecture that has resulted in Healthy advances growth of 19.5% and deposits growth of 22.6%. Net revenues growth of 21.1%. Core net interest margin of 4.2% and adjusted for LCR 4.3%. Cost to income at 38.8%. Robust PPOP growth of 23.4%. Stable credit quality with current quarter GNPA of 1.38% and core credit cost ratio of 90 basis points and 68 basis points net of recoveries. Profit after tax growth of 26.8%. With that, operator, we can open it up for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Anyone wishing to ask a question, may please press star and 1 on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of from IDFC Securities. Please go ahead.

Yeah, hi. Just a few questions. Firstly, if you could explain the rules around the netting of deposits from borrower accounts. That's one. Also, if you would be in a position to comment on the Altico case, what's being reported in the newspapers. And also, in terms of your exposure to accounts that have been downgraded in the last four to five months, would you be in a position to quantify your exposure to these accounts, including HFCs, NBFCs, and other accounts? And also, if you could share the number of slippage for the quarter in rupees.

Take the last one first. The core slippage is 3,714 crores. And one other thing before Jimmy jumps in, which is you asked about netting deposits to advances. You're talking about reporting netting? No, no, no.

As in that there are banks and even on an HFC call, we were told that if a borrower has taken a loan from you and he also maintains a deposit with you,

then you could net off those deposits so what are the rules around denting of those deposits uh hi good evening everyone this is jimmy um take the question on politico first as everyone knows it is our policy not to comment on individual exposures that said I would add that a lot of what has found its way into the press is based on what may have been heard by the press from various parties other than ourselves because it's the same policy. We don't necessarily talk. A fair amount of that information is not perfectly accurate and should not be, therefore, considered as such. Beyond that, all I can say is The bank had an exposure, the bank had specific security, and the bank was able to set off that specific security.

Okay, and what would be the rules around, general rules around netting of deposits? You need a specific lien or if a borrower has a loan and a deposit with you, could you net it off?

There are various rules. specific to individual contracts as well as specific to general banking practice, rules and laws around these subjects. So of course there are situations where you create a specific charge or liens or pledge or hypothecation over various assets including financial assets. And there are obviously the existing laws which we all know regarding general liens and set-offs that are available to banks and other lenders as well. So that goes by the law of the land and we also do go by the law of the land.

Okay, so what's the, sorry, I'm not aware of the law, that's why I'm asking.

I don't, might be little difficult to discuss it at this point. Okay. But because it's an academic subject in that sense, it's not germane law.

Got it. And any quantification of any watch list that you might have or your exposure to the accounts downgraded over the last four, five months?

Things are quite stable. Okay. You saw in some of those ratios that we... You will see it in the numbers and the ratios that have come. Things are quite stable.

Okay. Thank you.

Thank you. The next question is from the line of Manish Ostwal from Nirmal Bank. Please go ahead.

Thank you for the opportunity, Sir. My question on the SBB financial specific, the company has adopted best NPA recognition practice during the quarter. So can you look at the same? What are the changes we have done during the quarter?

Couple of things, right? One is which normally banks do, but finance companies do not do, NBFCs do not do, but our HDBFS opted to get to more stringent practices, which is, one, first thing is daily recognition. It is not about recognizing delinquency or NPA at a point in time on the last day of the month, but on a daily basis what it is. So that was one thing. And the second aspect was about what we call the sticky, which is related borrowings of the related facility from the same borrower. So if a borrower had two facilities outstanding, if one is delinquent and the other standard, we had to tag them along. So it is to getting that connected or sticky added to the one that is non-performing to make it wholesome and sure uh secondly sir if we exclude this uh one more thing is that these things will get upgraded only when all of the all of these outstandings are becoming current zero dp yeah the second uh point i have if we exclude this impact of the changes of entry recognition

still the asset quality, I mean growth has increased from June level to September quarter. So can you share some insight about the, which are the segments, geography or the customer segments, pressure quality pressure in particular companies and SBB financial?

