ICICI Bank Limited (IBN) Q3 2014 Earnings Report, Transcript and Summary

N. S. Kannan - Executive Director, Member of Share Transfer & Shareholders/Investors Grievance Committee, Member of Committee of Executive Directors, Chairman of ICICI Securities Primary Dealership Limited, Chairman of ICICI Prudential Asset Management Company Limited, Chairman of ICICI Eurasia Limited Liability Company, Chairman of ICICI Prudential Life Insurance Company Limited, Chairman of ICICI Bank UK Plc and Chairman of ICICI Lombard General Insurance Company Limited Rakesh Jha - Chief Financial Officer and Senior General Manager

Mahrukh Adajania - Standard Chartered PLC, Research Division Jatin Mamtani - Barclays Capital, Research Division Suruchi Jain - Morningstar Inc., Research Division Manish Ostwal - K.R. Choksey Shares & Securities Private Ltd., Research Division Amit Premchandani Manish J. Karwa - Deutsche Bank AG, Research Division Abhishek Kothari Anand Vasudevan Rajeev Varma - BofA Merrill Lynch, Research Division Saikiran Pulavarthi - Espirito Santo Investment Bank, Research Division Bajrang Bafna Alpesh Mehta - Motilal Oswal Securities Limited, Research Division Surendra Chetty Puneet Maheshwari Adarsh Parasrampuria - Prabhudas Lilladher Pvt Ltd., Research Division

Ladies and gentlemen, good day, and welcome to the ICICI Bank's Q3 and FY '14 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference to Mr. N.S. Kannan, executive Director of ICICI Bank. Thank you, and over to you, sir.

