HDFC Bank Limited

Ladies and gentlemen, good evening and welcome to the HDFC Bank Limited Q3 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 the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchstone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. Thank you, and over to you, sir.

Okay, thank you, Stanford. Appreciate the participants calling in today. We'll start with some background on the market context on what we have seen and are seeing to provide a backdrop so that that's the backdrop on which we'll talk about the results on some of the business dynamics. As you know, after recovering sharply in the months of August to October, the tailwind of the festive season provided good economic relief. The trend was good, suggesting that the overall economic activity remains in the positive territory, and there has not been a reversal in the recovery process. For instance, PMI manufacturing continued to strengthen in December, and GST collections rose to a record high of INR 1.15 trillion in the month of December 20. Looking forward, we expect the economic recovery to gather pace in Q4. We expect the rural economy to fare better than the urban centers and provide support to overall growth. Agriculture sector is likely to expand by 3.4% in FY21. Overall, the share of agriculture is estimated to rise to 16.3% of GDP in 2021 compared to 14.6% in 19-20, led by a healthy curry forward. That augurs well for us, fitting in well with our suru strategy. We expect GDP growth to turn marginally positive in Q3, 0.5%, and recover further in Q4, 1%, after witnessing a contraction of minus 24% in Q1 and minus 7.5% in Q2. For the full year, our house view is that we expect GDP growth of negative 7% to 7.5% for full year 21, which is in line with our previous estimates. On the inflation, it cooled off sharply in the month of December, coming in at 4.6%, with a 6.9% recorded in November. Moderation of CPI inflation was largely driven by contraction in food prices. Core inflation remained firm at 5.5% as inflation in subcategories like health, education, and recreation picked up. The near-term inflation outlook has improved, and we expect CPI to print close to 4% in January. That's again a house view. For February and March, we expect inflation to inch up somewhat as the base effect impact wears off. On an average, we expect inflation at 4.4 to 4.7% in Q4-21. We expect RBI to keep rates on hold till at least first off 22 at 4% and keep its times accommodating. Further, we anticipate a graded CRR cut rollback in Q1-22. The liquidity surplus in December continued to remain high. average of $6.4 trillion. Given concerns around the high liquidity in the system, we expect RBA to use special overmars to manage yield curve. Some moderation in liquidity is expected in Q4 as the central bank slows down its intervention in the FX market and the government goes into collection mode in the last quarter of the year. The fiscal deficit, again, another important indicator in the macro, for April to November touched 135% of budget estimates as tax collections continue to remain under pressure. We expect the center fiscal deficit to raise to 7.6% of GDP in FY21 versus a target of 3.5% on the back of sharp revenue receipt shortfall, while expenditure is likely to be slightly above the target. The combined fiscal deficit for FY21 center plus state is likely to be 12.3% of GDP. Now, during the quarter, the equity capital markets, in the equity capital markets, the private issuers raised 24,000 crore as against 80,000 crore in the previous quarter. Retail participation in IPOs and rights have been strong. The equity fundraising pipeline, both in public and private markets, continues to be robust. During the quarter, we, along with other syndicate members, executed a handful of deals. On the debt capital markets, Indian debt capital markets continue to witness good activity in Q3. The total debt raised Approximately 2.19 lakh crores was 25% higher than the corresponding quarter of previous year. For the nine months ended December 31, our bank was ranked number two arrangers for INR bonds. On the CSC and SuRU front, with a rapidly evolving rural economy, there is a need to have a robust digital and rural strategy. Our association with CSCs is helping us offer cost-effective services to semi-urban and rural parts of the country, which in turn is working as a stimulus in assuring the digital era through the creation and spreading of socially and financially inclusive banking model. We have signed up approximately 1.6 lakh village-level entrepreneurs, of which 1.02 lakh are onboarded as business facilitators and 13,502 business correspondents. These business correspondents are not only executing financial transactions through the use of other enabled payment system, which works on biometric authentication, but have also enabled them to sell multiple products, including CASA, fixed deposits, loans, including gold loan, two-wheeler loan, car loan, tractors, and home loans. On the CLC business side, we have been able to keep the momentum and have seen good uptake in CASA accounts where more than 2.3 lakh accounts have got open during the year so far. Now on the