HDFC Bank Limited (HDB) Q2 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, good evening, and welcome to HDFC Bank Limited Q2 FY '22 Earnings Conference call on the financial results presented by the management of HDFC Bank. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. Thank you, and over to you, sir.

Okay. Thank you, Rutuja. Good evening, and welcome to all. Let's start with providing the context on the environment and the policies, which are at an inflection point for accelerated growth. With support from pent-up demand and easing of mobility restrictions in the country, economic activity moved above the second wave levels in early August. Encouragingly, in recent weeks as well, economic activity has remained robust. We expect economic activity to recover further, driven by festive season, pick up in vaccination and the likely increase in government spending. Activity indicators like CMI, GST collections, et cetera, fared better in Q2 and continues to be building up. We expect GDP to show positive sequential growth for the coming quarters. Inflation has remained within policy range, and RBIs captive policy stands accommodated. Now in this backdrop, the bank is operating and is poised for capturing significant growth opportunities. Key enablers are very well lined up for execution of our strategy. For instance, capital adequacy is at 20%. Our CET1 ratio is at 17.4%. Liquidity is strong, as reflected in our average LCR for the quarter at 123%, approximately $6 billion excess over a floor of 110%. Balance sheet has been built with great resiliency. The GNP ratio has remained within a reasonable range of 1.35%. Floating and contingent provisions aggregating to INR9,200 crore helps in derisking the balance sheet. About 400 branches are in the pipeline to open within a short period of time. To give additional context on the branches, we also added 432 branches over the past 18 months, that is during the current period, positioning us for capitalizing on the opportunity, progressing on the vintage maturity models. We added 5,868 people in the quarter, 9,248 people in the first half of this financial year. We have added 12,259 people over the past 12 months, which ensured our people were ahead on the productivity curve before reopening up the market once COVID subsided. Technology enablers are getting in place by driving future-ready organization with several partnerships for co-creation and for product sales and marketing. Several large programs are in progress under the digital factory and enterprise factory umbrellas using agile methodology. HDFC Bank is the first to deploy its own landing zone in September '21 using a hybrid multi-cloud strategy for hosting applications on cloud. This will enable the bank to build and deploy highly scalable platforms with flexible capacity utilization, while conforming to the high security posture of the bank. In the month of September, bank's website traffic received -- website received a traffic of about 82 million visits from approximately 31 million visitors. This is an increase of over 24% versus last year. As per our analysis, HDFC Bank has received more than 30% to 80% higher website traffic than the next bank in the public or private sector, respectively. Over 60% of the visits were through mobile device, indicating the mobile centricity of the footballs. The growth momentum that has already started, which is put in motion shows great early results. During the quarter, we opened an all-time high of about 2.4 million new liability relationships, which is an increase of 31% over the prior year and 45% over previous quarter. Total deposits sequentially grew by 4.5%, led by strong momentum in CASA deposits that grew at 7.6%. Total advances sequentially grew by 4.5% with a substantial upswing in retail -- retail assets, commercial and rural segments growing at 5.4% and 7.4%, respectively. Credit card spend for the bank has grown 36% on a year-on-year basis with a sequential total growth at 27%. Early results for the first 10 days of October show 42% growth in card spends over similar time period in September driven by festive spend. We are making new headway in leading the market to digitize the economy. In the last 5 weeks of the quarter, we issued 416,000 credit cards, recommencing our accelerated approach to digitizing the economy through card payment products. It is expected to sustain and grow monthly run rate from here onwards. Operations are underway to consolidate a large number of ongoing merchant offers. Two large tie-ups are already announced. Bank customers contributed almost 55% of the spends during the special sales organized by ecom platform players. About 7,000-plus hyperlocal offers for the festive season is underway to ensure best deals are available to customers across geographies. There are several strategic partnerships in pipeline. One of them -- one of which has been concluded, which is restaging Millenia, Infinia Metal, Freedom credit card offerings. The bank expects to see momentum building up in new offerings in consumer commercial business card space in the coming quarters. UPI transactions by count, both P2P, P2M put together has sequentially grown by 35% to INR89 crore transaction, and over year, it has gone up by 2.2x. For the quarter, in terms of value, P2P market share is about 10% and P2M market share is about 15%. Mobile transaction -- mobile banking transactions count in the first half has seen a growth of 66% year-on-year. We are positioned to capture the opportunities in the emerging growth segments of BNPL through enhanced product offering and segmented sales and marketing with a product-led approach and partner-led approach to pay with convenience to customers for small value transactions to enjoy free credit period up to 30 days to pay for multiple items of services in a consolidated manner and pay in EMI for larger value purchases in monthly installments. This is targeting to acquire new customers, activate existing customers and drive stickiness. We have over 3.5 million customers with such easy EMI loans. Consumer finance business is enabled across 1.3 lakh merchant points. The bank's merchant offering is scaling to provide enhanced value-added services across various segments. The bank has 2.5 million acceptance points as of September end with a year-on-year growth of 27%. Acquiring business volumes, including credit, debit, UPI, EPI, direct pay, grew by 45% year-on-year to INR3,53,000 crore for the quarter. The bank's acquiring market share is at 47%. We are consistently improvizing merchant and customer engagement and user experience on the Smart Hub merchant platform. Several new developments on the platform have been implemented in the month of September. As on September 30, 1 million small businesses operate through this new Smart Hub platform. With the above strategy, the bank is confident on achieving the scale of 20 million merchants and also be the largest payment ecosystem in the country. Asset volumes are gaining momentum to reach new heights, driven through relationship management, digital offering and build-up products. In the wholesale segment, corporates has seen strong cash flows and also have preference to use market instruments for borrowing, but at a fair degree of prepayment. However, on the retail assets front, incremental disbursals during the quarter exhibited phenomenal growth of 50% sequentially and 71% year-on-year, resulting in a sequential growth of 5.4%. Arvind Kapil can give little more color in terms of what we are seeing in the market.