Thank you. Good evening. Welcome to the conference call on the financial results of ICICI Bank for the third quarter of the current financial year. In my remarks this evening, I will cover the following 5 areas: First, the macroeconomic and monetary environment; followed by an explanation of the change in deferred tax accounting on Special Reserve and its impact on our financial reporting; then we'll talk about our performance during the quarter, including our performance on the 5Cs strategy, then we will move on to our consolidated results; and finally, the outlook for the full financial year 2014. Let me start with the first part on the macroeconomic and monetary environment during the third quarter. During Q3, economic activity continued to remain subdued with industrial growth as measured by Index of Industrial Production, or IIP, recorded a year-on-year decline of 1.6% in October and 2.1% in November 2013. While going forward, improvement in agriculture sector growth is expected, overall economic recovery is likely to remain slow. While wholesale inflation increased from 5.9% in July 2013 to 7.5% year-on-year in November, it declined to 6.2% year-on-year in December, driven by a reduction in food inflation. Similar trends were seen in the Consumer Price Index, or CPI. However, CPI inflation continued to remain high at about 10% in December 2013. In view of this, after raising the repo rates by 25 basis points in October, the RBI further increased the repo rate by another 25 basis points in January policy to 8%. After exceptional volatility in Q2, financial markets were relatively stable during the third quarter. As a result of the improvement in the current account deficit and mobilization of about USD 34 billion under the swap facilities introduced by RBI, the rupee stabilized during the quarter and in fact appreciated by 1.4% from INR 62.78 per U.S. dollar on September 30 to INR 61.90 per U.S. dollar on December 31, 2013. In view of the same, the RBI concluded the normalization of the policy rate structure and reduce the gap between the repo and the MSF rate to 1%, with the MSF rate being reduced by 75 basis points and the repo rate being increased by 25 basis points during October. As a result, short-term interest rates on market instruments like commercial papers and certificate of deposits eased by about 50 to 100 basis points during the quarter as compared to the peak rates seen in the previous quarter. The yields on 10-year government securities remained volatile through the quarter due to high inflation and increase in repo rate. The yields increased from 8.76% at end September 2013 to a high of 9.1% at November 22, 2013, before ending at 8.83% at end December 2013. During the quarter, there was a net inflow of FII funds into the equity market of about USD 6.6 billion compared to net outflows of USD 144 million in the second quarter. The benchmark BSE Sensex rose by 9.2% to 21,171 at end December 2013 from 19,380 at end September 2013. However, during January, market indicators seen some volatility, on account of global developments as well as domestic policy actions. Now coming to the trends in the banking sector, non-food credit growth moderated to about 15% year-on-year by end December 2013 from about 18% at end September 2013, reflecting continued weakness in economic activity and the normalization of non-bank funding channels. Growth in total deposits increased to about 16% at end December compared to a growth of about 14% at end September 2013, driven by an increase in term deposit growth to about 17% at end December, reflecting mobilization of FCNR deposits by banks. Demand deposits increased by about 8% on a year-on-year basis at the end December. Trends in asset quality for the banking sector continued to remain challenging with the outstanding corporate debt restructuring referrals for the system currently standing at about INR 720 billion. There were several regulatory developments in recent months. Apart from the changes in deferred tax accounting for special reserves, which I will discuss subsequently, RBI issued draft guidelines and discussion papers on capital surcharges for domestically systemic important banks and countercyclical capital buffers; a draft framework for early recognition of financial distress in borrower companies and revitalizing distressed assets; the report of the Committee on Comprehensive Financial Services for Small Business and Low Income Households; and final guidelines, applicable from April 1, 2014, on additional provisioning and capital requirements for exposure to companies with unhedged foreign currency exposures. The impact of these developments on the banking sector's business and profitability would have to be assessed over a period of time. I now move to the explanation of the change in tax accounting. Section 36(1)(viii) of the Income-tax Act permits reduction from the taxable profits of amounts transferred to Special Reserve. The deduction is up to 20% of the profits derived from long-term lending business for tenures exceeding 5 years. The bank has been making transfers to Special Reserve annually. No deferred tax liability was created on this reserve, since only a drawdown of the reserves could reverse the tax benefit and these reserves are not intended to be drawn down at all. The Special Reserve was, however, considered net of tax for capital adequacy competition as per RBI requirements. Banks are now required to create a deferred tax liability on a prudent basis for amounts transferred to Special Reserve, as per RBI guidelines issued on December 20, 2013. The deferred tax liability up to financial year 2013 has been permitted to be adjusted from the reserves, whilst from financial year 2014 onwards, the same is to be charged to the P&L account. The bank has accordingly netted off INR 14.19 billion, representing deferred tax liability for Special Reserve up to financial year 2013 from general reserves. We have provided for deferred tax liability of INR 2.15 billion for the 9-month period ended December 31, 2013, in the Q3 2014 financials. A quarterly charge would be made in the fourth quarter as well. There is no adverse impact on capital adequacy for the bank as Special Reserve was already being considered net of tax while computing the Tier 1 capital. There is also no impact on current tax, that is, the cash tax to be paid by the bank will continue to get the benefit of Section 36(1)(viii). However, the increase in deferred tax will result in an increase of about 2% in the effective tax rate in the P&L. Let me now move to our performance during the quarter, including our progress on the 5Cs strategy. First, with respect to credit growth. The total advances of the bank increased by 16% on a year-on-year basis from INR 2.87 trillion at December 31, 2012, to INR 3.33 trillion at December 31, 2013. The growth in the domestic loan portfolio was 13.3% on a year-on-year basis. Growth in the retail portfolio continued to be strong and improved to 22.3% on a year-on-year basis at December 31, 2013, compared to 19.6% at September 30, 2013. Growth in the retail portfolio continues to be driven by secured products, with the outstanding mortgage and auto loan portfolios growing by 23% and 35%, respectively on a year-on-year basis at December 31, 2013. Commercial business loans declined by 17% on a year-on-year basis, reflecting both a slowdown in this segment as well as rundown of the bought out portfolio in this segment. The unsecured credit card and personal portfolio at INR 62.25 billion at December 31, 2013, continued to remain a small portion, about 1.9%, of the overall loan book, though the growth rate is high due to the low base. The bank continues to adopt a calibrated approach to growth in the corporate and SME segments, in view of the weak operating environment. Growth in the domestic corporate portfolio moderated to 6.9% on a year-on-year basis at December 31, 2013, compared to 11% year-on-year growth at September 30, 2013. The SME portfolio declined by 5.5% on a year-on-year basis. Net advances of the overseas branches increased by 10.3% on a year-on-year basis in U.S. dollar terms, mainly due to lending against FCNR deposits, which is classified under overseas branches during the quarter of about USD 1 billion. The net advances of the overseas branches increased by 23.9% on a year-on-year basis in rupee terms due to movement in the exchange rate. On a sequential basis, the growth was 9.7% in dollar terms and 8.3% in rupee terms. Moving on now to the second C on CASA deposits. Reflecting our strong retail franchise, we saw an addition of INR 21.9 billion to our savings deposits in the third quarter. Current account deposits also increased by INR 10.68 billion during the third quarter. During the quarter, the bank also raised an aggregate of about USD 2 billion in FCNR deposits, which reflected in-the-term deposit mobilization for the bank. Even after including the FCNR deposits, I am happy to report that we maintained our period-end CASA ratio at 43.3% as of December 31, 2013, similar to the level at September. The average CASA ratio for the bank was at 39.1% in Q3 compared to 40.3% in the previous quarter. Now moving on to the third C on costs. For the third quarter, operating expenses, including DMA expenses, were higher by 15.7% on a year-on-year basis. The increase in operating expenses was primarily due to an increase in non-employee expenses due to increase in the bank's physical network and higher retail lending volumes. Employee expenses were higher on a sequential basis as there was the benefit of lower valuation of retiral benefits in Q2 of 2014. The bank's cost-to-income ratio was 37% in the third quarter of fiscal 2014. Let me now move on to the fourth C on credit quality. During the third quarter, the bank saw gross NPA additions of INR 12.30 billion, primarily driven by slippages in the SME and