HDFC Bank Limited

ladies and gentlemen good evening and welcome to hdfc bank limited q2 fy23 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 hand the conference over to Mr. Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. Thank you and over to you, Sir.

OK, thank you, Rutuja. Good evening to all. Let's start with a brief overview for the context. We believe that the continued recovery in domestic demand boosted with the onset of festive season and higher government capex provides support to the growth. While there are risks stemming from the possibility of global slowdown, higher inflationary pressure, and an uneven monsoon, consumer demand and fiscal spends are likely to keep the economy stimulated. Geopolitical instability, strong US dollar, et cetera, continue to occupy center stage during the quarter. Activity indicators released during July to September quarter indicate that economic activity continues to hold up despite global risk. High frequency and other indicators have risen so far this year and is also promising to provide further opportunity and optimism in the economy. Labor market conditions are also improving in the rural areas as seen by the fall in the Manrega work demand and a rise in wage growth. RBI raised the policy rate by 100 basis points in the quarter, taking the repo rate to 5.9%. The central bank has hiked rates by 190 basis points since May 22. The central bank has kept its stance unchanged at withdrawal of accommodation while supporting growth. We estimate that the GDP growth to be around 7% for financial year 23. Let's go through key themes. On the distribution expansion, We added 121 branches during the quarter, and about 500 more branches are in various stages in the pipeline to be opened in the next few months. We have 15,691 business correspondence, an increase of 73 over prior quarter. Goal loan processing are now offered in 2,960 branches, an increase of 900 branches in the current quarter, and up 2.2 times over March 22. Payment acceptance points have grown by 269,000 in the quarter to 3.5 million and have grown by over 1 million versus prior year growth of 41%. Wealth management is now offered in 502 locations through hub and spoke model. We have expanded by 145 new locations in the quarter. We plan to drive increase in market share through deepening in B30 cities. In customer franchise building, Our people have acquired 2.9 million new liability relationships, exhibiting a healthy growth of 22% over prior year and 11% over prior quarter. Over the last five quarters, we have steadily acquired over 2 million new customer liability relationships per quarter, enabling us to further broad base and deepen our relationships in time to come. On cards, we have issued 1.2 million cards during the quarter. Total card base is now 16.3 million. During the quarter, we also closed 2.4 million cars, which have been inactive for a period of time in accordance with the RBI circular. We are focused on granular deposits. Total deposits amounted to 16,73,000 crore, an increase of 4.3% over prior quarter, and up 19% over prior year. In retail deposits, We added 71,000 crores during the quarter and 2,35,000 crores since prior year September. Retail constitutes about 83% of total deposits. Retail deposits have been the anchor of our deposit growth. CASA deposits recorded a strong growth of 15.4% year-on-year, ending the quarter at 7,59,000 crores, with CASA ratio at 45.4%. Retail CASA grew by 19% and retail total deposits grew by 20.4% year on year. Term deposit registered a robust growth of 22% year on year, ending the quarter at 9,13,712 crore. On the advances side, which were at 14,79,873 crore, grew by 6.1% sequentially and 23.4% over prior year. Our retail advances growth was robust Domestic retail grew by 21.4% year-on-year and 4.9% quarter-on-quarter. Card spends have grown 9% over prior quarter. Commercial and rural banking, which drives our MSME and PSL book, continued its momentum with a year-on-year growth of 31% and quarter-on-quarter growth of 9.4%. Our SME businesses are present in 90% of the districts in the country Rural business reach expanded to 1.42 lakh villages and is on track to reach the objective of 2 lakh villages. Wholesale segment witnessed a strong growth year-on-year of 27% and quarter-on-quarter growth of 9%. On the technology front, the bank continued its momentum on the technology and digital transformation to provide greater customer experience to the digital and enterprise factory. SDSC Bank One, that is the customer experience of was launched and we migrated phone banking, virtual relationship banking, and telesales on this platform in the recent quarter. It enhances our customer relationship management process using AAML and conversational bot, enabling round-the-clock self-service capabilities akin to human interaction. Phone banking voice support rollout is underway across the country, adding more cities along with multilingual support. We see this as a significant step in our journey to create an engaging customer experience while at the same time bringing in productivity improvements to our call center operations. We launched PaysApp 2.0 to a closed user group for performance optimization and improved payments experiences. We expect to broad-based the rollout shortly. SmartHub Yopar app, a one-stop merchant solution, was formally launched to facilitate instant digital and paperless merchant onboarding and allow merchants to accept interoperable payment across multiple payment modes including cards, tap and pay, UPI, and QR code. The platform is adding more than 60,000 merchants every month. As of end September, over 1.6 million small businesses are on the Smarter platform. In Q2, we received a total of 261 million visits on our website, averaging about 30 million unique customers per month with a year-on-year growth of around 12%. Our well-established distribution network, combined with our focused digital offering and relationship management, continued to fuel growth. Balance sheet remains resilient. LCR for the quarter was at 118%, capital adequacy ratio is at 18%, and CET1 is at 16.3%, including profits for the half-year index September 22. Let's start with revenues. Net revenues were at Rs. 28,617 crores. Core net revenues were at Rs. 28,870 crores, excludes the trading and mark-to-market losses, which grew by 18.3% over prior year and 6.2% over prior quarter, driven by advances growth of 23%, deposits growth of 19%, and total balance sheet growth of over 20%. Net interest income for the quarter at 21,000 crores grew by 18.9% over prior year and 7.9% over prior quarter. The core net interest margin for the quarter was at 4.1%, Prior year was also at 4.1% and prior quarter was at 4%. Based on interest earning assets, the core net interest margin was at 4.3%. Moving on to the details of other income, fees and commission income constituting three-fourths of other income was at 5,800 crore and grew by 17% over prior year and 8% over prior