ICICI Bank Limited (IBN) Q2 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, good day and welcome to the ICICI Bank Q2 FY18 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Chanda Kochhar, Managing Director and CEO of ICICI Bank. Thank you, and over to you, ma'am.

Thank you and good evening to all of you. So our Board has approved the financial results for the quarter ended 30th September, 2017. We continue to make good progress on the strategic priorities that we had outlined in our 4 by 4 Agenda which basically covers priorities around our Portfolio Quality and around Enhancing Franchise. Coming specifically to this quarter, a few things that I would like to highlight is that first we continue to maintain our focused approach to growth. So our domestic loan portfolio grew by 12.8% year-on-year basis. Within that the retail portfolio grew by 18.6% year-on-year basis and the growth in retail portfolio was strong across all the retail products. During this Q2, 2018, we also saw an uptick in the domestic corporate loan growth. So if we exclude the net NPAs, restructured loans and loans and the drilldown list then the growth on the domestic corporate portfolio was actually 14%. Not just that about 90% of the disbursement from the domestic corporate portfolio in H1, 2018, were to corporate [ph] rated A minus and above. The net growth also came in the SME portfolio, which grew by about 6%. But as we saw the growth of these portfolios we also saw some reduction in some parts of our balance sheet. One is the net NPAs restructured loans and the loans in the drilldown list which declined by 30.9% year-on-year basis. And secondly the loan portfolio on overseas branches declined by 21.6% on year-on-year basis. So therefore the overall loan growth was 6.3% and the overall domestic loan growth was 12.8%. Coming to our funding profile, funding profile remains healthy because the savings account deposits increased 21.5% year-on-year and current account deposits increased 17.2% year-on-year. The outstanding CASA ratio on 30th September, 2017 was 49.5%. Talking about the profitability, the net interest margin was at 3.27%, which was at a similar level as the Q1 of 2018 and compared to Q2 of 2017 it was higher by 14 basis points. Talking about assets quality, the gross additions to NPA continue to decline and they were INR 46.74 billion in Q2 2018 compared to INR 49.76 billion in Q1 of 2018 and of course INR 80.29 billion in Q2 of the previous year. The net NPA declined during the quarter in absolute terms from INR 253.06 billion on 30th June to INR 241.30 billion on 30th September, 2017. The net NPA ratio also declined from 4.86% to 4.43%. There was also a sequential increase of 410 basis points in the provision cover ratio on the nonperforming loans to 59.3% including the cumulative technical and prudential write-offs, which has further strengthened our balance sheet. We are also happy to say that we made significant recoveries from nonperforming loans during this quarter. So the recoveries and upgrades from NPLs aggregated INR 10.29 billion in Q2 of 2018. The Bank’s capital position continues to be strong with Tier 1 capital adequacy ratio of 14.85% on 30th September, 2017 including the profits for H1 of 2018. We also continue to be at the forefront of offering technology enabled services to our customers. So the debit and the credit card transactions have continue to grow at a healthy rate. The number of debit card transactions at the POS terminals increased 64% year-on-year basis and the number of credit card transactions increased 40% year-on-year basis. The number of mobile banking transactions increased 57% year-on-year. Over $5 million of UPI virtual payment addresses have been created using the Bank’s mobile platform till 30th September, 2017. As regards artificial intelligence the Bank’s AI powered chatbot iPal now handles about 1 million queries or chats monthly on both the website and the mobile app and achieved nearly 90% resolution and these services are around simple questions, or financial transactions or helping customers to discover new features around products and services. Coming to our subsidiaries, I think the most important point is that during Q2 of 2018, we saw the first IPO from a general insurance company in India, and this was by ICICI Lombard General Insurance Company. Transaction valued ICICI General at INR 300 billion and has market capitalization on 26th October, 2017 was around INR 311 billion. The Bank continues to own 55.9% shareholding in ICICI General and in a way this transaction again demonstrates the significant value that the group has created in our non-banking subsidiaries. With this I will hand over the call to Kannan.

