HDFC Bank - Q1 23/24

Transcript

Operator (participant)

Ladies and gentlemen, good evening, welcome to the HDFC Bank Limited Q1 FY 2024 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. There will be an opportunity for you to ask questions after a brief commentary by the management. Should you need assistance during this conference call, please signal an operator by pressing star and 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, over to you, sir.

Srinivasan Vaidyanathan (CFO)

Okay. Thank you, Bhavin. Good evening, a warm welcome to all the participants. I want to briefly start and give a minute update on the merger. Effective July 1, as you all know, HDFC Limited has been merged into the bank. Consequently, all subsidiaries of HDFC Limited have become subsidiaries of the bank. Earlier today, with the support of BSE, NSE, NSDL, CDSL, all HDFC Limited shareholders, as on the record date, have received shares of HDFC Bank, which concludes the 15 months journey for the bank and all the regulators involved. We would like to take this opportunity to thank them for their continuous engagement and support. HDFC brand, built over 47 years, will now be proudly owned by the bank.

It is a privilege to add on and engage with the 6,000 institutional investors and 7 lakh individual shareholders. HDFC Limited has excelled in nurturing trust in their customer engagement over four decades of operation. We'd like to harness this bond with the home loan customers by leveraging our exhaustive distribution reach and comprehensive digital platform to upsell a complete bouquet of the bank's and subsidies products across pay, save, invest, borrow, insure, and trade, like the savings account, personal account, and so on, including the credit card and SIPs. Seamless integration to aid the sustained and optimal execution is undertaken, involving merging products and processes expertise, creating learning opportunities by focusing on customer engagement and experience, onboarding four million customers with over INR 56 trillion portfolio, onboarding 4,150 talented professionals, bringing in knowledge and culture.

Now, let's look at the key macro environment during the quarter before we review the earnings. Stronger than expected GDP growth in the March quarter has boosted sentiment. Various indicators suggest economic activity continued to be strong in the recent June quarter. GST collections have been robust in the Q1, where it is INR 5 lakh crore, grew by INR 55 lakh crore, grew by 12% year-on-year. Manufacturing PMI at 57.8 and services segment PMI standing at 58.5, all goes well and shows robustness. Again, the current account deficit narrowing to a 7 quarter low adds more strength. Payment systems indicate business activity continues to be robust, with 14% growth in RTGS, NEFT transactions and 44% growth in UPI payments.

On the consumption side, the passenger vehicle and two-wheeler sales showed robust growth, reflecting strong consumer demand. During the quarter, our retail issued card spends have shown robust growth of 30% year-on-year and 10% sequentially. The uneven distribution of monsoon has adversely impacted sowing. Excessive rains in North India have inundated fields already sown, while lack of rainfall in East Central and Southwestern regions has delayed sowing. Overall, we continue to see healthy domestic demand conditions, resilience in services exports, and push from government through CapEx expenditure. These factors are estimated to result in India's year-over-year GDP growth rate of 7.7% in Q1 and greater than 6% in the full year 2024, after a stronger than expected GDP growth of 7.2% in FY 2023.

Weather-related uncertainty, with the rising likelihood of El Niño causes risk to rural recovery and inflation, which remains high. Let's go to the key themes. On the distribution, while we added 39 branches in the quarter, we added 1,482 branches over the last 12 months, which now stands at 7,860 branches. On the payment acceptance points, we have 4.6 million, year-on-year growth of 37%. That includes 2.8 million merchants accepting through the SmartHub Vyapar platform. On the CRB side, our SME businesses are present in more than 90% of the district, expanded to 1.7 lakh villages reach, and is on track to achieve the objective of over 2 lakh villages.

gold loan processing is now offered in 4,336 branches, an increase over June 2022, a twofold increase over June 2022. In the customer franchise building, we added 2.4 million new liability relationships during the quarter. With now over 85 million customers, it provides the base to engage, enabling us to broad base and deepen our relationships. In order to provide for this engagement, we've added 29,000 people over the last 12 months and 8,500 people during the quarter. On cards, we have issued 1.5 million cards in the quarter. The total cards stands at 18.4 million. Our website continues to receive enormous traffic.

We received on an average, 109 million visits per month, with over 89 million unique visitors over the quarter, at a year-on-year growth of 42%. Focusing on the granular deposit, which continues, deposits amounted to INR 19.1 lakh crore, an increase of 19.2% over prior year, on the back of a fantastic quarter in March 2023, where we added INR 1.5 lakh crore. We further built on this enhanced base during the June quarter with an addition to deposits of INR 30,000 crores. Retail deposits added in the quarter was INR 38,000 crores. Retail, which has been the anchor of our deposit growth, constitutes about 83.5% of our total deposits, getting more granular compared to 82% in prior year June.

Retail deposits grew at the rate of 21.5% year-on-year and 2.4% sequentially. Wholesale deposits constitute 16.5%, and these grew 9% year-on-year, but were lower, 2.5% sequentially. On a pro forma merged basis, retail deposits grew by 20.6% year-on-year, this is a pro forma merging on a pro forma basis, merging the June deposits of HDFC Limited, I'm talking about, and the retail constitutes 83% of the total pro forma. Now moving to advances; growth of IBPC advances grew 20% year-on-year. Net of IBPC advances at INR 16.3 lakh crore grew by 13.7% versus prior year. This is an addition of approximately INR 16,000 crores during the quarter and INR 2.22 lakh crores in the year.

Credit to deposit ratio as of June end stood at 84%. Our retail advances growth was robust. Domestic retail advances grew 20% year-on-year and 4% quarter-on-quarter, primarily driven by strong performance in home loans and personal loans. Commercial and rural banking, which drives our MSME PSL book, continued its momentum with a year-on-year growth of 29%. Wholesale segment grew 11% year-on-year, de-grew 1.2% sequentially. The bank's advances growth of IBPC grew by 20.1% year-on-year, when we include HDFC Limited's individual home book. The pro forma core loan growth for the merged entity is 18.7% year-on-year. Technology, we continue to focus on the technology agenda.