retail branch banking side, During the quarter, our sustained efforts on new customer acquisition complemented with video KYC led full KYC accounts and digitally powered smart accounts has enabled us to register growth of 20% in savings account acquisition and 15% in current account acquisition over the corresponding quarter of the previous year. On an overall basis, we have opened 2 million new liability relationships in the quarter, an increase of 18% over the same period in the previous year and 9% over previous quarters. During the quarter, we have launched Next Best Action, an AIML-led analytical tool for engagement with customers, giving our staff sharper recommendations to follow through for conversion. This has improved conversions and maximized return on efforts of our colleagues in the branches. Quick Loan Shopping, which was launched from 1st of September onwards, as an integral part of the branch's permanent in-house elements of merchandise and shopper activation, with an aim to transform the branches into a financial solutions supermarket, has helped increase retail assets throughput by way of higher customer inquiries and leads. With the launch of the video KYC, liability and personal loan customers are onboarded through vKYC through digital channel. This facility is also being extended to auto loan, two-wheeler loan, and card customers in the future. On the payments business, Q3 showed an even better recovery compared to Q2 on both issuing, acquiring, and consumer finance, which is the finance at point of sales business, albeit helped by a festive season which spanned both October and November. Card sales volumes is sequentially up 32% in Q3. Spends were up smartly, riding on the wave of enhanced customer engagement programs. Further, opening up of markets post-lockdown, enhanced acceptance of electronic payment modes as an ecosystem trend, Enhanced marketing spends by most luxury and high street consumption brands. Festive treats lent a boost to consumption with this larger than last year format covering, larger numbers of participating merchants across physical and online formats, as well as close to 15,000 plus local and regional physical merchants offering a wide variety of discounts and offers. Smart customized and personalized digital marketing. Significant penetration of small ticket spends on the debit and credit increased activation and engagement levels. December spends matched October, leading to optimism and growth prospects in 21. Strategy will be to continue to keep customer engagement to enhance wallet share, thereby making bank cards as the primary source of electronic expense. We ran exclusive TV campaigns during the IPL, and also increased our presence on digital and OTT platforms. Festive treats microsite attracted over 7 million unique visitors to the offers. On the merchant acquiring side, The similar recovery of spends were reflected in all acceptance form factors, which is the cards, UPI, net banking, et cetera. Enhanced merchant sign-up, deep customer engagement through one bank approach, bank staff visitations, value-added services, driving EMI at point of sale have helped in gaining counter-share and float. Merchant acquisition volumes is sequentially up 20% in Q3. Renting across merchant types to take care of short-term working capital needs will be the core component of strategy going forward. On the retail asset front, retail advances continued a pointed recovery aided by the festive season, the dispersal surpassing pre-COVID run rate and clocking a 40% sequential growth. Given the solid foundation of our retail asset franchise, we are confident of sustaining this momentum and making strong gains in market share. Arvind will have more color on this as we go later in this call. On the wholesale and SME segment, The performance of wholesale business across large, mid, and SME corporate was at par with the pre-COVID trends. Bank continued to gain market share due to diligent adherence to sales process. We'll have Rahul cover this later as we go along. On the collections front, the bank entered Q3 with a cohesive strategy to manage the volume increases and expected going to the end of moratorium release. The bank's primary goal was to stabilize the resolution rate within short order to progressively reduce the quantum of accounts flowing through into higher levels of delinquency. Jimmy Tata will talk more about credit and collection as we go along in this call. Now getting on to a few comments on the franchise balance sheet set. We are further built on the strength of the franchise and continue to be positioned well to reap the market opportunities. The recent customer relationships that we have built are performing well in accordance with our vintage models. This has enabled a robust buildup of deposits, thereby maintaining strong liquidity positions. The bank's average LCR for the quarter was at 146%, which is 95,000 crores of surplus, or approximately $13 billion, considering 110 LCR as a floor. Capital adequacy ratio is at 18.9%. We have 7.8 percentage points more capital than the regulatory minimum of 11.075%. Our CET1 at 16.8% is 9.3 percentage points more than the regulatory minimum