Good evening to all of you. I’ll first talk about our performance on growth and credit quality. I’ll then talk about the P&L details, subsidiaries and finally capital. First on growth, the domestic loan growth was 12.8% year-on-year as of September 30, 2017. This has been driven by strong growth in the retail business. Within the retail portfolio the mortgage and auto loan portfolios grew by 17% and 15% year-on-year respectively. Growth in the business banking and rural lending segments was 26% and 16% year-on-year. Commercial vehicles and equipment loans grew by 14% year-on-year, the unsecured credit card and personal loan portfolio grew by 39% year-on-year off of course a relatively small to INR 249.55 billion and constituted about 5.2% of the overall loan book as of September 30th. We continue to grow the unsecured credit card and personal loan portfolio, primarily driven by a focus on cross sell to our existing customers. The SME portfolio constituted 4.3% of the total loans, as of September 30, 2017. The net advances of the overseas branches decreased by 21.6% year-on-year in rupee terms and 20% year-on-year in U.S dollar terms as of September 30, 2017 reflecting our overall approach to corporate lending, as well as the repayment of FCNRB deposit linked loans in fiscal of 2017. The international loan portfolio has now reduced to 14.9% of our total loans. Coming to the funding side, the total deposits grew by 11% year-on-year to INR 4.99 trillion as of September 30, 2017. On a daily average basis, current and savings account deposits grew by 24.2% year-on-year, on a daily average basis the CASA ratio was 45.2% in the second quarter. Moving on to credit quality, gross NPA additions were INR 46.74 billion in Q2 of 2018. The retail portfolio had gross NPA additions of INR 6.6 billion in the second quarter, compared to INR 8.79 billion in the previous quarter. Additions to NPAs from restructured loans, loans to companies internally rated below investment grade in key sector on our drilldown list, development of non-fund based exposure and increase in outstanding due to exchange rate movement related to accounts classified as nonperforming in prior periods, and loans to a central PSU Walt power company in respect of which we have been disclosing the net exposure as a footnote to the drilldown list disclosure in the aggregate were INR 17.27 billion. The exposure to the central PSU Walt power company is under resolution through a demerger process, which we expect will conclude in the coming months. As we await the demerger order the account has been classified as non-performing based on payment record and application of relevant RBI guidelines. The balance addition of INR 22.87 billion to NPA includes one large exposure in the oil and gas sector. The net standard restructured loans where INR 20.29 billion about 0.4% of net advances as of September 30, 2017 compared to INR 23.70 billion as of June 30, 2017. The Bank has been reporting a further drilldown of its portfolio in the key sectors, our approach to the drilldown list has been explained in slide 33 of the investor presentation. The aggregate fund based limits on non-fund based outstanding to companies that were internally rated below investment grade in the key sectors and the promoter entities decreased from INR 203.58 billion as of June 30, 2017 to INR 195.90 billion as of September 30, 2017. Our slide 35 of the presentation we have provided the movement in these exposures between June and September. There was a net decrease in exposure of INR 9.6 billion; this decrease was mainly due to a reduction in exposure to a promoter entity. There were rating downgrades of exposures aggregating to INR 4.48 billion to below investment grade during the quarter, the downgrades were largely from the power and iron and steel sectors of this exposure to one account has reduced by INR 0.98 billion subsequent to September 30, 2017. And there were also reduction of INR 2.56 billion due to classification of certain borrowers as nonperforming. The above amount of INR 195.9 billion includes non-fund based outstanding in respect of accounts in this portfolio where the fund based outstanding has been classified as non-performing. Apart from this, the non-fund based outstanding to borrowers classified as NPA was INR 21.19 billion as of September 30, 2017, compared to INR 21.35 billion as of June. The aggregate non-fund based outstanding to companies in the restructure portfolio was INR 4.15 billion as of September compared to INR 5.15 billion as of June. On slide 27 of our presentation we have provided the details of loans under various RBI resolution schemes as of September 30, 2017 and we have also indicated the amounts under each scheme which are part of the drilldown list or the restructured portfolio. Comparative numbers as of June 30, 2017 have been provided on the link slide number 61. I would like to mention that of the outstanding performing loans of about INR 26 billion where a change in management outside of the SDR scheme is being implemented, loans of about INR 10 billion are a part of the drilldown exposure and the balance about INR 17 billion largely represents one borrower in the sugar industry where a binding agreement for change in management has been entered into and we expect this to be resolved in the coming month. I would also like to highlight the overlap of about INR 17 billion noted on slide 27, between the loans for which refinancing under 5/25 scheme has implemented, and loans under SDR or change in management outside of SDR. At September 30, 2017 excluding NPAs, restructured loans, drilldown list and the loans under RBI resolution schemes, the maximum single party BB and below rated exposure was about INR 6 billion. During the first quarter 2018, RBI has advice banks to initiate insolvency resolution process in respect of 12 accounts under the provisions of the Insolvency and Bankruptcy Code 2016 and also request banks to make higher provisions for these accounts during the year. The Bank was required to make an additional provision of INR 6.51 billion over the three quarters as advised by RBI, in addition to the provisions to be made as per the existing RBI guidelines. The entire amount of INR 6.51 billion was provided in the second quarter. At September 30, 2017 the Bank held provisions of INR 35.42 billion on these loans, which amounted to 56.5% provision coverage in respect of outstanding loans to these borrowers. During the second quarter RBI directed banks to initiate insolvency resolution process for additional accounts under the provision of IBC by December 31, 2017. If a resolution plan where the residual that is not rated investment grade by two external agencies not implemented by December 13, 2017. At September 30, 2017 the Bank had outstanding loans and non-fund based facilities to 18 borrowers’ amount into INR 104.76 billion and INR 13.84 billion respectively. 98.7% of the loans amounting to INR 103.37 billion were the borrowers already classified as nonperforming as of September 30, 2017. The Bank at September 30, 2017 holds provisions of INR 32.99 billion against these outstanding loans, which amounted to 31.5% provision coverage in respect of outstanding loans to these borrowers reflecting that these are more recent additions to NPA. As we have stated in our previous earning calls, we continue to expect the additions to gross NPA in FY2018, to be significantly lower than FY2017. Moving on to the P&L details, the domestic net interest margin was at 3.57% in the second quarter of 2018, compared to 3.62% in the first quarter of 2018 and 3.41% in this second quarter of 2017. International margins were at 0.95% in the second quarter of 2018, compared to 0.73% in the first quarter of 2018 and 1.65% in the second quarter of 2017. There was interest on income tax refund of INR 0.79 billion in the second quarter of 2018, compared to INR 1.77 billion in the first quarter of 2018 and INR 1.11 billion in the second quarter of 2017. Margins in the second quarter of 2018 were positively impacted by significant interest collections from nonperforming and other non-approval accounts. Noninterest income for the quarter include a gain of INR 20.12 billion relating to sales of shares of ICICI General in the IPO and dividend income of INR 2.76 billion from ICICI Life. Noninterest income in the second quarter of 2017 had included gains of INR 56.82 billion relating to sale of shares of ICICI Life. Moving on to the other components of non-interest income, fee income grew by 9.1% year-on-year in the second quarter of 2018 with retail fee income growth of 13.1% year-on-year. Growth in retail fees was driven by lending linked fees, third-party fees, as well as credit card fees. Retail fees constituted 70% of the overall fees in the second quarter of 2018. Treasury recorded a profit of INR 21.93 billion in second quarter of 2018 compared to INR 64.12 billion in the corresponding quarter last year. Other income was INR 4.23 billion in the second quarter of 2018, compared to INR 3.52 billion in the second quarter of last year. On costs, the Bank’s cost to income ratio was at 35.9% in the second quarter of 2018. Operating expenses increased by 4.6% year-on-year. The Bank had 83,058 employees as of September 30, 2017. The Bank’s standalone profit before provisions and tax, excluding gain or sale of shares in the insurance subsidiaries was INR 49.74 billion in the second quarter of 2018 compared to INR 51.84 billion in the preceding quarter and INR 49.54 billion in the corresponding quarter of last year. Moving on to provisions, they were INR 45.03 billion in the second quarter of 2018, compared to INR 26.09 billion in the preceding quarter. There was a sequential increase of 410 basis points in the provision coverage ratio on nonperforming loans to 59.3% including cumulative technical and prudential write-offs further strengthening the balance sheet. The Bank standalone profit before tax was INR 24.83 billion in the second quarter of 2018 compared to INR 25.75 billion in the preceding quarter and INR 35.53 billion in the corresponding quarter last year. The Bank’s standalone profit after tax was INR 20.58 billion in the second quarter of 2018, compared to INR 20.49 billion in the preceding quarter, and INR 31.02 billion in the corresponding quarter last year. Moving on to the subsidiaries, the profit after tax for ICICI Life for the second quarter of 2018 was INR 4.21 billion compared to INR 4.19 billion in the second quarter of last year. The new business margin has been continuously improving from 8% in financial year 2016 to 10.1% in fiscal 2017 and further to 11.7% in the first half of the current financial year. In H1 of 2018, the company retained its market leadership among the private players, based on retail weighted received premium with an overall market share of 13.7% and the private sector market share of 24.6% in H1 of 2018. Embedded value based on Indian embedded value methodology was INR 172.1 billion as of September 30th, compared to INR 161.84 billion as of March. The profit after tax of ICICI General increased by 19.3% from INR 1.71 billion from the second quarter of 2017 to INR 2.04 billion in the second quarter of the current financial year. The gross written premium of ICICI General grew by 17.5% on a year-on-year basis, to INR 32.34 billion in the second quarter. The company continues to retain its market leadership among the private sector players and had an overall market share of about 8.9% in the first half. The profit after tax of ICICI AMC increased by 20% year-on-year to INR 1.56 billion in the second quarter. With the average assets under management of about INR 2.8 trillion for the quarter, ICICI AMC continues to be the largest mutual fund in India. The profit after tax of ICICI Securities increased by 32.3% year-on-year to INR 1.31 billion in the second quarter of 2018, compared to INR 0.99 billion in the second quarter of 2017. The Bank’s total equity investments in ICICI Bank UK and ICICI Bank Canada has reduced from 11% of the net worth as of March 2010 to 4% as of September 2017. ICICI Bank Canada had a profit after tax of 12.8 million Canadian dollars in the second quarter of 2018, compared to a loss of 5.4 million Canadian dollars in the last quarter of -- in the second quarter of the last year. ICICI Bank UK had a profit after tax of $2.4 million in Q2 of 2018, compared to $2.3 million in Q2 of 2017. The consolidated profit after tax was INR 20.71 billion in Q2 of 2018 compared to INR 29.79 billion in corresponding quarter last year and INR 26.05 billion in the preceding quarter. Now moving on to capital, the Bank had a Tier 1 capital adequacy ratio of 14.85% and total standalone capital adequacy ratio of 17.89% including profit for the half year of current fiscal. The Bank’s consolidated Tier 1 capital adequacy ratio and the total consolidated capital adequacy ratio including the profit for H1 of 2018 were 14.67% and 17.5% respectively. The capital ratios are significantly higher than the regulatory requirements. So finally to sum up during the second quarter of the current financial year, the Bank has continue to unlock value in the subsidiaries, progress on resolution and recovery in the corporate segment, sustained growth in retail loans, maintained a healthy funding mix, continue to focus on selective lending opportunities and maintained focus on cost efficiency and capital efficiency. The Bank’s pre-provisioning earnings, capital position and value created in the subsidiaries give the Bank the ability to absorb the impact of challenges in the operating and recovery enrollment for the corporate business, while at the same time driving growth in identified areas of opportunities. We will now be happy to take your questions. Thank you.