HDFC Bank won the customer experience hub, over 12.5 million unique customers have interacted through the platform, according to over 22 million interactions. On the PayZapp, has handled transactions volume of over 13 million during the quarter, with more than 1.6 million monthly average logins and 1.5 times increase in customer spends. Express car loan volume now contributes 30% of our car loan volume. We continue to be focused on these investments in expanding both the distribution as well as the digital footprint, and thereby driving the relationship management for growth. Balance sheet remains resilient. LCR for the quarter for the bank was at 126%, prior quarter was 116%, and prior year was 108%.

LCR on a pro forma basis, that is, including the estimated HDFC Limited book as of June 30, based on the merged entity, was at over 120%. Capital adequacy ratio is at 18.9%, and CET1 is at 16.2%. Net revenues for the quarter were at INR 32,829 crore, grew by 26.9% over prior year, driven by gross advances growth of 20% and deposit growth of 19%. Net interest income for the quarter at INR 23,599 crore, which is 72% of net revenues, grew by 21% over prior year. The core net interest margin for the quarter was at 4.1%. On an interest earning asset basis, the core net interest margin was at 4.3%.

Getting to the details of other income, which was at INR 9,230 crores, fees and commission that constitutes two-thirds of the other income, was at INR 6,290 crore and grew by 17% over prior year. Retail constitutes approximately 93% of fees and commission. Effects and derivatives at INR 1,309 crore was higher by 27% compared to prior year. Net trading and mark-to-market income were at INR 552 crores for the quarter, prior quarter was a INR -38 crore. Prior year was also negative, slightly above INR 1,000 crore. Other miscellaneous income at INR 1,079 crore includes recoveries from written-off accounts and dividends from subsidiaries.

Operating expenses for the quarter were at INR 13,057 crores, an increase of 33.9% over prior year, and an increase of 4.4% over prior quarter. In this context, it is pertinent to note that we added 1,482 branches and 1,732 ATMs since last year. In the medium to long term, distribution reach is the key. This is what will provide funding through better engagement. Cost income ratio for the quarter was at 42.8%, reflecting the cost of investments, which is cost of investments, which from a timing point of view, has been chosen during the benign credit environment to capture the market opportunity. This will moderate and revert to below previous levels after the breakeven and payback from the investment starts to flow through.

PPOP for the quarter grew by 22%. Our pre-provision operating profit was at INR 18,772 crores. Coming to asset quality, the GNPA ratio was at 1.17% compared to 1.12% in prior quarter and 1.28% in prior year. Out of the 1.17%, about 14 basis points are standard, but the core GNPA ratio is 1.03%. GNPA ratio, excluding NPAs in agricultural segment, because agricultural segment has got the seasonality in June and December, so excluding the agricultural segment, GNPA ratio was at 0.94%. Prior quarter was also at 0.94%, and prior year was 1.06%.

Net NPL ratio was at 0.30, and net NPL ratio, excluding NPS in agricultural segment, was at 0.23, again, same as prior quarter, which was also 0.23. The slippage ratio for the current quarter is at 35 basis points, or about INR 5,800 crores. The slippage ratio for the current quarter, excluding agricultural segment, was at 26 basis point, about INR 4,200 crores. During the quarter, recoveries and upgrades were INR 2,650 crores or approximately 16 basis points. Write-offs in the quarter were INR 2,100 crores or approximately 14 basis points. There was no sale of any NP accounts in the quarter. The restructuring under the RBI resolution COVID framework as of June end stands at 27 basis points, about INR 4,265 crores.

In addition, certain facilities of the same borrower, which are not restructured, is approximately 5 basis points or INR 800 crore. On the provisions reported were INR 2,850 crore against INR 2,700 crore during the prior quarter and INR 3,200 crore in the prior year. The provision coverage ratio was at 75%. At the end of current quarter, contingent provisions and floating provisions were approximately INR 11,150 crore, same as last quarter. General provisions were at INR 7,150 crore. Total provisions comprising specific floating, contingent, and general provisions were 131% of the gross non-performing loans. This is in addition to the security held as collateral in several of the cases. Floating, contingent, and general provisions were 1.12% of gross advances as of June end.

Coming to credit cost ratio, the total annualized credit cost for the quarter was at 70 basis points, prior quarter was 67 basis points, and prior year was 91 basis points. Recoveries which are recorded in miscellaneous income amount to 19 basis points of gross advances for the quarter. The total credit cost ratio, net of recoveries, was at 51 basis points in the current quarter, compared to 68 basis points in prior year and 44 basis points in prior quarter. The profit before tax was at INR 15,912 crores, grew by 30% over prior year. Net profit after tax for the quarter at INR 11,952 crores, grew by 30% over prior year. Some highlights on HDB Financial Services, this is on India basis.

The total loan book as of June end stood at INR 73,568 crores, growing 5.1% sequentially and 19% year-on-year. Secured loans comprises 72% of the total loan book. Disbursements for the quarter were higher by 42% over prior year. Customer franchise grew to 12.8 million, with 7.3% additions during the quarter and an increase of 29% year-on-year. Distribution network was augmented by 989 branches in the quarter, taking it to 1,581 branches spread across 1,100 cities and towns. Net interest income for the quarter was INR 1,501 crore, an increase of 5% quarter-on-quarter and 13% year-on-year.

Provisions and contingencies for the quarter was INR 267 crores against INR 398 crores for the quarter ended last year June. Quality of the book continued to see sustained improvement. Gross Stage 3, as of June end, improved to 2.5% against 2.7% as of March 2023, and 4.9% as of last year June, reflecting sustained healthy collections. Provision coverage on the Stage three books stood at 66%. The profit after tax for the quarter ended June, increased to INR 567 crores against INR 545 crores for the last quarter and INR 441 crores for last year's same quarter. ROA and ROE for the quarter stood respectively at 3.2% and 19.4%.

