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HDFC Bank Ltd
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Good evening, ladies and gentlemen, and welcome to the HDFC Bank's earnings conference call on the financial results for the quarter ended 31st December 2017 presented by Mr. Paresh Sukthankar, Deputy Managing Director; and Mr. Sashid Jagdishan, Chief Financial Officer. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sukthankar. Thank you. And over to you.
Thank you. Good evening, everyone. As usual, I'll try and walk you quickly through some of the key highlights of the quarter's results and we'll take questions thereafter. So for the quarter ended December 31, 2017, the bank's total income was INR 24,450 crores, which was up from INR 20,748 crores. Net revenues, which is net interest income plus other income, these increased by 23.9% to INR 14,183.5 crores. The net revenues came 73% from net interest income and 27% from other income. The net interest income growth was 24.1% on the back of a core NIM of 4.3% and asset growth. Other income was INR 3,869 crores. This grew by 23.1% -- sorry, by -- yes, by 23.1% over the corresponding quarter of last year. The -- of the 4 components of the other income, commissions accounted for INR 2,206.8 crores, so that's the largest component from the INR 3,869 crores, commission growth was 20.1% year-on-year; the FX revenues were INR 426 crores; the bond gains were INR 259 crores; and recoveries and miscellaneous income were INR 311 crores, which were -- which all totaled up to the INR 3,869 crores of other income.Operating expenses for the quarter were at INR 5,732 crores, which was again an increase of 18.4% over the corresponding quarter of the previous year and that meant that the core cost-to-income ratio was at 41.2%.Total provisions were at INR 1,351 crores. This is as against INR 715.8 crores for the December '16 quarter and as against INR 1,476 crores for the September quarter. Moving on. Post-tax net profit was INR 4,642 crores and that registered a growth of 20.1%. Balance sheet size touched INR 949,000 crores. Our total deposits at INR 699,000 crores, grew by 10.1% over December of 2016. Current accounts deposits were at INR 101,000 crores, and savings account deposits were at INR 205,000 crores. And the CASA ratio therefore as at December 2017 -- December 31, 2017, was at 43.9%. Total advances were at INR 621,000 crores and grew 27.5% year-on-year from December 31, 2016. Both the deposit growth and the loan growth is a bit of a distortion in the rates of growth because of the base effect. December 2016, as all of you would recall, was the demonetization quarter so deposit -- the base for deposits was much higher given the sudden spike in deposits we have seen during that quarter. And on a relative basis, the loan growth was a little muted because we'd had some repayments in business banking and so on. So as a result, the base was low for loans and higher for deposits, which is why the loan growth at 27% year-on-year -- or 27.5% year-on-year is clearly higher than what it has been in the last couple of quarters. And on the other hand, the deposit growth seems that much lower at around 10.1%. If you look at the sequential growth in both of these, you will find that deposit growth was 3.9%, almost 4% sequentially, which is the December over the September quarter, that's for deposits. And the sequential growth on the advances side, on the loans and advances, was 4.4% over September 2017.Growth has come at almost similar growth rates, just a couple of percent difference between the retail and wholesale growth rates. So both the segments have contributed to the fairly strong loan growth. And the mix now is about 55% retail and 45% wholesale.On the asset quality front. As at the end of December, the gross NPS were at 1.29%, net NPAs were at 0.4%. Our branch network was at 4,734 branches in 2,672 cities. And finally, on capital adequacy, the total cap ad was at 15.5% and Tier 1 CAR was at 13.6%.Just a couple more clarifications, which I'd like to give upfront, especially because some of these things were report to in our previous quarter as well. As you might remember, in the September quarter results, we had mentioned that we had made contingent provisions in respect of an account, which was under supervisory review. Immediately thereafter, on the day after the quarterly results, we had received regulatory communication and we had put out another press release mentioning that, that account had been classified as nonperforming