HDFC Bank Limited

Ladies and gentlemen, good evening and welcome to the HDFC Bank Limited Q2 FY21 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 and there will be an opportunity for you to ask questions after a brief commentary by the management. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch tone phone. Please note that this conference is being recorded. I now want the conference over to Mr. Srinivasan Veddinathan, Chief Financial Officer, HDFC Bank. Thank you and over to you sir.

Okay, thank you Lisanne. I appreciate the participants calling in today. We have a few comments on the top line comments on the strength of the franchise, how we are continuing to position to gain strong market share and then from there on we will get on to some more details. At the high level, we carried on the strategy to build on the deposit and on bringing in new customer relationship, thereby maintaining strong liquidity positions. The bank's average LCR for the quarter was 153%. That's about 1,10,000 crores of surplus or approximately $15 billion, considering 110 LCR as a flow. Next, I want to cover the capital adequacy ratio at 19.1% total capital adequacy ratio. We have 8 percentage points more capital than the regulatory minimum of 11.075%. Our CP1 at 17% is 9.4 percentage points more than the regulatory minimum of 7.575%. The floating and contingent provisions totaling 7,755 crores built over a period of time helps in de-risking the balance sheet. We have also taken several steps to further tighten the credit. We have remained prudent in our approach to moratoriums and as of now are diligently handling the restructuring requests. The provision coverage ratio has been further augmented to make the balance sheet even more resilient for any shop. Provision coverage ratio including all categories of results stand at 195%. We will cover more on credit later in the call. Now, we'll get to the results for the quarter. COVID has had a certain impact on the financials, which we will call out individually as we go along. We'll start with net revenues. Net revenues grew to 21,869 gross driven by an advances growth of 15.8% and deposit growth of 20.3%. Net interest income for the quarter was at 15,776 crore, up 16.7% over previous year and grew by 0.7% over previous quarter. For the quarter, core net interest margin was at 4.1%. Prior year was at 4.2% and prior quarter was at 4.3%. As mentioned earlier, the bank's average liquidity coverage ratio increased to 153 in this quarter from 140% in Q1, in line with the strategy to build on deposits, thereby strengthening the liquidity position further. While the excess liquidity positions the bank to cater to potential loan demand in the future, it impacts current NIM by around 15 basis points. This drag was offset by monetizing some of the investments in the form of trading gains. Moving on to the details of other income. Total other income at 6092 crore was up 9% versus prior year and 49.5% versus prior quarter. Fees and commission income constituting 65% of other income was at 3940 crore, lower by 2.8% compared to prior year, but higher by 76.6% compared to prior quarter. Retail constitutes approximately 91% and wholesale constitutes 9% of the fees and commission income. The fees and commission income has been impacted by around 700 crores due to COVID pandemic. This impact was largely caused by lower loan originations, distribution of third party products, payment product activities and so on. Moratorium relief was available to customers according to RBA notification Waving of certain fees for customers was also implemented in accordance with the mandate. FX and derivatives income at Rs 560 crore was higher by 1.6% compared to prior year of Rs 550 crore. Sequentially, the activity volumes picked up significantly, reflecting in a 28.4% growth versus prior quarter, which was Rs 437 crore. Trading income was Rs 1,016 crore for the quarter, This represents the ALCO strategy of monetizing some portion of the gains from excess liquidity investment that was meant to be offset on the net interest margin, as I alluded to earlier. Other miscellaneous income of 576 crore includes recoveries. The collections were impacted due to graded lifting of lockdown during the quarter. This had an impact of approximately 100 crore on recoveries. The net recoveries in the quarter was about 22 basis points on advances. Operating expenses for the quarter were 8,055 crore, an increase of 8.8% over previous year. Year on year, we added 297 branches and 104 branches during the quarter. During the first half of this year, we opened 176 branches. Approximately another 100 branches are in various stages of readiness to be opened in a short period of time. Further, we are in the process of identifying another 100 branches by the end of this financial year. Since last year, we added 1,340 ATMs, cash deposits, and withdrawal machines, and 296 during the quarter. Since previous year, we added 11,931 business correspondence managed by common service centers, including 5,589 open during the quarter. During the first half of this year, we have added 6,591 business correspondence through CSEs. The staff count increased by 5,874 during the last 12 months and about 1,000 during this quarter. We positioned our staff without letting go anybody, looking forward to the economic growth that is on the anvil to tap into that so we don't need to restart anything and we are readily positioned to go after this. Cost to income ratio was at 37% versus 38, 39% in the recent past time period. We would expect the spend levels to increase in course of time with increased sales and promotional and discretionary spends. Thus, the cost-to-income ratio will be reverting to the recent historical trends in the short run, while our goal remains to bring this down again in the medium to longer time period. On to the PPOP. The fee provision operating profit grew by 18.1% to 13,814 crore from 11,698 