Earnings per share in HDB was at INR 7.16. Book value per share in HDB is at INR 150.5. HDB remains well capitalized with a total capital adequacy ratio of 19.8% as of June end. A few sentences on HDB, on HSL, our securities company, that has added nearly 0.6 million clients in the last 12 months, taking the client base to 4.6 million. HSL has a network of 207 branches across 147 cities and towns. Digital offerings continues to enjoy good traction in the market. Around 93% of active clients utilize the services during the digital platforms of the company.

HDFC Securities has introduced HDFC Sky, a low-cost broking platform, which is targeted at all kinds of customers, millennials, investors, traders, providing easy do-it-yourself seamless execution with a high yield and competitive flat pricing policy. The total reported revenue for the quarter was at INR 497 crores against INR 432 crores in prior year, and the net profit after tax was at INR 189 crores, almost flat to prior year. Earnings per share in the quarter in HSL was INR 119, and the book value per share at HSL is at 1,153. In summary, our results reflect consistency of delivery, diligently executed to result in continued momentum in deposit growth at 19% and retail deposit growth within that, which is 21%, 21.5%.

Gross advances growth of 20% and the net advances growth, net of IBPC, of 16%. Profit after tax increased by 30%, delivering return on assets in the quarter over 2% and ROE of about 17.3%. Earnings per share reported in the quarter is at INR 21.4 at the standalone bank level and INR 22.2 at the consolidated bank level. Book value per share, standalone bank is at INR 525.4, and at the consolidated bank level is at INR 542.7. With that, may I request the Operator to please open up the line for questions, please?

Operator (participant)

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 their 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 to two per participant. If time permits, you may join the queue for any follow-up. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Suresh Ganapathy from Macquarie. Please go ahead.

Suresh Ganapathy (Managing Director)

Yeah, Hi. I have two questions, Srini. One is on credit growth and deposit growth, the other is on merged company profitability. Let me first touch the deposit growth aspect. You know, I know, quarterly there can be fluctuations, but you know, your QoQ standalone deposit growth was about INR 30,000 crores, right? 1.6%. I'm looking at the system number. Apparently, the system seems to have added INR 9 trillion of deposits of 5% QoQ. Somehow I feel on an incremental basis for the quarter, you might have lost a lot amount of market share. Anything specific which affected this quarter's deposit mobilization?

Srinivasan Vaidyanathan (CFO)

No, there's nothing specific as such. Typically, Q1, is, of all the quarters, it's a slow quarter, right? Across various parameters, it's a slow quarter. From branches to deposits, to loans, to if you go back historically and see, the Q1 contribution is in single digit. Typically, on an average, if you see, there will be sometimes where it is in double digit, but typically single digit is what it contributes. That's one. Two, I know that, if I take you back a quarter or 2 ago, that it's not about 1 quarter. If you look at how, extraordinarily it got built in March, and then we sustained it.

That means we did not lose that over, and then we built on top of that, because it's, it was not a small feat, and at least INR 50,000 crores came through in March quarter, more than what one would have envisaged, and we kept that, and we built on top of that. Particularly the retail, if you see, we built INR 38,000 crores in retail. Typically, the Q1, you see the current account going down and savings account to some extent moderates due to spend. We have seen 30% increase in spends, right? Our issuing card customer spending increased 30% and 10% up sequentially on spends, card spends on the retail cards.

These, some of these factors typically contribute, but then more important is that we are confident that the building blocks that we put in place for the such enormous growth remain, and confident of getting that to fruition over the next few quarters.

Suresh Ganapathy (Managing Director)

Okay. The other question is on advances. You know, you reported in the pre-Q update, merged gross, number, excluding wholesale of HDFC Limited to be growing at 15%. Apparently in the call this time, you said it's actually grown at 18.5%. That is, if I just take the retail HDFC and add the gross advances of the standalone entity, the number is 18.5%. What number to go by? What is then the pre-Q is 15.5%, merged growth, excluding wholesale. Yeah.

Srinivasan Vaidyanathan (CFO)

Yeah. See, the gross bank, we put that up on page 23 of the earnings deck that we published earlier today to be helpful on that. The bank's gross of IBPC grew by 20%.

Suresh Ganapathy (Managing Director)

Correct.

Srinivasan Vaidyanathan (CFO)

HDFC's individual loans, the mortgage individual loans, grew by 14% year-on-year. Combined, just the bank loan and the individual loans, because that's, these are the categories of loans that are managed for significant opportunities and growth. That's grown at 19%, 18.7%. Right? That's the growth. The HDFC's non-individual loans de-grew by 18% year-on-year. Right? 18% it de-grew year-on-year, which we know that there have been management actions driving that de-growth. We will evaluate over the next 2 quarters in terms of what is a stable level before we start to build, right? We get to understand it better before we get that to be building. That's down 18%. That's why, including that, it is a 16% growth.

All loans on a growth basis then is 16%.

Suresh Ganapathy (Managing Director)

Okay. Yeah, there's some confusion with the pre-Q. Okay, no problem. Finally, you know, are you confident that on a merged basis, when you deliver the September quarter results, you can sustain the current levels of ROA reported? I mean, you exited, of course, this quarter with 2.1%. Last year also, full year, the number was 2.1%. How confident you are based on your initial assessments?

Srinivasan Vaidyanathan (CFO)

Yeah. See, the level of confidence is pretty high. Typically, I think, Sashi had alluded to in some other context that we're looking at 1.9-2.1. That's the range at which we'll oscillate. Quarter-to-quarter, if there is a timing on certain things, particularly if there is anything that we do, will be timing. But otherwise, broadly, it is the 1.9-2.1 that we alluded to before. That is where we are confident of driving to deliver.

Suresh Ganapathy (Managing Director)

Okay, thank you so much.