There is only one thing to mention on this, which is the commercial vehicles, which as you would know, as our credit would remind us, The realizable value on commercial vehicles in the country is pretty high. And anybody who is going through the kind of capacity utilization or the utilization issues now will bounce back to pay off the loan to get the vehicle back and get on with the business. This business over the life, right, not just over the cycle, over the life, hasn't experienced, will not experience more than 10 to 13 basis points of experience, which is pretty low. But given the times, we'll go through the 10-year cycle and we'll come back on. That is the significant cost of the change one quarter to another.

Any time to list the SBP financial next one year, sir? Sorry?

Any plan to lead the SGB financial in next one year, sir?

Well, the board of the bank has not yet taken a decision, neither has the board of the company has yet to take a decision. But yes, they will, if at all there is any plan, they will sort of notify it to the exchanges.

Sure. And one data point query, interest on other balances, anything one-off and free income side, is there any one-off?

Thank you.

Other than routine things, there are no one-offs to mention.

So the payment business has seen a very strong growth and that has also led to more than decent growth in fees and incomes. As Srini was mentioning, the growth in the insurance business, so the earnings, the yields on the insurance business have been much better than what we have seen in the past thanks to the product mix that we have been selling. So that has also sort of contributed a decent amount of growth, offsetting the mutual fund income degrowth.

Sure, sir. Thank you very much.

Thank you.

The next question is on the line of Kunal Shah from Edelweiss. Please go ahead.

Yeah, firstly in terms of this entire general and contingent provisioning, if you could further give more highlight in terms of last time we stepped up the provisions towards the unsecured book. So was it there this time as well or it was largely general and we had provided something towards NBFCs and HFCs as well. So is there any contingent provisioning towards any of those specific sectors?

This is a mix of wholesale, retail, all in it, not focused on one. But the context to give you is that given what we see in the macro environment to ensure that our balance sheet remains resilient at all times, there are some provisions made. They do not represent provisions for non-performing loans. You can take it as they are precautionary and not anticipatory.

Yeah, but in terms of the stepping up, particularly on the unsecured pool, has that continued in this quarter as well? Or maybe we were largely done in terms of inching of the coverage on the unsecured retail credit?

So on the unsecured part of, you know, as we recall, we had stepped up the provisions on the non-performing assets. The rate of provision was stepped up, as you also alluded to, to improve the coverage on the personal loan or unsecured loan portfolio. So that was a correction that was done last time. Now it carries through at an elevated level. That's the only change that happened last quarter.

Okay. And in terms of the behavior, either on the unsecured, last time we highlighted that maybe it's holding on pretty well. So both on the vehicle financing side, no doubt the growth has slowed down, but any early signs of delinquencies or maybe the increasing stress either on the vehicle on the unsecured side, we are seeing it over the last three, four months.

So to quickly cover the unsecured as well as the secured financing, portfolio behavior, take the unsecured first and let's take the biggest chunk of that which is the personal loan book. The delinquency is fairly stable. The heartening part of this is that the early indicators that we measure on the newer portfolio, I won't say new, but the newer portfolio because we measure several months back as well, is definitely trending better. in fact this early indicator is trending better across various portfolios so even if you look at the business loans which are unsecured there again whereas there may have been a creep in the coincidental frequency historically the early indicators once again show that there is a reversal if you can use that word and one would see a better portfolio coming forward, whereas we don't want to give any guidance, but the early indicators, once again, are heartening. If you move into the secured books, where the single largest one, of course, is our auto loan book, as you are aware, given the market conditions, there has been a denominator effect in the delinquency, and that denominator effect has played a large role in the delinquency numbers. Once again, if we look at the early indicators here, they are fairly stable. And once again, if we look in addition, as it would have been in the unsecured, as well as in these secured books, if we look at comparatives to industry delinquency and in terms of comparatives to industry trends, we are obviously far better at this point in time.