quarter. Detail constitutes approximately 93% of the fees. Effects and derivatives income at 948 crore was higher by 9.3% compared to prior year. Trading and mark to market losses were 253 crores loss. The mark to market losses are mainly from our EFS investments in our corporate bonds and PTCs due to rate moments in the front end yield curve. Prior quarter was also at a negative 1,312 crore and prior year was a gain of 676 crores which were then opportunistic from an investment portfolio. Other miscellaneous income of 1,098 crores includes recoveries from return of accounts and dividends from subsidiaries. Excluding trading and mark-to-market losses, total other income at Rs. 7,849 crores grew by 16.7% over prior year. Moving to operating expenses for the quarter which were at 11,225 crores, an increase of 21% over prior year, an increase of 6.9% over prior quarter. As I mentioned earlier, we added 813 branches and 2,226 ATMs since last year, 121 branches and 248 ATMs last quarter, taking the total network strength to 6,499 branches, 18,868 ATMs, and 15,691 business correspondence. Cost to income ratio for the quarter was at 39.2%. Moving on to PPOP, our core PPOP group by 16.6% year-on-year and 5.8% sequentially. Our pre-provision operating profit was at Rs. 17,392 crores. Pre-provision operating profit for the quarter is 5.37 times of total provisions. Coming to asset quality, the GNPA ratio was at 1.23% as compared to 1.35% prior year and 1.28% in the prior quarter. Out of the 1.23%, About 19 basis points are standard, thus the core GNPA ratio is at 1.04. However, these are included by us as one of the other facilities of the borrower is in NPA. Net NPA ratio was at 33 basis points, prior year was at 40 basis points, and preceding quarter was 35 basis points. The slippage ratio for the current quarter is at 36 basis points, or about Rs. 5,700 crores. During the quarter, Recoveries and upgrades were about 2500 crores or about 19 basis points. Write-offs in the quarters were about 3000 crores or approximately 22 basis points. There were no sale of stressed or written off accounts in the quarter. The restructuring under the RBI resolution framework for COVID-19 as of September end stands at 53 basis points, 7,851 crores. In addition, certain facilities of the same borrower which are not restructured is approximately nine basis points. On provisions, the total provisions reported were around 3,200 crores as against 3,900 crores for the prior year and 3,200 crores during the prior quarter. The provision coverage ratio was at 73% as against 71% in prior year and it was at 73% in prior quarter two. At the end of current quarter, Contingent provisions and floating provisions remained close to the prior quarter level at 11,000 gross. General provisions were at 6,800 gross. Total provisions comprising specific floating, contingent, and general provisions were about 171% of gross non-performing loans. This is in addition to the security held as collateral in several of the cases. Floating and contingent and general provisions were about 1.19% of gross advances as of September quarter end. Now coming to credit cost ratios, the total annualized credit cost for the quarter was 87 basis points. Prior year was 130 basis points and prior quarter was 91 basis points. Recoveries which are recorded as miscellaneous income amounted to 22 basis points of gross advances for the quarter as against 23 basis points for prior year as well as prior quarter. The total credit cost ratio net of recoveries was at 64 basis points as compared to 103 basis points in prior year and 68 basis points in prior quarter. Now coming to profit. Profit before tax was at 14,152 crores. Net profit after tax for the quarter at 10,606 crores grew by 20% over prior year. Now some highlights on HDB financial services. This is on an in-day basis. The momentum in disbursements continued during the quarter, which was at 9,860 crores, registering a healthy growth of 29% year on year and 8.5% sequentially. Customer franchise grew to 10.4 million customers with a 6% additions during the quarter and an increase of 33% year on year. HDB Financial Services has started to augment the distribution network and opened four branches in the quarter, taking it to 1,407 branches spread across 1,009 cities and towns. The total loan book as of September end stood at 63,112 crores, with secured loan comprising 75% of the total book. Net revenue for the quarter was 2,201 crores, a growth of 14.9% on an year-on-year basis. Cost to income for the lending business was at 38.4%. Provisions and contingencies for the quarter were 351 crores as against 398 crores for prior quarter and 634 crores for prior year. Quality of the book in the current quarter has sustained the improvement shown in the last two quarters. Stage three as of end September stood at 4.9% after factoring in the 1.1% impact of the new RBA guidelines from late last year, reflecting sustained healthy collections. The provision coverage ratio on secured and unsecured book stood at 46.5% and 92% respectively. Profit after tax for the quarter ended September 30 was 471 crores as against 192 crores for the quarter ended last year same time. Return on asset slightly over 3% and return on equity 18.5%. Earnings per share for the quarter 5.96, rupees 5.96 and book value per share was HDB remains well capitalized to the capital-requisite ratio at 20.8%. HDB also continues to augment its digital investments to enable the next level of growth in its business across segments while maintaining healthy asset quality. Now moving on to HSL, again on an NDIS basis, the physical network for the customer acquisition remains steady. HSL has 215 branches across 147 cities and towns as of end September. SCLC Securities has grown its claim base very strongly, with a year-on-year growth of 36% over prior year September, taking the overall claim base to 4.14 million. HSL's digital offerings are enjoying very good traction in the market. Over 91% of retail broking revenues from trades that are originated digitally. The total reported revenue for the quarter was at 468 crore, as against 489 crore in the prior year, and net profit after tax was at 191 crores as against 240 crores in the prior year. Earnings per share in the quarter was 120, which is 120.59, and book value per share was at 1,084. In summary, strong momentum coupled with our seamless execution and delivering comprehensive range of products and services has helped us capitalize on growth opportunities. Our results reflect continued robustness across various parameters, advances growth 23%, Total deposits growth of 19% and retail deposits growth of 20.4%. Core operating profit growth, excluding bond sales, of 16.6%. Profit after tax increased 20%, delivering the return on asset of over 2% and ROE of over 17%. Earnings per share reported in the quarter is at Rs. 19.1. Book value per share stands at Rs. 456.2. With that, may I request the operator To open up the line for questions, please.