Thank you very much sir. [Operator Instructions] First question is from the line of Mahrukh Adajania from IDFC Securities. Please go ahead.

Yes hi. On RBI audit the report of which will come out next quarter, I mean, this quarter, there are lot of names floating around for other banks whose audit is complete. So based on that would there be any guidance on what would be the size of divergence in the next quarter because that’s one key figure that everyone is tracking?

Yes Mahrukh, we said earlier also that the final process of RBI supervisory review is not complete so we awaits the final report. And during that period it’s not appropriate for us to talk about any specific cases or any other bank specific issues.

Okay. And just in term of the watch list, of course you have clarified what slipped outside the watch list and there are details in the -- there are good enough details in the presentation. But over the last two quarters the slippage from the watch list is low. So how do we view the watch list going ahead as in that do you expect -- so this question is not about slippages outside the watch list, this question is focused on the watch list that has the asset quality on the watch list stabilized now? Or do you expect to those slippage ratio from the watch list to be lower now than what your expected say five months ago or six months ago?

It's a drilldown list, but I'll tell Kannan to answer.

So Mahrukh in terms of the drilldown list that we've given across the sectors. One of the things is that indeed some of those loans are under various RBI differentiation schemes that is either an SDR is underway or a change management outside SDR. So those things are there and that is something where a differentiation is there. So in terms of the specific sector like fees for example indeed the performance of the companies has generally been improving over the last couple of years. But other sectors there clearly is stress and we'll have to see how the classification moves over the coming quarters from the drilldown list.

Okay. And just in terms of margins, the margins have turned out to be better than what most people expected. How do you view margins going ahead? So would you be revising your guidance for the full year now or have do we view it?

In terms of -- we had said that our margin should be more than 3% for the year. So clearly the first half we have been at 3.27%. So for the year we will definitely end up higher than the initial estimate that we had given. For the second half of the year we would expect the margins to be above 3%. So for the full year it will be average of 3.27% and what we see in the second half of the year. There has been some benefit that we got from the reduction in the savings deposit rates of 50 basis points partly it came in the September quarter part of it will come in the coming quarters. Kannan talked about some of the benefit that we got from the interest on the income tax refunds in Q1 and Q2 as well.

And as I mentioned we also had decent collection from the non-approval loans during the second quarter.