of 7.575%. The balance sheet is resilient. The floating and contingent provisions totaling to approximately 10,000 crores built over a period of time helps in de-risking the balance sheet. We continue to originate loans in accordance with our proven credit models. We have handled diligently the restructuring requests, which we'll cover more as we go along on credit. Now getting to the results highlights for the quarter. Net revenues grew to 23,761 crores, driven by an advances growth of 15.6% and deposit growth of 19.1%. Net interest income for the quarter was at Rs. 16,318 crore, up 15.1% over previous year, and grew by 3.4% over previous quarter. For the quarter, the core net interest margin was at 4.2%, prior year was also at 4.2%, and prior quarter was at 4.1%. As mentioned earlier, the bank's average liquidity coverage ratio was at 146%, while the excess liquidity positions the bank to cater to potential demand in 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 as we have done in the past quarters. Moving on to the details of other income. Total other income, 7,443 crores, was up 11.6% versus prior year and up 22% versus prior quarter. Fees and commission income constituting about two-thirds of other income was at Rs. 4,975 crores, grew by 9.9% compared to prior year and 26% compared to prior quarter. Detail constitutes approximately 94% and wholesale constitutes 6% of the fees and commission income. Effects and derivatives income at 562 crore was higher by 7% compared to prior year of 526 crore and was almost flat to prior quarter. Trading income was at 1,109 crore for the quarter This represents the ALCO strategy of monetizing some portion of the gains from excess liquidity investments, similar to prior quarter levels. Other miscellaneous income of Rs. 797 crore includes recovery. On the expenses, operating expenses for the quarter were Rs. 8,575 crore, an increase of 8.6% over previous year. Year on year, we added 282 branches and added 55 branches during the quarter. we opened 231 branches during the nine months of this financial year. These levels of branch build accomplished on an average of slightly above one branch build per working day. By the end of this financial year, we expect to open approximately another 100 branches or so. Since last year, we added 1,008 ATMs, cash deposits, and withdrawal machines, and 249 during the quarter. We have 13,502 business correspondence managed by common service centers, including 1,532 open during the quarter. During the nine months ended December 31, we have added 8,123 business correspondence. The staff count increased by 3,579 during the last 12 months and is at 1,17,560. Cost to income ratio for the quarter and year-to-date was at 36%. Our expectation is that the spend levels will increase driven by sales, promotional activities, discretionary spends and investments. Thus the cost to income ratio will be reverting to recent historical trends of 38-39% in the short run, while our goal remains to bring this down again in the medium to longer time period. Moving on to PPOP, the pre-provision operating profit at 15,186 crore grew by 17.3% over previous year. Now coming to asset quality. As mentioned in the past quarter, the Supreme Court passed an interim order dated September 3, 2020, stating that those accounts that have not been declared NPA till August 31, 2020 should not be declared as NPA until further odds. The bank has complied with the said directive and has not classified any account which was not NPA as of August 31, 2020, as per the RBIRAC norms, and will not be classified as NPA till such time the Supreme Court rules finally on the matter. Similar to previous quarter, the bank, as a matter of prudence, used its analytical models to estimate potential NPA in an expedient manner on a pro forma basis and has provided for corresponding contingent provisions towards the same. The bank holds provisions as on December 31 against the potential impact of COVID-19 based on the information available at this point in time and the same or in excess of the RBA prescribed norms. For the credit update that we will provide in the next few minutes, We will first mention the reported number, and it will be followed by the pro forma number, which is analytically arrived. If you consider the potential NPS as just mentioned, using analytical models, the pro forma annualized slippage ratio for the current quarter is at 1.86%, as against 2.31% in prior year and 1.98% in prior quarter. Year-to-date nine months pro forma annualized slippage ratio is at 1.67%. The GNPA ratio reported was at 0.81% of gross advances. The impact of the NPA ratio by use of analytical model in determining the NPA, as I mentioned earlier, is about 57 basis points. Therefore, the pro forma GNPA ratio for the quarter was at 1.38% as compared to 1.37 in the prior quarter and 1.42% prior year. GNPA ratio for the quarter on a pro forma basis, excluding NPAs in the agricultural segment, was at 1.2%. Prior quarter and prior year levels are also at 1.2%. Net NPA ratio reported was at 0.09% of net advances. NPA ratio for the quarter on a pro forma basis was at 0.40% as compared to 0.35% in the preceding quarter and 