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to limit their questions up to two per participant. If time permits, you may join the queue for any follow-up. The first question is from the line of Maruk Adjania from Nuwama. Please go ahead.

Yeah. Hello, sir. Congratulations. So my first question is on the liability growth going ahead. Of course, this quarter was impressive with strong retail growth, but as we move closer to the merger and if you assume that RBI does not give any dispensation, then how would the liability strategies change? Would it be focused on wholesale borrowings, wholesale deposits? And even this quarter, your wholesale borrowings have also grown with deposits. So what is the color? I mean, What kind of borrowing would these be?

OK, thank you. In terms of the deposit strategy of the funding strategy, as we have articulated over the last three months, including the May month of the June month when we have met many of you, continues that that is a very important aspect focused area for our execution. There are several components of that strategy, which is branch led. Relationship based and we articulated in terms of how sell funding across various products to deepen those relationships and get the funding is an important. So we gave you some examples of various opportunities that exist there, right? That remains and continues to be the focus and that is why you see that the retail push is there. 71,000 crores of growth in the quarter in retail and the same way last quarter retail did 50,000 crores of deposit growth last quarter. So we are building up that momentum and retail as you see. The branch network that we open, branch network is a more medium term, long term, so that the pipeline in two, three years time continues to be there. That's what the branch is. Currently, it is about harvesting and utilizing those branches. 60% of those branches are migrating from one vintage bucket to another vintage bucket. That is what is driving and including bringing in the new customers, right? So that continues to be the mainstay of the strategy. There are other market borrowings that opportunistically happen and that can continue depending on what happens in the market. Our treasury takes those calls and depends on what funding for the day is required. That is how that is handled there.

Got it, sir. So, and my next question is if you could share any outlook on margins, not necessarily in the very near term. But where do you see margins going, say, two to three quarters down the line on a standalone basis? I know merger will put pressure on margins. So any outlook on standalone margins?

I'll generally talk about margins rather than an outlook. You know that the bank does not provide any forward-looking guidelines, but I do want you to take back so that you can think about what that margin means, right? Typically, we have operated between 3.94 to 4.45. That's a typical range at which we operated. And when we operated at that range, the mix of products is very important, which is the retail mix between 53 to 55% and the wholesale mix between wholesale component of that mix 45 to 47%. Over the last two, three years, it's switched. Retail is now at 45%. wholesale is at 55 percent, it's switched. So we are at the low end of the range, and now the rate cycle is going up. So you're seeing some slight pickup in the margin because there's a little lag effect. So most of the wholesale products, we have about 55 percent of the book which is index-based floating rate, and we have another 45 percent that's fixed rate. Fixed rate mostly is in the retail type of loans. Within that floating rate, as the rate moved up, you're seeing that lead effect on the asset repricing happens. That's there. There are two aspects. One, the interest rate cycle moves to bid up. There is always an opportunity to the extent the rate goes up, lead and lag. Lag on the deposits, lead on the loans. That is there. The second aspect is that you should continue to see the mixed change that needs to happen as As we have said, the economy is 60% consumption-led. That is how over a period of 10, 20 years, we have had the lead in the retail. And now that momentum is picking up. You saw the last quarter retail book growth over 20% on advances, call it sequential growth close to 5%. And even in the June quarter, it was similar. So you're seeing that it is 20 plus, right? That's the kind of rate at which the retail is moving. And as long as you see that continue to pump and move up, you'll see that the mix is moving. That also gives the opportunity for the margin to move up. So these are the two aspects you can keep in mind in your models to think about how the margin moves.

Okay, sir. Thank you.