Okay and on the non-retail side the growth which has been there particularly maybe even if I look at the business banking it's been a good traction out there in this particular quarter. So how are we seeing this particular product segment to scale up over next 12 to 18 odd months and on the corporate side the growth which has come in is it any maybe some particular pockets wherein we would have given it in terms of either the sectoral or are there any chunky loans which have been given? Or just like the rundown was not there like Q1 and that's where we have seen this kind of a growth?

Sure. So to take the business banking side first, we continue to have a good, healthy, steady stream of business banking opportunities available to us. We continue to have better and better ability to monitor these portfolios and therefore also take better and wiser decisions in terms of acquiring these. So that is a good, healthy pipeline, not necessarily spiking upwards, and we don't see trend downwards either.

Moving into the corporate segment. And just to supplement what Jimmy is saying, our penetration into the semi-urban and rural, the fact that we have really galvanized the distribution channel and complemented them with good digital offering. These two have really aided in pushing up a lot of pipeline.

Yeah. On the corporate side, there have been growth opportunities in various places. So again, it's a good thing to report in the sense that it is not necessarily chunky. It is not isolated transactions. Of course, we do have a very large So there will be some large transactions in that, but it's not necessarily that it has been dependent on a few large transactions. We have had healthy growth across industries, across businesses and across ticket sizes and products as well. Some transactions of course will be large, but it has been across the board. There have been, I will say while I'm saying this, there have also been some exposures taken selectively in a few sectors like NBFCs, like power, like telecom. I want to say that all these exposures have been taken to the absolute best entities within these industries and we are confident of them.

Okay, yeah, thank you.

Thank you. The next question is from the line of Nitin Agarwal from Motila Lothal Securities. Please go ahead.

Hello. Hi. Thanks for the opportunity. So over a recent period, we have been... Come closer to the mic, please. Can you be a bit louder, please?

Nitin, we're not able to hear you. Can you be a bit louder?

Sorry to interrupt, Mr. Agarwal. Mr. Agarwal, we are not able to hear you. Can you speak a bit louder?

Hello?

Yes, sir, please go ahead.

Yeah, sorry. So my question is on the competitive intensity. Over the recent period, we have been seeing a very aggressive HDFC bank, be the branch expansion plans, the promotions that we are running, the loan growth that we're delivering amidst the slowing macro. So how are you seeing the competitive intensity in different product segments?

The competition is also intense. It's not that we are getting it that easily. I don't want to name the banks. I think all of them are reasonably aggressive in this particular space, especially some of the larger PSU banks and some of the larger private sector banks as well. But having said that, I think we have the advantage of having a far more larger distribution reasonably well-oiled machinery, which is sort of aided by the kind of spends that we're doing on the festive side. So that is bringing a lot more footfalls, whether it's the retail, whether it's the SME, whether it's the corporate side. The digital offering obviously has helped the latter even more, especially the SME and the corporate side. So the only thing I can say is, Thus far, while there would be a pocket of exuberance because of festival, some amount of pricing in certain pockets, but largely I think competition has been pretty rational, but still very intense.

Okay. And secondly, you did talk about the underwriting standards that we have revised upon the HDB, but besides stepping up the provisioning run rate, have we tightened standards at the bank level also? And if you can give some color on the rejection rates and how the Sybil scores are moving in our new loan originations across some of the key unsecured segments.

Yeah, as I mentioned a little while ago, the early indicators are all looking up and that is reflective of various corrections, filters and policy changes made across products, across geographies, across spectrums, wherever they have been required. In terms of how it has impacted numerically, we don't really disclose beyond what is always disclosed. But the signs are looking up. When it comes to how it is moving across bureau bands, we have seen a good shift in terms of better income orientation, better propensity to repay. All these have improved. The bureau bands are only one amongst several inputs to us, and we do extend finance across bands. We are more cautious about the individual leverage, about the individual's income, about the stability of income, and naturally when it moves into a business environment, the same for the business in question. So the bureau is only one ingredient for us.

Right and lastly on the home loan growth side now with banks like moving over to the external benchmark based pricing so and some of the PSU banks are priced relatively far lower than where the housing finance companies are. So do you see this can impair the ability for us to originate home loans particularly as this monetary easing continues a bit more?