Srinivasan Vaidyanathan (CFO)

Thank you.

Operator (participant)

Thank you. We have the next question from the line of Mahrukh Adajania from Nuvama. Please go ahead.

Mahrukh Adajania (Analyst)

Yeah, Hi. My first question is on OpEx. Basically, this happened even in the last year's Q1. The OpEx growth in the first two quarters on a sequential basis is 4%-5%. Then as branch ads pick up, basically, the OpEx ratio, or the OpEx growth, not the ratio, but the OpEx growth scales up to 7% QoQ, 8% QoQ. Last year this happened because the branch ads were significantly high in the second half, right? 600-700 branches in each quarter of the second half. How do you look at the standalone OpEx going ahead?

You know, HDFC's business moves, at a steady state OpEx, but your own OpEx, as you go on adding branches, do you see the 8% sequential growth coming back?

Srinivasan Vaidyanathan (CFO)

No.

Mahrukh Adajania (Analyst)

I'm not talking more in terms of cost to income, but the QoQ growth, because, yeah.

Srinivasan Vaidyanathan (CFO)

No, no, that's not the, the 8% QoQ is essentially the buildup of the branches that happened there. So the way we try to pace it in such a way, if you think about what happened there, we started the quarter, and our goal was to start building the distribution, so we created a lot of capability to build branches. Then as we were confident, because if you think about it, what we mentioned, which is we're trying to take the benign credit environment as an opportunity to see how we invest, and during this time period, run through the maturity and try to get that. When credit normalizes, when the credit reverts to mean, which is the historical mean, call it 90, 100, 110, somewhere around that, basis points.

That's the kind of when credit reverts. Before the credit reverts to mean, we need that maturity cycle to come to fruition. We are waiting for that to see, and as we saw, we started to accelerate and go. As time goes by, you'll see that the base comparison starts to lap, and then after that, you'll see a moderate level, right? We have still not seen the lapping of the growth from a base comparison point of view. We started to some extent in the September quarter, to a large extent in the December quarter, and as we saw the credit bending further down. If you look at the credit cost last year, June quarter was 91 basis points. This quarter is 60 basis points, right?

As you, as we saw that coming in, we started to implement that. That's essentially, in fact, not all of the credit cost is getting reinvested, but we are taking that opportunity and environment to do that.

Mahrukh Adajania (Analyst)

Got it. My next question is on loan growth and incremental deposit growth. Just in terms of loan growth, we had kind of indicated doubling of the book. Do we see that starting FY 2024? Because the run rate is a bit softer in the Q1, the merged balance sheet has grown 13% after including everything, and if you exclude IBPC, then it's grown 16%. Do we, can we see a 17%-18% growth as we end the year? Would that be a fair estimate?

Srinivasan Vaidyanathan (CFO)

Yeah, Mahrukh, yes. See, if you think about any time period, a three-year period or a 5 year period, typically, which we look at 2.3 times, 2.4 times, it moves up, which indicates about 17%-18% kind of a growth. And that's over a period of a longer term, right? 3, 5 years time period. Over a shorter time period, somewhere we have done 15%-16%, somewhere we have done 18%-19%, but 17%-18% is the kind of a our capacities are built, and that is how we are gaining traction to be at that level from a consistency of growth point of view. Quarter-to-quarter it differs, but yes, when you're asking about the full year, that's the kind of level at which.

The non-wholesale, the non-retail book in HDFC Limited will receive evaluation, and as you see, and as we deem fit in terms of growth rate, whether it takes a quarter or 2 before we start to pump in with that, we will see. At least, yes, on an overall basis, we're confident that there is enough credit demand. It is for us to see which one we want and what time we will start to build in. At the right price, I want to mention that even during this quarter, there were several opportunities on loans. If you look at our wholesale loans, 11% year-on-year are -1.6% or close to -2% quarter-on-quarter. We were not shy of not participating in certain loans.

If the price is not to our liking, we don't need it, and but we need the relationship, right? We keep it because around which we build several other segment relationships. Yes, that broadly, that's where we are operating.

Mahrukh Adajania (Analyst)

Okay, got it. Sir, what would be the, would you be able to quantify the CRR and SLR of Limited, HDFC Limited, at the end of June? Would that be possible?

Srinivasan Vaidyanathan (CFO)

No, see, it starts to kick in, I think, in the next fortnight, it will start to kick in. We provided you the high level in terms of how we're carrying liquidity to both to support the growth and support all the results that are required. The bank standalone LCR is 126%. On a combined basis, which was 116% last quarter, 126 now. On a combined basis, pro forma combined, 100, little more than 120%, after accounting for what is required for CRR and so on. Yes, quite comfortable with the position there to meet the regulatory requirements.

Mahrukh Adajania (Analyst)

Okay, thank you so much.

Operator (participant)

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

Kunal Shah (Director of India Banks, Financials)

Thanks for taking the question. Firstly, on, say, on the retail deposit side, last time it was quite encouraging of INR 1 trillion. We have highlighted that on a quarterly basis, we would want to add that kind of a number. Obviously, Q1 has some kind of a seasonality, given the capacities which are being built and the investment in franchise which is being done, what is the average kind of retail deposit accretion which we can see over next 6-8 odd quarters?

Srinivasan Vaidyanathan (CFO)

See, Kunal, what we want. We don't give one forward-looking statement, but at least I want to indicate what we have previously said, which is, yes, we have built capacities to be at that kind of a level. That is where, that is when you look at it over a period of time. Yes, there has been a quarter where it is lower. Again, there are, seasonality. It is low because there are times in this April to June quarter where typically it is low because the people are away, customers are away, schools are out. Many things happen in this quarter, right?

But our goal and our drive is to be at that kind of a level that we previously indicated, and this will come back up and where we try to drive that forward.

Kunal Shah (Director of India Banks, Financials)

One trillion was the indication, so we should drive that back to INR 1 trillion odd level.