crore in the prior year. Now coming on to the asset quality. During the quarter ended September 30, 2020, the Supreme Court passed an interim order dated September 3rd, stating that those accounts that had not been declared NPA till August 31, 2020 should not be declared as NPA until further orders. The bank has complied with the set directive and has not classified any account which was not NPA as of 31st August, 2020 as per the RBI IRAC norms. In light of this interim order, We have not been and will not be classifying as NPA till such time the Supreme Court rules finally on the matter. However, at the same time, the bank has, as a matter of prudence, used its analytical models to estimate potential NPA, including accelerated recognition in an expedient manner on a pro forma basis and has provided for corresponding contingent provisions towards the same. The bank holds provisions as of September 30 against potential COVID impact based on information available at this point in time, and the same are in excess of the RBA prescribed norms. For the credit update that we will provide in the next few minutes, we will mention the reported number, and it will be followed by the pro forma number, which is analytically arrived. Annualized reported slippage ratio is at 0.8% in the current quarter. If you consider the potential NPAs, as I just mentioned, using analytical model, The pro forma annulus lift-page ratio for the current quarter is at 1.98% as against 2.2% in prior year and 1.2% in prior quarter. GNPA ratio reported was at 1.08 of gross advances. The impact of the NPA ratio by use of analytical model in determining the NPA, as I mentioned earlier, is about 29 basis points. Therefore, the pro forma GNPA ratio for the quarter was at 1.37% as compared to 1.36 in the prior quarter and 1.38 in prior year. GNPA ratio reported excluding NPAs in the agricultural segment was at 0.9%. GNPA ratio for the quarter on a pro forma basis excluding NPAs in the agricultural segment was at 1.2% as compared to the 1.2% in prior year and in prior quarter. Net NPA ratio reported was at 0.1% of net advances. Net NPA ratio for the quarter on a pro forma basis was at 0.35% as compared to 0.33% in the preceding quarter and 0.42% in prior year. Now coming on to provisions. Specific loan loss provisions reported were 1,241 crore. If we were to follow a regular recognition process without any constraints of court directives, including accelerated recognition using analytical models, the specific loan loss provision would have been higher by 1,130 crore, resulting in a specific loan loss provision on a pro forma basis of 2,371 crore for the quarter as against 2,041 crore for the prior year and 2,740 crore during the prior quarter. The total reported provisions were 3,704 crore as against 3,892 core during the prior quarter and 2,701 core for the prior year. The total provisions in the current quarter included contingent provision of approximately 2,310 crore. This contingent provision has got two components. The first component is the incremental specific loan loss provision of 1,130, which is reflected here. This amount we just added to the specific loan loss provision on a pro forma basis, and I just mentioned it moments ago. The second component of the contingent provision of 1,173 crore represents provisions to strengthen the balance sheet to make it more resilient. The specific provision coverage ratio was at 84% as against 76% in the prior quarter and 70% in the prior year. There are no technical write-offs. Read-offs and branch books are fully integrated. Beginning of the quarter, we had contingent provisions of 4,002 crores, with a build-up of approximately 2,310 crores. At the end of the current quarter, contingent provisions towards floating provisions remained at 1,451 crores as of end September, and general provisions were 4,734 crores. As on September quarter end, total provisions comprising specific, floating, contingent, general provisions where 195% of reported gross non-performing loans or 154% of gross non-performing loans versus the prior quarter on a pro forma basis. 154% of pro forma gross non-performing loans versus prior quarter ratio of 149%. This is in addition to the security held as collateral in several of the cases. Now coming to the credit cost ratios, the reported core credit cost ratio, i.e., specific loan loss ratio was at 47 basis points of advances. If we were to follow regular recognition process without any constraints of core directors, including certain accelerated recognition of losses, the specific loan loss ratio would have been higher by 43 basis points resulting in a specific loan loss ratio on a pro forma basis of 91 basis points for the quarter, as against 90 basis points for the prior year and 108 basis points for the prior quarter. As you are aware, recoveries are recorded as miscellaneous income. Therefore, the core reported credit cost ratio net of recoveries was at 26 basis points. As mentioned earlier, on a pro forma basis, The core credit cost ratio net of recoveries was at 70 basis points as compared to 68 in prior year and 99 in prior quarter. After factoring in the accelerated contingent provision as I previously mentioned, which has an impact of 43 basis points and the remaining contingent provision to make the balance sheet more resilient, which has an impact of 45 basis points, the total credit costs for the current quarter at 141 basis points as against 154 basis points in prior quarter and 119 basis points in prior year. The reported profit before tax at 10,110 crore, which is approximately 110 crores per day during the quarter. Net profit for the quarter grew by 18.4% to 7,513 crore. Net profit for the off-year ended September 13th was at 14,172 crore, up by 19% over the corresponding off-year of prior year. Some balance sheet items. The bank's balance sheet sizes of September 30 was at 16,009,428 crores, an increase of 21.5% over the prior year