HDFC Bank Limited

Ladies and gentlemen, good evening and welcome to HDFC Bank Limited's Q3 FY22 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 brief commentary by the management. Should you need assistance during the conference call, please signal an operator by pressing start and zero on your touchstone phone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. Thank you and over to you, sir.

Good evening and a warm welcome to all the participants. First, to start with, the environment and the policies that we operated in the quarter were conducive for growth with good tailwind from monetary and fiscal policy. You all know about the activity indicators bearing better in Q3, like the PMI, GST collections, e-wables, et cetera, et cetera. They're also up to date about the CPI or RBI policy rate stands and the liquidity conditions. Now, in that backdrop, the equity capital market was robust in the quarter. Private issuers raising almost 82,000 crores. We were mandated for eight IPOs. Indian bond market also saw a total fund raise of approximately 1.87 lakh crores in the quarter. The bank maintained its ranking as one of the top three arrangers in the INR bond market. Now, with that, let's go through five themes at a high level before we delve into the quarter financials. One, on the banks, balance sheet continues to get stronger. For instance, the capital adequacy ratio is at 19.5%, CET1 at 17.1%. Liquidity is strong as reflected in our average LCR for the quarter at 123%. Balance sheet remains resilient. The GNP ratio is at 1.26%. Floating and contingent provisions aggregating to this 10,100 crores helps in de-risking the balance sheet and positioning for growth. Two, investments in key enablers are picking up in executing our strategy. We opened 93 branches in the quarter, 171 branches year-to-date nine months period. To give additional context, we have added 525 branches over the past 21 months, that is, during the COVID period, positioning us for capitalizing the opportunity. We onboarded a little more than 5,000 people in the quarter, 14,300 plus people during the nine-month period. We have onboarded about 17,400 people over the past 21 months during the COVID period to get the people ahead on the productivity curve as the economy accelerates further. There is a growing impetus on digital and we have taken the steps necessary to ensure our customers have great and consistent experience in whatever channel they choose to bank with us. Key initiatives like a streamlined, modern customer experience hub, allowing access to content across channels and devices will be introduced soon. We are also committed to continuously enhancing the digital experience for our customers through fully revamped payment offering. We have taken multiple steps to ensure ensure robust, scalable, and secure technology setup to strengthen even further. Some key initiatives include capacity for UPA has been tripled, net banking and mobile banking capacity has been doubled to manage 90,000 users concurrently, a significant step as most of our customers now relay on digital channels for banking needs. The bank has migrated core data centers in Bangalore and Mumbai to state-of-the-art facilities The bank is moving to next level of disaster recovery with DR automation and implementation of hot DR active-active setup for key applications. Significant upgrades in network and security infrastructure to support our exponential growth in digital transactions. Our digital capability is coupled with rich data and customer's behavior. Take for instance a traditional retail product wherein close to 80% new loans go through digital scorecards or automated underwriting. In Q3, we received a total of 245 million visits on our website, averaging 31 million unique customers per month. As per our analysis, we had 30 to 70% more visits on our website with our own public private sector peers. Close to 60% of the visits were through mobile device, indicating the mobile centricity of the footfalls. Three, on customers, Acquiring new liability relationship is setting new high, preparing for broad basing and deepening relationship in times to come. During the quarter, we opened about 2.4 million new liability relationships, 6.4 million new liability relationships during the nine months period of this financial year, exhibiting a growth of 29% over the same period last year. Four, our market leadership in digitizing the economy is setting new high. In Q3, we achieved the highest ever issuance with 9.5 lakh card issuances. Since late August, when we recommenced issuance of new cars, we have so far issued 13.7 lakh cars. Credit card spend for the bank has grown 24% year on year, and debit card spend has grown 14% year on year. These spend growth reflect both increased customer engagement and economy improvement from a consumption perspective. In similar lines to our CSE partnership and to scale our business further, we have signed MOUs with two large payment banks for distributing certain products. This opens up further opportunity to scale among other places growth in semi-urban and rural areas, leveraging partner distribution access points and feet on street. We have further scaled emerging growth segments such as easy EMI, consumer durables targeting our preferred customers through segmented sales and marketing. Consumer finance business has one plus, one lakh plus active distribution points. We have over five million customers with easy EMI options. The bank merchant offering is scaling to provide Enhanced value-added services across various segments. The bank has 2.85 million acceptance pointers of December with a year-on-year growth of 35%. The bank's acquiring market share stands at approximately 47% with a 19% share in terminals, processing about 300 million transactions per month. The bank has been focusing in suru locations and is investing in training and offering segment-specific solutions. Over 50% of new merchant sourcing is from Suru locations. Five, asset volumes are gaining momentum to reach new highs driven through relationship management, digital offering, and breadth of products. In the wholesale segment, carpets