Thanks, Srini. Very good evening, everybody. The retail assets book has exhibited a robust quarterly sequential growth of around 4.5% at September '21 over June '21 and around an 11.5% on a year-on-year basis, September '21 over September '20. This is on the back of the incremental disbursals in the quarter where large portfolios like whether the 4-wheeler auto loans, unsecured loans and mortgage loans have achieved new heights. And we expect a positive sequential growth in the coming quarters as well. To supplement this, let's also look at a quick sense of how we see the macroeconomic indicators from a business point of view, and I'd like to, in the next 2 minutes, supplement it with what's happening on the ground level. So one is the monsoon, we see finally is normal levels. The rural economy has started to show, at a ground level, a feel good factor, you will have a good rabi season probably in the next 6 months. If I look at the employment indicators, we can see that it's -- probably September reached the pre-COVID levels if I look at the CMI data. If I look at the bureau data for loans, the industry inquiry for loans has witnessed a month-on-month increase. And for all our retail asset business, it's confirming a strong demand and validating our confidence for growth. Now if I also look at the mobility index that we watch, I think it's improved across states with the potential to boost consumption. Adding to that, if I were to just look at quick eyeball into the GST, electricity generation, the TRAI generation, index of industrial production, I think all of these are showing positive trends. Now let me quickly add this to the ground level. I think what's happening -- what I hear from my teams and the way the business trajectory is moving. Let me begin by auto loans. So our book is -- has shown -- has grown against the tide at a healthy pace. And just to give you a sense, the domestic vehicle sales units witnessed a drop at an industry level of 37% for the month of September '21 over September '20. However, incremental auto loan disbursal for HDFC Bank in value terms has increased by 36% during the same period. Probably, that could give you a sense of our level of traction that we are building. We understand from our manufacturing partners that these are -- there are global supply chain issues affecting the supplier vehicles. And however, this -- they should be able to, probably in a month or two, get a much more tighter grip on that. And that will, I think, add to our strength of what we are building on the disbursal side. On the unsecured personal loan side, our incremental disbursals are exhibiting sustained growth with very consistent sensible delinquencies are focused on increasing government business, which is our core strategy on this product is yielding positive results, and we plan to strengthen the segment consistently in quarter-on-quarter thereafter. On the combined mortgage books and I'd like to comment on the home and LAP, Loan Against Property. Together, it's exhibiting a strong sequential quarter-on-quarter growth, and we expect this growth rate to sustain in the latter half of the year as well. Loans above INR1 lakh are clearly showing a significant higher traction. And I think loans below that, that's 2-wheeler and the microfinance segment, we expect the disbursal run rate to reach peak over the next 60 days. We are beefing up on distribution on both business loans and home loans via noteworthy Quantum, which will yield results in the subsequent quarters. And this effort is on, as I speak to you. And even when I look at the ground level feel on the confidence of the self-employed, if I look at the textile side, they're talking about -- the businessmen are talking about an expectation of a growth of 30% to 40%. A couple of home appliances guys are talking about a 20% higher than pre-COVID. The food grains, telecom, FMCG is talking about a range of 20% to 30% growth. So that's just a feel at what we are hearing at the ground. We are not only increasing our market share across products, but we are also, same time, ensuring and witnessing our [indiscernible] quality is improving across the risk bands. And so whether it's the bureau, the quality of the score, a certain percentage of better customers is increasing. Our open market distribution, we believe, gives us a strength of first right to refuse, and that strength will give us substantial quantum leaps as we come up with new digital products, whether it's on the auto loans or it's a couple of other products as the government kind of opens up that and allows the law of the land, allows certain -- even the mortgage side. We are further strengthening our geographical footprint, both on reach and density. We're also strengthening our contactless end-to-end digital journeys. This was a big strength, which we developed during the pandemic times. Another area, like I mentioned to you, is the government and the used cars, which is going to make our future level readiness. We are market leader position, coupled with our portfolio quality, the sustained economy recovery that we see and an ongoing festival season, even with the festive treats that we have launched in our limited capacity to add to the existing demand that we see at the ground level. We are clearly bullish on our retail assets growth in the coming quarters. And we believe we should be in a position to be ahead of the curve quarter-on-quarter. Thank you, Srini.

Thanks, Arvind for that. The next segment I want to talk about is the commercial and rural business that saw a robust sequential growth of 7.4% quarter-on-quarter, capturing strong underlying economic activity and continued market share gains. Rahul, a few words on this, please.