September level. Total deposits amounted to 12,029,310 crores, an increase of 20.3% over prior year and up 3.4% over prior quarter, which is an addition of approximately 40,000 crores in the quarter and rupees 2,008,000 crores since prior year. Retail constituted about 80% of total deposit, and incremental contribution during the quarter was also on similar lines. As a result of our focus on granular deposits, CASA deposits grew by 27.5%, ending the quarter at 5,11,451 crore, with savings deposits at 3,48,432 crore, and current account deposits at 1,63,019 crore. Sequentially, CASA deposits had a strong momentum with a growth rate of 7.1%. Time deposit at 7,17,859 growth grew by 15.7% over previous year and 0.8% over previous quarter. CASA deposits comprised 41.6% of total deposits as of end September. Credit deposit ratio was at 84% for the current quarter as against 88% in prior year. Total advances were 10,38,335 crores, an increase of 15.8% over prior year and 3.5% over prior quarter, which is an addition of approximately 35,000 crores in the quarter and 1,41,000 crores since prior year. Retail advances on a basal basis grew by 5.3% year-on-year and sequentially grew by 2% and wholesale advances on a basal basis grew by 26.6% year-on-year and 4.6% sequentially. Moving on to capital, with regard to capital adequacy, the total capital adequacy as per Basel III guidelines stood at 19.1% against the regulatory requirement which I just mentioned, 11.075. And this is an increase compared to prior quarter of 18.9%, and prior year was 17.5%. During the quarter, The net capital generated is about 22 basis points, which is reflected in the increase in the total capital from 18.86 to 19.08. In the half year ended 30th September, the bank generated net capital of 56 basis points. To provide further context, during the financial year 1920, the net capital generation was 140 basis points for the total capital ratio. Based on our current assessment, Our internal generation of capital is adequate to sustain and support our business growth in the short term. Now in summary, our people across various verticals zealously manage customer relationship in executing our strategy by delivering products and services. These results that I just described reflects deposit growth of 20%, advances growth of 16%, operating profit growth of 18%, profit after tax increased by 18%, delivering a return on asset of 1.9%. With that, may I request Tashi to come? Yeah.

Thank you, Srini. Thank you very much. I think quarter two was reasonably more positive than what we had experienced in the first quarter of this fiscal year. We have seen a lot more micro-level indicators that capture the intensity of activity, whether it is the mobility indicators or the PMI, for manufacturing, all that rose to an eight-year high in September. Rural economy continued to be reasonably buoyant even during the second quarter. We have seen stepped-up sales in two-wheelers, tractors, gold loan sales. I believe some anecdotal evidence of SMCG sales have also been reported during this particular quarter, especially in the rural and semi-urban economy. Whilst the CMI has reported some amount of job losses, it appears to be heavily concentrated in sectors like hospitality, entertainment, education, and the informal SME segment. However, when we look at our internal numbers, because we are one of the largest corporate salary banks, Large companies, either in manufacturing or services, have not reported any substantive reduction in payrolls. When you do, as we have always mentioned, customer acquisition is one of the most important feeder for our business. Even during the height of lockdown, we manage the branch channel and other channels manage to mobilized 1.2 million customer acquisitions in the quarter ended June. Thanks to a step up in the digitization efforts. This quarter, I think the channel has managed to open 1.8 million new liability relationship. It is a quite commendable job where there is still a large portion of people working from home as well. So this is thanks to the kind of digitization efforts that have been implemented over the last six months. We are seeing a step up in the cards businesses, both the merchant acquiring as well as the issuance businesses have shown recovery. More or less, both of them hitting about 97% of last year's September numbers. I think we should see the third quarter to be far more better than what we saw in the last similar corresponding quarter of last year. We have launched the Festive Treats 2.0. This is a 45-day long program where we have aggregated far more and better offers from more than 1,000 brands as compared to 100 last year, and the reach of this particular festive treat is far higher than what we did last year as well. So we hope to sort of lift the mood and the sentiments during the third quarter. So this is something that we are very keenly watching. The early trends seem to be reasonably positive. The retail assets is something that got hit during the first quarter of this year. I think as we see the recent trends, they have started to show first signs of recovery. Disversals in Q2 have reaching about 80 to 85% of the prior year levels and more than two and a half times of June quarter. More of this color as to what's happening at the ground level, we'll have Arvind Kapil who will give some color to that. but that's a little later. The key driver, once again, during the quarter was from the wholesale banking segment. Corporate banking did a stellar growth of 40% year-on-year and a sequential growth of 3% to 4%. Though, of course, we did have some impact of a couple of obligors prepaying some of the loans. else the growth would have been even much stronger. But let me pause out here and let's hand over to Rahul Shukla as to where he saw the growth coming in from and what's the ground level feedback that he is seeing at the ground level in the coming months. Rahul, over to you.