0.48% in prior year. The restructuring under RBA resolution framework for COVID-19 was approximately 50 basis points of total advances. Now on to the provisions. Specific loan loss provisions reported were to be 691 crore. If you were to follow a regular recognition process without any constraints of court directives, the specific loan loss provision would have been higher, resulting in the specific loan loss provision on a pro forma basis of 3,170 crore for the quarter as against 2,884 crore for prior year and 2,371 crore during the prior quarter. The total provisions reported were 3,414 crore as against 3,704 crore during the prior quarter and 3,044 crore for the prior year. Total provisions in the current quarter included contingent provisions of approximately 2,400 crore. The contingent provision in the form of incremental specific loan loss provision is reflected here. These pro forma contingent provisions will be reversed to specific provision as and when final court order becomes available. The reported specific provision coverage ratio was at 88%, as against 84% in the prior quarter, and 67% in the prior year. There are no technical write-offs, so red office and branch books are fully integrated. At the end of the current quarter, contingent provisions towards loans were at approximately 8,600 crores. The bank's floating provisions remained at about 1,450 crores as of December 31, and general provisions were about 5,000 crores. As on December quarter end, total provisions comprising specific, floating, contingent, and general were 260% of reported gross non-performing loans or 148% of pro forma gross non-performing loans. This is in addition to the security held as collateral in several of the cases. Now coming to credit cost ratios. The reported credit cost ratio, which is the specific loan loss ratio, was at 0.25% of advances. If you were to follow a regular recognition process without any constraints of co-directors, the specific loan loss ratio would have been higher by 91 basis points, resulting in the specific loan loss ratio on a pro forma basis of 1.16 for the quarter as against 1.22 for prior year and 0.91 for the prior quarter. As you are aware, recoveries are recorded as miscellaneous income. The recoveries amounted to... 24 basis points of gross advances for the quarter as against 35 basis points for prior year and 21 basis points for the prior quarter. After factoring in the contingent provisions as previously mentioned, which has an impact of 91 basis points, the total credit cost for the current quarter was at 1.25% as against 1.41% in prior quarter and 1.29% in the prior year. The reported profit before tax at 11,772 crores, which is roughly 128 crores per day during the quarter, grew by 18.9% over prior year. Net profit for the quarter at 8,758 crores grew by 18.1% over prior year. Net profit for the nine months ended December 31 was at 22,930 crores, up by 18.6% over the corresponding nine months of prior year. Some balance sheet items. The balance sheet sizes of December at 16,54,000 crores is an increase of 18.6% over the prior year December level. Total deposits amounted to 12,71,124 crores, an increase of 19.1% over prior year and up 3.4% over prior quarter, which is an addition of approximately 42,000 crores in the quarter and 2,04,000 crores since prior year. Retail constituted about 80% of total deposits and 100% of incremental contribution during the quarter. With our persistent focus on granular deposits, CASA deposits grew by 29.6%, ending the quarter at Rs. 5,46,747 crores, with savings account deposits at Rs. 3,74,639 crores and current account deposits at Rs. 1,72,108 crores. CASA deposits also registered a robust sequential growth at 6.9%. Time deposit at 7,24,377 grew by 12.2% over previous year and 0.9% over prior quarter. CASA deposit comprised 43% of total deposits as of December end. Credit deposit ratio was at 85% for the current quarter as against 88% in prior year. Total advances were 10,82,324 crores, an increase of 15.6% over prior year and a sequential growth of 4.2%. This is an addition of approximately 44,000 crores in the quarter and it is 1,46,000 crores since prior year. Retail advances on a Basel basis grew by 5% year-on-year and sequentially grew by 4.3%. And wholesale advances on a Basel basis grew by 26% year-on-year and 3.8% sequentially. Moving on to CAFAD, with regard to capital adequacy, total capital adequacy ratio as per Basel III guidelines stood at 18.9% as against a regulatory minimum of 11.05%. Prior quarter was at 19.1% and prior year was at 18.5%. The Tier 1 capital adequacy ratio was at 17.6% in the current quarter as compared to 17.7% in the prior quarter and 17.1% in the prior year. C21 capital stood at 16.8% in the current quarter compared to 16.2% in the prior year and 17% in the prior quarter. In the nine months ended December 31, the bank generated net capital of 40 basis points. To provide further context during the financial year 1920, the net capital generation was 140 basis points to the total capital ratio. Now some highlights on STB financial services under igap which was made for consolidation with the bank disbursements for q3 were at last year