Thank you, Srini. As Srini said, commercial and rural banking had a end-of-period growth in assets, 27.4% Y-o-Y, 7.5% Q-o-Q. The CASA performance remained strong at 21% Y-o-Y and 4.6% Q-o-Q. Business growth was aided by continued market share gains, expansion in SURU segments, the semi-urban and rural areas, underlying strength in the economy and carry forward of June momentum as we opened up after the still environment in April and May. While the growth rates were high in a normally quiet quarter, we entered into a traditionally strong second half, where we are already seeing strength. We have a strong growth outlook in both the December and March quarters. Our rural banking business had approximately 12% quarter-on-quarter growth, helped by record disbursements, strong customer acquisition through deeper village penetration in 1 lakh villages where we already operate; secondly, through program expansion in 1 lakh more villages, which we are steering over the next 18 to 24-month period; crop diversification, focus on small and marginal farmer, slightly delayed but strong sowing from June to July with a normal monsoon; and rural infrastructure support initiatives. The business remains on track for a 20% to 25% growth for the full year on a conservative basis. Our transportation finance business saw a 5.2% Q-o-Q increase. We have now improved our market share to 25% to 30% with almost all OEMs in the product categories that we want to be present in strength. Retail commercial vehicle volumes that we financed in this particular quarter compared to Y-o-Y, it was 4.5x. But if you look at it, the industry volumes grew 1.2x. So we significantly improved our position. Similar trends in both construction equipment and tractor. The second half is expected to be a stronger period, and the industry is in a growth phase. The industry has absorbed the impact of changes such as axle load norms and BS VI, et cetera. With overall growth picking up, growth in e-commerce, particularly that leads to strong demand pull for the CV industry, sustained infra spend by the government and take off of scrappage policy over time, this business is on a strong footing for growth. In our mid-corporate segment, which is largely self-funded, it saw a 29% Y-o-Y increase and 5.6% Q-o-Q. We began the year with a goal to expand our business footprint to over 100 cities by end of the year, which is March 2022. We have already achieved this by the end of September. Business remains on track to expand with strength. We see growth in CapEx demand in several sectors. We believe a recovery in consumption and exports over the coming quarters will help lift capacity utilization rates. Favorable environment and improvement in corporate revenue growth bodes well for improvement in balance sheet positions. This, coupled with policy measures such as lower corporate tax rates, labor response, PLI scheme and the transition to a multipolar world with companies looking to diversify incremental production, should help improve private sector CapEx growth as well in the next 12 to 15 months. Our wholesale SME business, it saw an asset growth of 33% Y-o-Y, 7.5% Q-o-Q and remains largely self-funded. At the start of the year, we set a goal to expand our footprint to 575 districts during the year. We are almost there at the end of 6 months. In our retail SME business, we had record disbursements, 83% higher than quarter one. It remains on track for a 50%-plus growth during this financial year. Our healthcare business had a 5.2% Q-o-Q growth rate. This is a result of strong cash flows in the sector. We have optimistic outlook for this segment and are enthusiastically participating in the government's flagship LGSCAS scheme. What stuff are we doing digitally? Well, but for mortgage perfection, which is dependent on SRO, the bank largely does the entire processing digitally. That includes customer front end for transaction initiation and execution, there is checks and clearances to documentation type of search and disbursement. The proof that it works beyond the storyline is reflected in pace of customer acquisition. Let me just share an anecdote. It happened in a dry fruit belt in a particular part of Southern India, where a lot of banks are present. When we went in over there, we basically saw a particular need. And all that we simply did was the ability to go out and do PCFC in foreign currency as well as forward cover as a hedging tool, being able to do online, together with our normal support that we go out and provide. And we were able to convert that entire belt into an HDFC Bank customer segment. And these are stories that come from all around the country. We are also working diligently on our system upgrade to be able to plug-in with the product and data SME stack in India, which is fully developed. During the quarter, we launched our Dukandar Overdraft program supporting street vendors and small hawkers. We also piloted Kirana Overdraft with a FMCG major. As we roll these out, we are digitally reaching out to areas of economy that need a helping hand. Srini, in summary, we are on track to have the strongest growth over the last few years in both our rural and MSME business. Number two, when we look at the SME growth outlook, not just this year, but for the next financial year, we are poised for a 1-plus-1 model, which basically means that whatever is our book as of March 31, 2022, we feel confident that we will be able to aid exactly the same amount of disbursement, incremental disbursement in the next fiscal year. That is how strong the business momentum is within HDFC Bank and how strong the underlying trends are in the economy. Having achieved our cities and district expansion goals for mid-corporate and wholesale SME businesses, we are working diligently to expand our village footprint by 1 lakh more villages through our Har Gaon Hamara village campaign, our BC network and leveraging the common service centers. We are also participating in a lot of government schemes, such as the Agri Infra Fund, CGFMU, LGSCAS, CGTMSE, PMFME, PM Kisan Saturation, PMMSY, ECLGS, Kusum and a variety of other schemes. There are about 25 schemes that we are looking at and participating and supporting what is needed to be done for the ecosystem. Thank you, Srini.

Okay. Thank you. Thanks to you both, Rahul and Arvind for that, getting the ground level view of what's going on there. Now getting to revenues. Net revenues grew by 14.7% to INR25,085 crore, driven by an advances growth of 15.5% and deposits growth of 14.4%. Net interest income for the quarter was at INR17,684 crore, which is 70% of net revenues. It is up 12.1% over previous year and up 4% over previous quarter. The core net interest margin for the quarter was at 4.1%, which is similar to range in the prior period. Net interest income growth is reflective of underlying shift from unsecured lending, essentially gravitating towards higher-rated segments in the COVID period. This is also represented in our ratio of net interest income to RWA, which is consistent at around 6%. Moving on to the details of other income. Other income at INR7,401 crore was up 21.5% over prior year and 17% over previous quarter. Fees and commission income, that constitutes approximately 2/3 of the other income was at INR4,946 crore and grew by 25.5% compared to prior year. Retail constitutes approximately 93% and wholesale constitutes 7% of the fees and commission income. FX and derivatives income at INR867 crore was higher by 55% compared to prior year. Trading income was at INR676 crore for the quarter, prior year was at INR1,016 crores. Prior quarter was at around this level at INR601 crore. Miscellaneous income, of which -- which is at INR912 crore includes recoveries from written-off accounts and dividends from subsidiaries. We'll cover about the recoveries from written-off accounts at a later stage. Expenses for the quarter, those were at INR9,278 crore, an increase of 15% -- 15.2% over previous year. Year-on-year, we added 256 branches, almost 1 branch per workday, bringing the total branches to 5,686. We also added 1,350 ATMs since last year. We have 15,717 business correspondents that is 3,747 higher than same time last year. This quarter expenses includes approximately INR80 crore for charge taken for employee stock options granted in the quarter. The expensing of employee stock options through the P&L is consequent to regulatory circular issued in August -- August '21, applicable to the industry on a prospective basis, effective financial year '21-'22. Our cost-to-income ratio for the quarter was at 37%, which is similar to prior year level. As technology investments are stepped up and retail segments picks up further, we anticipate the spend levels to increase driven by incremental volumes, sales, promotional activities and other discretionary spends in the retail segment. Moving on to PPOP. The pre-provision operating profit at INR15,807 crore grew by 14.4% over prior year. Pre-provision operating profit was about 4x, a little more than 4x coverage -- provides little more than 4x coverage of the total provisions. Coming to the asset quality, the GNP ratio was at 1.35% of gross advances as compared to 1.47% in the prior quarter and 1.37% on a pro forma basis prior year. Net NPA ratio was at 0.4 of net advances. It's pertinent to note that the 1.35% GNP ratio has about 20 basis points that are standard. These are included by us in NPA as one of the other facility of the borrower is in NPA. The core annualized slippage ratio for the current quarter is 1.8%, on a quarterly basis, 45 basis points or INR5,300 crores. During the quarter, the recoveries and upgrades were about INR3,500 crores, call it approximately 30 basis points. Write-offs in the quarter were approximately INR2,600 crores, approximately 25 basis points. Sale of NPA was INR500 crore. That is included in one of the categories above. The restructuring under the RBI Resolution Framework for COVID-19 as of September stands at 150 basis points; 152 to be precise. It is pertinent to note that this is at the borrower level and includes approximately 25 basis points of other facilities of the same borrower, which are not restructured, but included in restructuring reported above. Provisions, the core specific loan loss provisions for the quarter were at INR2,286 crore. The total provisions reported were INR3,925 crore. The total provisions in the current quarter included additional contingent provision of approximately INR1,200 crores. The specific provision coverage ratio was at 71%, but no technical write-offs, no head office and branch books are fully integrated. At the end of current quarter, contingent provisions towards loans were approximately INR7,700 crore. The bank's floating provisions remained at INR1,450 crores. General provisions remained at -- general provisions is at INR5,800 crores. Total provisions comprising all of these, which is specific, floating, contingents and general, were 163% of gross nonperforming loans. This is in addition to the security held as collateral in certain cases. Looking at through another lens, floating, contingent, and general provisions were 1.24% of gross advances at the end of September. Coming to credit cost ratios, the core credit cost ratio that is specific loan loss ratio is at 0.76% for the quarter against 1.46% for the prior quarter and 91 basis points on a pro forma basis for prior year. Recoveries, which are recovered as miscellaneous income that I referred to, amounts to 23 basis points of gross advances as against 14 basis points in the prior quarter. The annualized credit cost for the quarter was at 1.3%, which includes the impact of contingent provisions of approximately 40 basis points. Prior year was at 1.41% and prior quarter was at 1.67%. Now with that, Jimmy, you want to give some color on credit at that stage, please.

