Ladies and gentlemen, good day and welcome to HDFC Bank Limited Q4 FY22 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 a warm welcome to all the participants. Let's start by the COVID current state business dimension as we start. The saga as it permits, we can say is hopefully behind us, at least for now. We cannot forget the deeds of the people who dedicated their lives in the service of the bank during the year and thousands of others who single-mindedly were in the service of the customer through all this. Same time last year, we were in unimaginable crisis. Most if not all of the restrictions are behind. Thanks to our team and, equally important, thanks to you all for being with us through this to get us here. Let's start with providing the context on the environment and policies during the quarter which are manifesting signs of speedy recovery. We'll jump over this basic details of GST collections, PMI, et cetera, et cetera, that shows growth of ₹10 crores. Around the mid-part of the current quarter -- the recent quarter, geopolitical tensions raised across the world, which have given raise to global uncertainties. This has impacted the global economies profoundly, which is evident from the surge in crude oil price, major commodity prices and then further global supply chain disruptions from recent period. CPI inflation is on the rising trend due to higher put crude oil and LPG prices. The RBI kept its monetary stance unchanged. However, it is expected that this accommodative stance shall be fixed to a neutral stance in the next MPC. We also saw the introduction of SBS and the RBI reverting to a pre-pandemic policy corridor of 50 basis points, with a lower bound SBF and the upper bound MSF. We are confident that the policy measures are supportive and at this time provides us…

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

Yes, so I had 2 questions. My first question is on margins. During the second quarter also, in the earnings call we had outlined that there could be margin improvements with a lag once retail loans pick up, and that could happen over -- 3 to 4 quarters maybe. And now in the fourth quarter, margins have declined further. So is the margin expansion on-track? How do we view margins from here on? That's my first question. And also connected to margin, if you could just give a rough indication of the commercial banking yield ex-agriculture?

Okay. Let's take these questions. Margins, see, I think I mentioned it a few minutes ago when I was presenting. Our asset mix has shifted significantly from unsecured to higher rated segments. And it has come -- all through the pandemic, you saw that the retail was going down in the rate of growth and it was picking up in wholesale and in commercial and rural. If you go back to pre-pandemic, go back to 3 years, 2019, right, if you look at it, the Basel disclosures that we do -- I'm doing that Basel because we show that assets by type -- wholesale was 45%, retail was close to 55%. Now things have reversed, right. Now, retail is 45% and wholesale is 55%. In fact, in this quarter, the rate of growth in wholesale was even more, 10% sequential -- 11% sequential growth in wholesale in this quarter, right. And retail also grew very well at 5%, 5.1%. That's an annualized rate of little more than 20.5% on retail. So retail has grown well, but except that the wholesale has grown much faster, right. So that's one from a mix point of view. What does this mix do, right? What has happened is that the higher rated segments tend to be low yielding. Basically, what has happened is we've traded off NIM to operating costs and credit costs to sustain -- to deliver sustained profitability on our -- that what has happened in this scenario. You will appreciate that NII or NIM is a function of risk and you've got to connect it with the credit too. And we have been -- we've chose to be risk-off all through the pandemic and it is not something that, that's why we told you last time that it could take 3,…

Sure. So henceforth the focus will continue to be on in minus credit cost, is that the right way to look at it? Because if the macro remains volatile, then the risk-off could continue longer, correct?