midsized corporate loans. Deletions in the third quarter were INR 3.56 billion. The bank also wrote off INR 5.04 billion of NPAs. The net NPA ratio as a result was 81 basis points at December 31, 2013, compared to 73 basis points at September 30, 2013. During the third quarter, we restructured INR 20.46 billion of loans. After taking into account deletions and the required specific provisioning, the net restructured loans for the bank increased to INR 86.02 billion at December 31, 2013, compared to INR 68.26 billion at September 30, 2013. The CDR pipeline continues to remain elevated, and the bank currently has loans aggregating about INR 30 billion referred to CDR. Provisions for the third quarter were at INR 6.95 billion as compared to INR 3.69 billion in Q3 of 2013 and INR 6.25 billion in Q2 of 2014. As a result, credit costs as a percentage of average advances was at 85 basis points on an annualized basis for the third quarter. And for the 9-month period ended December 31, 2013, the credit cost as a percentage of average advances was at 83 basis points on an annualized basis. The provisioning coverage ratio on nonperforming loans was 70% at December 31, 2013. Now to the fifth C on customer centricity. The bank continues to focus on investing enhancing customer service capability and leveraging on its increased branch network to cater to the customer base. During the quarter, we added 81 branches and 117 ATMs to our network. With this, we have a branch network of 3,588 branches and 11,215 ATMs as of December 31, 2013. The bank also continues to strengthen its technology channels for increasing customer convenience. In one such initiative, the bank has facilitated opening up savings accounts through its Tab banking platform. The bank's Facebook page continues to be appreciated by customers with about 2.7 million fans. ICICI Bank continues is to have the largest fan base on Facebook among the Indian banks. Having talked about the progress on 5Cs, let me move on to the key financial performance highlights for the quarter. The net interest income increased by 21.6% year-on-year from INR 34.99 billion in Q3 of 2013 to INR 42.55 billion in the third quarter of current fiscal. The net interest margin increased from 3.07% in Q3 of 2013 and 3.31% in the previous quarter to 3.32% in the third quarter. The domestic net interest margin was marginally higher at 3.67% compared to 3.65% in the previous quarter. International margins were at 1.7% in the third quarter compared to 1.31% in the Q3 of the previous year and 1.8% in the second quarter of this financial year. The sequential decrease in international margins by 10 basis points was primarily on account of issue expenses related to the bond issuance of $750 million we made in the third quarter. Total non-interest income increased by 26.5% from INR 22.15 billion in Q3 of 2013 to INR 28.01 billion in Q3 of 2014. Looking at the components of this non-interest income, the fee income grew by 12.8% from INR 17.71 billion in Q3 of 2013 to INR 19.97 billion in Q3 of 2014, driven by healthy growth in retail banking fees. The bank's retail fees, including remittances, contribute to about 55% to 60% of the overall fees. Other income was INR 3.57 billion in Q3 of this fiscal compared to INR 1.93 billion in Q3 of 2013 and INR 2.51 billion in Q2 of 2014. The increase was primarily due to higher dividend from the subsidiaries. During the quarter, ICICI Life Insurance company, paid a special dividend to the shareholders based on an assessment of capital requirements and high solvency levels. Accordingly, the bank received an additional dividend of about INR 1.2 billion from ICICI Life compared to the previous quarter. ICICI Life has also announced a special dividend out of its Q3 of 2014 profits, which would accrue to the bank in Q4 of current fiscal. During the third quarter, treasury recorded a profit of INR 4.47 billion compared to a profit of INR 2.51 billion in Q3 of 2013 and a loss of INR 0.79 billion in Q2 of 2014. The improvement in the treasury income, primarily, on account of reversal of mark-to-market losses on the fixed income portfolio as well as realized gains and mark-to-market reversals on the equity portfolio. I have already spoken about the trends in operating expenses and provisions while speaking about our 5Cs strategy. As a result of these performance, the bank's stand-alone profit before tax increased by 21.4% from INR 30.84 billion in Q3 of 2013 to INR 37.44 billion in Q3 of 2014. The tax charge for the bank has increased on account of the deferred tax accounting impact that I had mentioned earlier. As a result, the bank's stand-alone profit after tax increased by 12.5% from INR 22.5 billion in Q3 of 2013 to INR 25.32 billion in the third quarter of current fiscal. This translates into an annualized return on average assets of 1.75% for Q3 of 2014, compared to 1.7% for the previous quarter. For the 9 months ended December 31, 2013, the profit after tax increased by 18.9% to INR 71.58 billion from INR 60.21 billion for the 9 months ended December 31, 2012. Excluding the impact of DTL on Special Reserve, the growth in profit after tax would have been higher at about 22% for both Q3 of 2014 and 9 month on a year-on-year basis. The bank's capital adequacy, as per RBI's guidelines on Basel III norms, continues to remain strong at 16.81% overall capital adequacy ratio and 11.53% Tier 1 ratio as of December 31, 2013. In line with the applicable guidelines, the Basel III capital ratios reported by the bank for the quarter ended December 31, 2013, do not include the profits for the 9-month period ended December 31, 2013. Including the profits for the 9-month period, the capital adequacy ratio for the bank as per Basel III norms would have been 17.94% and the Tier 1 ratio would have been 12.66%. I now move on to the consolidated results. The profit after tax for the life insurance company in Q3 of 2014 was INR 4.28 billion compared to INR 3.97 billion in Q3 of 2013. The new business annualized premium for ICICI Life was INR 8.68 billion in Q3 2014 compared to INR 9.04 billion in Q3 of 2013. The retail weighted received premium for ICICI Life increased by 6.7% on a year-on-year basis during April to December 2013. While the IRDA numbers for the industry are not available, we understand that the company has retained its market leadership among the private players. Following the implementation of regulatory changes with respect to traditional products, ICICI Life has seen a change in its product mix with unit linked products forming about 68% of the new business during the quarter, compared to about 60% in the previous year. As a result of this change in business mix as well as regulatory changes in the charge structure for products, the new business margins for the company were lower at 10.9% in Q3 of 2014. We will continue to assess how the business evolves and take steps to optimize margins and profits going forward. The profit after tax for the general insurance company in Q3 of 2014 was INR 0.76 billion as compared to INR 0.95 billion in Q3 of 2013 and INR 1.56 billion in the second quarter. The profits were lower on a sequential basis, primarily on account of higher claims and provisions during the quarter. The company maintained its leadership position in the private sector with overall market share of 9.6% during April to November 2013. Let me now move on to the performance of our overseas banking subsidiaries. As per IFRS financials, ICICI Bank Canada's profit after tax for Q3 2014 was CAD 10 million as compared to CAD 8.3 million for Q3 of 2013. Total assets for ICICI Bank Canada were CAD 5.28 billion at December 31, 2013, compared to CAD 5.27 billion at September 30, 2013. Loans and advances were CAD 4.7 billion at December 31, 2013. The capital adequacy ratio for ICICI Bank Canada was healthy at 31.6% at December 31, 2013, compared to 31.2% at September 30, 2013. ICICI Bank U.K.'s total assets were USD 4.37 billion at December 31, 2013, compared to USD 4.21 billion at September 30. Total loans increased from USD 2.61 billion at September 30, 2013 to USD 2.94 billion at December 31, 2013, primarily on account of lending against FCNR (B) deposits. ICICI Bank U.K. is also focusing on selective lending opportunities to highly rated entities, including trade and transaction banking products and short-term loans to multinational corporations and subsidiaries of Indian companies in U.K. and Europe. The profit after tax for ICICI Bank U.K. for Q3 of 2014 was USD 8.5 million compared to USD 5.4 million in Q3 of 2013. The capital adequacy ratio was 24.4% at December 31, 2013, compared to 26.1% at September 30, 2013. Let me know talk about the overall consolidated profits. The consolidated profits for Q3 of 2014 increased by 8.6% to INR 28.72 billion compared to INR 26.45 billion in Q3 of 2013. The annualized consolidated average -- the return on average equity based on the level of profits for Q3 2014 was 15%. Our outlook for the full year fiscal 2014 continues to be broadly in line with what we have indicated on our call following the Q2 earnings. We continue to see be strong growth -- strong core operating trends: continued momentum in retail lending, healthy deposit growth and the deposit mix, improved margins and fee income growth relative to the previous year and healthy cost ratios. While the pace of restructuring of loans is expected to continue to increase in the coming quarter, these healthy core operating trends give us the ability to absorb the higher level of provisioning arising out of the credit cycle. We do not expect the full year provisioning as a percentage of average loans to exceed 90 to 100 basis points, as we mentioned earlier. Our growth continues to be supported by capital position that is well above the current regulatory norms. With these opening comments, my team and I will be happy to take your questions. Thank you.