Sure, Srini. Thank you. Hi, good evening, everyone. So a bit of an update on what's happening on credit and credit quality over here. So as we entered this third -- this quarter, the impact of the second wave was actually abating with lifting of lockdowns, economy opening up and of course, the rapid progress of vaccination. This improvement in economic and business activities further accelerated during August and September. And as a result of this, there have been improvements in various key risk indicators, which I will just come to in a minute, which has resulted in a gradual reversal to kind of business as usual situation. Let me elaborate on the portfolio quality with the help of these risk metrics, and I'll just start with retail assets. So if you look at demand resolution, at an overall retail asset level, the demand resolution for the month of September was 97.5%. It's almost back to the pre-COVID levels of 98% and is higher than the level seen before the second wave of March '21, which was before the second wave hit us. We move on to the resolution rates across various DPD buckets. I'll just give you a bit of color on that. The bounce resolution has also shown a lot of improvement. We are now better off than the pre-COVID levels of Feb '20 in most of the products. And it might also be of interest for everyone to know that around 10% more than the customers who previously used to self-cure on bounce are now self-curing. What this means is the customer bounces, but does not require any intervention or persuasion to actually clear and clears check on his own. So that's another encouraging sign in terms of what bounces and the resolution there. Moving to the actual collection resolution in the various DPD buckets. Most buckets have reverted to pre-COVID levels. And in some products are actually better than the pre-COVID levels. The bank expects the remaining resolution rates in all buckets to revert to pre-COVID levels by around December or January '22 in the absence, of course, of any unforeseen extraneous impact of a third wave, et cetera. Coming to the third wave itself, I think we have done a lot to prepare ourselves for this. So we've been working with the staff as well as our collection vendors to get the workforce vaccinated. The first dose coverage amongst this population is almost 100%, and the second dose coverage will be in excess of 90% within the next 30 days or so. Hence, the bank does not expect to stop collections as it did in the second wave, both office and field, barring, of course, if there are lockdowns enforced. But otherwise, we would be ready to -- and continue our collection efforts. Coming to recoveries. The recoveries in the portfolio has been quite encouraging again. For the quarter, the recovery is around 10% higher than pre-COVID levels. And this is also improving month-on-month. So in the actual month of September, the last month of the quarter, it was around 20% higher than the pre-COVID levels. And this also should see further improvement. So it's an encouraging trend. Wholesale credit continues to be very stable. There's been healthy underwriting and credit performance. So we don't have much to report there. The severity of the second wave did, of course, affect the SME sector. However, post June, again, there has been a steady reduction in the number of COVID cases, and therefore, the unlocking across most states started, and this led to an improvement in the business and the cash flows for these customers as well. The SME book, of course, is fairly diversified with no industry having more than 5% exposure, except the agricultural, which is largely focused on priority sector, and therefore, it's required to be put in those quantums. The other measures of the SME segment that we always comment upon, which is the self-funding, the collateralization, the average cash flow, all these things continue to remain stable as they have been in the past. The wholesale and SME book, overall, continue to maintain the high-quality that we are accustomed to. Small note on the ECLGS portfolio. So given the exceptional circumstances that had led to the ECLGS to be announced, the bank had a very proactive approach to this particular scheme, and we did do a fair amount of the first ECLGS particularly before it started getting segmented into these stress sectors. Given our usual approach to portfolio risk management, we have been continuously monitoring and carrying out a detailed quantitative assessment on these portfolios to gauge the potential risk associated with these books. This assessment has been carried out by us considering several parameters like the individual behavior, scores, liability behavior, asset repayment behavior, the overdue status, pre as well as post the ECLGS and, of course, bureau information, which might lead to something we can glean from other institutions performance. So all this has been done and continues to be done and will continue to be done going forward as well. But our study suggests that there is good robustness in this business with minimal potential stress to let us estimate it to be in single-digits. Restructuring has also been -- there were two scheme, as you know, announced, which are colloquially known as R 1 and R 2. The bank did take a proactive and empathetic stance in this as well, and we have extended this regulatory lead for several affected customers. We have carried out a similar exercise of monitoring this particular portfolio and the potential risk that could be estimated. And this was determined through our ongoing analytics on all these borrowers, their pre- and post-restructuring behavior, inputs from various other data sources, their banking account performance and, of course, again, the bureau sources. And our assessment of this particular portfolio, using this methology, indicates around a peak potential impact of 10 to 20 basis points at any point in time. And we, of course, continue to subject these portfolios to enhanced monitoring. While it's mentioned a lot about the portfolio quality, just let me take a couple of minutes to maybe corroborate some of what Srini was mentioning in terms of the growth opportunities and what the bank is doing in terms of demonstrating our credit readiness to capture these emerging opportunities. So there are several credit programs that we continue to evolve and adapt to support growth. We've been early adopters of analytics, as everyone knows, to drive these credit decisions and actively been using big data to leverage diverse data types and done a lot of these programs successfully, create straight-through processing through click of a button lending programs. We have done this historically in large measure for the existing customers of the bank for some time. We have seen the benefit from customer experience. We have also seen that there is no adverse detrimental impact on the portfolios. And we are now extending these models, of course, with some further analytics and development into new-to-bank customers so that they may also get the same digital experience, the seamless processing, et cetera. We continue to invest in this space for more digitization and better experiences to the customers. And we have highly adaptive risk management approaches to these new models as well. We have a suite of newly developed in-house models through which we will address these new-to-bank customers. The robust monitoring of this portfolio also help us looping back these earnings at a granular level, and of course, lets the bank be alert. It allows us to keep the underwriting teams equipped with the latest conditions and trends and it supplements our credit processing and our risk appetite. We've also introduced a credit innovation lab. The credit innovation lab is being used to incubate a lot of experiments to test new products, new customer segments, delivery channels across the whole spectrum of lending from micro lending, consumer lending, SMEs as well as, to some extent, wholesale banking. To facilitate this, the bank is working with a lot of technology partners who are experts in their respective fields to build, design these testing mechanisms and, of course, to help us speed to market. So with this, we hope to keep pace alongside a whole lot of fintechs, be at the cutting-edge and actually be at the forefront of these levels of innovation as well. And this lab will focus on the partnership base to even extend distribution and credit delivery to the partners' customers using these models. So we would add, of course, new data sources like the UPI, digital footprints of customers and several such processes to give insights into various new innovative schemes that we want to put out. Of course, we will be monitoring this, and we will give you further updates as we build some scale on this. Srini, that's what I would comment. Thank you.

