HDFC Bank's Srinivasan Vaidyanathan Expounds On Credit & Margin Growth

26 basis points compares to 24 basis points in the prior year. Now getting to the overall credit costs and provisions, the bank's credit performance across segments continues to remain steady in a credit environment that remains benign. The bank has considered this as an opportune stage to enhance its floating provisions, which are not specific to any portfolio nor meant for any specific anticipated risk, but acts as a countercyclical buffer for making the balance sheet more resilient. Accordingly, the bank has made floating provisions of rupees 90 billion and an additional contingent provision of 17 billion during the quarter. The total provisions in the quarter was 39 billion compared to 32 billion in prior year. The provision coverage ratio is at 67%. Provision coverage ratio excluding agriculture segment is at 71%, consistent to prior quarters. Total credit cost ratio is 56 basis points. Excluding those contingent floating provisions I alluded to, the credit cost ratio net of recoveries is at 41 basis points for the quarter. The profit after tax for the quarter at 18,182 billion grew 12.2% over prior year. This has resulted in advances under management growing at 8.3% year-on-year and deposits on an average basis growing at 16.4% versus prior year, delivering return on assets of about 1.9% and return on equity of 14.7%. The earnings per share reported in the quarter is at 23.7 at the bank level. Now getting to two other items. One is on the dividend. During the quarter we carried out the HDBFS listing process wherein the bank diluted some stake which eventually culminated in the stocks being listed on 2nd July. Earlier today the board announced an interim dividend of rupees 5 per share. The board also recommended to shareholders the first ever bonus share issue in the ratio of 1 is to 1. With this, may I turn back to the operator to open up the line for questions. Thank you.

Thank you for asking. First, let me take the slippages. Yes, normally based on this Kharif and Rabi season, June and December is what the bank has typically seen agricultural credit and slippages elevate in these two quarters and then it starts to subside in the following quarters. So this quarter is no different. It is just that the core excluding the agriculture which we have shown has been very benign and pretty close to 102 basis points or so compared to 96 basis points or so last year. So very, very close outside of the agriculture. And same with the GNPA which I alluded to, which is 114 basis points GNPA excluding agri and the last year was 116 basis points and last quarter was 113 basis points. So they are consistent and very stable across. So that's one on slippages. The second you asked about the contingent and the floating provisions. Yes, you're right, at any specific opportunity we have taken this as an opportune stage to enhance the floating and the contingent provision is not meant for any specific portfolio, it is not meant for any specific anticipated risks. These are countercyclical buffers for making the balance sheet resilient and that's where we have intended to enhance this. And if you look at it, our contingent provisions were about 51 basis points of the total advances. It has moved to 57 basis points, enhancing the coverage. The floating provisions were at 47 basis points and with this addition that we have done in this quarter we have taken it to 80 basis points. So essentially strengthening our buffers. And these floating provisions qualify for inclusion in tier 2 capital within certain limits. So these have been enhancing our reserve and to some extent provide tier 2 capital.

Two to one more thing you asked about the credit growth. How the credit growth is. See, if you look at the credit growth, two things are happening. One at the industry level, you're seeing that the credit growth is coming down. Call it between 9% thereabouts, could be touching 10 but between 9 and 10%. If you look at our credit growth, our AUM we reported currently little more than 8%. Our AUM growth. If you last year if you see March we closed at about 7 odd%. So we are moving up in that direction of growing credit. You asked about where is the focus of our credit growth. There is no one particular portfolio that I would say we are focused on. We want, which we have always done, to have a balanced growth across all of the customer segments we are present. That is how we have stopped and that is how we have invested to have across all. However, having said that, you know that the consumption in the country contributes about 60% of the country's GDP. So to that extent, there will be on balance more than off focused towards the consumer segment, and which is what we see that opportunity remains to be taken. And with the food inflation being benign and overall inflation also lower, with the onset of the festival season imminently in the next few weeks, we do expect that there will be greater opportunity in those areas. Having said that, the wholesale also provides the scope to grow and provide the employees in various wholesale relationships also provide retail growth opportunities. So that's one. The other aspect of your follow-up question you asked is about the margin. I wouldn't venture into talking about an outlook of where it will be, but do want to mention that cost of funds has been the only item that had inhibited the margin from the 4% to 3.4% thereabouts. Cost of funds had two components in it. One is the borrowing mix was higher than typical what the bank had experienced. 7% or 8% or so went all the way to 21%. We have brought it somewhere midway between the 7 and the 21 right now. So we have more room to go to get that borrowing retired in course of time. The second thing is about the CASA ratio. One due to merger and two due to the market environment of the rates remaining high. We have seen that the CASA ratio decline and now with the rates also going down, the policy rates going down. Historically we have seen over the last 10, 15 years that when the policy rate goes down, the CASA ratio industrywide comes up, which you have seen even at the industry level the CASA ratio last year dropped by a little more than 200 basis points or so. So we do expect that according to what we have seen in the historical past, the CASA ratio should pick up once the rates started to come down, which it has started to come down, and there is some lag effect that happens, and that is what we are expecting. And we are resourced both from a branch presence, customer additions, and enhancing our engagement.