[Operator Instructions] We have the first question from line of Mahrukh Adajania from Standard chartered.

Just had a couple of questions. Firstly, on the restructuring pipeline, is it on CDR? And if you see the last few years, then there has been a huge rush on CDR referrals in March. So is this INR 30 billion likely to grow as we move ahead in the quarter? So that's my first question.

On -- so the pipeline that we talked about, the INR 30 billion is largely -- case is already referred to CDR. So you are right, it's mostly CDR. But the rush towards March, I am not sure, it's more a function of the state of the economy and how things are working. It's very difficult to project, any kind of seasonality on that.

Okay. And in terms of these unhedged exposures, those guidelines. So have you been able to estimate any cost impact? Or is it still too early?

No. Actually, it's quite onerous to do that computations. I guess it will take us some time to kind of put that in place. And that will be true for all the banks. It is effective from April 1, so there is some time that banks have to kind of put all the data requirements and the computations in place. So I guess over the next few weeks, we'll have a better sense of how those numbers would look.

And all these draft guidelines are forming repositories and having a very quick resolution to stressed loans. Do you think that is going -- that could likely put pressure on the capital ratios even of large private banks? Because currently as a segment, private banks appear to be very well-capitalized. Do you think that's likely to put any pressure on the capital ratio of the private bank, including yours, in the next 1 year or so?

This is the way it goes. Guidelines, have been in the draft guidelines there. If you kind of -- ensure that banks, look at early resolution of cases. So I'm not sure that you'll have a direct impact on the capital itself of banks. So yes, initially there may be operational things of -- in the current state of economy there will be maybe a number of cases which are 60 days plus overdue. And you'll have to form that -- even join lending forum and also all things. So banks have given some feedback to RBI. Our expectation is that these guidelines will come out pretty soon. And they will, in the long run, be beneficial for the system. They may not have any immediate direct capital effect. Of course, there are other guidelines which are the -- which will have medium-term, definitely, capital implications for both private sector and PSU banks. But those other guidelines are more in medium term, over the next, I would say maybe 2 to 3 years.

Okay. And the other question I wanted to ask is that in terms of slippages, any lumpy accounts on the corporate sector, or...?

It depends on the definition of lumpy. But -- in generally, when we -- in additions as Kannan mentioned, were on the corporate SME side and they would be reasonably -- these may be large-sized NPLs around that.

Midsized cases.

Sorry?

Midsized cases.

We have the next question from the line of Jatin Mamtani from Barclays.

I just had a couple of questions on the restructured loans this quarter. Just wanted to understand the chunkiness of this. So would you be able to share what would be the concentration or the share of the, let's say, the 3 largest loans or the 4 largest loans and within the INR 2,046 crores, and maybe if you could talk about the sectors they belong to?

As Kannan mentioned, these are midsized corporates that have been --- got into restructuring. So while we don't give any specific concentration on these exposures, but from your understanding perspective, these are midsized corporates which have got into restructuring. And most of them are cases that have got referred to CDR.

Understand, understand. And in the pipeline of INR 3,000 crores, is it a similar composition, or are there any chunky accounts there?

So these are not -- separately talked about which cases and all. But you would have seen from the public announcement that would have happened by these companies, that there are a couple of cases which have got referred, like -- which have been slightly on the higher side in terms of exposure. That's why the pipeline is at INR 30 billion compared to the lower pipeline we had earlier.

[Operator Instructions] We'll take the next question from the line of Suruchi Jain from Morningstar.

I had 2 questions. One is on the fee income growth. It seems that you're doing something differently to get a really robust fee income growth. Could you tell us more about how that's going so robustly?

The fee income growth of 13% has been largely coming from a robust growth on the retail assets and retail liability side. Several decisions we have taken in the past, including Forex and other transactions at the retail liability, branches is helping. Of course, now retail assets, we have seen a growth over the last 3, 4 quarters. On the corporate side, I would say that the transaction banking side of corporate -- that's the commercial banking revenue streams are growing at around the same average growth level of fee income for the bank as a whole. And if you look at -- there's so many type of activities that has been a decline in the fee income growth. That is the general color on the fee income. So as we said earlier, we expect this kind of trend to continue in the coming months as well. And I would broadly say that, given the kind of projects on the corporate lending credit environment and our approach to this segment, the fee income growth has got much more granularized today. That is the kind of general color I can give you on the fee income.

Okay. And just my second question on overall year NIM guidance and tax guidance, given the changes in taxation as well as the FCNR deposits coming into play. Has your guidance -- what's your relative guidance?

Yes, we had talked about our own expectations in terms of the net interest margin expansion, which was 3.11% for the last year. We said for this financial year, we will expand it by 20 basis points. That pretty much continues, so that is the number we would be looking at for this fiscal as a whole. On the tax issue, as I mentioned earlier, this change in accounting on a prudent basis does not impact our tax outgo in terms of payment of tax to the government. So that is not the issue at all. The issue is that we have to, on a prudent basis, provide for the DTL as if the tax benefit available to us is a temporary benefit. So to that extent, what it will do is that about 2% additional impact it will have in the P&L accounting in terms of our effective tax rate. That is something we are budgeting first going forward. That -- so our effective tax rate from a P&L perspective, it can look at more like a 30% number going forward, compared to a lower number we would have seen in the past.