Thank you, Jimmy. Now getting on to the -- PBT is printed and at INR11,883 crores, 17.5% growth for the profit after tax at INR8,834 crore, 17.6%. Now with that, getting to balance sheet, I'll keep it light because it's part of the published balance sheet anyway. But all I want to bring to attention is that the 4.5% growth over previous quarter on deposits and 14.4% over the previous year on the deposit side is approximately INR61,000 crores of growth -- the net growth in the quarter on deposits and INR1,77,000 crores growth since last year. I want to leave that part. And similarly, on the advances, the 4.5% sequential, 15.5% year-on-year growth on advances means it is about INR51,000 crores of net growth in the quarter and INR1,51,000 crores growth since prior year. Now on the capital adequacy, 20% against a regulatory minimum of 11.075%; Tier 1 at 18.7%; CET1 stands at 17.4%. Now with that, I want to move to give some highlights on HDB Financial Services. It'll be on NDIS basis because NBFC follows NDIS accounts. The total loan book as of September end stood at INR60,000 crore, with a secured loan book comprising over 70% of the total loan book. Our conservative underwriting policies on new customer acquisition, which was implemented post-COVID, continues to be in place, and the company will review its stand, review course based on external environment. With increased focus for the disbursements at about INR8,000 crores in the quarter, recorded a 93% growth quarter-on-quarter and 27% growth year-on-year. With monsoon receding through the country and onset of festival season, we are optimistic on a further uptick in disbursements through Q3 and Q4 quarters that have traditionally shown relatively strong over the years -- strong growth over the years. For this recent quarter, net revenues were INR1,917 crores against INR1,704 crores for the quarter last year, a growth of 12.5%. Cost to revenues for the lending business was about 35.4%. Provision from contingencies for the quarter were at INR634 crore, that included INR125 crore of consolidated management overlay on NDIS basis. Profit after tax for the quarter was INR192 crores compared to a loss of INR85 crore in the prior year and profit after tax of INR89 crores in the prior quarter. As of quarter end, growth Stage 3 NPA stood at 6% -- 6.1%, a reduction of over 200 basis points in the quarter over the previous quarter. Over 70% of the Stage 3 book is secured, which has more than 100% collateral in the SME book and more than 80% collateral in the asset finance book and still carries a provision coverage of 43%. The unsecured Stage 3 book had a provision coverage of 88% as of end September. Liquidity coverage is healthy at 157%. Cost of funds have been brought down in this recent quarter to 5.96%. The capital adequacy -- total capital adequacy is at 19.8%. HDB has 1,336 branches across 956 towns and cities. The company has taken benefit of the past few quarters to leap ahead and ensure data and data analytics become the bedrock of growth and build an omnichannel model to deliver business velocity, widen the acquisition funnel, while reducing acquisition costs and providing an intuitive section of customer experience through the loan life cycle. On the acquisition, unassisted straight-through processing has been enabled for all small ticket consumer loans, which is 90% of all new customer acquisitions. On the underwriting -- credit underwriting, enterprise-wide automated business engine has been implemented, which delivers a real-time scorecard on all customer applications. In the area of collections, HDB has enabled all customers to pay using digital payment channels. With markets opening up and customer accessibility improved to near pre-COVID levels, we believe the company is well poised for a healthy growth from hereon. HDFC Securities. We've got a wide network presence, 213 branches across 147 towns and cities, 4 digital centers in this country, has shown an increase of 42% increase in total revenue to INR489 crores. Net profit after tax of INR240 crores is an increase of 44% over the prior year. HSL has implemented digital account opening journeys, and it's running successfully over the last few months, leading to a significant increase in the overall client base to over 3 million as we speak as of end September. In summary, we have navigated the shocks arising from COVID pandemic, which has been ranging since early 2020. This has been possible by adopting new ways of working to deliver seamless banking experience to our customers. Using this opportunity to scale up and strengthen our infrastructure, our credit filters were tightened to avoid adverse selection and are progressing now to normal to support and grow. We have reasonably overcome the effects of the pandemic over the past 18 months across the broad context of balance sheet, P&L and human capital. We are now in a state of accelerating growth. The future-ready organization has been in place for more than a quarter and the key enablers for driving growth are well stacked up to capitalize on the early signs that we are seeing now. The quarter result reflects the deposit growth of 14% and advances growth of 16% to build upon. And the earnings per share -- the return on asset of 1.9% and earnings per share in the quarter of INR16 and book value per share stands at INR395. With that, may I request the operator to open up the line for questions, please?