Well, frankly, I think as we speak, I think we continue to have a very robust origination of home loans for HDFC Limited. We are not seeing any early indicators of, you know, the price being a disadvantage for our set of customers. I think obviously there is a bit of a premium that customers are willing to pay for the HDFC Limited home loan product. So thus far, no such indication. We continue to see reasonably strong momentum as we have seen in the previous quarter as well.

Thank you so much.

Thank you. We'll move on to the next question that is on the line of Rahul Jain from Goldman Sachs. Please go ahead.

Yeah, hi. Good evening, everyone. Three set of questions. First of all, on the asset quality bits, Can you all give us the outstanding contingency provision that we're holding? So we have floating provisions of 1450 crores.

I'm just trying to understand how much outstanding would be there on the contingency side.

Thanks for taking, but that number is not something that we have publicly talked about.

OK, OK. OK, no problems. Can I get the write off numbers for this quarter?

thousand five hundred and eight one five eight nine crores um and also just trying to uh understand the gnps and the agri portfolio and how it would have moved versus last year um i thought that's just part of uh gmp in agri portfolio yeah Okay. GNPA in agree. Last September was 6.06. Currently it is at 5.64.

Got it. And secondly on the disbursals in the auto portfolio. So while the book has grown, I think perhaps just flattish versus last year. Can we get some color on how disbursals would have trended in this quarter versus versus that in the previous year as well as last quarter.

Dispersals in auto? Yeah. I don't have it readily. Ajit, anything you have?

So, Rahul, I missed that one. Are you saying how the dispersals have been in the second quarter for auto?

That's correct, Sushil.

Dispersals have been reasonably strong in the second quarter. I think contrary to expectations, I think we have seen almost about 12% to 13% sequentially, the quarter two numbers and auto loans have been up vis-a-vis the first quarter or two. So that's pretty encouraging. And we hope, we're not too sure, we hope that the festival quarter will be even better or at least have similar kind of numbers that we have clocked in the second quarter.

Got it. This one last question that she and she need on the salary expenses.

So year over year we have 23% increase. Was there any one off in this quarter and how do you see the full year kind of not playing out? I know you don't really guide about the numbers, but just to get a sense the salary expenses would it stay at these levels or there was some one off in this quarter.

So there's no one off as she did mention 17% of the 23% 17% is principally just on account of the growth in number of employees. And then the balance is on account of the increments that one has for the entire portfolio. So we do almost about 6% to 8% of wage inflation that we have been doing for the last so many years. So that's what is baked into this 23%. So it's principally the number of employees that have gone up significantly. And as you know, We are this is the best time for us to invest and we are in an investment mode.

Yeah, yeah, yeah. Small amount drop in terms of gratitude because that's the way this is as usual. It is not something that.

Thank you so much. Thank you.

Thank you. The next question is on the line of Bunty Chawla from IDBI Capital. Please go ahead.

Thank you, sir, for giving me this opportunity. Just a few questions. One, if it is possible for you, can you share what will be the cost, extra cost we will be bearing on these festive offers which we are currently running?

No, it's a forward-looking statement. After the program is done, we will be able to see what and how it impacts us. It is a continuous program, and it depends on how great it finishes, right?

And in the third quarter, that will be based into the third quarter numbers for sure, and you will see that.

Thank you. The next question is from the line of Pawan Aluwalia from Laburnum Capital. Please go ahead.

Thank you very much. Two questions. One, you talked about this being the best time to invest in employees. So as there's been a significant addition, could you give us a sense of where you're looking to add employees? Because you previously talked about, in fact, using technology to drive down the cost to income ratio, which would consider Obviously, it doesn't have to be in the same places, but it would be good to know.

Sir, your voice is breaking up.

Can you hear me now?

Yeah, please go ahead.