We have the next question from the line of Manish Ostwal from K.R. Choksey. Manish Ostwal - K.R. Choksey Shares & Securities Private Ltd., Research Division: My question, one is provision side. You have reported INR 695 crores of provision. So could you break this provision into a general provision and keep revision and the provision on account of restructured assets?

So the breakup that we gave every quarter is basically the provision on standard assets. That is, general provision that we've made is about INR 1 billion. And the balance is against NPLs and restructured loans. Manish Ostwal - K.R. Choksey Shares & Securities Private Ltd., Research Division: Okay. And secondly, this -- can the deal portfolio during the quarter, have you any buyout which shows a higher growth and it is also original organic growth entirely?

It is organic growth actually. Most of the buyouts that we do incrementally for priority sectors, anyway now happens more in the form of investments. So that shows up in the investment book in the form of PTC. The growth that you're seeing is [indiscernible]. Manish Ostwal - K.R. Choksey Shares & Securities Private Ltd., Research Division: Lastly, the fee income breakup , could you just break this into corporate retail. What probably the portion of corporate fee income within retail fee income?

The retail fees -- overall is slightly above 55% of total fee income. The balance is corporate.

We have the next question from the line of Amit Premchandani from UTI Mutual Fund.

If you look at the fresh stressed addition trajectory of ICICI, it has moved from 12 to 15 billion every quarter if you include slippage plus restructuring data every quarter. The last quarter, it was -- it didn't move to 20 billion. Now it is 32 billion. And you're saying that most of it is come from mid-corporates. So the large corporates is still not started, or they are restructuring themselves. So just wanted to have your view on what could be your guidance on this trajectory moving fresh stressed addition of slippage plus a restructuring costs?

As we have been saying that, it is indeed quite difficult to have any specific guidance on the quantum of restructuring and NPLs in a particular period. What we have been giving is, in terms of the cases that have got referred to CDR, which gives a broadlier -- quite a fair indicator of the expectations of restructuring in the coming quarters. Of course, that pipeline can increase if some other cases do come up in the interim. But that has been a reasonably good estimate of the restructuring in the coming quarter. In terms of the overall numbers, as we have mentioned that the pipeline for Q4 is about INR 13 billion. So that will mean that we will have a higher rate of addition to NPL and restructure in the Q4. But overall, in terms of the credit cost, we indeed mentioned during the previous quarter that we are seeing that the addition to restructuring in particular, and somewhat in addition to NPLs have been running higher than what we estimated at the beginning of the year. So that's why we had increased our guidance on the credit cost itself. So I would suggest that if you go by the credit cost estimate, we have talked about that we don't expect it to cross about 90 to 100 basis points. We are comfortable with that estimate that we have given out. Yes, in the interim in the next 2, 3 quarters, I think it is reasonable to expect that the addition to restructured loans will relatively be on the higher side, compared to the previous periods.

That previous period, then it must be Q1 and Q2 of this quarter and Q3 of this -- this year, sorry, or the last financial year?

This year itself, you have seen that the numbers have gone up. We did about have INR 10 billion in Q2 and about INR 20 billion in Q3. And Q4 will be -- INR 30 billion is the pipeline that we have.

So that should be the run rate for next 2, 3 quarters, that is what you're trying to...

As I've said, it's very difficult for us to have a run rate on that number because we don't have, for example, today, a list of cases which will definitely [indiscernible] It's not there. So from what we see today, we are giving you the estimate of that INR 30 billion which I referred to CDR. Going forward, as I said, compared to a normalized run rate, will credit cost be higher on the corporate side in the next few quarters? That will be the case. And for us, it is on an overall basis. It continues to get offset by the fact that on the retail side, we are seeing the credit quality to be extremely good. So overall, the credit cost numbers should still be within overall comfort levels in terms of the contribution to the return on assets.

And it will also, more -- more in line with your assessment of what is the credit quality in the large corporate space, because until now, they are not yet hit the CDR. So how comfortable are you with the large corporate portfolio that you have?

In terms of large corporate, again, if you look at it, how would you define the large corporate, indeed, in terms of the cases that have got referred to CDR, which you would be knowing by name, indeed there are some of the cases which are large corporate or large corporates or large borrower groups which are there.

It's also reflected on the INR 30 billion also.

Yes. So those -- some of the larger cases are definitely there. In a few of them, we have somewhat lesser exposure. In some of them, we have a higher exposure as well. So it's not that the larger corporates have kind of completely been away from the restructuring in itself. In general, for some of the larger borrower groups that we normally talk about, we don't want to go name by name, but indeed, in many of them, our level of comfort would be a relatively more than what maybe your comfort could be. That is possible. But as I said, that in the restructuring pipeline and actually what we have done in general, there would be some large cases as well.

And given the fact this [indiscernible] addition will go up, any guidance on the coverage ratio, because you have guidance of 1,900 basis points on credit cost, but coverage ratio has already hit 70%. I know that RBI has a requirement of 70% as of now, but internally, what is your target that you will not let it go beyond or below this?

I think what does happen on the coverage ratio, which you will be seeing across all banks, whether public or private sector banks, is that the incremental NPA provisions requirement is indeed closer to maybe 15%, 20% or, at most, 25%, if a case gets added to NPL. So by definition, when there are additions to NPLs, the coverage ratio does come off. And with some lag, that will, again, catch up. So it's not that we have any specific comfort level on a particular ratio. For us, the ratio has declined over the last few quarters, like for most of the banks. A part of the decline also has been because we have been writing off loans on a continuous basis over the last 3 or 4 quarters, about INR 4 billion to INR 5 billion, which itself takes away close to 1 percentage point of coverage ratio in every quarter. So it's not that we have any minimum number in our mind or any threshold which is there, so we will make provisions as we believe are appropriate. So it's not that we also stick to the very minimum which is required. So we do indeed do somewhat more than that, and that's why we are still at 70% despite the additions that we have seen this year.