[Operator Instructions] The first question is from the line of Mahrukh Adajania from Elara Capital.

My first question is on NII growth. So what would it really take to get back NII growth to the mid-teens? Would it be traction on credit cards? What would it take? That's my first question.

Okay. See, there's a couple of things to keep in mind, right? If you look at over a period of 6 to 8 quarters, how the book transitioned from a retail to wholesale over a period of time and we are at a threshold inflection point where the retail is now starting to tick-up and at least the momentum on the retail is more than wholesale. Right? And I did give one particular data this time around to talk about net interest income on RWA at 6%, right? So if you look at it, the pricing is for the risk. And certain segments that we grew over the last 18 months or so were low-risk segments. That means with a lower price that comes with it. But adequately, at the bottom line, if you see the last 18 months return, our ROE has been quite steady, 1.9% in this quarter and about 1.9% to 2% every other quarter over the last 4, 5 quarters. So that was one. The inflection point has come and the retail is going up, right, so which has got a higher NII from that sense. That's to keep in mind on that one. The second thing is that even in this quarter, while we have had the retail growth coming up, the -- so for the average to catch up will take a couple of quarters for the average to catch up with the overall base. So one has to wait through a few quarters like the way it took a few quarters for this, and now it will take a few more quarters to get there.

My next question is on restructuring. So the restructuring is higher than what we saw in the first wave, that is R 2. So what is the profile of these restructured loans? Were they the ones that opted for moratorium last year?

One thing I will mention, and then Jimmy will talk more. But one thing I did mention that out of the 150 basis points, 25 basis points is accounts that are not restructured, but we have reported restructured because at the borrower level, one other facility of that borrower has been restructured. So it is reported. Otherwise, I would have reported 125 basis points, but we said 150 basis points -- 152 basis points, to be precise. Jimmy, you want to take the profile of...

Yes, sure. Thanks, Srini. The restructuring has been availed by many diverse people. And as I mentioned earlier, we've been quite empathetic on this. We haven't tried to be excessively strict as to whether want to or not. If someone asked for it, and we felt that the person is going to recover well, we would offer that restructuring. Yes, there will be moratorium customers in the restructuring book. And in fact, in the various analytics that I mentioned, one of the considerations is a moratorium customers' behavior, pre- and post-moratorium as well. So there would be some moratorium customers in that portfolio.

Sure. But the analysis that you have done would be on R 1, right, not on R 2?

We have done it on both, Mahrukh. Of course, one has to admit that there’s not so much time lapsed post R 2 and therefore the analytics on the R 2 book has focused a lot on the behavior of the customer and his attributes before the restructuring. We have found, when we are building these models, that both the behavior before and post-restructuring has had a significant bearing on the outcome of the stability of the person thereafter. So of course, we’ll keep up to date with you in future calls as well as to what’s happening. But at this point of time, yes, we have analyzed R 2. We have a reasonable insight into it. And what we put out is what we think the impact is going to be at this point in time.

Thank you. The next question is from the line of Kunal Shah from ICICI Securities.

Again, on restructuring. So broadly, what you are suggesting is with respect to OTR 2. But if you look at the outstanding restructured pool, should that be altogether at around about INR20,500-odd crores, both OTR 1 and OTR 2 put together?

1.5% would be little less than INR20,000 crores. 1.5% would be about INR18,000 crores or so.

Yes. So INR18,000 crores would be this under 2.0. And OTR 1, the way we had given the movement out there, that is INR5,600 crores, and there is overlap of INR2,600 crores. So there would be further addition of INR3,000-odd crore under OTR 1 as well?

No, no. This is for total number I gave you. 1.5% is the total, R 1 and R 2 total.

Okay. And secondly, in terms of the nature, so broadly, when we look at retail, in particular, wherein, say, under 2.0, it is INR14,000-odd crores, would the split in retail between secured and unsecured be similar to the overall loan book or it will be more skewed, say, toward either of that?

It will be within the -- secured, unsecured -- have we disclosed secured unsecured? No, we haven't, Kunal -- we haven't produced that for -- it's not in the table.

Sorry?

No. The table we published, Kunal, there is no split between the secured and unsecured.

Yes. No, sir, just wanted to get some sense if it will be similar or maybe it is more skewed toward the secured houses that maybe the profile, particularly within the retail loans of INR14,000-odd crores. If maybe, qualitatively, you can comment, yes.

I don't have it in front of me. Jimmy, if you have...

I don't have the numbers either, but it's mixed is what I can tell you, but I don't have exact numbers.

Sure. And in terms of the movement which is shown with respect to OTR 1, so finally, and the way we are seeing is almost 20%, 22% has slipped. There is 12%-odd, which has written off. So both put together almost like 30% from last time's restructuring, it has either slipped or written off. Now, maybe with respect to the current pool, okay, what we are seeing under 2.0, should we see similar kind of behavior within this restructured pool? Because I think you highlighted 10 bps, 20 bps kind of an impact when you did that risk assessment analysis. So how we are actually getting towards that, yes?

That's what Jimmy went through, Kunal, which is to analyze the entire book according to his risk models, the models that he uses for both application review as well as the models that he uses for collection behavior and prioritization. Through those models, that's how we arrived at saying that we need to be watchful for 10 basis points to 20 basis points at any time that we need to be watchful in that portfolio.

Okay. Sure. And just -- I'm asking in terms of this payment product. So obviously, a significant part would be the credit card portfolio within this payment product. So another INR3,000-odd crore, which is there, if I broadly assume, maybe even comparing the last quarter's number. This would be more kind of a pay-later or maybe the EMI, which you are referring to, which is getting plugged within that portfolio, would that be the broader number to assume?

Whatever you were talking, Kunal, were echoing. I couldn't...

No, I'm saying, we have disclosed payment products separately this time. So when we look at the last quarter, wherein we have discussed credit card as well, and there was a payment product, there is -- maybe credit card would be subset of it, and there is additional INR3,000-odd crores, which is there. So would it be fair to assume that this INR3,000 crores is easy EMI or maybe pay-later kind of a product which is sitting in that pool?