So my first question is, could you give us some color on where you're hiring these people? Because obviously, you've talked previously about places where you're using technology to cut costs, which to an extent could mean, you know, reduce the number of people necessary. So could you give us a sense of where, in fact, you're using less people and where you're using more people. And the second question is around margins and CLRs. So we saw net margins come off a little bit. You know, this quarter is still within the range that we target. But it would be good to get some color from you on that. I noticed there was a very strong ramping of deposit. So it would be good if you could link that to the liability side outlook. And given the new MCLR rules, the benchmark rules that the RBI has put out, how do you see that impacting our profitability, volatility on net interest and clicks?

Okay. So on the employee's front, you know, as Shaneed had mentioned, the, you know, the bank on a year-on-year basis have added about 489 branches. Okay. So you would need people for that because we believe that distribution is one of our strongest points. Probably in our earlier calls, we did sort of even give an indication that we would be opening somewhere around the 600 to 700 further distribution points in our network. So that is where you will see the kind of employees getting more added. But in addition to that, let's face it, we are not sort of diluting our technology investments or we are not removing our focus on digitizing our processes and product offerings. The fact of the matter is, despite what you do, there is still, in India, there will be an X percentage of people who would need to have, you know, who would not be as savvy digitally as you and I are. So there would be people who need to go and source, especially on the sales side, where you need a lot of investment, a lot of people to go and get business, whether it's an asset or a liability of the car's business. There is a finite capacity of how much each one can do. When it sort of, you know, reaches that kind of a capacity, you need to add more people. So while, you know, as Srinu was mentioning, we are growing our total advances by about 19.5%. It's not a small amount. You're adding almost about a bank within a bank. So we will see people being invested in the branch banking area. We will see in the retail asset area. We will see in the agri distribution because agri is far more intensive. We will see people in the sustainable livelihood because that's something that we are very proud of. We give back to society. It also sort of helps us in... It's a good, great business model. So combination of all this is where we have seen the 17% growth. So you will see people moving, but as Srini was mentioning, the jaws will continue to be, the gap will be there. If the revenue is growing at 21%, we'll try and maintain the jaws between the 17 and 18% of expenses growth. Or if the revenues were to come down, so would the cost be. So that kind of play we will always have, and that's the kind of a strategy that we're going with. So I've explained to you on the people side. The second one is on the margins, where you're saying that the margins have come off from 4.3% to 4.2% from June quarter to the September quarter. That's principally, as you also alluded to it, I think we have consciously, right from the last two years, have been focusing on mobilizing granular retail deposits. Now, whether you like it or not, time deposit is necessary, especially when you have a kind of appetite to grow on the credit side or the asset side. So we are very clear that the sales machinery will not be, we don't want a yo-yo in giving directions to the huge distribution that we have to say that, okay, this quarter you focus on fixed deposit, next quarter you don't focus. That'll sort of really destabilize the kind of a sales machinery that we have created. So we are happy to have excesses. We are happy to have excess liquidity up to a certain point in time, which is what is reflected in the current margins. As Sheeni was mentioning, our margins would have been higher by about 15 basis points if we had sort of slowed down the deposits, but from a medium to long term, this is the right way to do it. So even if it sort of shaves off a bit of a margin, we are happy and that is what it is. The third aspect of this is on the MCLR.

On the external benchmarking, as we announced, we have chosen the repo as our benchmark. It got kicked off on 1st October. We are seeing incremental volumes will come through that in terms of MSME volumes or retail floating rate volumes that are there today, which are very, very insignificant, but still whatever it is, it will come through that. And in our pricing, in our ALCO strategy, we have components of repo plus credit spread plus other spread that factors in any kind of hedging or the difference between an MCLR and a repo that we need to factor in. And so at this moment, the pricing is just fine. As time goes by, we need to see how it will evolve. But as we see now, we are priced neutral to what it was in the past. because that's how you get it started. But as we go, we see where it comes. And as the book is renewing, we will figure out the customer preferences also play a role here. Thank you.

Thank you. The next question is from the line of Jai Mundra from BNK Securities. Please go ahead.