Thank you. The next question is from the line of Suresh Ganpati from Macquarie. Please go ahead.

Yeah, hi Sini. So I had two questions. One is on the deposit rates itself. So the Reserve Bank of India has hiked rates by 190 basis points, but none of your banks have even hiked deposit rates even by half of that amount, right? So if I look at track your own deposit rates in the one year to two year category, they have only gone up by 50-60 basis points in the last six months so there is a significant gap between what rbi is doing versus what you guys are doing from a monetary policy transmission now that the second half is going to be a bit tighter and tougher what is the outlook on deposit rates itself because it is grossly inadequate compared to what the Reserve Bank of India itself is doing so how do you see that panning out that's point number one and the second question is on branch addition itself that you have a targeted branch opening of 1500 to 2000 branches every year if I look at the first half the number of branches added if I'm not wrong is 350 so again Significantly below that significantly below that target. So how do you look at the branch additions and you think this second half is going to be very strong. I'll just squeeze in one more question with respect to this NCLT approval which has come for convening a shareholders meeting. Does this mean that the pace of approvals are better than expectations, which means that the September deadline that we are talking about the merger, which was initially said in the presentation, can be brought forward? Thank you.

Okay, thank you for that, Suresh, for three very important ones. First is in terms of the deposit rates as such. The way we think about the deposit, you know, the CAFA is a different aspect, right? It's completely administered. So we leave that to the time deposits that we're talking about. The way we price the time deposits is that if you think about certain public sector peers and private sector peers, So the bank in its ICO determines in terms of how to be competitively priced, right? And when you look at that, we are more or less in line with certain private sectors here. That's how the pricing is so that it is not at an advantage or a disadvantage. We are there. And so it is only about the execution capability to get the, so it is not rate based, rate driven kind of a sales or a marketing process. It is more of a relationship based and a kind of our ability to go network and bring the customer point of view. Then if you think about the public sector peers, there are certain points in the curve that we are higher, typically in the medium to longer end of the curve, we are slightly higher. and then the shorter end of the curve is slightly lower. It's not by our design. If you look at our time deposit yield curve, it is a clear upward sloping yield curve. Point to point in the curve, it's upward sloping, but there are other players who have different, from the real management, I guess the different pricing. So that's how we monitor that and see how at which price point we need the money and thereby the pricing is done in such a way. So there is no such formula of any repo pricing or other kind of a treasury bill or a GSEC type of pricing that determines the deposit rate. It is about the demand and it's about the positioning in the market in terms of at what price point we are able to get that. So that's how we approach it in our ALCO and go through that. That's one aspect of it. The second aspect of it, you touched upon the branches. Yes, you're right. We've been slow in the first half. Typically, it is like that as we put this strategy together and get those places scanned and analyzed as to in terms of where the maximum propensity is there for us to be present to get those customers in the deposits. We have done a lot of that and we do see here that there is a ramp up going to happen in the second half on the branch build. As I told you, the branch build, it is more a medium-term to long-term returns because the break-even itself is 18 to 24 months. But as soon as we get the branches, there is some new accounts that come in, so there is a new account value that we measure and monitor to manage that so that there is a good traction gain. and then there is a existing customer depth of relationship and so on. So that is a secondary aspect that we monitor and manage that. So yes, you will see in the second half accelerated process in terms of the branch opening. We have at the moment more than 500 branches in the pipeline in various stages of completion. In the coming months, we will get them to be open soon. The third aspect of it in NCLT, the short answer and then I will give you a little explanation. So the short answer is, are we on the timeline? More or less we think we are on those timelines. Maybe there is a quarter or a few months early. We had previously indicated September, call it Q2, Q3 kind of a timeframe. Maybe the way it is going, it may be Q1, Q2. So that's where I would put it. Maybe there's a few months it's running ahead, but not a big deal on that front. But there are still lots of processes left, right, which is after the EGM is done, we need to file a scheme petition with the NCLT seeking their approval. Again, the scheme should be in line with what the shareholders approve. And that's what goes finally for NCLT consideration. And once that is done, NCLT goes to various agencies in the country, right? Government agencies and real estate agencies and so on. So to get an NOC, that is a long drawn process, right? That happens. And then there is some newspaper advertisement and calling for hearing or calling for any comments or questions and so. So that is the big process that gets followed. And after all of that is done, that is when there is an NCLT sanctioning that happens. This could take six, seven months, eight months, the entire process, after the shareholder's approval.

Okay, sorry, clarity on RBA exemptions.

As regards the RBA exemptions, we continue to be in dialogue on that. There is no particular line of clarity or anything, but that conversation continues on that front.

Thanks, Srini.

Thank you, Suresh.

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

Yeah, congratulations and team. So our first question, particularly with respect to payment products growth on both on a quarter on quarter and year on year, it seems to be lagging a bit to the industry, but we are not seeing any loss in market share with respect to spend credit card spends. So is it more in terms of the behavior of the transactors versus revolvers. How should we look into this? Or maybe it's more of a other payment product contribution that is leading to mere 2% sequential growth.