Srinivasan Vaidyanathan (CFO)

Yeah, there, thereabout, that's what we had indicated, that that's the level at which we'd like to operate.

Kunal Shah (Director of India Banks, Financials)

Sure. In terms of credit growth, what you highlighted, 17-18 odd %, that is again, maybe not taking into effect IBPC. Is that a fair or maybe this 13%, which is there, post IBPC, is what you are indicating to be, like, 17-18 odd % sustainable one?

Srinivasan Vaidyanathan (CFO)

See, IBPC is typically a very transient book, right? And transient means, it comes in, it goes out and comes in, back in, right? IBPC is not a full space. We manage it quarter to quarter. There are a few objectives that we achieve, from a priority sector obligations point of view, or from a liquidity point of view. There are several considerations that go into doing that. But when we think about the loan, 17%, 18% are historical that we have done 2.3 times, 2.4 times, doubling every 4 years to 5 years, it is on a total basis, right?

Kunal Shah (Director of India Banks, Financials)

When do we actually expect this number to moderate? Maybe obviously this will move out, it's a transient one, but what is the kind of number which we can look at in terms of the IBPC, because that also drives at least the overall balance sheet number.

Srinivasan Vaidyanathan (CFO)

We don't have a target for IBPC, it is opportunistic.

Kunal Shah (Director of India Banks, Financials)

Yeah.

Srinivasan Vaidyanathan (CFO)

It is, as I told you, the purpose, not only opportunistic from a balance sheet point of view and the market demand, there was a good amount of demand in the market, right. There are certain other institutions which are wanting to put the assets on, and we get a good price, we pass it on, right. That's what I. We, and second thing is that if there are, when we look at the priority sector requirements and our ability to what we need to do, and if it's an opportunity to let that go with somebody else, that is also something. There is no particular target we have. It completely depends on, it is opportunistic, it depends on what the market is on pricing and priority sector pricing opportunities.

Kunal Shah (Director of India Banks, Financials)

Sure. One last question, in terms of any integration cost that would be incurred once there is a merger or there is no integration cost?

Srinivasan Vaidyanathan (CFO)

No, there will be integration costs in the form of stamp duties and in the form of just another cost that we will have. They are, as we said, within reason, nothing substantial, but within reason it will be. We will call that out separately after we complete it.

Kunal Shah (Director of India Banks, Financials)

Okay, that's not a meaningful one, which will affect the-

Srinivasan Vaidyanathan (CFO)

It's not a big mover of the overall financials.

Kunal Shah (Director of India Banks, Financials)

Thanks. Okay, thanks. Thanks a lot, and all the best. Yeah.

Srinivasan Vaidyanathan (CFO)

Thank you.

Operator (participant)

Thank you. We have the next question from the line of Saurabh Kumar from JPMorgan. Please go ahead.

Saurabh Kumar (VP of Digital Banking)

Hi, good evening, Srini. Just two questions. One is on deposit repricing. This, this quarter-on-quarter, your interest costs is up quite sharply, 15%. Can you help us understand where you are in terms of your term deposit rates on balance sheet versus incremental? And the second is basically on this on the HDFC mortgage book. Fair to assume that in 6 months, this book completely moves out, moves into EBLR? Yeah, thank you.

Srinivasan Vaidyanathan (CFO)

The second question I didn't understand. Mortgage book what you said?

Saurabh Kumar (VP of Digital Banking)

Basically, this will all be repo lending now. This is all PLR lending at HDFC Limited.

Srinivasan Vaidyanathan (CFO)

Oh, okay. I got the question now. Okay, first, the deposit pricing. Yes, you know, if you look at the deposit pricing over a period of time, CASA deposits haven't moved, as you know, not just for us, in the entire market it is what it is. It is the time deposit. Our deposit cost that you are seeing is simply a function of the mix that has happened, which is rightfully we are targeting to get the holistic customer relationship or deeper customer engagement, that is why the time deposit. Last year grew 29%, this quarter grew 26.5% time deposit. It's a function. The next question is if you're growing the time deposit, at what rate, right? It's just a market rate.

If you look at our deposit pricing, it is more or less at or slightly below some of the competitive competitors' pricing level, right? We are not pricing to gain any deposits. We are trying to price it at or slightly below competitors' level. We want that engagement, so we are not shy of that it is a cost, but because it gives better engagement and it gives little more duration on deposits, and we are okay with that. That's how you think about. It is not the lead pricing to get deposits. That's not what we are after. If you see any table at any point in time in your repo, across various tenors, that's what you will see that, right?

Of course, we have pitched slightly above State Bank for most of the tenors, except for some short end, where I think State Bank could be priced higher for whatever reason. Other than that, more or less in the private sector side, the top 2 or 3 or 4 banks were more or less there on pricing. On the mortgages you asked about the EBLR, yes, it will move to repo-based pricing. But when it starts off, it starts off with no difference to the customer. At the end of the day, customer is, whatever is the benchmark in which you do, even today, yesterday, or last year, the customer had a choice to finance anywhere the customer wants.

The price is to be pitched at a level, which is again, like the time deposit that I spoke about, competitively priced and with something differentiated in terms of engagement and better relationship with the customer. That is how we are approaching it. Yes, it will move to EBLR, repo-based loans.

Saurabh Kumar (VP of Digital Banking)

Sir, why I ask this is, typically in future, when HDFC's NIMs will have, you know, slightly higher volatility than what it had in the past, because now you have a large potentially external benchmark in scope, or will you still try to manage these 2 cycles, yeah?

Srinivasan Vaidyanathan (CFO)

Okay, yeah. See, if you look at how HDFC Limited managed, and that is the same book that we are taking over, along with the same people and with a similar kind of a risk philosophy and structure, the margins were moving in a narrow band, right? It was moving in narrow band because, from a duration point of view, they were fairly hedged on the duration, right? From an interest rate risk. That is why when the repo rates went up, you did not see in HDFC Limited, spread or the NIM jumping out of page. Because the risk management was keeping it in a very narrow band.