Yeah, hi, sir. Thanks for the opportunity. So I have one question, especially on retail credit growth. So if you look at this quarter retail, either you look at regulatory basis or internal basis, it has come down to 14 to 15%. Now that is actually below system retail growth. If you look at the RBI data. So just wanted to understand what is causing this. Are you a bit worried about slowing retail growth? The overall growth anyway looks very good, but just on this retail growth, is it the base which has become so big that You know, internal incremental growth has become a bit lower. Or as you said, you have increased the filters, which is causing this kind of a thing. Or it's just an anomaly. Thanks.

Look, I think she did mention almost about 17% of a book on the retail side is the vehicle segment, which is grown only by 2.3%. And that is a fact that you and I cannot sort of ignore because there is an underlying sales, whether it's the auto loan or the two-wheeler or the commercial vehicle sales that are happening in the market. So if you exclude that, the growth is not so bad. Even at the Basel, it comes to retail excluding vehicle loan is about 19% growth. And even from our own internal perspective, it's about 17.5% or 18% growth. So you need to look at it from that perspective. Having said that, let's face it, yes, has first consumption slowed down a bit? Absolutely, there is, you cannot deny that. But I think, you know, the bank, if you have seen the kind of buzz that we've been creating, we seem to be sort of, we believe the kind of properties that we have created whether it's a distribution all the kind of uh marketplace that we have the kind of credit card offers that we are doing all the kind of uh buzz the partnerships that we've created in the recent past we believe that we should see reasonable amount of healthy growth uh going forward but let's post let's face it i mean these are some expectations We hope it sort of converges to our expectations, but I think we are well positioned to that.

I can add over here once again, whatever growth is coming is good growth. It is well selected and the indicators are in good order, so. It's the healthy part of the growth.

Sure, Sir, thanks. Thanks so much.

Thank you. The next question is in the line of Sanjay Kalar from Acme Private Limited. Please go ahead.

Yeah, hello. Sir, thank you for giving me the opportunity. I have a few questions. What will be the impact of tax rate cut on our profitability? Secondly, sir, we have raised 25,000 crore about a year ago. Any more fundraising plans through equity or bonds in the near future? I have another couple of questions.

I mentioned in the call the impact of the tax, the net impact of the tax rate change, 450 crores that was mentioned.

450 crores annually? No, in the quarter, what we have taken in the quarter. Okay, sir.

What's the second question?

Fundraising plans through equity bonds.

We are adequately capitalized as we speak. I think when we do have a requirement and when we have better clarity on the regulatory provisions relating to tax and the other aspects which is still in debate, we probably will think about perpetual bonds in the future. Okay, sir.

And a couple of more questions. Sir, what is our bank's focus on corporate loans portfolio? As you know, business prospects for Exist Bank and ICICI looks brighter, more brighter than our bank as far as corporate portfolio is concerned. So what do you have to comment on this?

I'm not too sure where you're getting this particular kind of perception. So I really do not know how to answer that. I've not understood your question at all.

I mean that, you know, why Exist Bank and ICICI banks are told

of corporate banks and we are more of a retail bank then not much focus on the corporates well that's for you to say i mean for all of you obviously even our corporate our corporate has been growing very steadily in fact in the recent past slightly faster than our normal long-term average so we are we may be one of the largest retail banks in the country but we are also a very strong wholesale or corporate bank as well, whether it's in the working capital space or even on the term side. In fact, on the term side, we are probably one of the second largest distributors, whether it's the loan or the debt syndication as well. And as you can see, we have been maintaining this kind of a ratio of about 45 to 50% on the wholesale side for some time, which means that even the wholesale has been growing pretty steadily I'm not too sure I don't have a comparison as to what kind of a what is the kind of proportion or what is the kind of balance sheet on the wholesale side the other banks have but I can talk for ourselves I think we are reasonably well positioned both on retail and wholesale and this is where the growth is going to come in now and in future as well okay sir and one last question are we looking at expanding banking beyond Indian boundaries into Asia or Middle East or other countries I think we have said this in the past. I think the opportunity that India provides is so immense that we would like to spend our energies out here. We are pretty happy with the proportion of our overseas branches are giving. I don't think we will sort of scale that up in the near future. Okay, sir.