And just on the FCNR front, maybe I missed it. How much money have you raised and how much money you will lent against it?

We raised about $2 billion of FCNR (B) deposits and we have lent from our overseas branches just over $1 billion against these deposits.

So just to understand from my perspective, how does the NPA benefit of the FCNR loan changed? Because if you lend it and you are using your capitals for the ROE of that capital we use is going down because of the low-spread business, so how do you look at it raising FCNR without giving -- without lending and raising FCNR after lending?

So lending -- so we'll just take it as the last question because there are other people...

Sure, sure.

So in terms of lending, which banks have done, it is against the FD itself. So it's actually, in that sense, completely risk-free. So there is -- so in that sense, whatever margin you make on the loan, it actually has an extremely high ROE. There's no real capital which is required because it's a loan against the deposit. So the way banks have looked at it is that if you look at overall cost for raising the FCNR(B) deposit and the swap cost which RBI was offering at 3.5%, and with no SLR and CRR, it was coming out to be lower than the term -- domestic term deposit cost. But in addition, the benefit of PSL was there. So in terms of economics, it was pretty clear that it makes sense.

We have our next question from the line of Manish Karwa from Deutsche Bank.

I just wanted to check, your Tier 1 capital has actually increased in this quarter compared to the previous quarter. What is the reason for that?

In terms of -- as -- in the Tier 1 capital, we reduced the deferred tax asset from the overall Tier 1 capital to -- from the total capital to reach to the Tier 1 capital. So this quarter, the net deferred tax asset has come down for us by about INR 11 billion or INR 12 billion, and that is because we have created the deferred tax liability on the Special Reserve. So to that extent, we have got a benefit on our Tier 1 capital for quarter.

So do you -- so you mean to say the deferred tax liability is set off against deferred tax asset?

Yes, the net deferred tax asset [indiscernible] Tier 1 -- from the total capital to reach the Tier 1 capital.

Okay. But as you said, then this should not make any difference to your Tier 1, right, because incrementally, if you create deferred tax liabilities, that will impact your Tier 1 capital?

It's a function of whether you have deferred tax assets in the books, so the deferred tax -- because we had a lot of deferred tax assets, so that is why we got the benefit of creation of this deferred tax liability...

We do not have any adverse impact on the capital adequacy ratio because the reduction was always a net of tax is what we mentioned.

Okay. So incrementally, now you do not have any deferred tax assets?

We still have some deferred tax assets which gets netted off from total capital.

Okay. So incrementally then, every quarter now, you will be creating some deferred tax liability to the tune of like 2% of your tax rate...

Correct.

That gets set off?

Yes.

And just on the DTL [ph] thing that you will have a DTL [ph] mainly on mortgage and infrastructure loan, right?

Yes.

So as the book of your mortgages continue to grow, the portion of the DTL [ph] can be higher as we move forward?

Meaning, if you look at overall for the last few years, the numbers have kind of stabilized, not getting more of proportion is going up substantially. We also do a lot more of working capital compared to the longer-term lending that we were doing earlier. So I don't think that those numbers will really increase from where we are.

Right, and just for my understanding, let's assume 2 years down the line, you have a reasonably larger deferred tax liability book. Can -- how can you use it for your capital? Can you use it actually?

No.

So that just becomes a provisioning line item or a current liability item for you?

Yes, it becomes a provision item. So of course, over time, because this is something which has just come up in the previous quarter. So as Kannan mentioned, as per statute, actually if you don't utilize the Special Reserve, there is -- it is not taxable at all. But given this ruling, I guess, banks will again kind of ask for some maybe changes in the tax rule itself, which may actually allow Special Reserve to be utilized after a long period of time or something of that sort. So we'll have to just evaluate what to do on this. But otherwise, there is no cash flow impact which is there. It's only a notional deferred tax impact which is there.

Okay. And lastly, how much commissions do you pay on a quarter on your retail loans as of now?

We don't disclose that...

Some rough indication? No, is that the thing that is increasing your other expenses on a sequential basis sharply?

It would also have contributed to some increase there. But typically, in the third quarter, we do have some higher expenses on, especially on advertisements and sales promotion. You also may have festive season, some expenses are indeed there. So the sourcing cost would have gone up, but that would not be the only the major driver.

[Operator Instructions] We have the next question from the line of Abhishek Kothari from Networth Stock Broking.

So just wanted to know what's your overall NPL from the restructured portfolio?

It's about -- if you look at all the loans that we have restructured over the last few years, the slippage from that has been about 10% or so.

10%. And sir, I missed your opening remark regarding NBP coming down. Could you just explain that?

What he said was that the new business margins for the third quarter were lower at 10.9% because of 2 reasons: One, the new product highlights related to the non-linked products came into effect from October 1 and lower -- similar to the earlier guidelines reviewed on ULIP, have reduced the charges and so on and so forth, which reduces the margins on those products. And second, because it is a transition phase to the -- these new product structures, the proportions of ULIPs which are, as in the current framework of regulation, in general, lower margin than the non-linked product. The proportion of ULIPs in the business have increased in this quarter, so it was about 60% last quarter. It's about 68% this quarter. Due to these 2 factors, the margins come down to just below 11% from where they were a quarter ago. But we'll wait to see how this evolves based on -- as regulations, the companies get more time to adjust to the regulations, what is the kind of final stable product mix that we arrive at. And that will kind of determine what the long-term margin trend will be.

We have the next question from the line of Anand Vasudevan from Franklin Templeton.

We now have a clear visibility on the regulatory capital requirements over the next few years. So how do you assess your capital adequacy in this framework? So what I'd like to understand is what is your threshold and the comfort level for Tier 1 below which you'll want to raise cash equity based on the new glide path?