Thanks for asking Kunal on that. Yes, on the spend we see good amount of traction coming on the spend and it is not transactors driven spend. We do see customers who are spending have very good liquidity. That is I think last time also I said, and it's more or less at the similar level, which is if you look at our card customers, liability balances is close to five times the loan balances, right, of those customers. So on an average total, right, the total average. So we see enormous amount of liquidity. So the pay downs are quite high. The revolver rates have not picked up. Revolver rates are still at that 70, 75% of the pre-COVID level. So last quarter to this quarter, we haven't seen revolvers picking up. We do look at revolvers into three or four buckets, which is, call it for lack of another better term, chronic revolvers, which means somebody who revolves more than six times, nine times in a given 12 months, somebody who revolves three to six months, somebody who revolves zero to three months, right? So those kinds of analysis we see, We see that people who have the tendency to revolve over a longer period have actually come down. And there is an early signs of a pickup. That means that one to three months revolver type of profile customers are slightly picking up. So we do see something, but it's very early. We have not seen that credit card customers, revolvers coming back on post the COVID. We don't see that.

Sure. and secondly with respect to the commercial banking so again when we look at the breakup of GNPA there is still improvement as far as retail and corporate is concerned but commercial tax of agri is still steady and given the entire inflationary impact which we are seeing some export oriented industries might also get impacted because of global recession So what would be our view with respect to the outlook as far as commercial banking is concerned, given that the growth is also at a rapid pace, and what incremental measures we are taking in this kind of a scenario of global slowdown?

Yeah. Okay. See, the strength of the commercial banking, excluding the agree that you're seeing about, call it the SME segment, more particularly the heart of the SME segment, we see quite a robustness and that there goes to the model, origination model and management model, relationship model of that customer. Lending is one of the value proposition. I think previously we have talked about or we have said that or even in May month we presented where the self-funding ratio as we call it, which is the liabilities generated by this segment uh through their own cash management account and through their promoters account and to their employees that's the 80 85 percent self-funded which that is part of the business model to ensure that there is a kind of a good uh monitoring process for uh credit management right that's part of that model uh that's that's part of the stability that comes from there and again the secondary collateral more than 85-90% secondary collateral. So in addition to the primary collateral of land or plant and machinery and stock and trade and so on, the secondary collateral is also very important. So there is much more skin in the game for the bank and the customers to work together. That's part of how we handle. So irrespective of the cycle that you've seen, even through the COVID cycle, this particular segment came quite unscathed and quite good.

But are we tightening any norms over here? Just looking into global slowdown or maybe exports could get impacted.

We haven't seen the need yet. We still see good cash flows, strong cash flows coming in. And our credit takes the call on a case-to-case basis on these types of loans.

Okay. Yeah. Thank you. Thank you and all the best.

Thank you, Kumail.

Thank you. The next question is from the line of Raoul Jain from Goldman Sachs. Please go ahead.

Yeah, thank you, Sini.

Hi, and congrats to you and the team for good numbers. Just had two important questions. One is, can you just help us understand on the headcount side, we've added about close to 9,000 in this quarter. How many more do we need to hire for this year? I would imagine we may have preempted or maybe preformed some hiring for the upcoming branch expansion. Is that the right way of looking at it or we need to do more hiring as we move along this year and even for the next couple of years? How do we think about the headcounts?

OK, good yeah see yes there is some level of hiring for the branches happened and will happen for for more new branches as we Determine and complete that location. We start to go into higher rate. As soon as the location is signed, the hiring starts so that as the fitment in the branch is happening, the people are lined up to come. So that happens and will happen. But however, the broader question that you asked is how you should think about the headcount itself at the total level. Yes, we do think that with the with the digital efforts that we are putting through. And the journeys, several of the journeys, I think last quarter we talked about a calendar of various digital journeys to go through in Q3, Q4. We do see a lot of traction gaining on the digital front. So thereby, at the rate at which historically we added, we probably don't need to add, right, at that rate. That's one. And there are certain kind of a sales force, street on street sales force, which may be operating even in our subsidiary. And if necessary, we're going to bring them on our books too. So it may be simply a shift of headcount coming from a subsidiary into the bank because for better management, we're going to give them a higher value relationship management. So we'll bring them into the bank and have. So this, it is not a particular number that determines anything in terms of these are the two, three ways in which we think and do. One branch we need. Two, we need to not replace attrition from as we go into the digital journey. And as we bring people, the pure feet on the street sales force into the bank for higher relationship management, there will be some addition. So that's how we should think about it. So just as I may do a follow-up, how much would be sales force out of this $161,000? See, OK. There are about 45,000, I think the last number we reported, I think was in March, but that is a similar number that 45,000 people, if you see, is the sales force which is there. And then there are a few layers above that that are supervisory layers of the sales force. And if you look at those levels, they'll be level 10 or 11 below the CEO. Understood. Got it.