as per directions from the regulator.We have in our -- with our results, also explained the total diversions that had come out of the supervisory process. And of where we are in respect of those accounts, in respect where the asset classification had been changed. There were 3 accounts. One of which was what I just discussed where it was made NPA in the month of October and though it was -- I mean, it was -- the instructions were that the account was to be recognized as NPA and the effective date of that recognition or of that classification was March of 2016. So the accounts, which had to be declared NPL had to be classified NPA as of March 2016. Because this was -- I mean, it was accounted for in 2000 -- in this quarter, we have given the divergence during this quarter for the March 2017 NPA numbers. For that account, again, something which we have given with our -- in our notes, that account, based on the 2 factors, which is that the account has for the specified period, from the 2016 period when it was the effective date of the NPL then onwards, has never crossed 90 days. And the fact that they were nil overdues for all the banks in the JLF, the JLF decision was to -- that this account is therefore eligible for upgrade, and that has been done, which is why if you look at the end of the December quarter, this does not remain an NPL in the books. So to go back to the contingent provisions that we had made in the previous quarter when the account was reflected as an NPA during the quarter, obviously those continued -- the provisions would have become specific provisions. However, since by the end of the quarter, these are not required now. The contingent provisions are no longer required -- or the provisions are no longer required, they do not continue as contingent or specific provisions. What we have done clearly is that the contingent provisions in the last quarter had been created, which were roughly INR 700 crores, had been created, half of them from floating provisions, which have been reinstated as floating provisions; and the other half has gone towards a higher general provision for stressed assets -- for stressed sector and for a contingent provision for a certain agricultural portfolio. The point being therefore that the entire INR 700 crores roughly of contingent provisions, none of that has been reversed back on a net basis into P&L for this quarter.So coming back to the, I think, the clarification, which I was just -- I mean, which is, again, all of this is there in terms of the movement of the divergence and where we are has been mentioned in the notes with the quarterly results, but I thought I should spend a minute on having just sort of share with all of you. Let me take a pause here, and I think we'll take your questions now.
[Operator Instructions] The first question is from the line of Mahrukh Adajania from IDFC Securities.
Could you share the slippage for the quarter and the breakdown of floating and specific provisions?
So the net increase in the gross NPLs for the quarter, this is, of course -- you're going to have in this quarter a slippage and a upgrade, right? So if you include the account that I referred to, which on account of divergence was recognized as NPA and then in the same quarter sort of getting upgraded as well, the slippage would therefore have been at 2.6...
[ 1.67 ].
1.67. And the -- as far as provisioning is concerned, the floating provisions now go back to INR 1,300 crores, INR 1,326 crores, to be precise. And the specific provisions for the quarter are essentially the total provisions for this quarter almost entirely were therefore on a net basis specific provisions, leading to a coverage ratio of about 66.3%.
Sorry, Paresh. I actually missed the slippage figure because I got thrown off the call for a short while.
1.67 including the fact that we had, had the slippage.
Including the fact that you had the...
Slippage and then the upgrade, right?
Right, right, right. But all the other [ INR 2.9 billion ] also classified in this quarter only?
No. The -- of the balanced amount, which were -- of the 3 divergences, the other 2 had already been classified as NPAs in June, September and so on at various points of time when they became NPA for other reasons.
The next question is from the line of Manish Ostwal from Nirmal Bang Securities.
My question on the fee income during this quarter, it has been growing around 30% Y-o-Y and even ForEx income also grew very strongly. So any one-off in this item? And what is the sustainable growth rate for these 2 lines?