In the up cycle or down cycle, it's a narrow change that will happen, but cannot go off, that's part of how the duration is managed, and that will be how it will continue to be managed that way.

Saurabh Kumar (VP of Digital Banking)

Got it. Thank you, sir.

Srinivasan Vaidyanathan (CFO)

Thank you.

Operator (participant)

Thank you. We have the next question from the line of Rahul Jain from Goldman Sachs. Please go ahead.

Rahul Jain (VP of Valuations Control Group)

Hi. Good evening, Srini.

Srinivasan Vaidyanathan (CFO)

Good evening.

Rahul Jain (VP of Valuations Control Group)

Just, first question, going back to one of your statements that you are sort of making use of declining credit costs in investing in capacity build-up. How long can this trend continues? We've seen structural decline in credit costs so far along. Is there any more legroom available out there to bring the credit cost down from here? How do you see that play out?

Srinivasan Vaidyanathan (CFO)

Okay. It's a very good, very good question. Thank you. Right. There, there's no crystal ball when the credit reverts to mean, right? There will be reversion to mean. When that reverts to mean, that's part of the risk management art our credits will tell us few quarters ahead of time, which is what happened, right? When we started to build those branches somewhere, November, December 2021, we were looking at how our risk management was viewing, how the cycle is coming along, and then we started to get on to those branches. March 2022, we added little more than 500 branches. Then from then on, we've been on that cycle of building.

We will, our risk management will evolve and tell us in terms of how the cycle is going to turn or when. It is nothing but it's a function of maturity. It's not about the quality of the book. The quality of the book is sound now, it was sound then, and it will be sound in times to come. It's a question of maturity cycle of the product and of the credit, and when that reverse reversion begins, that's when we start. Still, by the time the reversion begins, we are confident that we will lap the base effect comparison cycle, right?

That's where we want to get this through so that the base effect starts to kick in, the maturity cycle starts to come in 18-24 months breakeven, and it starts to contribute to the top line, and then hopefully the reversion to mean starts, right? That's the kind of process that we are going through on that. I hope it helps for you to think through how long it can, right?

Rahul Jain (VP of Valuations Control Group)

Yeah. Just to paraphrase, I think you've got sufficient degree of visibility, at least for this year, that credit costs can keep compensating for enhanced investment and capacity build-up. you know, that's a fair understanding, right?

Srinivasan Vaidyanathan (CFO)

Yeah, that's a fair understanding. Normally 18-24 months breakeven to pay back. If you started this in December 2021, January 2022, that's where we started, 18 months time that you see. By the time the base effect is also in.

Rahul Jain (VP of Valuations Control Group)

Makes sense. That's very helpful, Srini. Thanks. The second is on, the segmental growth. We saw PL quarter-on-quarter growing, I think, you know, had a pretty, you know, slow sequential quarter, whereas home loans have picked up. Is this because of your, you know, calibrated risk stance that PL has to slow down and the secured portfolio has to go up? Or it is just a quarterly phenomenon?

Srinivasan Vaidyanathan (CFO)

It is simply a quarterly, Rahul, I think in some other place I alluded to. Q1 is typically a very slow quarter. If you look at three, five years time period at an aggregate level on loans too, little more than mid-single digit to somewhere little, mid to low double digit, that's the kind of Q1 contribution to the full year, right? It is normally slow, but we still see a good amount of underlying demand, which is there.

Even as we speak, right, you've been asked about this, but as we speak now, as this quarter has begun and moving on, the mortgages now, post-merger, what we get anecdotally from various sources within our bank, and as we see some of the logins, right, it has to translate into full loan dispersals. The mortgage logins are 20% on a combined basis, 20% more than what we have seen before. We are seeing good amount of traction build up there. It's a question of timing when it realizes into the balance sheet, but there is a good demand that is coming up, coming through.

Rahul Jain (VP of Valuations Control Group)

Actually, I was quite curious about personal loans in particular, because the YoY growth also for the last few quarters have been under-indexing versus the broader systems, PL growth. You know, I was quite curious, is this, you know, more of a conscious strategy that you're not trying to grow this portfolio or gain share or?

Srinivasan Vaidyanathan (CFO)

Good. You know, thanks for asking that, right? People sometimes have asked us, the market grows personal loan at 30% or 35%, or whatever, high 20s and so on. Why we are not growing. We are at 18% or 20% or 22% kind of rate. What's going on, right? See, that's the level at which, our risk management looks at, how to calibrate and get that, growth across. There are opportunities to do 2x that from a growth rate point of view. I'll leave that, respectfully, to our credit to determine at what pace, because every growth, gets monitored, evaluated, post the dispersals into the bureau to see learnings are incorporated.

There are several processes they follow to calibrate it and go, and I wouldn't second-guess them in terms of demanding far higher growth than what they allow.

Rahul Jain (VP of Valuations Control Group)

That's helpful. Just one last question on the PSL and RIDF. Any incremental color? Did you have to buy any more RIDF this quarter, or were you self-sufficient for the full year? Can you just throw some color around that, please?

Srinivasan Vaidyanathan (CFO)

See, I wish I could tell you how much we will buy, but, you know, I want to be careful about the price in the market and not speak up or down. At the same time, we are conscious of the requirement. We are at an aggregate level more than what is required. We always look for subcategories that we want to build, and over a long period of time, we want to be self-sufficient. That is the reason for our geographical expansion, going into deep villages and so on. That's over a period of time, right? That we need to be self-sufficient ourselves.

In the short term, yes, all of those activities, which is buying PSLC, RIDF as a compensatory where we think that the price is not appropriate in the market, IBPC that provides PSL or the securitization, which is the pass-through certificates that give qualifying assets. We are, in addition to organically building, we are in the market for all of those all the time.