Okay, perfect. Thank you. Thanks.

Thank you. Next question is from the line of Kunal Shah from Edelweiss Securities. Please go ahead.

Thanks for taking my question. So particularly with respect to the RBI’s second list and the provisioning which we are covering today so the net sprout [ph] and looking at the assessment of what could be the sustainable debt in say these exposures 18 borrowers, when do we think of say providing extra. So it's like we waiting for the admission and say the final resolutions under NCLT or maybe till December. So how would be the overall provisioning on almost like 10,000 odd crores?

As I mentioned in my remarks, we do have a provision cover of about 31.5% currently and the time has been given still 13th of December to work out a resolution plan. So we are working on that resolution plan and failing which we'll have to refer to NCLT by December 31st, and the provisions still are to be taken before 31st of March. So we will continue to work on these cases and see how it develops.

Okay. So in terms of this…

And also in the meanwhile in some of the cases depending on the budgeting normal 18 provisions also will happen.

So, if it gets refer to NCLT and given that that would be 180 day deadline so would it get pushed to the next fiscal in terms the further provisioning or it will have to be taken prior to the March this particular period?

RBI guideline has very clear, that 50% provisioning will have to be taken in this financial year.

Even on the second list.

Even on the second list that is quite clear that the resolution process is a separate one. That will take 180 to 270 days depending on how we progress as an FC under FCFT [ph].

Okay. And in terms of the expression of interest which are coming for say first 12 cases, what is our assessment in terms of maybe the fair value which we would have estimated for a particular entity and now the expression of interest and the supply of maybe the assets which would be available. Is there a used scope of bid down under the NCLT resume of this and the recoverability could be lower?

This we have said earlier also that the steel companies in the first list that they have been showing a good EBITDA and the industry prospectors are much better today. So we do believe that there could be good amount of sustainable debt in that portfolio. So if you really remember earlier when we discussed about some of these assets, we said that 50% plus debt would have been sustainable even under the S4A process. So, things have stabilized there so the operating plans we are very confident of getting a decent amount of sustainable debt. So I think that outlook even now continues things have only gotten better from there.

But apart from steel maybe the others haven’t maybe EPC and also, I think given the underlying assets are not much so that’s…

Yes, it depends on case-by-case we will have to really look at it. So there as I said we have increased the provisioning covers by taking the entire hit upfront in this quarter itself. So, that will really help us in terms of having a good provision coverage ratio and the set of those effects also.

Okay. And lastly, in terms for the MCL how much has transitioned to MCLR from 56% in the last quarter?

So it is 62% of domestic floating rate loans and all into MCL.

62% that’s compared to 56% last quarter. Okay, yes. Thank you.

Thank you. Next question is from the line of Pawan Ahluwalia from Laburnam Capital. Please go ahead.

Thanks. I just want to shift gears and talk a little bit about the retail side of sales. So, the progress on CASA is obviously quite impressive, I was just wondering when I look at the asset side of the book it looks like it’s a very conservatively constructed book. I was just wondering given the CASA you’ve gathered given the scale and franchise you have and given the investments you are making in technology. Is there room to do more in terms of the kinds of things some of your peers are doing with deeper penetration on unsecured loans, on credit cards, on really the high yielding portion of book. Because plain vanilla retail is already intensely competitive and may even get more so, depending on how PSUs react to the recapitalization. And in a similar way the fee income growth has been fairly sluggish. So, I was hoping to get your perspective on what the retail strategy is likely to look like over the next few years? Is there a scope of doing at a higher margin better fee generating retail products or is it likely to be very conservatively constructed book and you’re willing to go for margin and fees, you follow a risk.

Yes, so if you look at the retail the growth over the last several quarters it has been extremely robust and even now we have got the number of about 18% growth and we said that for the full year, we will do anything between 18% to 20% growth. So given the kind of improvement we seen we believe that it’s a very good robust growth we have seen. And within that if we look at how the high margin businesses we have indeed seen a much higher growth although as you said the base is a little small there, but as a proportion it is increasing. So, to -- our own strategy is clearly good growth not at a cost of quality that is something which we are very clear about. We have pushed many livers if you really look at the kind of things we have done in the last few quarters the branch base to sourcing has increased a lot. We have also mined our data to look at prequalified offers for our existing customers. And thirdly, we have deployed technology and big data to make sure that we do the analytics and then expand our business in this area. So, from our side we are not really holding back, but we just wanted to make sure that as we grow the portfolio the quality is intact, which is what has happened we will continue to grow this portfolio going forward. Fee income growth, yes it is about 13.5% today in the retail segment, which we think is good and of course as you said as we move along there is an opportunity to further increase the fee income growth in the retail area. So, I clearly want to give a message saying that we are growing and we are growing quite robust manner even the recent indicators of growth are showing a very robust growth in this portfolio within the quality parameters we will be very happy to grow this business further.

Given what you said is it reasonable to expect another two, three year horizon your metrics on the retails funds in terms of penetration of the higher margin products the overall retail NIM, etcetera will converge with the best in class private sector peers that you have?

So I don’t want to make any interbank comparison this best in class or otherwise, but what I feel is that as a proportion clearly like you said that it will go up from here. And we believe that we have looked at the portfolio quality it is growing with a very good quality. So, at a proportion it will definitely increase from here.

Okay, thank you very much.

Thank you.

Thank you. In order to ensure that the management is able to address questions from all the participants, we request the participants to please limit your questions up to one. [Operator Instructions]. We move to the next question that’s from the line of Ravikant Bhatt from Emkay Global. Please go ahead.

Yes, hi thanks for the opportunity. Just I was referring to your comments post the fourth quarter results where you said that for the year as a whole, that your overall slippages will be significantly lower compared to FY17. So I mean looking at your performance in H1, would you still be reasonably confident that this performance can be repeated in H2 on the slippages part.

Yes, we are absolutely confident that the slippages for this current financial year is going to be significantly lower than last year.