levels and sequentially up 23 percent over q2 with business across product lines gaining traction total aem reached 60 176 crores net interest income for the quarter was at 1010 crore a growth of 1.5 percent over q3 last year while sequential growth was at 9.3 percent PPOP for Q3 was at 748 crores, growing 7.5% over previous year. Provisions for the quarter were at 818 crores, which included general provisions made during the quarter. For the quarter, HDB Financial Services has reported a small loss of 44 crores. For the nine months ended December 31, the profit reported was 218 crores. HDB Financial Services has given impact of Supreme Court order and forced NPAs passed NPAs at the end of August and held the status of these accounts as standard. As on December 31, gross and net NPA were 2.7% and 1.7% respectively. If HDB Financial Services had classified borrowers' accounts as NPA after August 31, 20, along with the NPFC recognition methodology, the pro forma GNPA ratio would have been higher at 5.9% as on December 31, as against 5.1% as on September 30 and 2.9% as on December 31 last year. However, no benefit of standstill is taken in the P&L as adequate general provisions have been made to neutralize the benefits. STB Financial Services had adequate liquidity and LCR as on December 20, which was at 285% LCR ratio. STB Financial Services is also able to borrow at attractive rates coupled with the strong capital position of 19.5% and are well positioned to maintain growth momentum built in Q3. Now coming back to the bank, and particularly on the December 2nd RBA order, we want to mention that progress is being made on the plan of action provided to the regulator. We have taken it positively as it will raise the standards. The regulator will institute a process to inspect the action plan and the progress. We shall give updates in the future. In summary, our teams across functions enthusiastically handle customer engagement in implementing our strategy, regardless of the challenging atmosphere. This is reflected in deposit growth of 19%, advances growth of 15.6%, operating profit growth of 17%, profit after tax increase of 18%, delivering the return on asset slightly above 2% or so. With that, I may request Jimmy Tata to give a few comments on credit and then we'll have some business highlights coming too.

Hi, good evening everyone and thanks for coming again. I'll do what I usually do and just take you through segment wise wholesale and SME and then take a small break. while Rahul would then step in and give you some brief on the business momentum, after which go through retail, which would be followed by Arvind's views on the business again. So, on the wholesale portfolio, the wholesale portfolio is now reasonably large at around 5.8 lakh crores. It's been growing well. It continues to grow well. in pretty much the same way as we've been reporting over the last two or three quarters most of the growth coming from well-rated public sector and private sector enterprises everything is pretty much steady state so there's not too much news to give you in that sense the gross incremental portfolio I don't know if I need to explain our HDB ratings again, but I think if you go back to the previous calls, we have the 1 to 10 HDB rating. It's a model that we keep sharpening and has served us very well for 25 years. One is the lowest risk, 10 is the worst risk. 4.37 was the cross incremental portfolio during the quarter, corresponds well into the AA, AAA category. Around 68% of the portfolio is rated HDB 5 and above, which measures into a AA again. This is just for external reference. It's not that we benchmark it that way. So we have around 67% of the externally rated portfolio. Actually, no, I should phrase that again. 67% is externally rated at AA and above. And since I'm using the word above, maybe I'll just let you know that it's a 50-50 between AAA and AA by and large. The average rating of the portfolio itself Remained very steady and it's been that way for the last few quarters at around 4.4. 70 is the high 70 percentage is I would say is where the externally rated book. So at this point of time it's 79, but it's usually in the high 70s. Of the externally rated book is either AAA or AA rated. 90 plus percent is A and above. Moving into what we usually mention on the unsecured book, the unsecured book always has a better rating than the average portfolio because we do take great caution in what is done in the unsecured space. The weighted average of the unsecured portfolio today is an HDB 3.4 as opposed to the average of 4.4 and thereby the secured book being a 4.57. That's how the average gets determined. So things are pretty much as they were going well. We are confident and it seems in order. I think Srini commented on the NPA numbers and the pro forma NPA levels. Within the wholesale book, there is really not much distance between the actual and the pro forma NPS because the book itself is quite steady and stable. Just take a minute to move into the SME book and let you know what is taking place there. So over the last two, three quarters, given the injections of various benefits that have come in from the Reserve Bank and from