continue to generate strong cash flows across sectors, resulting in fair degree of prepayments. Trade continues to be an opportunity for credit growth, factoring, invoice financing, export financing, import financing, or some of the products we participated in to grow. They are also making progress in MNC segment with their ambition to be the largest player in the space. Corporate banking and other wholesale loans grew by 7.5% over prior year and 4.4% over prior quarter. On the retail assets front, the momentum pickup observed during Q2 continued its stride in Q3 as well, witnessing a robust sequential asset growth of 4.7% and year-on-year growth of 13.3%. This has been This has been on the back of a strong incremental dispersal during the quarter. Commercial and rural banking businesses saw robust growth this quarter, registering a sequential growth of 6.1% and year-on-year growth of 29.4%, reflecting underlying economic activity and continued market share gains. Now let's start with net revenues. Net revenues grew by 12.1% to 26,624%, driven by an advances growth of 16.5% and a deposit growth of 13.8%. Net interest income for the quarter, which is at 69% of net revenues, grew by 13% year-on-year and registered a sequential growth of 4.3%. The core net interest margin for the quarter was at 4.1%. This is in the similar range of previous quarter. Net interest income growth is reflective of underlying shift from unsecured lending essentially gravitating towards higher-rated segments in the COVID period. This is also represented in our ratio of net interest income to RWA, which is consistent at around 6%. Moving on to details of other income, which is at 8,184 crores, was up 9.9% versus prior year and up 10.6% versus prior quarter. Fees and commission income, constituting about two-thirds of other income, was at 5,075 crores and grew by 2% compared to prior year and 2.6% compared to prior quarter. Retail constitutes approximately 93% and wholesale constitutes 7% of fees and commission income. Fees, excluding payment products, grew year-on-year by 17%, and fees on the payment products de-grew year-on-year due to lower fees on card loan products, cash advances, over-limit fees, reflective of a cautious approach to card-based lending, as well as customer preferences. However, card sales, ANR, and interchange have come out robustly, which positions us for future growth and a customer propensity to use card products for loans and revolver increases. In addition, during the festive period, we offered certain fee waivers to incentivize customer engagement. Effects and derivatives income at 949 crores was higher by 69% compared to prior year, reflecting pickup and activities and spread. Trading income was 1,046 crores for the quarter. Prior year was at 1,109 crores, and prior quarter was at 676 crores. Some of the gains from investments were monetized in line with our strategies. Other miscellaneous income of 1,113 crores includes recoveries from return of accounts and dividends from subsidiaries. Now moving on to expenses for the quarter at 9,851 crores, an increase of 14.9% over previous year. Year on year, we added 294 branches, bringing the total branches to 5,779. Since last year, we added 1,697 ATM cash deposit and withdrawal machines, taking the total to 17,238. We have 15,436 business correspondence managed by common service centers, which is higher by about 1,900, slightly over 1,900 compared to the same time last year. Cost-to-income ratio for the quarter was at 37%, which is similar to the prior year level. As previously mentioned, when technology investments are further stepped up and retail segments pick up further, we anticipate the spend levels to increase driven by incremental volumes, sales and promotional activities, and other discretionary response. Moving on to asset quality, GNPA ratio was at 1.26% of gross advances as compared to 1.35% in prior quarter and 1.38% on a performer basis in prior year. It is pertinent to note that of the 1.26% GNPA ratio, about 18 basis points are standard. These are included bias in NPA as one of the other facility of the borrower is in NPA. Net NPA ratio was at 0.37% of advances, net advances. Preceding quarter was at 0.4. The annualized slippage ratio for the current quarter is at 1.6, about 4,600 crores, as against 1.8% in prior quarter. Agri seasonally has contributed approximately 1,000 crores to slippages or about 25 basis points annually. During the quarter, recoveries and upgrades were about 2,400 crores or approximately 25 basis points. Write-offs in the quarter were 2,200 crores, approximately 23 basis points. Sale of NPA, about 260 crores, approximately two basis points in the quarter, included in one of the categories above. Now, looking at check bonds and restructuring and so on. The check bonds rate continues to improve in December across most of the retail products and is not only back to pre-pandemic level, but are also marginally better. Further, the early January bounce rate shows continued improvement. Similarly, demand resolution at 97-98% for most of the products is back to pre-COVID level, and in some cases, better than pre-COVID levels. The improvement in bounce and demand resolution rates at aggregate level, amongst other things, illustrates the overall portfolio quality. The restructuring under RBI resolution framework for COVID-19 as of December end stands at 137 basis points, This is at the borrower level and includes approximately 28 basis points of other facilities of the same borrower, which are not restructured but included here. To give some color on restructured accounts, 40% are secured with good collateral and with predominant good SIBIL score, which we feel is comfortable. Of the unsecured portion, approximately two-thirds are salaried customers and about 40% are good SIBIL scores, more than 700. The demand resolution is showing encouraging trends. COVID restructuring has been an enabler for our customers to tide over the uncertainty in the last few quarters. Initial indicators suggest that most of these customers are now positioned to resume their payment with minimal impact to overall quality