Yes, in terms of how long -- see, the retail growth if you see, is at 5%, 5.1% growth is what we had sequentially, right? On a year-on-year basis if we see retail, it is about 15 odd percent. So it is lagging. That means the quarter growth is more than the year-on-year growth, because it was on a sliding scale. More paydowns were happening than bookings in the past several quarters around the COVID time period. And now the sequential is leading, right? You're seeing that it is beginning to go on an up curve. So the year-on-year will come and catch up soon, right? And that is one on retail. You need that to power. And when the retail powers, I do want to mention to you, it does not come free. It comes with enormous cost. You can see the cost to income -- the full-year cost to income is at about 37% or so. The quarter cost to income is 38%, 38.3% to be more precise, right? It comes with cost. And when the retail powers to 6% and 7% and so on, you will see that the cost to income also goes up. And again, on the credit, and the credit cost I'm talking about, that also goes up because retail comes with a higher credit cost as compared to wholesale. So at the end of the day, it is about getting the returns that you need. That is why I tried to focus on, I gave you the numbers on the return on asset, on the return on equity, which is what gives the shareholders value or RFPs, returns above the cost of capital, right, if you think about what the cost of capital is, whether there -- it is either any of these mix, whatever happens on the individual lines, is top line growing, is customer franchise growing, showing you how the retail, wholesale and the commercial is growing; 5% on retail, 10% on commercial, 11% on wholesale, right? That is the top line customer franchise growth that you're seeing. And what is that translating into the bottom line? Good return, 18%, 20% PBT or PAT with a 2% ROA, 17% ROE. So that's what at the top line and the bottom line from a franchise growth point of view gives you. In between that is the optimization tools that we deploy to get that.

Sir, any rough range you can give on yield on commercial banking loan?

Yield on commercial banking will be approximately about 8% or so. And you asked about what the agri could be, 9%-10% assortment offers the agri yield.

Sir, now moving onto the next question, what is the accounting policy associated with RSUs in terms of upfront cost and amortization?

Okay. See, first accounting policy on RSUs, first, let us take what is RSU, right, so that you will see whether it is any different from ESOPs or not from that cost point of view. RSU, you can think about it as similar to ESOPs, except that it is at a deep discount. That's one thing, that's the exercise price is one. However, the way to understand this is, the number of RSUs will result in no different impact had the bank chosen to grant ESOPs, no different. What does that mean? For instance, if the bank was to grant 3 ESOPs, what's the fair value of 500 each, right? It will grant 1 RSU, right? That's all. That means fair value of 500, you grant 3, and employee gets 1,500. Now when you grant RSU, you just grant 1 RSU. And what does it do? So that the total compensation is remaining at that 1,500 or so and it avoids the shareholder dilution to some extent, right, it mitigates the shareholder dilution. And what is it that we are trying to do with RSU? One, it is intended to be extended to mid and junior management or deeper in the organization for the staff, up to 10 levels below the Managing Director, that's one thing. And this will be part of the overall compensation structure. Whatever is the compensation structure, this is part of that overall structure. 75% of the RSUs are intended for personnel in level 6 to 10 below the CEO, right, 75% is intended for them. And what is it going to do? It is going to lower the attrition significantly, is going to bring up enormous amount of productivity at those levels. So this is something that we thought about it and we wanted to…

The next question is from the line of Rahul Jain from Goldman Sachs.

So 2 or 3 questions, Srini. First of all on the liquidity coverage ratio, dropped quite a bit in this quarter, seems like you utilize the excess liquidity that you're sitting on. So how long, I mean, how much more scope is there to rationalize this? And if I were to tie it in with the deposit mobilization that you also intend to do in light of the merger, what would be the strategy out there? So that is the first question from me.

Okay. Let's get on to that one. The first thing is as it relates to the -- yes, we've continuously optimized on the liquidity available, as you know. And the context for this quarter if you see, we had loans growing -- in this quarter, loans growing ₹1,08,000 crores. In 1 quarter, we had that kind of a growth, right, ₹1,08,000 crores. And in this quarter, the deposits also grew ₹1,13,000 crores. So we did consume. In instance, the deposit growth from an amount point of view, exceeds the loan from how we are deployed. But from an LCR value point of view, it will come down because there are certain things that you'll have to have the liquidity assumptions, the run down assumptions and so on and so forth. So we use that. And how much more we can optimize this, I don't think we can optimize this any further, right, we have come to 112, probably -- see, we run it with a floor of about 110, right, that's the kind of a floor we think that we'll run. At 110, we will get on to doing certain things in terms of mobilizing more. We love to run it between 110 to 115 optimized. But I do expect, I think in some other context we did talk about the branch vintage model and the deposit that it should generate. Think about the branches that we have opened. The 0-to-3-year vintage branches, call it provides the value of X, and that branch -- those branches migrate to 3 to 5 and 5 to 10 years, give you a value, which is 3x and 5x from a branch productivity point of view. The branch productivity that we have as a bank is ₹250 crores per branch. That's the productivity that…

Got it. Srini, just one more question on retail. Various segments in retail has shown now continued momentum. So fair to assume that all the credit facilities have normalized and this can be sustained over the next few quarters, next few years?