Thank you very much.

Thank you. The next question is on the line of Raj Parohit from SIMPL. Please go ahead.

Hi, this is Abhi Purohit here. Thanks for taking my question. Most of my questions have been answered, but just wanted to understand about this deferred tax element on our P&L. I mean, might sound a little naive, just wanted to understand how is it getting created every year and how does it get reversed and what is the impact of this tax cut on the deferred tax numbers and also whether, so even in this quarter, our reported tax rate was about 30%. But as actually the tax rate has been reduced to 25. So just wanted to understand how is the adjustment being made.

So, okay, first the deferred tax rate, how it is created. That's the difference between the book profit and the tax profits. The book profits example, one particular example we can give you is take the provisions. Provisions are made according to accounting standards and according to RBA guidelines. allows provisions in a different formula. One, it has to be fully written off, and two, there is some formula-based deduction. So the tax allows for these credit provisions at a scale which is lower than what the book takes. So because of that, we have to create, according to the accounting standards, we have to create deferred tax assets. So that is how deferred tax is created on the books. And you have to evaluate this deferred tax on an annual basis, considering what the prevalent tax rates are and your ability to consume going forward. So to the extent that we perceive profitability and the tax rates remain stable, the deferred tax continues to be on the go without any change. There will be in and out. You consume and then you put back. That goes on. In terms of this quarter, the tax rate changed. So we adopted the new tax rate from the previous tax rate of 34.7 to 25.17, 25.2. That would mean we have to evaluate the carrying value of the deferred tax asset and revalue to the current tax rate. And that impacted the 1,650 crores we said earlier in the call. That was a one-time charge that was taken. Getting to the third aspect of the question, which is, If the tax rate is 25.2, why is the effective tax rate 32 or thereabouts? Because what happens is that you have to take this charge of 1,200 crores, so the tax rate year-to-date comes to 25.2, but since you re-evaluate the deferred tax and take a charge on that, that takes it to 25.2 goes to 32%. and then when you go into next quarter you will see it is back to 25.2 because that one time adjustment is already factored in and then it goes as business as usual okay so in the next quarter our reported tax rate itself will drop to 25.17 close up to the margin rate yes i can't pinpoint exactly 25.17 but that is the more or less plus minus that's the kind of rate you should expect

Sir, again, a very basic question. Under what circumstances or what needs to happen for us to consume the deferred tax asset?

How do we consume the deferred tax asset?

Yeah, so the last few years we've been only seeing it rise significantly higher.

I'm presuming because we've made higher provisions and the taxmen have not allowed us to kind of... If the provisions we create creates this deferred tax asset, And if there is an actual write-off that happens, then the taxman will allow this write-off to be deducted for tax purposes, at which time it will get consumed. Okay. There are a couple of other things like depreciation differences and so on. Again, think about an asset which is on a straight line on books or an asset which is on a return on value method in tax purposes. If that's only one asset in the company, it gets to book value of zero, you know that it gets consumed. So I'm giving you a theoretical answer on that, but that's how you should think about.

For us, but it's predominantly to do with our provisions, right?

A big piece of that is to do with the provisions.

Okay. Thank you so much for the clarification. Thank you.

And then there will be some timing. For example, subordinated debt that we have, we accrue for subordinated debt based on the coupons. Taxman will allow it only when you pay the interest expense on the debt. So period to period, there will be some small changes. For example, if you need to, if the coupon date is 30th May and 31st March, we have the accrue. And there will be a deferred tax asset. And then the next year it will come. So it's a running account in and out, in and out.

Okay. Okay. Thank you. Thank you so much.

Thank you the next question is in the line of others. Guardia from Kazana National. Please go ahead.

Hi Sir, you spoke about the growth in insurance business has been pretty strong for us and even you mentioned that we have seen a change in the product mix. So first question is what kind of change in product mix we have witnessed?