So indeed, there are now a set of draft and final guidelines which are in place. So most of those guidelines, we can kind of compute what the impact is. Some of them is still like migration to advanced approaches for credit, market and operational risk. I think that, still, the full clarity in terms of what the impact would be there, we'll work out over the next 12 or 18 months. In terms of the minimum Tier 1, and we also have been kind of discussing what that level should be. So it clearly seems that in the 6 or 7 years back, the minimum Tier 1 was more like 7.5% or 8%, below which, if you went, you would raise capital. It does look like, right now, that number should be closer to 10% over the next 2 years. That is the threshold that will become what the market expects. So we have kind of not yet, because given the level where we are, we are not close to those levels yet. So we are still kind of finalizing in our mind as to what level should trigger us to look at raising capital. But it could be in the region of 9.5%, 10% depending on how investors look at this. So given our current capital level, clearly, over the next couple of years, we would be comfortable with our capital adequacy, Tier 1 ratio in specific. Beyond that also, depending on how things go, how the migration path is and what are the expectations on capital, whether we can do some hybrid beyond that. So we'll have to see how it works and whether we have any...

Monetize.

Monetization of the subsidiaries or...

Repatriation.

Or repatriation from overseas subsidiary. I guess 2 years, for sure. Beyond that, we will see how things will pan out.

Okay. My second question is on asset quality. So you've given your guidance for the year. But do you anticipate any additional negative impact on portfolio quality looking into FY '15 from the further clamp down on government expenditure in the immediate quarter?

Anand, as you're saying in response to an earlier question, that given the sharp slowdown that the overall economy has seen along with other challenges, clearly, on the corporate side, that impact has been showing over the last few quarters. And while we believe that on a macro front, maybe things have kind of bottomed out and we should see slow recovery from here, but just the impact on the corporate SME portfolio, there is some lag which is there. So over the next 2, 3 quarters, there would be -- there would still be some incremental pain which is there for banks.

We'll take the next question from the line Rajeev Varma from Bank of America.

Just one question. I want to know on the repatriation of capital, any color on that? Because you've somewhere mentioned, you were focusing on that.

Yes, the discussion for the regulators continue. We do believe that some kind of -- some amount of dividend from the overseas subsidiaries and some repatriation can happen over a period of time. And we continue to believe that capital adequacy ratios, which I mentioned in the opening remarks have been much, much higher than the regulatory requirements in those geographies. So our approach would be a calibrated growth and the continued discussions with the regulators for both capital rationalization, as well as -- or getting some dividend approval. The only thing is that since there is regulatory approvals involved, we won't be able to exactly determine the timing of the amount. But all efforts will be there from our side. That is very much on as we speak.

And just one other thing, in terms of the loan mix, you've highlighted that you're -- most of your slippages have been coming from the SME and mid-corporate. Do you have some -- SME's about 4.5%, as you've disclosed. Do you have some idea how much would be the mid-corporate constitute from loan mix?

Loan mix, we have not broken it out into mid and large corporates. The domestic corporates would be about, I think, 27% of our -- sorry, 31% of our...

Right, of your total loans.

Yes. That is some -- we have not broken it down. And we have, in the past, talked about what is our total infrastructure [ph] exposure, which is about 12% or so. So those are the only 2 numbers we have [indiscernible].

Your next question is from the line of Saikiran Pulavarthi from Espirito Santo.

Just a quick comment on the cost. So I just wanted to understand actually, the cost growth have been much lower than the income growth for quite some time, almost like 7 to 8 quarters. Do you think this trend to continue or -- going forward, or is there any scope for further improvements here?

Our endeavor would be to keep the cost-to-income ratio below 40%. That is the kind of medium-term goal there we would work towards. So having met all the steps we have taken, including the technology initiatives that are really meant towards achieving the operating productivities. So that will continue. So you could take it as below 30% or something, which we want to target -- below 40% is what we want to target as a cost-to-income ratio.

I understand the cost-to-income, but if I look at the absolute basis of costs, your employee costs have been trending much smaller there too when you were growing your retail book, which is a little bit counterintuitive. We just want to understand your thoughts there.

In terms of -- if you look at the general environment in terms of the job growth in the economy or the kind of overall economic growth, they are not -- the cost -- the wage or other cost pressures associated with the 2007-type of an environment is not there today. So to that extent, we are able to plan, we are able to determine the salary increases and so on. So to that extent, given the overall economic conditions, the cost -- the pressures are also that much muted. So that is also reflecting somewhere on the overall growth of the employee expenses in our book.

And as we have mentioned in the previous quarter, that if you look at the previous quarter and maybe 9 months in aggregate, as well, there would be some benefit that we'd have gotten this year, especially when compared to last year because the interest rates have gone up and the provisions on retirements would be lower this year compared to the last year. So that would have given some benefit on the employee expenses as well.

Okay. And last question for my side. If you look at your vintages on the SME book or the retail book, how does it see versus the last cycle? Do you think individual vintages have peaked out, or what is the sense over there?

On which portfolio?

SME.

SME and retail.

Retail, actually the performance that we are seeing on -- based on the vintage growth is quite good, and we believe that there really is no worsening in trends that we have seen in any of those products. We did see some increase in delays in payments on the commercial vehicle portfolio, which we talked about in the last quarter. But even in terms of that portfolio, NPL additions have not really been significant. So retail portfolio, we are extremely comfortable. SME, we have been talking about that for the last 5 or 6 quarters, that the stress has continued on that portfolio. And we have seen addition to NPLs and restructure coming in from that portfolio. Incrementally, of course, we have been extremely cautious. We have seen -- you have seen that our portfolio, actually, has come off now -- actually declined in the most recent quarter. So hopefully now, it should pretty much on the SME portfolio, in terms of the stress, things should be kind of peaking out.