You mean the retail lending -- retail loans?

Lending growth, yes, yes, yes. Like credit cards, PL, et cetera picked up, yes.

Yes, we believe so. So even in this quarter, if you look at it, the retail grew by about 5% or so, sequentially, right, that's the kind of quote. Now supply chain issues were impacting the vehicle type of businesses. That grew lower than the average. And the payments business, I alluded to the card spending growing at about 28% or so, but the payment business grew -- the cards business on the loan side is about 14% or so and sequentially slightly under 5%, rounds to 5% -- under 5%. So slightly under the average. Now if you look at the total outside of the vehicle segment and the cards, the retail currently is powering at about the sequential momentum of about 6% or so. And we do believe that the vehicle should come back, once the supply constraints abate which is somewhat for a good part it is slowly coming back. The rate of growth this quarter we had on vehicles was better than the last quarter, is coming back. And same with payments too, right. Last quarter, we had a spend -- credit card spend of 24% and a loan growth of 9%. This quarter credit card spend is growing at 28% and the loan growth of 14%. This is all year-on-year numbers. So you're seeing the momentum also picking up there. So that's something I want to bring your attention to. Over a longer period of time, that's what you should expect that there is an enormous opportunity, demand far outstripping supply and the credit penetration in the country is low and we are there, capturing that.

Okay. Can I just squeeze in one small question on the fee income as well. It picked up this quarter nicely, 12% year-over-year. Can you just break it down between payments and the other usual fee income that you on, how the momentum has been there in those segments?

Okay, got it. Yes. See, the 12% is partly aided by the payments doing a little better also. But still, payments is not at the business as usual type of growth that we have seen in the past, right, it is not there. But from a mix point of view, if you see what the mix is, the total 12%, the payment is 10%, 11% or so now. It was very single -- small single digit last quarter. And excluding the payments, we are at about 14%, 15% or so on the fees. And if you think about the mix that you asked about, the retail -- the assets and the liabilities on the retail, let’s call it about say 40%, you should look at an annual rather than quarter because quarter-to-quarter there will be variation. Some point in time you will see some third-party products, customer preference. And some point in time, you will see some festival spend and other things happening. So quarter-to-quarter variations, but if you look at the mix of various fees over a year kind of a time period, retail assets and liabilities, about 40% of the total, about 20:20 each. And if you look at the third-party product, you can call it close to a quarter of the total fees and card, call it about under 1/3, call it, 30% or so, right? And the wholesale is anywhere between 5% to 7%. So that's the kind of how the fees set up in terms of what are the contributing factors, what are the products that contribute into the fee mix.

Got it. So the payment grew 10% to 11% Y-o-Y in this quarter, just wanted to clarify that.

That is correct, yes. Still it is -- it is lagging what used to.

The next question is from the line of Aditya Jain from Citigroup.

On the branch slide which you have provided some time back and you reiterated recently, just thoughts on the link between the historical deposit connectivity and branch linkage as it’s in the chart. Could it be different now versus the historical experience, given that the earliest branches would have been the largest cities. Frequent ones would have gone into smaller location for growth. So the multiplier effect that you are seeing, could it be lowered, and your sense on how much could that in fact be with historical experience?

Okay. Aditya, if I understand your question, historical location of the branches versus the current location of the branches, give the same kind of a branch maturity model, branch productivity model, that is the question I assume, that's what you're asking. And the answer is, yes, given the current model, this is how we test and this is how we establish what is the best-in-class. And we drive the branches to those best-in-class, and that's part of the current model that we have.