Yes. So I think, again, the rate of growth, especially on fees -- I mean, we've had a good quarter on fees. No major one-off for the quarter. However, when you look at the rate of growth, again, the December quarter for last year was muted. If you remember, there were some fees that banks were not allowed to charge in the December 2016 quarter, right? And as a result, if you look at the fee growth in 2016, that is 2016 [ over ] 2015, fee growth was muted at around 10%. So it was a bit of a lower base, which does help the rate of growth for this quarter. Having said that, even if you look at it sequentially, the fee growth has been fairly, fairly healthy and that rate of growth has really come from a couple of businesses, one of which -- one of them was a third-party distribution piece where the mutual fund -- especially the mix of mutual funds towards equity has given a boost to that income. And the other -- and of course, there has been a higher volume of third-party distribution fees on the insurance side. And the third contributor has been processing charges on retail loans, especially on auto and commercial vehicles and so on because that was a segment -- that was a -- in this quarter, we saw a healthy growth in disbursements and that therefore has been the other contributor for fees. So if you look at it, the rate of growth at 30% seems higher than what would have been the case if the base had been a normal base, but the growth rates have -- the growth areas have been these 2 or 3.
And in [ exchange ] and derivatives, there's no one-off, right?
No. In exchange and derivatives, also there is no one-off. But in the last couple of quarters, in fact, we have seen slightly lower growth rates, and this was just a slightly stronger quarter then.
Okay. And second, what is your assessment overall of the credit cycle and the credit growth in the system now? A couple of banks reported very strong share of sequential credit growth also. So what is that assessment? Whether the retail is picking up strongly and corporate also coming back, what is that assessment?
So I think you've seen that even at a banking industry level, the rate of growth, which was languishing at around 6% to 7%, has moved up to, I think, 11.1% as per the last print that we've seen. So there has been some pickup in loan growth for the banking industry. I think part of it could actually represent a slightly stronger demand for credit, although it is still much more on the consumer side, but a little bit of it coming through on the corporate or wholesale side as well. And the other piece is that I think the proportion of loan demand, which has been cannibalized by the debt markets, whether in terms of commercial paper, and bonds and so on, I think that has at least in relative terms on an incremental basis started coming off, maybe representing the slightly lower liquidity in the system and perhaps where the market rates have moved vis-à-vis loan rates in the last month or two. So I think both these have given a bit of a boost to loan growth for the banking system. And then within that, of course, banks who have been either in those segments, which are seeing stronger growth, especially retail or banks which have been able to gain market share in some parts of wholesale, have clearly seen stronger growth. In our view, we are positioned for both these. I think we have a strong retail franchise across products. And as -- for instance, you've seen strong growth on, say, car loans or commercial vehicle loans, based on the underlying sales, that clearly has given a slight pickup in loan growth on the retail side. Products that had been doing well like personal loans or card -- credit cards have seen continued growth. And on the wholesale side, between working capital, trade finance, medium-term loans and opportunities for refinancing including some amount of growth on the term side, that has contributed also in the 20%, 24% level.
And last question. On the operating expenses trend, especially if you look at the last 5 quarter, the average growth rate Y-o-Y, in operating expenses around 15% and the revenues growing close to 20%-plus on average Y-o-Y growth. So -- and then now we are reaching 40% cost-to-income ratio. So basically, whether we can sustain this kind of cost-income ratio or being a retail bank we can see some uptick in that ratio.
Yes, I think I wouldn't sort of focus on any one quarter as representative of what our annualized cost-to-income ratio will be for the full year. But as a trend, having been focusing on continued improvements in the operating ratios and the operating leverage that we should derive, the answer is yes. There have been a few drivers, but in particular, the increased digitization has helped us, both in terms of improved efficiencies and improved productivity on the sales side, lower costs on the credit and operations side, especially as higher and higher proportions of our origination are capable of being processed either at straight-through or at least some components of it being processed on a straight-through basis. And with incremental branch expansion slightly lower than what it used to be and earlier branches, which are now 2, 3, 4 years old having -- gradually getting into higher productivity levels and therefore reaching breakeven, both of those are contributing. We continue to invest, however, across various businesses. So from our point of view, we sort of don't have a number that we are guiding to. We don't have a guidance on either any revenue or expense lines, but our attempt, of course, will be to remain focused on improving the cost-to-income ratio.