Another question was, you know, on the credit or deposit, which, you know, seemed to have expanded in this quarter and it is now at about closer to 88, 89%. And, you know, in addition to this, then we see our incremental market share in deposits has increased quite a bit in the last year or so. So when you look ahead, you know, in the future, let's say the next couple of quarters, how do we think about uh the combination of credit and deposit growth you know playing out um can we sustain this incremental market share gains uh because the system is now uh you know ratcheting up the efforts on deposit mobilization by offering higher rates etc or we'll also have to kind of you know up the game there um you know because the cd ratio whatever we had to juice out may have already been juiced out so how do you think about these prospects

OK, OK, good. Yeah, see in terms of the CD ratio or in terms of the deposit growth and the advances growth and how to see that. There are I know we are in a particular interest rate cycle, but if you have to go back to five years or even 10 years in the past right where there have been two or three cycles and see what has happened over those two or three cycles, right? And if you see that. 2012 to 17. 2.4, 2.5 times. That's the rate of growth on both sides. And if you go to 2017 to 22, that is the kind of a similar 2.3 times rate of growth. So I'll point you to through the interest rate cycles over a period of time, call it a decade. We can go one more five-year block behind that. Over a period of decade, that is the kind of uh the rate of growth and that is how uh we are capacitized and that is how uh the execution happens okay okay got it got it thank you so much and wish you good luck for the teaser quarters thank you very much thank you the next question is from the line of abhishek madarka from hsbc please go ahead

Hi, Shini. Thanks for taking my question and congratulations for the quarter to you and your team. So just a few questions. One is going back to the NIM conversation. Now you pointed out that the mix is where it is and that's why you're at the lower end of the range. And it's the rates that are going up that is playing out. So suffice to sort of figure from this that as the deposit rates start catching up, we should get back to a 4% kind of level for NIM or is that not going to be the case and you would be able to maintain this additional spread that you've got?

As it relates to rate related, that's where we are focused on. There is a lead and a lag effect, right? which is so, it is, if you see the rate that has changed, 90 basis points in the June quarter and 100 basis points in the September quarter, and as the market prediction is there, there is more to come in the December quarter and March quarter, right? We don't know what the terminal rate is for sure yet, right? But as this rate go up, there is this continuation of this lead and lag effect goes through, right? And that is one. And two, it is also about the deposit mix funding. We have the opportunity to increase our penetration in time deposit. You see the time deposit grew by 22%. And the objective of that time deposit mix is that we have a very low penetration, 14%. to 15% of our customers is where we are penetrated on time deposit and we think there is an enormous opportunity through the engagement process that in the past we probably didn't need and so the engagement was light and now we are enhancing our engagement to ensure that we are able to have that right kind of a dialogue with the customer on that. So it depends on the mix of the deposit product and it also depends on the lead and lag effect and how long the rate cycle goes, right? That determines.

Understood. So basically what you're saying is even with the same mix, you expect yields to be going up more and your deposit gathering strategy will not be entirely rate dependent. So to that extent, you should be able to gain on spread. Is that a correct understanding?

To the extent that we lead the rate on the advances and lag the rate on deposits,

uh that we should see a pickup coming and whether that is what we will do i i will not know because it depends on market circumstances uh as we execute on the ground got it got it uh my second question is on hdb when i look at the gnps there on a sequential basis they're pretty flat uh can you just uh give some color on you know what's happening there in terms of asset quality and also what's the restructured book there how much of it is in MORAD and any provisions you're carrying on that. So just some color on asset quality for HDB.

Okay. See, the HDB asset quality, I think I did allude to say in terms of the improved delinquency of the stage 3 APA from 5 to 4.9. So we are in the trajectory of that improvement and we believe that the trajectory continues, right? It should continue to be there. That's one thing. The second thing in terms of the provision coverage on the MPA, the secured book provision coverage is 46% and the unsecured book provision coverage is 92%. And on the overall loan book itself, 75% of the total loan book is secured loan book. So this is quite a good type of book. And the customer segment is such a customer segment that got significantly impacted in the course. That's part of the NPA spike that you see. And as the economy is stabilizing and became stronger, you see that slight improvement, but more to go with that.

Okay, so in GNP also, is it 75% secured and 25% unsecured? Or that was for the full book?

That 75% secured is for the whole book. For the GNP, I don't have it in front of me, but I'm sure... HTB at some point in time will be publishing when they publish their results, yeah.

Sure, and restructured book in HTB? How much would that be, excess provisions, anything that you're carrying over there?

There is some management overlay like the way we do have and continues to be there. That restructured book on HTB, I don't think they're published yet.

Okay, okay, no worries. Just a last question on this MTM loss. So we still have trading losses, whereas you explained or you alluded to, you know, corporate bonds and PTCs contributing to that. Can you sort of explain the reason for this? Mostly rates have gone up on the short end and there, you know, you don't need to do any MTM on the T-bills, etc. So can you just explain this?