Thank you.

Okay, thank you. First is the slippages. Yes, outside of the agri book which is seasonal, the slippages have been fairly rangebound and steady there. So there is nothing outside of that that is there to report. That's one on slippages which I mentioned even in the prior question. The second you talked about the margin and whether one to two years or end of FY27 where do we do. Again, I don't want to venture into giving an outlook of when that is. As you know, the margin is dependent upon the rate path in the country and the slope of the yield curve. Both of that contribute into the margin. And the asset reprices faster than deposits, which also is known where you have a repo-linked loan. Mortgages is all repo and there are some loans that are repo-linked and some corporate loans that are repo-linked, so that has a lead and a lag effect. In the current environment with the uncertainty on where the rates are going, because the rates can if the rates are steady then that provides an opportunity to settle both sides of the balance sheet from a rate structure point of view. If the rates slide down or whenever it starts to go up, those are the time periods that we need to adjust. So at this time it is not sure whether the rates are at the bottom or whether it is going down. As you have heard from our overall policy point of view, we need to wait and watch and incoming data will show where the rates will go. So we'll have to be patient waiting for that. On bonus issue, sir, see the bonus shares, I think the directors of the board has recommended to shareholders. Certainly we don't see that it is an annual exercise because that's not how it is looked at. But certainly something that from an overall shareholder participation, retail shareholder participation, it enhances and it's an opportunity that will get created in times to come. So we don't expect that bonus shares for an annual exercise. Thank you.

Yes, thank you for asking. Yes, the fee income has got a seasonality. The Q4 is typically quite strong in seasonality particularly from a third party distribution fees. Normally the season for insurance is quite high in the country around that January to March time period and then it starts to pick up after the first quarter. So first quarter is low and this year first quarter has been similarly in line with the past trends low. Yeah, there is seasonality to that.

Okay. See, the cost of funds has come down about by 10 basis points or so in this quarter. The yield on loans has come down, call it about 20 to 22 basis points this quarter. You know that there are market benchmark loans which are there, which is the floating rate loans. And these floating rate loans reprice faster than the cost of funds pricing. So that is why you are seeing that there is a lead effect coming from yield going down. So it has to stabilize. From here where it goes, it has to stabilize the rate has to stabilize. You saw one more rate reduction of 50 basis points from RBI in June. And so that has to factor in fully yet. It is not fully factored in yet as it is. So over the next quarter it will factor in. And the cost of funds is a managed cost of funds as you know that our bank and other banks determine and offer savings rate and time deposit rate appropriately. We competitively price these deposits and the market has not fully priced in the reduction of the policy rates which is 100 basis points down from February to June. The cost of funds or the deposit rates are not factored in yet fully the 100 basis points. And once that comes in, then you'll have to wait and see based on the renewal tenors and the new bookings that happen, it comes in at a lower rate. So there is a path for it and the path will be a few quarters out.

Yes, which is very similar to what we talked last time, which is the larger corporates are quite liquid, highly rated and pretty strong on the balance sheet, which means the yield that one could get from that is lower. And we have seen competition from certain segments of the financial system where the rates are pretty low. They offer very low rates. So consequently, while we like the quality there, we have been selective in offering and waiting for the rates that at least the rates that the banks are offering to larger corporates to be stable. And even in this quarter we have seen while the credit spreads widened by anywhere between 10 to 15 basis points depending on a double A or a AAA, the loan yields continued to come down. So it is something that we managed on a close relationship basis with corporates to participate not just on a lending as a value proposition but overall relationships which is non-fund based as well as employee and the theme segment distribution and supply chain segment. So for holistic relationships is where we participate in those kind of funding.

Thank you.

I think in our presentation it is there. It is there in one of those pages. You will see that we give two categories. We give agri and all others. It is there in the deck. 90 out of which excluding agriculture it is 68 and the 90 minus 68 which is the 22 billion is agriculture. And the comparative figures are also there in the same deck. And I think I mentioned about the slippage ratio. Slippage ratio excluding agri 26 basis points compares to 27 basis points in the prior year.