Yes. One small point. When we are completing our cap raising?
Manish, can I request you to come back in queue a little because I think I [indiscernible]
[Operator Instructions] We'll move to our next question, which is from the line of Kunal Shah from Edelweiss Securities.
Yes. So broadly, in terms of the overall provisioning breakup...
Sorry to interrupt you, Kunal. Can you please come a little closer to the phone?
Yes. So the breakup of the provisioning between the general and specific and any investment depreciation during the quarter, if you look at it INR 1,350 crores kind of a number overall.
Yes. So the depreciation of provisions on the investments doesn't come through the provision line in any case. That would -- if you look at the other income line, in that, the profit or loss on investments is the net of what gains we would have realized net of any negative mark-to-market. So that comes in that line as well. The provision line itself of INR 1,351 crores does have a -- effectively is almost entirely out of that INR 1,340-odd would be the specific provision because to the extent that there is a general and a floating provision reimbursement, so to say, that was by the reversal of the provision that we had created earlier.
And there was no sale to ARCs during the quarter?
There was no sale to ARC during this quarter.
Okay. And lastly, in terms of the fundraising, which we are planning, okay, of INR 24,000-odd crores, so how would be the utilization in which particular asset segment, will we see it be it either through organic or inorganic growth? So what will be the focus area overall? And in terms of the unsecured portfolio, so now that's growing at a steady pace, 16% of the book. So do we still see it growing at a similar levels? Or we would want to cap it at a particular level?
Well, in relation to the capital raising, clearly it's not being raised with a specific allocation of that incremental capital either for specific segments, for instance, between wholesale and retail assets, or specific products within these segments. The basic point is that the rate at which we have been growing our risk assets, that's been higher than what our internally sustainable growth rate is. And we have therefore been consuming, depending on the quarter, anywhere between 20 to 50 basis points in a quarter. On an annualized basis, a little more than -- somewhere between 1% to 1.5%, sometimes a little less, sometimes, a little more. Depending on the composition of that asset growth, it has been where our capital has been utilized. On the other hand, we have also been designated as a domestic SIB and that, again, increases the threshold slightly in terms of the capital requirements. So when we are looking at this capital raising, we are looking at essentially boosting our capital adequacy ratio to support our growth plans for the next few years. We believe that there are opportunities across wholesale, retail and across, in retail, for instance, the secured loans as well as unsecured loans, but that's more to do with the market opportunity and our positioning and the competitive environment and not really to do directly with the quantum of capital or the actual capital raising at this point of time.
And unsecured?
Yes, I think the unsecured piece, whether it's personal loans or cards, still continues to grow. Of course, as I mentioned a little earlier, in this quarter, if you look at the absolute growth, the secured retail loans have actually grown in absolute terms much more than the unsecured. Of course, those are the larger books as well so the percentage growth might look a little lower, but if you look at the sheer size of the growth, you'll find that, that's where the higher portion of the retail growth might have come from.
The next question is from the line of Ravikant Bhat from Emkay Global.
My question pertains to the nonperforming assets. Now if one were to look at the period prior to March '17, your gross NPA ratio had, for a very long time, ranged between 90 to 110 basis points. And after that, I think, first quarter you have had some farm-related delinquencies and there have been other specific episodes. Now your GNP ratio stands at 1.29%. So any thoughts whether we are going back to lower levels or there could be some continued accretions due to which the ratio has now touched a kind of a different normal, which could be upwards of 1.2% or 1.3%?