Okay, good. Yeah. See, if you look at the corporate bond book, it's not about team bills, it is about the corporate bonds and the pass-through certificates which are predominantly PSL-driven or qualified pass-through certificates, right, which are there. If you look at the rate, the base rate that determines the valuation of the bonds and PTCs are published by the FIMDA and various association that publishes the rates. The base rate is the GSEC. The six month rate is up 77 basis points in the quarter, one year 67 basis points, two year 42 basis points and so on. So that's the kind of the front end part of the curve. where the rates are up. The long end part of the curve, if you look at the 10 year rates are down 9 basis points, quarter on quarter. But these bonds and PTCs that we have, they are more on the front end side. So if you look at the dispersion of the bond book, it's like a pretty good normal distribution around that one and a half, two year type of range of bucket. That's where the normal distribution is there. That's one element. The GSEC yield curve on the front end of the curve. That is one of the elements that goes into valuation. So as the rate spikes, you will see the value coming down. As you know, these are not economic market. The second aspect of it in the valuation is also the bond spreads. And as part of the valuation process, the bond spreads have come down. You would imagine the bond spreads are down to some extent. And if you see the bond spreads, I think in the front end also the bond spreads are down. If you see, for example, the NBFC AAA spreads in the six months is down six basis points and one year down 21 basis points and two years down 11 basis points, right? It is down. Similarly, corporate AAA, one year is nine basis points down, two years is 11 basis points down. So the bond spreads is another element of the valuation. They are also down. However, as you know, in the valuation, the bond spreads are flowed. They are flowed at 50 basis points. So until the bond spreads go past that level and then starts to improve up or down, it is inconsequential on that front. So it is a lot driven by the GSEC. And in this case, the position of the portfolio is towards a normal distribution around the two-year, one and a half, two-year mark. And so it depends on the rate that has changed in the front end.

Okay, okay.

got that got that she that is clear thanks for this this is very useful and all the best thank you thank you the next question is from the line of rashaan kumar from sunili securities please go ahead uh thanks for the opportunity uh my question is on uh a credit card business uh 3 public sector banks, Union Bank, PNB and Union Bank has launched Rupee Credit Card on UPI.

Sorry to interrupt you Mr. Kumar, but your voice is not clear, so it is breaking in between.

Hello, is it audible? Yes, please go ahead, Sir. So my question is with linkage of Rupee Credit Card on UPI, what will be the impact of credit card business on Pricing perspective pricing for the like low value PI on credit card. Or higher value transaction of MDR for UPI on credit card will be similar to other credit card. I mean or it will be settled down to the incentive to given in the range of. around 2.2% to 2.4% and you can give some colors.

Okay. These are very early stages on that front. How the market settles, we'll have to wait and see what happens to that. And as far as we are concerned, we are predominant Visa MasterCard issuers on that front. and the rupee cards are a small proportion of our card case, that's one. The second, the UPI, as it goes through UPI, uh what is the kind of how that upa pricing itself settles and how it is going to impact we have to wait and see where it goes right at this moment it's not clear and the transaction sizes that come through these are also important and that currently that what we have through mastercard visa the transaction sizes average transaction sizes are quite high and good for us yes uh and

On the asset quality side, just on data keeping, so what is the slippages and what is the right of hand upgrade and recovery if it is handy?

Yes, I did provide that previously, but I can give that again to you. The slippages, I think the slippages in the quarter was, the current quarter was about 36 basis points or 5,700 crores. The recoveries and upgrades, about 19 basis points, 2,500 crores. The write-offs, about 22 basis points, 3,000 crores.

Okay. Thank you so much, sir. That's it from me. Thank you.

Thank you. The next question is from the line of Saurabh from JP Morgan. Please go ahead.

Hi, Sheeni. Sir, just can you talk about the corporate banking fees, you know, this 9% quarter-on-quarter growth, So where is it coming from? Are you displacing some public sector banks in some of the large corporates or is it just reducing the risk filters? And this is a great question on that will be said, I mean, the consequence of that build up should be names could obviously come off, but at the ROA level, it should still be a 2% business or how do you think about it?

Yes, so two aspects of it. First, let me address your ROA part of it, yes. All of our pricing decisions as well as business decisions are determined, the models determined through what returns it provides. The models don't go through to say what NIMIT provides. The models go through to say what returns it provides. And yes, and these are quite good relationship based businesses in the wholesale. And we've had quite a good traction again during the largely contributed, I think, by the telecom sector in the quarter. There's some energy related that came through. There are some PSUs also in this, right? Very high quality, good PSUs with whom we want to have. We already have big relationships. We have done that, yes. They are priced very well and they are priced to get returns that is in line with the bank's overall returns, the 2% that we have seen and which you have seen, which were published for the March report also. I think you've seen that wholesale or retail, our returns are quite, quite good. And we continue to do business on those lines. Again, which I didn't mention yet, but I will, since you touched upon whether there is a price competition or what, yes. 25, 30,000 crores of wholesale loans we have let go this quarter because we have been, as you have seen our pricing, how we moved on pricing right from May quite fast. And there are others who take their time or their own internal process to price to catch up. So when their price is not good, we let go of the volumes. We let go of that particular transaction, not let go of the relationship of the customer, because these are all good relationship businesses. So we keep the relationship, but if that particular transaction doesn't work, We're very clear that particular transaction doesn't work.

Got it, sir. And so the second question is, you know, there was an interview by Mr. Parag Rao where he said, you know, half the digital transformation is over and, you know, the IT costs would probably peak out. And he also mentioned that on the smart hub, we're going to reach about 21 million merchants from approximately 3 million a day. So how should we think about this impacting your OpEx? Should we now your OPEX at some point moderates up or you choose to reinvest any gains you get on, you know, either your credit costs or your name on OPEX site. How should we think about this?