of the advances of the bank. As mentioned previously, impact of restructuring on our GNP ratio could not, can be 10 to 20 basis points at any given quarter. We talked about it last quarter and mentioned that. The core provisions The core specific loan loss provisions for a quarter were 1,821 crores as against 2,286 crores during the prior quarter. Total provisions reported were 2,994 crores against 3,924 crores during the prior quarter. Total provisions in the current quarter included additional contingent provisions of approximately 900 crores. The specific provision coverage ratio was at 71%. There are no technical write-offs. Our head office and bank books are fully integrated. At the end of current quarter, contingent provisions to its loans were approximately 8,600 crores. The bank's floating provisions remained at 1,400 crores. And general provisions were at 6,000 crores. Total provisions comprising specific floating contingents and general provisions were 172% of gross non-performing loans. This is an addition to security held as collateral in several of the cases. Looking at through another lens, Floating contingent and general provisions were 1.27% of gross advances as of December quarter end. Now coming to credit cost ratios. The core credit cost ratio, that is the specific loan loss ratio, is at 57 basis points for the quarter against 76 basis points for the prior quarter and 116 basis points on a pro forma basis for prior year. Recoveries which are recorded as miscellaneous income amount to 25 basis points of gross advances for the quarter against 23 basis points in the prior quarter. Total annualized credit costs for the quarter was at 94 basis points, which includes impact of contingent provision of approximately 30 basis points. Prior year was at 125 basis points. Prior quarter was at 130 basis points. Net profit for the quarter at 10,342 crores grew by 18.1% over prior year. We'll give you some balance sheet items, color on some balance sheet items. Total deposits amounting to 14,45,918 crores is up 13.8% over prior year. This is an addition of approximately 40,000 crores in the quarter and 1,75,000 crores since prior year. Retail constituted about 83% of total deposits and contributed to the entire deposit growth since last year. CASA deposits registered a robust growth of 24.6% year-on-year, ending the quarter at 6,81,225 crores, with savings account deposits at 4,71,000 crore, current account deposits at 2,10,000 crores. Time deposits at 7,64,693 crores grew by 5.6% over previous year. Time deposits in retail segment grew by 8.3%. Time deposits in wholesale segment decreased by 2.8% year on year. CASA deposits comprised 47% of total deposits as of December end. Total advances where 12,60,863 crores grew by 5.2% sequentially and 16.5% over prior year. This is an addition of approximately 62,000 crores during the quarter and 1,79,000 crores since prior year. Moving on to CAPAD, which I covered at the beginning, total, according to Basel III guidelines, total capital adequacy at 19.5%, tier 1, 18.4%, CET at 17.1%, which I covered previously. Now getting on to some highlights on HDBFS, this will be on India's basis. The total loan book as on December 31 stood at 60,478 crores with a secured loan book comprising 74% of the total loan. Conservative underwriting policies on new customer acquisition which was implemented during COVID continues to be in place and will be reviewed in due course based on external environment. Disbursements are picked up in Q3, growing 9% quarter on quarter and 11% year on year. For the quarter, HDB FSL's net revenues were 1,982 crores, a growth of 15%. Provisions and contingencies for the quarter were at 540 crores, including 97 crores of management overlays against 1,024 crores for prior year. Profit after tax for the quarter, was 304 crores compared to a loss of 146 crores for the prior year quarter and a profit after tax of 192 crores for the sequential quarter. As of December end, gross stage 3 stood at 6.05% flat sequential quarter. 80% of the stage 3 book is secured, carrying provision coverage of about 41% as of December end and is fully collateralized. 20% of the stage 3 book, which is unsecured, had a provision coverage of 84%. Liquidity coverage ratio was strong at 222%. The STB is funded with a cost of funds of 5.9%. Total capital adequacy ratio is at 20.3 with the tier one at 14.9. With markets opening up and customer accessibility improved to near pre-COVID levels, we believe the company is well poised for a healthy growth from here on subject to any impact on further waves of COVID. Now a few words on HSL, again on India's basis. HSL, HDFC Securities Limited with its wide network presence of 213 branches across 147 cities and towns in the country has shown an increase of 58% year-on-year in total revenue to 536 crores. Net profit after tax of 258 crores in Q3 is an increase of 58% year-on-year. HSL's digital account opening journeys are running successfully. There has been a significant increase in overall client base to 3.4 million customers as of end December, an increase of 30% over prior year. In summary, we have reasonably overcome the effects of pandemic over the past 21 months across broad contours of balance sheet P&L and human capital. While the effect of the latest COVID wave is not clear, which we'll have to watch out over the next few weeks to see where it turns, we are confident of navigating through this, applying our learning from past waves. Our growth is accelerating, leveraging on our people, product, distribution, and technology. The quarter results reflect deposit growth of 14%, advances growth of 16%, profit after tax increased by 18%, delivering the return on asset over 2%, earnings per share in the quarter of 18.7, book value per share increased in the quarter by 19.4 to 414.3. With that, thank you very much. With that, may I request the operator to open up for questions, please.

Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on your touch-tone 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 resembles. The first question is from the line of Maruka Jania from Ilarra Capital. Please go ahead.