Okay. And just again rewinding a bit, if it’s possible for you to give some color on what kind of common boxes would the accounts identified earlier has divergent would have checked like for example were this SMA2 accounts or they were delinquent elsewhere, but not delinquent in your books, or belonging to particular NO segments. What kind of common boxes would these have checked?

There would not give a LEP [ph] such as common element to be identified, I think it’s more of a case specific, borrower specific kind of an issue, which is there. So if you look at our portfolio I think we have in addition to the NP and the restructure loans talked about the drilldown list also and some of the loans which are under RBI expectation schemes, that is the broad overall portfolio which is there.

And you know endeavor this time has been to give you full sense of the residual portfolio. As I mentioned specifically particular sugar asset, which we believe will get sorted out over the next few months because of the binding agreement, which has been entered into for changing management that’s of the order of about INR 17 billion. And also we thought we should give you a color on the residual portfolio, and we looked at the double BB and below internally rated portfolio the maximum exposure to single borrower was INR 6 billion. So we believe that apart from all the disclosures you have seen from us in terms of NPA restructured and other drilldown, et cetera the residual portfolio on the corporate side, which is below investment grade is quite a granular portfolio that is a sense we wanted to give you.

Sure, I think this is helpful. Thanks a lot.

Thank you. Next question is from the line of Nitin Agrawal from Motilal Oswal. Please go ahead.

Thanks for the opportunity. So my question is over past two quarters we have had downgrades amounting to nearly almost 200,000 odd crores, which has been hampering the reduction in the watch list. So is it possible to get a sense of assets which are under rating watch and thus potentially can get added to the watch list going ahead?

We did, talk about in the last quarter there was a particular development in a power sector company because of which it got downgraded from investment grade to below investment grade for us. So these are actually based on ongoing developments, which happens so it’s not that there is an immediate list of accounts which can potentially be downgraded which is available. In a large portfolio as you would appreciate there could be some downgrades and upgrades which happen on the overall portfolio. In general as we have said we do not expect any lumpy kind of a thing to come up in terms of the downgrades on the portfolio but beyond that it’s very difficult to say.

Okay. And the other thing is like do you think that is this possible that ICICI bank can report say zero or negligible divergence with the RBI or you think it is very difficult for banks with big corporate portfolio to have that in the current environment?

I think we shouldn’t alter it, just wait…

Yes, we should not comment on it, we will have to wait for the final report to get.

I am not asking just in respect to this year, but say probably in the following year. Can you like assure that we will not have any bigger divergence running into thousands of crores say even for the next fiscal?

So it’s very difficult to give assurance on a go forward basis, but in general yes when there is a divergence one also looks at internal processes and fees, what the regulator is expecting on some of these accounts but beyond that it’s an evolving thing, which is there. The regulator also has been changing its approach. So we have to see that we can’t give really -- I don’t think any bank can give an assurance on that on a go forward basis. But as we said that for the current year, our assessment is that our NP additions for the year will be significantly lower than the last year.

Right. And one small thing also if I may ask, does the RBI break the entire portfolio or is it some proportion of the portfolio, which gets waited while it analyzes the divergence?

It's like any supervisory process or any inspection process where is you would look -- you won’t really go account by account across the entire portfolio for banks. You would look at -- you would have your owns criteria to which accounts you would want to review and all. So there would be some kind of a sampling, which would be there across all the banks.

And it is a risk based supervision which is RBI adopting. So based on that they have -- they will look at files whatever their appropriate system in the bank and at the same time they also have the information with them of system wide contracts of these accounts. With information they choose to pick whatever they want to pick and we always give them all the information required for them to complete the assessment.

Okay, thanks so much.

Thank you. Next question is from the line of Manish Karwa from Deutsche Bank. Please go ahead.

Hi, thanks for the opportunity. My question is on SDR now in this quarter the increase in SDR is just because of one sugar account or there are other cases as well?

The increase in -- that’s the change in management outside…

Yes, outside SDR. Okay.

The sugar account and then there is one indeed from the drilldown list which is there.

Okay the two accounts. And in the sugar account, do we expect full recovery or there will be a haircut that we may have to take?

There is a binding agreement, which is we'll have to see how that kind of still if there would be any sacrifice involved or not. As of now it's very difficult to comment on that.

Okay. And on the mining account wherein we have implemented the change in management, what’s the update there? Because it's been almost three quarters since this has happened. When do we expect that to get concluded?

It is part of the RBI scheme, which is the change of management outside of SDR. The mine is operating and beyond that we'll continue to dialog for a management say nothing specific further to update during the quarter on that.

Okay. But how long can you keep that as a standard asset?

There are fixed time frames within RBI. So that timeline has to be followed in respect of this account also.

Okay. And just one data point, what was the oil and gas account that slipped, I mean, what was the quantum of that?

It could be a very large part of the slippage that you are seeing from outside the identified set of accounts, but we have not given a specific number for that.

Okay. And lastly what was the retail and SME slippage during the quarter?

Retail slippage of about INR 6.6 billion compare to about INR 8.79 billion in the previous quarter.

SME and corporate we give the combined numbers.

Okay. So 6.6 is SME and retail put together.

That’s retail only.

Only retail.

Okay.

It was INR 8.79 billion last quarter only retail.

Yes, got it. So that's about it. Thanks so much.

Thanks, Manish.

Thank you. Next question is from the line of Deepak Sharma from Alliance Bernstein [ph]. Please go ahead.

Hello, good evening to everyone. I just wanted to ask if we have plans to issue offshore bonds during the second half of this fiscal year?

As of now there are no firm plans around that, but that's an ongoing activity that we do to fund our overseas business. So depending on the loan demand that we see and the funding opportunities we would look at it.

Okay. And also with respect to the guidances for the credit cost and the NPA ratios, do you see any major change for the year end of fiscal ‘18 from the current levels?

As we have said on the credit cost we expected to continue to be elevated and on the NPAs we would expect the additions for the years to be significantly lower than last year. These are the two things that we have said. On the credit cost in the second half of the year of course there would be some impact which could come in from the second list of accounts which RBI has asked banks to resolve before December 13, failing which it has to be referred to NCLT.