Life insurance product mix change more.

You know there are term products as against more short term of the so-called ULIP products, equivalent of ULIP products. So when you sell more of the term products, obviously the yields are much better.

So is it basically the retirement product of HDFC live?

As you know, we now patronize not just the HDFC product, but also the Other two partners, which is AHA and Birla, now they contribute to almost about 29% of our business. So it's a combination of all the three.

And how is the share of the other two partners moved versus last year?

Which is what I just said. I think it's now 29%. The last year is, I think, was about 20%.

Okay, so it has moved up by 10%. last year was also about 25 so it's now 29 okay and so lastly uh given the commission rates on mutual funds have fallen so has there been a conscious strategy from the branch employees to focus more of cross sell on insurance versus mutual funds

You know that it's not a strategy that we tell them sell this or sell that. It is also, there is a customer preference in play, right? The customer need is the predominant one that determines whether it is insurance or mutual fund.

Yeah, but having said that, as Sherry was mentioning, we don't sort of actually sort of try and push something. If you really look at it sequentially, the mutual fund volumes other than liquid funds have actually gone up by about 6%.

Okay. Thanks a lot. All my questions have been answered.

Thank you. The next question is from the line of Hiral Desai from Aniwet PMS. Please go ahead.

Hi. Thanks for taking my question. I actually had a question on the asset quality in the auto book. And this is from your disclosure in the 20F. Now, I see a very sharp rise in FY19. You know, it's gone up by about 45 basis points. I do appreciate that the 20F numbers are on a consolidated basis. I just wanted to understand what led to such a sharp spike in the GNPs in auto?

Yeah. So, that is principally because of the fact that there were a couple of larger dealership accounts, which went bad. It was not something that is in granular. These were slightly more fraudulent kind of accounts, which is what we tagged them as an NPA in FI-19. So you do see kind of a jump from about 98 basis point to 1.43. So that's your 45 basis point increase. That was the reason for that. Otherwise, as Jimmy did mention, the core auto loan portfolio has been pretty much very stable even in the current scenario as we speak.

Barring the denominator effect due to the market, it has been stable. Moreover, we have the early indicators that are actually showing a better trend as compared to the recent past.

And Jimmy, just reading on your early indicators comment, would it be fair to assume that in terms of retail delinquencies would have topped out X of the Agri portfolio?

I don't think we can make that sort of a statement, but the early indicators are showing a better trend.

And lastly on the semi-urban and rural book, can you give us some flavor, X of the agri, you know, generally how has the growth been?

I did mention, I think we did sort of talk about it. I think, in fact, X agri, in fact, I said X vehicle segment, X vehicle segment in the sequential quarter has been pretty strong. Retail, X vehicle segment has been very strong. So it's about 17 and a half, 18%. In fact, on a sequential basis, it's about 6% X vehicle. So I think other than commercial vehicle, other than probably two-wheeler, all of the products, whether it's the auto, whether it's the personal loan, whether it's credit cards, whether it's the small business banking, whether it's loan against securities, whether it is home loans, gold loans, the KGC loans, which is the farm loans, have all seen reasonably healthy trends in this quarter.

Lastly on Smartbuy, could you share the number of carded customers who are already sort of operating on that platform or have bought something through that platform?

I don't have numbers as we speak. I don't think we've ever given that in the public domain but frankly even as we speak i don't have that readily available maybe let me just mull this over uh and maybe we can give you give it look broadly what would be the penetration within your carded base on people who actually transact through the smart buy platform as of now uh sorry uh i don't have those numbers here maybe I need to sort of dig deeper into that particular aspect. No problem. I don't have it off hand.

Thanks. Thanks a ton for answering all the questions. All the best.

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Vaidyanathan for his closing comments.

Okay. Thank you, Luzanne, and thank you all for participating. If there are more questions or any other information you need, feel free to call our investor relations. Ajit Shetty would be able to provide you the answers. Thank you. Thank you.

Thank you, members of the management team. Ladies and gentlemen, on behalf of HDFC Bank Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.