So that is part of the consumer durables that is added there right now.

Thank you. The next question is from the line of Suresh Ganapathy from Macquarie.

Srini, Just couple of questions. One is on these -- we understand, obviously, the staff expenses having gone up because of the ESOP issue, but even other expenses have gone up so very sharply Q-o-Q. I mean, how much of this is related to, say, technology and if that indeed is going to be decreased? Do you see a gradual rise every quarter as you spend more on technology? Just to understand what could be the impact of that in other expenses this quarter? And the second question is, can you share the GMV of the SmartBuy platform? If you can, that would be great. And also please comment on the relationship with Paytm. What are you trying to achieve through the Paytm network?

Okay. Two things that you asked about on the expenses. The expenses growth, Suresh, you will see that as retail is powering ahead, which it has already started to power ahead, the cost of acquisition, sales, promotion, marketing, the retail is far intensive on the front end cost, you will see that the cost is leading. And the income comes from an accrual over time. So that’s something that will happen. And then if you look at historically what happened when the retail came down, you’ll see that the costs came down too, right? And the retail is now getting up. And so this will go up. So that is one answer to that. If you see that the leading indicators of some of the retail activity is going up, the cost will go up, that’s one. And the approvals will come, and we will time it in a way that how much of growth we want at the kind of what price and what kind of cost to income, we, as a management, we need to decide and take. But that’s at least – we’re making the right kind of investments for future growth. That’s one. In terms of your technology cost, yes, technology cost, that has increased, but not a big deal of an increase. It will be normal increase that we have seen, 15%, 16% is growing sequential growth of 4%. So that’s the kind of a rate, 4%, 5%. It’ll have 1 percentage or so more. Again, timing more than anything. But yes, the tech cost of the investments that we have done – that we are doing and will do will come over time, that we migrate. And the benefits of that implementation should be felt more in the cost per acquisition going down because we’ll have less manual in the front-end sales and we’ll have less straight-through – less of manual intervention rather more straight-through. So offsets will come from that, right? So once we have more of this, we should get less of tech and other cost as we go. The second part of that is in the Paytm. See, the Paytm, we talked about a few things that we will do, right? One is from an acceptance point of view. How do we get some of those terminals? How are all those kind of merchants that today expect Paytm to accept our costs? That’s through QR approach, right? That means we embed our bank credit card QR into the Paytm QR so that we broad-base the merchant acquiring number. So that is one of the partnership activity we are pursuing. The other thing is that we are a bank, so we wanted to offer the banking relationship to those merchants. So that is another aspect of what we want to leverage the relationship on that. The third one is how do we get the cards – acquiring – card acquiring through this channel, both merchant acquiring as well as the customers on the Paytm platform? How do we get credit cards on the platform, both the data – if it’s our customer in that arena, we have a lot of details to make it available instantly through either preapproved models or other prequalified models and so on. But if it is not, we’ll have data from our partner, which will be analyzed. Jimmy talked about the lab and other things that we are going through, wherein the new-to-bank, there are several sources of data that will be part of that analytics. So again, same kind of an instant approach to score and make that card available on that platform. So these are the two, three things that we are thinking about in terms of what this partnership could mean to us, but this is more than cards. It’s acquiring, it is issuing, it is a relationship of banking. So it’s across all of these things. And this is – think about it as one of the channels, like, if you have the branch and the sales channels that we are having, this is one other channel through which multi products are made available to our customers or potential customers.

Thank you. The next question is from the line of Adarsh Parasrampuria from CLSA.

Srini and team, question was on the provisioning that we continue to create some contingencies. I just wanted to understand, within that pool of contingencies, is all the restructuring provisions included there? Like, can you continue to increase that buffer? You provided INR1,200 crores in this quarter. Could you guide to what's the -- how are you looking at this number? Is there a threshold where the bank wants to reach and will feel comfortable with that number? Because otherwise, the provisioning was slightly low if I go back.

Okay. See, the way we will -- we evaluate provisions every quarter in terms of how we should look at it and how we should evaluate that and take forward, yes, when we look at the total provisions is what you need to look at the INR9,000 crores that we have, the INR7,700 crores or so of contingent and the INR1,400-odd crores of floating provisions together taken. Yes, restructuring is considered when we look at various provisioning approach that we do. And what is our target? There's no particular target. We will look at it, we will evaluate it. To the extent that it makes the balance sheet more resilient, if there were to be another way, if there were to be another shot, the balance sheet needs to be much more resilient, and that's how we will evaluate. Historically, we've been conservative, and our stance has not changed from that sense.

Got it. And second question is, Rahul, to you. If you can break up that loan book piece that is now being disclosed separately for rural and commercial into the top 3, 4 pockets, then that will help just to put it in context of the growth opportunity in each of them.

So, look, I’m not familiar as to what breakup do we go and give out. But let me just basically talk to you about what are the opportunities. I have a rural book, in which, if you look at bureau data, between June ‘20 and June ‘21, we increased our market share, whereas if you take a look at the private sector banks as a whole, there was a decline in market share. We feel very comfortable in terms of expanding in that space because we had a NPA percentage decline as per bureau data as well as the absolute NPA amount, whereas if you take the ecosystem, other partners in our category, they had a 2 percentage increase in NPA percentage. So we are going to grow. Now the question is, what is the opportunity space in this to grow? And that opportunity space is INR15,00000 crore. So we are a small proportion of that. If you split that between secured and unsecured lending, we would be about 10% to 11% of the secured lending, but there is a lot of room to go out and do that, especially given government policies transitioning agri to a sustainable rural ecosystem focus rather than just focus on crop – three crop, which basically is water guzzling, so to say, wheat, rice and sugarcane. Now on the MSME piece, come back and think about the SME, retail and the SME wholesale, that entire space is roughly about – again, INR20,00000 crores or so. And that is the number that you’re looking at. And so when we say that, look, wherever we are going to be at the end of the financial year, that amount, we are going to basically do incremental disbursement in the following year. That looks very possible because there are about 1.5 crores MSMEs who today borrow, of the overall spectrum of 6.5 crore MSME customers. My share of those 1.5 crores is fractional, very small. I mean, I wouldn’t say that it is something that does not leave for a runway for growth for me. And of course, if you look at today, the mid-corporate segment, it’s vibrant, it’s healthy, it is growing. We just have to go out and meet customers. And let me put it this way, the brand pull and the offering is so, so strong that one of my team members was telling me day before yesterday that we just have to show up at certain places and customers just basically are ready to tie up and welcome us into their banking relationship. So that is sort of where we are. And that’s how I gave you the current growth numbers, the growth outlook, which should give you a sense, given the opportunity space that there isn’t a ceiling on the growth in the near-term or medium-term in this space.