Okay.

These provisions will end up increasing the provisioning coverage ratio.

Okay. And sir for the loan growth and deposit growth will it be similar to what we have achieved in the first half?

Loan growth, we would expect to see some improvement on both the domestic and the overseas book, domestic because last year if you remember the third and fourth quarters had a relatively lower growth because of demonetization. So, we would expect some improvement because of that on a Y-o-Y basis. On the overseas book as we have said in earlier quarters also because last year there was large repayments, which happened on the loans against FCNRB deposits so the portfolio had come down in the December quarter. So, again on a Y-o-Y basis from December you will see a lesser decline on the overseas books. So, overall the growth will improve, on domestic we would expect the growths to get to around 15% or slightly higher with retail continuing to be 18% to 20%.

Okay, that’s it from me sir. Thank you so much.

Thank you.

Thank you. Next question is from the line of Vishal Goyal from UBS Securities. Please go ahead.

Hi, thanks for the opportunity. So, I think in the residual slippage, which is around INR 22 billion was that from below investment grade book overall? Like was it -- what was like rated below triple B?

Yes it would generally be it will almost like value B.

Correct that is fair. Second I think on the NCLT 2, the second list. Now what is the stage from like I am sure there is one more month left, but how much of you of this you think would basically go into any resolution scheme like any sense on that? Resolution without like I am saying NCLT?

It is difficult to call just now because so these cases are construction cases and we’ll have to work with the other banks to complete the resolution. So we’ll have to really wait and see how it develops.

Okay. And the last question on the drilldown list, so almost 60% of our drilldown list is part of some RBI scheme now already roughly like 5/25, or FDR or something around that. Now so, if we were to think of mortality from here into let’s say NPL like you think like all these are kind of safe now, and the schemes are already being in place. So there is a very high probability of them staying standard?

So it would be a mix Vishal in the sense that like the case that we added in the current quarter for change in management outside SDR. There is a binding relevant already which is there. In some of the cases which are there in the drilldown list and within RBI scheme if it’s under SDR the change in management still has to happen on those cases. So it’s not that if it is under an RBI scheme, one can assume that the solution is already kind of done and complete. So, it will be a mix. S, that’s why it’s difficult to kind of say how much could slip and how much will be standard.

Okay. And one last question, there is cost being rebooked, IFRS what you think is the status now like is RBI interested in IFRS for this year or because we are hearing that the final rules are not out and there is only like three months, four months left?

So RBI in September had asked banks to submit their financials for the June quarter under IND AS, and the commission has to be done in the coming days. So to that extent RBI is clearly working on the IND AS migration from April 1, 2018. Of course banks have been expecting that maybe some of the draft guidelines because there will be changes prudential and regulatory guidelines as well those are kind of still awaited. But otherwise the IND AS, the standard itself is quite comprehensive you don’t really require too much of accounting guidelines but some of the regulatory guidelines would require a change and those draft guidelines have not come out. But otherwise from our understanding RBI is working on it and that’s why they have asked banks to submit their financial for the first quarter based on the IND AS numbers.

Thanks, very helpful. All the best.

Thank you.

Thank you. Next question is from the line of Pawan Mandorra from Edelweiss Securities. Please go ahead.

Thanks for the opportunity. Sir most of the questions are answered just one question, on a case in which may be seeing initial signs of stress and these are obviously not the cases which RBI mandates to be referred to IBC? How comfortable would we be to refer this cases to IBC for say some form of resolution? And like how do we see ICICI Bank or any other bank using IBC tools online. So how would we be approaching the -- with IBC in terms of resolution, wanted to understand that.

Even before this RBI list came we were the first bank to use NCLT where we thought that there is a best way to move forward, you would have -- it is not just this list one cases we also have several other cases which are in NCLT. So our approach to that would be that we will look at in the Bank’s interest, what is the best resolution mechanism possible given the environment given the asset and given our interest. So we will just go by that it has to be a case to case approach and then we will see whenever we think NCLT is an optimal way of arriving at a solution we will not hesitate to go to NCLT.

Okay, thanks a lot.

Thank you.

Thank you. The next question is from the line of Nilanjan Karfa from Jefferies. Please go ahead.

Hi, Kannan. Could we have the total this interest, cash interest received from basically the NPL accounts in the first half?

Actually we don’t disclose that separately.

Okay. But is the reported qualitatively the quantum going up on a year-by-year basis.

The quantum is actually reasonably volatile. So to the extent Q4 if you recollect we had reported that the one reason for higher margin was the increased collection from the nonaccrual accounts. Q1 was clearly a bit lower, Q2 again was higher, because these are non-accruing accounts wherein we get cash collection. So there is no consistency across that, it has been volatile in the last two quarters and we would expect the same to be the case going forward as well.

Okay and related to this, I mean, probably a stupid question to ask, but how do you distinguish whether it is an interest or principal payment.

In terms of…

I mean it could be very easily be classified under other income.

In some of the accounts it is indeed principal repayment also that we get in cash on these accounts. In some of them we get it as interest, based on the -- so if you look at for the quarter, if you look at overall recoveries and upgrades that we had of INR 10 billion that would be reflecting collections that we got in cash against the principal. And overall to give you a sense in terms of the interest collection and all the verdicts that I talked about it would not impact the margin by say more than 10 basis points on a quarter-on-quarter basis. So it’s not such a large number as well.

Okay, okay that’s fair. Second and also in this call so far we are sounding very, very confident on couple of things, which is like margins still good in H2, slippages will still be lower versus last year. So would that mean that your why don’t you qualify it also saying that I don’t know what the divergences will be next quarter or do you believe based on your past experiences, this is probably not going to move the needle so much and therefore you are that much confident.

See we have said very clearly that we cannot comment on the RBI divergence or otherwise report. What we have clearly said is that the final report is still awaited beyond that we can’t say anything on the RBI process or divergence.

So should you note while if I saying that subject to that report received next quarter, our guidances might actually change.