Okay. Again, you have two aspects to this. One aspect is in terms of the digitization itself in terms of that. The context of that, I think, was that Merchant Viapar app that we formally launched. And I think I had mentioned that the Merchant Wrapper app, when it took off earlier, had quite a good traction. We get in almost, call it per month, 60,000 merchants in the recent months. And we have more than 1.6 million signed up under this app. As a merchant, we have more than 3.5 million merchants, but 1.6 million under this smart app. Smarter platform, which is that we apart have, right? That's part of what I think he alluded to, and that is where in that context only he said that we will go past the 20 million in terms of getting the merchants into this. Again, this is not just a payment product initiative, right? This is more of a both the liability relationship, asset relationship, in addition to getting that payment relationship. That's what this does and it helps, it gives a lot of value to those merchants to do business with us because there's a lot of value of the features that go with it. That's one part of what you asked. The second part of what you asked is what does it do to cost and so on and so forth. I think in the past we have said that our cost to income before COVID was about 39 and a half and through the COVID as the retail kind of a transactions and the opportunity to do various things were lower. It came down all the way to 36, 37. Now it's past 39. It's back to 39, 39 and a half. That's where the cost of income is. And I think we said it can go to 40, 41 quarter to quarter. Quarter to quarter is not a measure, but over a period of a year, if you see, 40 is not a place that you would imagine it can go to 40 as we make those investments to come. we see the benign credit because the average credit cost if you see this quarter 1890 basis points last quarter 1995 basis points so there is an opportunity to reinvest and get that maturity cycle up right on anything from a branch maturity cycle to people maturity branch maturity cycle is 1824 months people maturity cycle could be six nine months and so that's part of what I the investments go to, say, take this opportunity to invest it, and of course, within the overall return framework.

That's very clear. So this 20 million merchants is just HDFC bank, doesn't include your FinTech partnerships, or does it include?

That is right. It is the bank. Merchant relationship is with the bank, yeah.

Okay. Thank you, sir.

Thank you.

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

Yeah, good evening and thank you for the opportunity. Shini, first question is, can you remind us what are some of the key dispensations or relaxations that you sought from RBI for the merger? And realistically, by when do you think you will start getting visibility on the same?

Manish, on this front, the same items I think that we talked upon on May 31st remains, right? Which is, is there a possibility on the CRR SLR glide path that will continue to focus on greater and faster credit growth both in the economy and supported by us? It is something that we are in discussion, we told you. And the second thing is also in terms of the priority sector lending, which kicks in 12 months after the effective date. So in this case, for example, continue the same September kind of a timeframe 23, thinking about December 24 kind of a timeframe from when that will come. what sort of a glide path that can have so that we could organically originate, right? So I think we alluded to that 1.42 lakh villages we have moved to now, right? We were less than 100,000 villages if you go back 12, 15 months ago. Come here and we are on track to go to that 200,000 villages to operate. So that is part of how we organically build this. And certain other things that we told you in terms of opening up a little around the 3000 mark now on the branches originating gold loan and we wanted to do to around 5000 branches. Again, part of that initiative to ensure that we get the right kind of quality on the priority sector lending. So these are the action plans that comes for organic, but the kind of call it a glide path is to get to that we organically do this. That's that's what I'm there. Are we on the state? We continue to have that conversation with the regulator.

By the time you seek shareholder approval towards end of November, are you expecting any visibility on any of these?

There is no particular time frame Manish for these right, but the bilateral conversations the regulators are private, so there's no details about that, but at least that is something that there is no time frame. Yeah, the other question which I had is on the funding side and one thing that I do want to highlight to you that which we mentioned it in May also. The merger is not predicated on this, right? The models are not necessarily assumed that these need to come. These are good to have, not necessary as such.

Sure, that's clear. Moving on to liabilities. Now, once you acquire a large mortgage book from HDX Limited, potentially you can fund it using long-term affordable housing bonds. So what are your thoughts around the same? How many of those bonds you think you can issue? And does that mean that in the interim, your LDRs as a merged entity could be higher than what historically we've seen for HDFC bank standard?

Certainly, that is part of the equation. And we would use those opportunities to get that. Because from a cost point of view, we'll be indifferent to that, right? Because we know that the assets on the other side are floating rate assets priced off the market benchmark. And there are hedging instruments in the market to ensure that the interest rate risk is managed. But at the same time, the liquidity maturity is also managed through these affordable bonds. And these affordable bonds do provide, as you know, offsets. Offset means the relief from a CR or SLR subject to certain qualifying criteria. They also afford opportunities to take off the ANBC and thereby reduce the PSL.

Sure, that's very clear. Thank you. Thank you very much.

Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. Vaidyanathan for closing comments.

Thank you, Rithu Jaap. Thank you, participants, for coming in today and joining us. It was our pleasure. If you still have open questions or any other things to interact, we are open at any time. Thank you. Bye bye.

Thank you. On behalf of HDFC Limited, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.