Rahul Jain (VP of Valuations Control Group)

Got it. Srini, just one last question, if I can squeeze in on the merger-related costs. I mean, is there going to be any one-off that we should expect, any qualitative color that you can give around, you know, as you move to consolidate the numbers between you and HDFC Limited for the Q2 or whatever, you know, during the year? Anything that you can share off?

Srinivasan Vaidyanathan (CFO)

Yes, there will be some merger-related costs. I think, in the previous, sometime, 1 or 2 call, the questions ago, I did hear from Kunal asking the same in terms of the merger cost. There will be, it would be something, within range, within manage, within reason, and nothing out of the page in a big manner.

Rahul Jain (VP of Valuations Control Group)

Apart from cost, there is nothing much that can spring up on account of?

Srinivasan Vaidyanathan (CFO)

No, no, apart from costs, there could be some capital assets that we will put in from an an infrastructure point of view, then over a period of time, we depreciate certain assets for capacity building. Other than that, some costs will be incurred, but they are within reason and range.

Rahul Jain (VP of Valuations Control Group)

Fair enough. Very helpful. Thank you so much for answering the questions.

Srinivasan Vaidyanathan (CFO)

Thank you.

Speaker 9

Thank you. We have the next line of Abhishek from HSBC. Please go ahead.

Yeah, hello good evening. Thanks for taking my question. Srini, the first question is on this wholesale book of INR 1.1 lakh crores, which you are running down, you know, the HDFC non-individual loan book. What part of that book remains to be run down still? Now is it at a steady state and you're probably looking to, you know, build from here?

Srinivasan Vaidyanathan (CFO)

Okay, you know, good point. See, it has come down 18% or so over the last 12 months, right? part of the management action in terms of how as we entered into the merger, a lot of rationalization, and it came down 18. it will receive. I don't have 1 number where we will settle and start to grow, but that's part of how our businesses evaluate, look at those relationships. You know that in our wholesale book that we have, which is the INR 4 odd lakhs or INR 4 trillion, something that we have, our wholesale book, it is simply not a lending-based value proposition.

It is a full relationship-based value proposition, which is lending with cash management, with the trade and FX, and with the salary accounts and with the supply chain distribution accounts. It's intricately connected across all the business segments we operate. Again, here, we are evaluating all of those things. And, we would like to grow this book at some point in time, but at this moment, it is getting evaluated for, what is the kind of a positioning across various segments that we need to do.

Speaker 9

Srini, the reason I'm asking this is, this obviously affects your headline growth, right? There would be part of this which you may have earmarked that, you know, this is not the kind of business we want to do. If we can get a sense of that, then we know except that how much we can grow.

Srinivasan Vaidyanathan (CFO)

It's not that we don't want to be in the business. We very much want to be in those businesses. The construction financing is very intricately connected to mortgage lending. We will be there, we'll be nurturing and growing that. It's a question of evaluation, and it's a question of picking up the right kind of relationship for a broad-based across various segments, diversification, then we need to go. There is some level of that review that needs to happen. There is not a chance that we are thinking of that we will not be in this segment. We will be. It's like it's the auto dealer financing, which we are very well embedded in. Very similar in the mortgage business.

We have to be in the construction business to get that insight into the into the development, so we are able to finance the mortgage through that process. We will be there. The other book is the LRB book. LRB book, we do that, and the bank already grows that, and we just add on to that, and we will continue to grow on that. The only thing that we would not be doing is land financing types, which we will not be doing, or some of the project financing that doesn't meet the regulatory requirements, we will not be. Other than that, very much part of the growth. I don't want you to take away saying that this is a rundown book. It is not.

It is a core part of the book to grow the other retail mortgage loans.

Speaker 9

Right. The part that you do want to do, the land financing and the project financing bit, does that run into, let's say, north of INR 10,000 crores or it's within that?

Srinivasan Vaidyanathan (CFO)

See, it first, we take it and come, but it could be INR 5,000, INR 10,000 crores, whatever. We are evaluating that in terms of what is it, what part of that we cannot or we shouldn't want to be there.

Speaker 9

Got it. Got it. The second question, Srini, is on deposits. The reason or the point I'm trying to get to is, your incremental deposit market share requirement is roughly 25%, and if I look at a longer period acquisition rate, you're going at a 20% incremental market share, so there's still a 5% gap. Incrementally, would you have to raise rates? Because you've kept your rates at or below competition mostly, but now you have this incremental requirement, right? It can't just be fulfilled through your investments in branches, you know. How do you think about your rates on the TD side versus, let's say, or going forward, and will that lead to, you know, stickier rates on your cost of funds and therefore some more pressure on needs? How do you think about that?

Srinivasan Vaidyanathan (CFO)

Okay, yeah, no, good things. Two things are little bit, too, right? One is the market share. We don't drive a business targeting a market share, so I want you to get off that thought process saying that, internally we are thinking of what should be the market share and drive that. No, we don't look at that at all. We look at what is our funding requirement and how do we use our building blocks to get that. I just wanted to keep in mind. There is no particular mindset target of what we need to go there from a market share point of view. Coming to the second aspect, which is more important, hey, if you need time deposit, what sort of a pricing?

We have stated in the past that's how, not just in the last one to two years, but for a longer period of time, the bank has demonstrated discipline in pricing. We never lead by pricing to get any volumes, and it is simply based on relationships. And this comes by few things, right? We have built a brand over a period of time. We need to reach the customer. We need to be closer to the customer. That is the thought process we have, and not just in the last one year, two years. Over a period of time, if you see, that's how the branch got built.

We had 2,500 branches in 2013, 4,500-4,700 branches in 2018, then went to 7,000-7,800 and growing, right? The branch strategy is not something that we decided recently. We are accelerating to some extent on that, but it is about the distribution and the reach that is required, which is what we are building. The third, once you have all this, we need to get the customers in, right? We have built so far getting in 85 million customers, and, the, out of the 4 million customers from HDFC Limited, we have opportunity to operate with more than 2.5-3 million of them to bring liability relationship.