The guidance that we have given for the year is that our gross NPA additions will be significantly lower than last year, we have really not gone ahead and given a much more precise guidance on the NPA ratio number or NPA addition number. And we believe that in our assessment we should be on track to end up the year with a significantly lower NPA addition compared to last year. So that is what we believe, of course the RBI process is not complete as we speak. Similarly on the margins we ended up the first half with 3.27% the thing is that for the second half we expect the margin to be above 3%. So clearly there is some pressure which would be there because as you know that incremental lending strengths are under pressure, there will be some offset because of the full impact of the 50 basis point savings deposited cut that we are factoring in. There will be some negative because in the first half we have got very good amount of interest on the income tax refund, which may not repeat in the second half of the year. So, taking that into account we have said that the margin will be above 3%. It’s not that we are saying that the margin will be maintained or it will improve in the second half, but that will be above 3% we are quite confident given the trends that we are seeing.

Sure, okay. And the risk of being pushed out, would you want to disclose what the total double B and below A at this stage. I understand you said per account basis it is INR 6 billion, but what is…

Per account basis the maximum is INR 6 billion.

Yes, but what is it in totality or the percentage?

If you look at in the last couple of quarters we have talked about few of these lumpy accounts on the below investment grade outside drilldown list, those are actually either slip into NPA or got resolved or one of them is in the change in management outside SDR. So, beyond that if you look at the double B and below portfolio outside of drilldown list and the various RBI dispensation schemes that we anyway disclosed separately. The largest exposure is INR 6 billion and overall the kind of addition in terms of absolute numbers that we have seen coming in from outside all of this in the last couple of quarters, given that the larger exposure now is INR 6 billion, we would not expect that to be the case. So, it should not be that much of an issue going forward.

Okay, alright. Thank you so much.

Thank you. Next question is from the line of Amey Sathe from TATA Mutual Fund. Please go ahead.

Hello, two questions from my side. One is on the SME loan book, you talked about around 20% growth, 15% to 20% growth last quarter, but this quarter it seems that it has slowed down little bit. So anything on that side?

For the year, we still believe that we should end up in that region of around 15% to 20% growth on the SME portfolio. For the quarter you are right on a year-on-year basis the growth was lower than what we were expecting. The market is extremely competitive in terms of pricing as well. Plus GST and all there would have been some impact which could have been there. But for the year even what we are looking at we are relatively confident of getting the growth of 15% to 20% on the SME portfolio. The other smaller business portfolio that we have which is a part of our retail business, which we disclose as the business banking portfolio that has grown at 20% plus for the year.

Okay. And the second on the margin you talked about it will remain about 3% for FY18, but for the 2018 year as we enter and with PSU banks getting a recap capital, do you think that government might nudge them to lower rates further which can impact our margin?

That is the possibility one doesn’t know for what reason that could have, but the fact that banks could compete away the current margins that’s something, which could happen especially given the kind of limited credit demand which is there and the surplus liquidity which is there in the system. So that is to some extent we are factoring in that when we say that the second half margin will be above 3%, while we are running at 3.2% plus currently. But you are right that it’s a risk in terms of the competitive in the market which could play out. And second of course there is a working group report from RBI which talks about linking the floating rate loans to market benchmark and other such stage. So, as and when that gets finalized and implemented one will have to see what is the impact of that as well.

And how much headroom is there for us to improve our cost of deposits from current level?

If you look at it, in terms of the -- we are already below 5%. So, of course if you look at for example one of the banks still has lower fixed deposit rates compared to our rates. So there is some probability of rates coming down, but I would not be certain of that. So, I think at the current level of cost of deposits it is already pretty low.

I just want to supplement by saying that is given all our funding strategies over the last few years, we are happy to say that after 2005 it is the first time when our cost of deposits have come down below 5%. So the deposit side we are seeing very good momentum and we are very happy about our cost of funds what we've been able to achieved in that aspect.

Okay. Got it, thanks a lot, this is especially from my side and best of luck for the next quarter.

Thank you.

Thank you. Next question is from the line of Mayank Bukrediwala from Goldman Sachs. Please go ahead.

Hi, good evening, this is Rahul here. Well most of my questions have answered, but just wanted to get some more color on this resolution pertaining to the second list of NCLT accounts. When RBI says resolution, what exactly does this mean? Does this mean implementation of any RBI differentiation scheme or seeing satisfactory performance from these accounts? And so can you just throw some color as to what does this really imply?

RBI has said that a resolution would mean that if banks have residual debt to the borrower that debt should be rated investment grade by two rating agencies. So that is how they have defined the outcome of the resolution.

So it's a natural view under any scheme or it will just be a simple restructuring.

Okay. And since then have you seen any resolution across the industry within these 28, 30 odd accounts?

Some JLFs have taken place, we have discussed but I don’t think so quickly they'll decide on resolution.

Got it.

But it can be any form of resolution provided it meets that caveat what Rakesh said that the residual debt should be investment grade rated by two rating agencies.

Got it. Thanks. Second thing is, is it possible to get the below investment grade book for the consolidate entity, the number that we share as part of our 20-F filling?

We disclose it on an annual basis as part of the filling.

Okay. The other question was on so we’ve made some more provisions against the first NCLT list. So I just want to understand what would be the ideal PCR that you would like to hold on these 12 cases?

Provisions that we are making as you know is essentially based on the RBI guidelines of aging of the loan plus the amount of loan, which is secured or unsecured. In addition of course for those cases that RBI has directed banks to refer to NCLT they have given certain minimum provisions to be made. So these provisions are being made on that basis and not really from any other context.

So, the current provision that we hold is that sufficient or we might need to make something more?

We would need to make something more because as the aging happens so depending on when the loan moves from substandard to doubtful one doubtful two, there will be an increase in provisioning some of those cases which would happen over the next couple of quarters itself.

Alright. So sir last question this as far as that we hold security receipts, what would be from the steel sector there and how much provisions or haircut have we taken on those? That's about it from my side. Thank you.

We’ve not given a sectorial breakup of the entire services.