Okay. Understood. And then secondly, on that view on depositor behavior based on experience in past trade cycles. So, one, as term deposit rates rise, will you expect some idle amount in saving deposits to start getting deployed in term deposit and would that be a material amount? And second --

Aditya, if I ask your pardon, as you are talking, there is lot of background noise that was coming, if you can patiently repeat, I'll appreciate.

Okay. Let me try again, sorry. So I was asking, depositor behavior in a rising rate cycle. So existing saving deposits and term deposits, would you expect the move of saving deposits to term deposit and how -- what sort of quantum that would be, is there a way to look at that? And secondly, your experience on how often or what proportion of term deposit investors would do an early break of their term deposit to get into higher rate deposits as rates rise? I don't know if it is easy to answer this, but just behaviorally from your observation if you could give us a sense.

Okay, a couple of questions you had. One is, what will happen to the mix of products between savings and time deposits as the rate starts to go up. So if you think about our regional mix of CASA ratio, currently at 48%. 48% is high, last quarter it was 46%, right. But if you look at overall longer period of time, the CASA ratio, anywhere between 40%-42%, that is the kind of rate at which we will see that. We are not shy of that, and I will tell you this. The time deposit penetration in our customer base is at just high teens. We would expect the time deposit penetration in our customer base to be in the 80s and 90s, because the part of the customers asset allocation you would expect, every customer would be having some amount in some liquid funds, some in savings, some in time deposit and so on so forth. So you would expect that the customer would have. And our penetration, we have a long way to go, to get the penetration up. So that's one thing. And we are not shy of that and that's part of the narrative our RMs have, conversations in the relationship management with the customer, is to engage to deepen that relationship, and if it is time deposit deepening, so be it. Over a longer period, if you go back 5 years ago -- 3 years ago, 5 years ago, 40%-42%, that's the kind of range that we had. Recent times it has gone up. But even now, a rational customer will go to time deposit if it's required. If he wants 50 basis points more, the customer will go to bank deposit. And as the rate starts to go up, it may go and we are okay with that, because that's how you price the assets too. You price the assets also as the rates go up, time deposit goes up, asset price also will be repriced up.

Got it. So there could be some more movement towards time deposit. And the second part of my question, if you could touch upon that behavior of time depositors, would they -- you know fact, sort of breaking current deposit in a higher rate term deposits?

It depends on the customer at what rate. It depends customer to customer. It depends there is -- I'm sure there is a breakeven analysis that everybody does in terms of when you break a time deposit and you pay the breakage fee. And because there is a penalty for prepayment, and when you do and pay the prepayment penalty, and we book it into the new rate, what is the yield pick-up that you get and for what tenure. So there is a math to be done, and I'm sure the customers do. But we don't see that as a rampant issue that this is not something that bothers. And there is always somebody who may have booked it at very low rate who wants to come and change it.

The next question is from the line of Manish Shukla from Axis Capital.

Srini, could you give some color about the wholesale growth during the quarter in terms of PSU versus private mixed or short-term versus long-term lending, the incremental lending done during the March quarter?

Okay. See, it is all of the above. For example, if you see there are -- the sectors if you see which are the sectors, telecom sectors are there where the loan -- there was a loan demand in the quarter. PSUs were there, where it is. There were some manufacturing we saw picking-up -- but not a big thing -- and some NBFCs also came in. So these -- I would say the 3, 4 things that came in to give. From a utilization, see what has happened is, we had a tremendous amount of prepayments happening at the beginning of the financial year, right. Corporates were prepaying. The prepayment in this financial year was to the order of about call it ₹60,000 crore, ₹65,000 crores or so prepayment happened, paydowns happened. Then this quarter we did not see as much of prepayment or paydowns happening. This quarter was something different. We didn't see it, right? So the 2 things contributed. Some new demand, they gave you some sectors that there was some credit demand. And the other thing is that the prepayment didn't happen as it was seen in the prior quarter. So these 2 contributed to higher wholesale and we are pretty okay because we are very interested in a relationship. We don't measure the profitability only on the loans, which again by the way the cost to income on the corporate side is in single-digit. The cost to income is single-digit, the expected credit loss is virtually nothing, right. So highly profitable or equally profitable as any other product that you would imagine, and so we're quite comfortable with that. As apart from that, it provides the kind of entry to deepen our relationship on the retail side through the salary relationships and the products that we do on the retail side with them.