I think if you look at the growth numbers of -- relative growth numbers of each of these portfolios, that pretty much reflects our approach to this lending and our estimate of credit space in each of these portfolios. Just to illustrate, while we are very happy to, overall, grow the retail book and within that retail secured loans, we have brought down the growth of commercial vehicles by 17% on a year-on-year basis. If you look at the SME, again, 5.5% decline has been there on a year-on-year basis. As a result, SMEs just account for about 4.3% of our overall loan book. So our relative growth and the comfort that we have on passenger cars and mortgages reflect in the strong growth we have seen in retail secured book. Somewhat of a discomfort we have on the CV portfolio and also the demands of CV itself going down reflects our CV loan book growing by 15%. And SME, we have consistently with said that in the last few quarters, we have seen slippages, and as a result, we have brought down book systematically from the peak level of about 7.5% to 4.3% currently. So I would say that our actions are sort of an after reflection on the relative credit quality of these segments.

The next question is from the line of Bajrang Bafna from Sunidhi Securities.

We have seen a lot of CCI clearances over -- in the last 3 or 4 months. Could you provide some sense that -- have you seen some sort of ground level activity in terms of the corporates coming to you and asking for loans in the coming period, some sense on that?

I think the CCI clearances are mainly to do with the existing projects that are stuck or where there is some approval pending. So I think those will help in clearing out the issues in existing projects so that they can start -- get completed and start generating cash flows. But I think that they are not really creating new loan demand in that sense.

Okay. And one sense on the -- whatever guidance that you are giving on the restructuring side is purely based on CDR cases. Are we seeing some sort of stress on the bilateral side also in coming quarters?

Just in terms of guidance, what we have said is that currently, the pipeline of our -- pipeline of cases that have been referred to CDR is about INR 30 billion, and as you know, there could be additions to that. And I guess, they -- even last quarter, we would've had some bilaterals, but largely, the cases being restructured are cases referred to CDR.

But bilaterals had -- we're not seeing much of the pain as of now?

No, I'm saying it's -- the pain is there in the corporate sector. Now whether it's reflected in -- it depends on the number of lenders and the size of each lender. Whether it happens through a bilateral or a CDR is not that relevant.

You have the next question from the line of Alpesh Mehta from Motilal Oswal Securities.

First of all, what is the outstanding provisions on the restructured loans that we have done so far?

It's about slightly below INR 10 million.

And while reporting numbers, do we net off this INR 10 million while reporting, or is it gross of that amount?

It's net.

We write -- it is net to restructuring.

Net restructured outstanding is net of this.

So net of -- so our gross number would be roughly INR 96 billion or so?

Yes, that 's correct.

Secondly, in the retail portfolio, the others category has grown on a Y-on-Y basis, even on a sequential basis, quite sharply. Is it to do with the agri-related lending...

That's primarily the rural products.

Okay. And the -- for the housing loan portfolio, what is the lag proportion between the housing loans?

Top 20%, less than 20 [ph].

Okay. And lastly, in this quarter, are ICICI home finance book has also grown. So incrementally, are we booking loans indeed in the HFC or it's still happening through bank?

It's largely been happening through the bank. The HFC also does some business on [indiscernible].

We have the next question from the line of Surendra Chetty from UBS.

I would like to understand, are there any funding plans through USD bond issuance in the near future?

No. We just concluded 1 fund-raising in the third quarter. And we do look at it based on the client demand for foreign currency funds and the market conditions at -- that are prevailing at any point of time. We have no immediate plan as such.

Next question is from the line of from Puneet Maheshwari from ICRA Limited.

Sir, if you can share what is average cost of FCNR deposit mobilized under RBI's window?

I don't have that number separately, but that was a mandated rate which was there LIBOR plus. Plus 400 was the rate.

LIBOR plus 400 [indiscernible].

We'll take the next question from the line of Adarsh P from Prabhudas Lilladher.

My question was on the restructuring that we did 20 and the 30 [ph] pipeline, I think, I believe at least media reports indicated that there are a lot of construction companies probably from shipbuilding as well, and the nature of the business also require a lot of non-fund base exposure to these companies. So I just wanted to understand, when we give the pipeline or what we've the restructured, what is the associated risk [indiscernible] once these limits non-fund base limits crystalize? Does this get added to the restructured base? Can you kind of throw some light on that?

So if it gets converted into funded exposure, it gets crystallized and included in the restructure.

Any kind of quantification on -- it seems that a lot of these entities that have got reported or concluded have a lot of non-fund base limits outstanding. Would it be possible to kind of indicate as to versus the size, the INR 50 billion rupees, how much was non-fund base exposure still is there which could get crystalized over the next 1 to 2 years?

So see, whatever -- it is not expected to going to get crystallized over the next 1 to 2 years to the extent that there are sort of evolvements [ph] or invocations [indiscernible] up to the point of restructuring [indiscernible] those also get factored into the restructuring. Thereafter, as long as the company has a going concern and performs its obligation, the evolvements [ph] normally should not be there or should not be material.

And the idea of a CDR is also to put in structure so that the company functions so their performance guarantees are not invoked at all. That is where the CDR kind of mechanism is helpful in making sure that the company does the performance activity while financial aspects have been restructured. So that evolvement [ph] of performance guarantees does not take place at all. That is being the endeavor of the lenders.

And would it be like safe that you will have reasonably large exposures on the non-fund base to some of the 4 or 5 large restructuring that have been done or are in the pipeline?

But that has always been in there. So I mean, in the construction sector for instance, the restructuring that we would have done 2 years ago or 1.5 years ago, also would have had a large non-fund [indiscernible]. And that has not lead to any bloating off of the outstanding restricted assets if you look at the trend of restructured assets.

Participants, that was last question. I now hand the floor over back to Mr. N.S. Kannan for closing comments. Thank you, and over to you, sir.

Yes. thank you again, for joining this call. And any further questions, please contact us, Rakesh and I are available for that. Thank you, bye.

Thank you, sir. Ladies and gentlemen, on behalf Of ICICI Bank, that concludes this conference call. Thank you for joining us. You may now disconnect your lines. Thank you.