Thank you. The next question is from the line of Saurabh from J.P. Morgan.

Srini, could you just quantify first the growth and the net slippage number for this quarter? The second was, if you could also quantify what is your technology spend to revenue and where would you want it to go to over the next 2 years? And thirdly, was a question on growth. So Rahul and Arvind have spoken about doubling their books over next 2, 3 years. So I just want to, number one, confirm if that indeed is the outlook? And secondly, what's your view on the corporate loan growth?

Okay. One is in terms of -- let's take the technology spend. You wanted the technology spend that we have forecast. It's not something that we've put out in terms of what we -- not just accounts we spend, we don't put an outlook or a forecast -- forward-looking statements at all on that. All we can tell you is that we are making investments across everywhere. I'll give you an indication of the branches, 400 branches imminently to open. We're adding people. So far, we've added 12,500 people in the last 12 months. We'll continue to add people. We are making investments in technology. So it is a continuous process. If anything, we will make more investments in technology, and thereby, get the best out of the digital offerings that we can do. But as part of this call, there's several kind of instances we alluded to and described in terms of the digitization and in terms of the digital delivery, both from an acquiring point of view and the servicing point of view. We want to be in the forefront of that to gets restructured as much as we can, right? So that's something. But certainly, the thought process are good in terms of looking for it. But unfortunately, it's not one item that I can give an outlook or a forecast, right? Because we don't do that. I cannot do that.

Srini, can you quantify the current number? What will be your current percentage to revenue or percentage of cost, how much will that be?

That's how it's delivered between -- given period is 2.7% to 2.8% of revenue, right? That's how you can think about it, and that's where we are. Or in other words, if you think about it, 7.5% or 8% of expenses. If you think about, that's the kind of a technology costs.

Okay. got it. Slippage and the growth?

Slippage I've given you 45 basis points or annualized at 1.8% or INR5,300 crores, that's the slippage. And...

The next slippage also, Srini, if you have?

Wholesale growth outlook. Yes, okay, I can talk a minute on the wholesale growth outlook. It all depends on two things. One is the infrastructure spending from the government, which seems to be already started because there are good signs – early signs that we are seeing. Once that starts, we expect the corporates to get behind that. So that could be maybe one quarter away before we see the light of that into the corporate book and thereby be participating in that. We are, I think, about 30% to – 30% to 1/3 of our book is from lending, which – and we are one of the largest providers of infrastructure funding in the country. So we will be participating in that, and we hope to get that with us. That’s one. The second aspect of the wholesale growth is also the capacity augmentation by the corporate. At this moment, the capacity utilization has not come back to the robust level of mid-70s, and that’s something to watch out, 70%, 75% capacity utilization. Last time around, when we touched that range, there was no capacity augmentation. But this time around, we do expect that once it gets there, there will be corporate demand coming in from there. But again, we do see that the corporates have much more flexibility now because times have changed. They’re able to access the capital markets directly. So that is also one other factor to keep in mind. And yes, we do expect – we need to be patient for another quarter or so, and you can see where that is developing.

Thank you. The next question is from the line of Abhishek Khanna from Jefferies.

This is Prakhar. Srini, my question is on the restructuring and the provisioning. Just wanted to take some perspective from you and Jimmy. So in the Round 1, you had restructured over INR7,800-odd crores of loans, of which INR5,467 crores were actually the personal loan in that category. And against that, you have made some overall provisions of INR930 crores. Now when I'm looking at the flow of these restructured loans, of the total loans, about INR1,680 crores have slipped, majority of them being in personal loans. If I'm just looking at the personal loan bucket, about 25% have slipped into NPAs and you have written off a majority, maybe 70%-plus of it already. I'm assuming this is like a 6, 7-month phase period that we have gone through since the restructuring was completed. So my question is, one, are we seeing almost 40%, 50% of the personal loans likely to slip into NPAs out of Round 1? And should we be applying a similar percentage to the INR14,000 crores you restructured now? And in that context, how do you look at your contingent plus floating provision levels?

One thing I'll comment on the contingent and floating and Jimmy will talk about the quality, which I believe he talked, but he will recap it again. One, we believe that our contingent and floating provisions have done broadly, not just directed on the restructuring, but more broadly, to make the balance sheet more resilient for any shocks, right? So that's something to keep in mind. So it's not just the contingent provision for restructuring. It is broadly against the balance sheet and to be more resilient and not have a start and have fits and starts and fits and starts so that we are able to go through, when the growth cycle is there, we are able to go through the growth without the fits and starts. That's what the contingent provision is supposed to cushion ourselves. Jimmy, in terms of the analysis that you had, you had already talked about it, but please.

Yes. Sure, Srini. I’ll just go through it once again. So we do have our restructured portfolio, and we continue to monitor this, and it is under heightened monitoring at all points in time. To answer the question you asked directly should – if I got your question correctly, should we expect 50% of that to slip into NPA? The answer is no. We are evaluating this, as I mentioned, on several different criteria. I think Mahrukh had also asked a question on that. I mentioned about one of the criteria, even being on the moratorium customers and their behavior pre- or post-moratorium as well as their behavior, pre- and post- the restructuring. Based on the analysis that we have done so far at this point in time, we don’t think the impact would be more than 10 to 20 basis points on our NPAs at any given point in time.

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.

Okay. Thank you, Rutuja for hosting and conducting this. We thank all the participants for participating and engaging with us today. We appreciate your time. And anything further you need, we are available and Ajit Shetty from our Investor Relations would be available to talk at any time. Thank you. Bye-bye.

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