Sure. In terms of overall wholesale mix, how would the PSU mix today versus let's say a year or 2 back, share of PSU in overall wholesale?

We do not put the PSU out. We have not separately called PSU, but if you look at the sectoral deployment, I think we publish that periodically. You will see that somewhere. It is so far not published. It will be published later today, I think, the sectoral deployment.

Okay. Sure. Last question, in terms of your overall loan book, how much is floating rate and, within that, how much is linked to repo?

Floating rate and fixed rate is, call it -- okay, 46% was fixed and 54% is floating.

Okay. And repo linked would be?

Repo linked is about -- you have to look at repo along with the [T-Bill], repo and T-Bill about 38% or so.

No, the only reason I'm asking repo separately is because repo is dependent on regulatory action, it will be market-driven, which is why I'm trying -- more interested in repo separately.

Yes. I think it was about -- 29%, 30% was the repo, about 10% was T-Bill.

The next question is from the line of Sagar Doshi, [ph] an individual investor.

Srini, my question is regarding the treasury income. So as I could see, quarter-on-quarter and year-on-year, treasury segment income has reduced. I understand that it might be due to the bond lease et cetera. But could you give any view on that, how it would go going ahead?

Okay. See on the -- you are talking about the trading income, right?

Right.

So that alluded to -- okay, last year same quarter was about ₹655 crores. Last quarter was little more than ₹1,000 crores. And this quarter was close to nothing or actually negative ₹40 crores. So that's what you're talking about, I guess.

Yes.

Right. Those were, as I alluded to several minutes ago, those were more opportunistic gains that we harvested from whatever was possible, the timing and so on whatever we could, we harvested. And in this quarter when the rates are rising, we haven't harvested and the opportunities to harvest is also less, right, in a raising scenario -- rate scenario. So going forward, how you should think about it, we should think about it that it is minimalistic. The second thing also you would need to think about it is, is the -- when we have excess liquidity, too much of the excess liquidity -- we do have always excess liquidity. When we have too much of that, we deploy it in such a way that we don't mind harvesting gains on those excess, right, so that the drag, that can come from securities that are lower kind of a coupon is offset in some of other form. But we are at an LCR of 112%, call it to around between 100 to 115 kind of percent a range. So you should not expect the treasury trading income to sustain at any big levels for the time being.

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

Srini and team, I had a couple of questions. One is from [Technical Difficulty]

Sorry to interrupt you, Mr. Adarsh, but your voice is breaking. Can you please check?

Yes, let me try again. So from a -- next 12 to 18 months perspective, how do you prepare the balance sheet for the -- you are already ramping up on branches and deposit mobilization. What's the implication both from how the balance sheet liability side would look? Would you gloat it up a little bit as you get closer to the merger? And from your OpEx perspective, because you ramp up distribution a little more front-ended, does that cause a drag on P&L for the next 12 to 18 months till the merger?

Okay. A couple of good points you are raising, but it's very important we address this, so you can think about it. It is not about preparing or merger or anything. But what is our normal strategy, right, that's a good thing to keep the moat off. We do want to ramp the branches. We do want to bring in new liability relationships. We do want to get the branch productivity from a deposit gathering point of view to be the best-in-class, right. And as I mentioned, to your point the branches are best-in-class and we are trying to deepen even further from a productivity point of view on that. So we will keep going on that, that's one. So what -- irrespective of what it is we do, and that is part of what's the branch growth that we have embarked on, right. There was a modest 350 odd branches in FY '21. This year, we have taken it to more than 700, and we have a plan to sustain significant amount of branch growth. 150 branches are in the pipeline, to open anytime soon. And so we are going to do that to mobilize the relationship. The reason for the depositor, we have equally from an asset appetite point of view, if you look at the last 5 years, right, we have grown assets CAGR, call it, 20 plus percent. That's what historically. I cannot give you an outlook of how asset growth -- what is asset growth we are doing. But I can only point you to the past effect. If you look at any kind of a 2 blocks of 5 year period or something, think about the 2017 to 2022 or 2016 to 2021 or 2011 to 2016, whatever kind of a time period if…

And Srini, can you refer to the point that you mentioned that cost income you are spending that will go up in preparation for some of this, like what's the kind of spike you would expect in the near-term?