Yes, so I think, one, I would certainly say that the sweet spot of somewhere between 1%, 1.1%, I think we have clearly moved a little higher than that in the last few quarters. And at this point of time, while we've seen a movement 2, 3 basis points here or there, I think we certainly seem to be closer to the 1.2%, 1.3% than the 1%, 1.1% that we might have been for a couple of years. Again, the way it looks -- it depends on the time horizon that you're looking at because if you look at our 20-year history, then we've been at higher levels as well and in fact the average might well have been somewhere closer to the 1.3% than where we were for a few years, which is why I called it as sweet spot for quite some time. Having said that, I think, specifically, even in this quarter when we have seen some increases, they've come once again from the agri portfolio and this is something, which I think at slightly heightened level agri-related NPLs is something that I think we'll just have to perhaps live with. There may be different factors at different points in time. Certainly, in the last year or two, a combination of some natural calamities, some issues on realizations post to what happened in terms of the availability of liquidity post demonetization in the rural sector and then the announcements and the implementation -- protracted implementation of some of the loan waivers have certainly been contributors to this particular segment's NPLs. Nonetheless, we still think that it's important for us as part of the requirement for us to meet our mandate for agricultural lending including small and marginal farmers and the direct lending to agriculture, that [ maybe ] we will have a certain sized portfolio in that segment and the reality of the risks of that will show up from time to time. So that's really where we've seen the growth. Other segments where we've seen ups and downs, we've had in the past something to do with commercial vehicles and construction equipment, which then got pulled back. We've seen some ups and downs on the SME side. But in more recent times, as I said, the agri portfolio has certainly contributed to some of the NPL formation. And on the corporate or the wholesale side, you will have one-offs every few quarters. It's less predictable or it's less of a trend that you can notice every quarter. But every few quarters, if you look on an annualized basis, it's still a portfolio for us, which has held up rather well.
The next question from the line of from Adarsh P. from Nomura.
[ Let's ] just again have the same question on asset quality then. So one is the -- you clearly identified agri contributing. So where have the NPL levels like trended from March in the agri book?
We have seen increases. Remember, the agri book, the period for classification is not what it is for other loans, right, where it is 90 days. So this really depends on the crop cycle and so on. So if you look at the -- even the percentage growth in agri from where it was, let's say, in December of 2016, as a percentage of the gross advances of that particular portfolio, you have seen, in percentage terms, we have come to a little over 5.5% for the agri portfolio, in roughly in that range, somewhere between 5% and 6%, and that is at least a couple of percent more than what it was a year back. So that is where it is now. Some of that, as I said, could be linked to some of the factors that are more specific to this year, right, especially when it comes to things like loan waivers and so on, you didn't have it earlier. And some of it, once the disbursements actually take place, some of it might get pulled back. But that has been the trend even in the last 12 months for this particular portfolio. For some of the other businesses, we have seen some ups and downs while this one has seen probably an increase, which has been a little more uni-direction.
Just getting into this a little bit more, like INR 700 crores of quarterly provisioning we had, right, before the demon quarter and then we've had almost a 2x kind of run rate on credit cost, or out provisioning. As part of it would have been agri, then some SME related to GST, demon, everything so it's like at least the excluding agri part, right? Is that settling lower again because we kind of get that feedback from say, NBFC banks that, that's kind of settling lower. So is that the case? Should we expect that to happen for a bank or...
So I would say that if you are referring specifically to what was seen as an impact of demonetization or, for instance, on our SLI portfolio or, again, the demonetization and to some extent the transitional GST impact on maybe SME, some of those, I think -- certainly, the demonetization impact, I think, on asset quality is true. I don't think there's any residual -- new formation of NPLs that you can even remotely attribute to what might have happened a year back. As far as the rest of the slippages or any delinquency formation is concerned, it's fairly stable. I mean, we don't see a trend continuing across a couple of quarters for any of the other businesses. In some of the retail loans, we have seen some increases in some quarters and stabilization or coming down again in some quarters. So we have seen -- it's not that all the other segments have seen extremely stable asset quality. We are talking about a few basis points up and down, and across these products, the actual NPLs have still been within what is priced in, or what we believe is fair for those products. So I do believe that, generally speaking, the asset quality at even the levels that we've seen in the -- ex agri, as you said, I think there has been reasonable stability out there.