This quarter, we added 2.4 million new liability relationships, so you need customers. We work on the customers, both the new account value. As we bring in customers, we get in certain balances, the change in balances of the existing customers, we work through engagement to see how do we deepen that to get more balances. One of the ways in which we have recently got change in balances of the deposit from customers is time deposits. We have seen that our penetration has been low at 14%. We moved that needle to 14.5% right now, the denominator has also changed, right? We have more customers now.

While we have grown 29% last year, 26% in the recent quarter, still it has made a difference of only 50 basis points higher from a penetration. We have a long way to go. If you look at the pricing, which is where you started this question, how far pricing is influenced by this, you can do any point in time, if you look at the pricing, our deposit, time deposit pricing versus some of the peer benchmarks, if you see, they're pretty closely aligned. We don't lead by price, right? I want to leave the thought there. This is part of the ALCO discussion in terms of how we engage with the customer and how pricing is not the lead consideration for getting any deposits.

Speaker 9

Got it. Got it. Thanks. Just squeezing in one quick question on your calculation, actually. The ROA that you show in your, in your PPT, that's 2.1%, is that calculated on quarterly average balances? Because when I calculate it comes to 1.9%. Just trying to reconcile that difference.

Srinivasan Vaidyanathan (CFO)

I don't know how you calculate, huh?

Speaker 9

Daily.

Srinivasan Vaidyanathan (CFO)

Daily averages. Whatever daily average, but you cannot get on point, and you send the enumerator and denominator, we will tell you where there is an issue.

Speaker 9

Okay, okay. I'll take it offline.

Srinivasan Vaidyanathan (CFO)

Yeah. Yeah, please.

Speaker 9

Thanks.

Operator (participant)

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

Manish Shukla (Analyst)

Yeah, good evening, thank you for the opportunity. Firstly, Srini, are you able to quantify the crystallized liabilities of HDFC Limited at the time of the merger?

Srinivasan Vaidyanathan (CFO)

Yeah. The liabilities that get crystallized about INR 6 lakh, INR 636,000 crores is what is moved to the bank. The INR 636,000 crores includes the deposits, right, which is on page 23 of the earnings statement that we showed. That includes the deposits. INR 636,000 crores is what is moved along with the assets.

Manish Shukla (Analyst)

Sure. That's helpful. Secondly, on the merge basis, the loan-to-deposit ratio is at about 109%. How and when do you think you can get it down to below 100%? Basically, I'm saying that in terms of your incremental funding requirements, how do you think between deposits and-

Operator (participant)

Sir, sorry to interrupt, but the line for you is not very clear. I request you to please use the handset while you're speaking.

Manish Shukla (Analyst)

Okay.

Srinivasan Vaidyanathan (CFO)

Okay, I'll get to Manish, right? Manish, I will get to that. See, on the, you asked about the deposits, credit to deposits. Yes, instantly, because of the merger, it goes up. On an incremental basis, if you see, last year was 72% incremental credit to deposit. This quarter is 50 something incremental deposit. The way we think about and operate is that on a pre-merger, on an average, it was 84%, 84%-85% credit to deposit. We are operating at about 80% or so. That is the kind of a thought process from a credit to deposit ratio. Even if we want, instantly, it cannot be brought down because there's a maturity profile for the borrowings that we have.

It will take 3, 4 years for that to come down, to a level at which the bank has historically operated. We have to wait for the maturity profile to go and get replaced with deposits.

Manish Shukla (Analyst)

The gap would essentially be funded via affordable housing bonds or other kind of borrowings, right?

Srinivasan Vaidyanathan (CFO)

The maturity profile, no, it will both run down. On an incremental basis is what you need to look at. It will play out, where it comes back in three, four years down to normal.

Manish Shukla (Analyst)

Got it. Understood. Thank you. Very well.

Operator (participant)

Thank you. The next question is from the line of Pranav from Bernstein. Please go ahead.

Speaker 8

Hey, good evening. Thanks for the session. I'll just go back to the IBPC issue, Srini. The question is, if you had, instead of going down the IBPC route, if you had kept the loans on the balance sheet, what could have been the loss in terms of numbers? Is it ROA which would have been impacted, or is it your LCR, or is it your PSL management? Or in other words, what would you have to sacrifice to report a better headline number?

Srinivasan Vaidyanathan (CFO)

No, it's like this, right? When you do IBPC sell, in which case, which is what we have done, you've taken the loans off the balance sheet, and, so the baseline for priority sector lending goes down. You are reducing the obligations on which you need to have the directed lending at some point in time in the future. That's something, right? Very important on that front. The second thing is that from a pricing point of view, if there is some better pricing and there is a demand there, it gives you certain pickup in the spread on that. These are a couple of concerns. Liquidity, of course, right? You get some cash, and you can deploy it. You can, essentially, it's leveraged again, right?

You got the money, you can get more loans that you want, and you're able to leverage from that. That's the kind of thought process we deploy to do this.

Speaker 8

Perfect. Thanks for seeing us, very helpful.

Srinivasan Vaidyanathan (CFO)

Thank you. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, we have come to an end of the time allotted for the call. I would now like to hand the conference over to Mr. Vaidyanathan for closing comments. Over to you, sir.

Srinivasan Vaidyanathan (CFO)

Okay. Thank you, Bhavin. Thank you all the participants for participating. It was good and quite a dialogue that happened. Further questions, and those of you who could not complete questions or haven't had that opportunity to get on the line due to time constraint, we'll be open to having a conversation at some point in time. Please get in touch with our investor relations like Bhavin, or anybody else with whom you are previously connected. We'll be happy to have any dialogue. Thank you. Bye-bye.

Operator (participant)

Thank you. On behalf of HDFC Bank Limited, that concludes this conference. Thank you for joining us. You may now disconnect your line.