The cost to income whether it will go -- cost to income, Adarsh, as I told you will go up as we have more retail activity coming -- retail lending activity coming, retail liability activity is coming in, you will see the cost to income go up. But this is we -- normally, as we said, we don't give an outlook or a projection of what we'll do. But cost to income is something that we have consistently said over a period of time that is, well, it will go up now. We do think in the medium term, 3 years, 5 years term, it will come down back to mid-30s. And that is purely driven through scale and driven through various digital initiatives that we are running, right. So while it will go up, it will come back down due to the scale operating on that.

One more thing, just to follow-up on the margin queries that were there earlier. Just from the perspective that given that you did have a mix change over the last couple of years where retail activity was a little slower through COVID, we did have a material drop in margins from the peak. Given the things are opening up and everything and given that you will get to normal mix, normal activity, is it safe to say that margins now stabilize to start going up? Because in a normal circumstance, one would think that the corporate growth now shouldn't like materially keep exceeding retail and SME growth for very long periods of time.

See, as I said, I don't want to project the future. We don't give an outlook of what the growth can be or how it will be. I can tell you what we drive to. Our strategic drivers, retail is back on the drive. That means we are back to the pre-COVID level in terms of the credit policy, opening up the business across product lines. Other than the supply chain issues that we had in vehicles, other than that, we had on the cards with the customer behavior, right. Spends are happening. Customer behavior will have to catch up. Other than that, we are in that. So in this quarter, we did see higher demand on wholesale and we entertain that because it provides good returns.

The next question is from the line of Saurabh from JP Morgan.

My question is on credit card. So one is, when do you expect your market share to come back your earlier 30% levels? It's been 7 months since the ban has gone, so what's your outlook on that? And second is, how much of your revolve rates now versus pre-pandemic? Thank you.

You're talking about the market share, means you're talking about --

Spend in market share.

Okay. So I do want to tell you one thing that we don't -- as a target, we don't have a market share because market share doesn't mean anything. Particularly spend market share doesn't do anything from a profitability and return point of view. So that's one thing. Because there are -- if you are looking at it, I would urge you to look at the retail funds versus commercial card spend. If you look at it, bifurcate and look at retail/commercial. We like retail. We are okay with commercial, but it's retail. Why? The propensity for the customer to do the other things, both from a relationship value, as well as from a card product value itself, is much more on retail, so that's where we'll focus, right. So chasing market share on the spend is not a target that we have. So I would not be able to tell you how much it will go. It's a function of optimization of the P&L, optimization of the customer relationship on the product that we are able to do with the customer. And the second part of your question was in terms of the revolve. We are still at about 70% to 80% of the pre-COVID levels on revolve rate. Last quarter, I mentioned that. Last quarter to this quarter, marginal improvement, 1 percentage point improvement in revolve. So that's also part what you're seeing in the card balances going from year-on-year growth to 9% to 14%. It's going in the right direction, but then that has to do the magic of paying interest rate as that starts to go up. It's a question of customer behavior and it will have follow through the lag. The spend happens and we are seeing the spend happening. The build-up on the ANR must happen. You are seeing that the buildup on ANR is slowly coming. The third aspect of this is the buildup of ANR happening, the customer needs to start to revolve. I can see that it is turning the corner 1 percentage point better, but some way to go.

Got it, Srini. And just one final question. When is PayZapp launching?

PayZapp launch is probably a quarter away, I would say. We have several clients on that from a close user group to making to selective customers and then getting to broad base, maybe a quarter away I would say.

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. Thank you all for joining us today. We appreciate your time and we had a good conversation. If anything more that you have, we will -- you can connect with Ajit Shetty in the Investor Relations. We shall be happy to engage with you. Thank you.

Thank you. On behalf of HDFC Bank Limited, that concludes this call.