Okay. But any particular sec -- I mean, any mix that you can share I mean, like I guess most of it would be…

Fairly large number also in the context of the overall loan portfolio.

I just wanted to because we have seen performance improvement in the steel sector so I just wanted to get some sense…

We don't have a breakup that we could give.

Got it, thank you so much.

Thank you. We'd request the participants to please limit your questions up to two, should you have a follow-up question we request you please rejoin the queue. We take the next question from the line of Adarsh Parasrampuria from Nomura. Please go ahead.

Just a question on power side on the watch list, do you all expect more additions because steel is a well-defined watch list in few companies, so I just wanted to understand that's the place where it looks like there could be further slippages. So I just wanted to understand that part.

As we said it’s an ongoing internal rating exercise that we have so stands a couple of cases get downgraded, it's a possibility which is there. But as I said there is really nothing lumpy exposure that we have which we think would kind of get downgraded. But it's an ongoing exercise that we do on a regular basis. So it can always happen.

And that INR 6 billion number that you said of single exposure applies to even these five sectors that you have…

No, that is for below investment grade outside of the sectors covered in the drilldown list. Outside of these cases which are already under any kind of an RBI dispensation. So we are excluding the SDR, S4A, change in management outside SDR, 5/25 refinancing because that is already disclose separately by the Bank. So, outside of all of this the residual exposure, which is below investments grade the maximum is about INR 6 billion.

Okay, understood. And again getting back to that the other sector below investment grade, I am just saying that you obviously had two, three names or accounts you specified earlier and those have kind of materialized. Now, could there be chances at least the way you all see your portfolio that maybe these individual accounts are like INR 5 billion each, but you have two three of them coming for a long time every quarter or that’s not something that you would expect?

Very difficult to say that, so we will have to see how it goes of course in the near-term there is general stress, which is there on the corporate portfolio for banks. So, if you say that will it come for a long time, for sure it will not come for a long time. Can it come for next couple of quarters it could.

Understood. Thanks a lot Rakesh.

Thank you. Next question is from the line of Vikesh Gandhi from Bank of America. Please go ahead. Vikesh Gandhi your line has been un-muted please go ahead with your question. As there is no response we move to the next question that’s from the line of MB Mahesh from Kotak Securities. Please go ahead.

Hi good evening. Four simple questions, one is you had some very large transaction on the oil sector the last quarter there doesn’t seem to be a material change in the watch list just trying to understand was there any other place where it was reflected or do we see that this is going to be the running number for the next few quarter? The second question is the rating downgrade exercises -- the rating exercises which you do will include the financials which a company gives you I guess once a year and most of these companies should we giving you the financials for FY17 probably in the first-half of this year or was this exercise already completed? And the third one is the oversight committee actually any relevant any more in the current schemes of things where most of them is moving to the IBC process?

So, on the first question regarding transaction in the oil sector. So you saw that reduction in the exposure to the promoter entities rated in the drilldown list and if you recollect the exposure in the past was about INR 60 billion or so. And in the past also we have said that some of the money was received earlier as well and that led to the reduction in terms of the exposure. So, this is reflecting the payment that we got during the September quarter, which was the residual payment that came in. On the ratings it’s an ongoing exercise and of course at the time that you get a new set of financials, you do a comprehensive rating exercise. But in addition to that depending on the rating category of the exposure you would also do a kind of a periodic review of the ratings for example if there are interim period accounts that come out statements quarterly or half yearly or is there any specify development for the borrower or for the sector. So it’s just like any rating agency would do that is what the internal risk department for the Bank does. So, it’s continuous kind of a process which is there.

That actually the reason I am asking you, typically the downgrades in the second half tends to be higher or in the September to December quarter tends to be higher because that’s when the unlisted companies start giving you the financials right. So that’s the key worry out here.

I am just saying that you any way would also get from our borrowers we do get their quarterly financials and all of that on a regular basis. So, it’s not that it will be a complete surprise which is coming in the financial result and it happen in a few accounts that the financials for the full year are somewhat different from what you were expecting that possible, but it’s not a large (inaudible) should be there.

No, on the first question if the customer has paid possibly what were the dues to be received at that particular point in time. Why was it not kind of change back to -- is it now fully moved back to a standard what is balanced to be paid or it’s being fully settled and it’s over once and for all?

No, this is the balance amount which is there.

So why is it still part of the watch list is the question. Because if either he has paid his outstanding dues so the account gets moved to a standard, right?

No the drilldown list is a list of all below investment grade exposures across these sectors, so because it would continue to be a below investment grade exposure, while we have got payments on that it is still a below investment grade exposure and it’s included in the drilldown list accordingly.

No, the question is why it still a below investment grade even after that transaction has been completed?

This is the balance exposure which is still there which needs to be repaid by the borrower.

Helpful, I will just take it off and the oversight committee relation.

In terms of the oversight committee of course given that RBI is kind of directing banks to take a number of these accounts to NCLT. So to that extend it is not -- those cases will not get referred to OC. But there could still be resolutions for some others borrowers, which happen as per say the S4A scheme or so then it has to get referred to OC.

Okay. So just one clarification the oil and gas account that was reported this quarter, does it also have any linkage to the engineering account which you reported in the previous quarter?

So we don’t talk about that specifically in terms of the borrower accounts.

Sure, thanks a lot.

Thank you. Ladies and Gentlemen with this I hand over the flow back to the management for their closing comments over to you.

Well, I think as we have said that if you look at during the quarter we have seen NIMs being quite comfortable, we have seen growth in fee income, we have seen asset quality trends improving in terms of additions or level of additions to NPA. So, given all that we will keep of course watching the environment we will keep working with the developments in the ecosystem as far as resolution is concerned. But there are lots of growth opportunities that we are capitalizing on. And given our overall position on capital, on distribution network, on technology leadership and so on I think we are quite poised to participation in the growth opportunities.

Thank you very much ma’am. Ladies and gentlemen, on behalf of ICICI Bank that concludes this conference call. Thank you for joining us and you may now disconnect you lines.