the side of the government, the ECLJS, so the various measures for agriculture and various other methods, we once again had a fairly good ability to manage. As we had mentioned earlier, cash flows into customer accounts, which we monitor very closely, had slipped in the months of April and May. From June onwards, quite happy to report that there has been a strong bounce back, and I'll come back to this in a minute. I'll just give you a better flavor of that there, but I'll leave this there for the moment. The 30 plus since the month of September, which is when you can actually measure it, has again shown an improving trend month on month. And I could tell you that the FITL in the SME book is a 0.74 or 0.75 percentage range which effectively shows the inherent strength of this book. We would, over the last few quarters, have done a lot of analysis and tried to explain to you why we think it is strong, but I would think that this is one of the actually manifested demonstrations of the strength of that book, that not more than this much required to be put into FITL. We also have been doing stress tests on this book, as we mentioned to you some time ago. And initially in the early days, of course, we were very conservative about it and we reported that 9% could end up being under stress. We revised that last quarter, if you remember, and it came down. It was much better than we had imagined, so it had come down to around 3%. There is again a small positive movement and today around 2.3 odd percent is where we consider there may be vulnerability which we watch rather closely. The utilization of facilities in the SME book has been steady over this entire period at around low 70%. uh the the number itself doesn't matter it's the fact that it is steady that uh we look at because this is based on working capital limit it is based on availability of drawing power etc etc so that once again puts things in a good light and it carries on the same way so i'm not dwelling too much about it it's pretty steady state Industry classification and diversification, once again, very granular. Nobody except agriculture, which is, once again, as I mentioned, is directed lending. So you have to have a particular percentage in it. It crosses 5%. All other industries in this SME book are below a 5% level. And I think if you go to industry number six or seven, it starts moving down to three and then to twos and threes. much lower than that. So there's a tremendous granularity in that. The delinquency trend quarter on quarter has also showed an improvement across all buckets. So be it the 7+, the 15+, 30, 60, whatever, there is an improvement across all buckets. So there has been good recovery seen even in those areas. Coming to the few points then that we usually mention, which are some of our own individual metrics, our self-funding ratio. Once again, I must caveat, as I always do, this is not security. This is the bank's internal measure of the customer's wealth and liquidity in the SME space. As we had mentioned to you in the early days of the pandemic, we were concerned and we were watching whether this would stay maybe to our surprise, we're not surprised anymore about it because we've now determined the reasons as well, but the self-funding actually grew from that point in time. I think the customers ended up with larger savings and larger balances in the bank than previously there. So that remains in the 70s now for a considerable period of time, I mean between 70 to 80%. The collateral coverage, again, rather steady, currently around 85%, and it's usually been in the 85 to 90% kind of range. The other good thing which I alluded to right in the beginning which I could report to you now is since the month of June, we have seen a very steady flow of receipts into our accounts, and this is something we monitor very closely. It's not just steady, it is actually growing. And at this point in time, I think I would be able to say that it's around 14 to 15% higher than the levels of the inflows in February. This, once again, I think reflects the health of the portfolio and the superior customer selection that the group has had. the ability of these customers to bounce back in terms of business receipts to pre-COVID levels and actually cross that shows that the book is in reasonably good health. That of course is all that we do internally. So we decided to do something a little more outward looking. And we decided to plot the receipts in our customer accounts and the collections vis-a-vis the GST collections of the government. And the plot shows two almost parallel lines. So once again, this shows that the flow of funds into our accounts is mirroring the recovery in the economy as well, which thinks into a good perspective for us. From the risk perspective, all I can say to conclude is we have our behavioral score just like we have the hdb ratings in the wholesale we have behavioral scores which focus a lot on customer behavior beyond just the balance sheet and the metrics these are also gravitating once again back into the full cover days so all in all comforting from our perspective just thought uh raul why don't you just speak a bit on the business side sure