So from a mix perspective, you don't think that, excluding these volatilities, the credit costs for the bank on a more longer term, like 3-, 5-year average running basis, should be higher now going forward versus what it was? I'm just trying to say adjusted for the fact that, as you said, we are beyond the sweet spot in retail, so maybe 10, 20 basis point higher. But from a mix perspective, do you believe that there should be a higher increase in the structural credit costs or...
No. I wouldn't say really structurally from based on portfolio mix that should contribute to any meaningful change, I mean, other than what I mentioned in terms of the cycle for specific businesses. And I can explain why, if you look at the wholesale-retail mix, it hasn't changed too much although retail has gone up slightly, which should contribute a little more than wholesale. But again, it's not huge. Within retail, you had an increase in unsecured, which should have been higher risk, but you also had an increase in home loans, which is lower risk. So on a blended basis, on a weighted average basis, I don't really think the mix by itself is going to result -- or is going to cause a meaningful change in the credit costs. But yes, I mean, sort of a mean reversion in some ways in terms of the gross -- the nonperforming loans and the provisioning is something that we might -- we have been seeing in the last few quarters.
The next question is from the line of Digant Haria from Antique Stockbroking.
One, we can see that all the high-yielding products, especially credit card, personal loans and two-wheeler loans, like there's a big jump whether you look at it Y-o-Y, Q-o-Q or whatever way. So is this pointing to some kind of a consumption boom, which may sustain for some more time? Or it's more of a pent-up of a lot of things which happened in the past and this quarter is when that pent-up demand from the consumers came?
Yes, I think certainly if you look at purchases of -- all these 3 products, well, not personal loans so much, but if I look at two-wheelers and frankly I would see auto loans or CV, you did actually see higher sales driving those loans, right? Personal loans and credit cards, in some respect, had been growing even earlier. Of course, this is the festive season, so you tend to have higher spends on personal -- on the credit cards and slightly higher revolve during the quarter. So this quarter, in any case, tends to have a seasonally higher growth rate in consumption-related retail loans. So I think we should watch whether this trend continues for a quarter or two more before we jump to the conclusion that, yes, this reflects a revival in the consumption boom, if you might. But also, I think the -- if you look at some of the growth rates that we have seen in semi-urban, rural, we have seen a slightly -- a slight pickup or a slight improvement in those growth rates vis-à-vis the previous few months. Nothing very stark, but certainly a little bit of pickup, which, again, might point to better sentiment, better -- monsoons having been better resulting in slightly better consumption in those markets.
Okay, okay. And second is on the commercial vehicle loans, like we have seen some really strong numbers for the third quarter. But I think our portfolio does not reflect a similar set of growth. So maybe like have we pulled out from some areas where competition have become irrational? Or if you can just throw some light on that.
Well, within that, some segments, we have been a little more cautious. But I mean, I can't say that we pulled out of any segment. Maybe in some we might have not grown as fast as we might have been doing a little earlier. But honestly, sequentially, 5%, 5.4% is the -- as per our own internal MIS. And if you look at as per the Basel classification, that the CV/CE business has grown 5.7%, and remember, this is for us the combined portfolio for the commercial vehicle and the construction equipment piece as well. So -- but yes, it's grown at about 23% year-on-year. I know there are some -- there may be some players and especially who are operating in certain segments who have grown faster, but I wouldn't say that we have pulled out of any particular part of the business.
The next question is from the line of Rohan Mandora from Equirus Securities.
So I wanted to understand...
[Operator Instructions]
So how do you see the lending opportunity in the salaried segment having income somewhere at, say, up to [ INR 5,000 ] per month? That was my first question. Second is like a bit in the retail loans, like what lending we have been doing up till now? Are there any pockets that we would have done cautious incrementally [indiscernible] product-wise, geography-wise or maybe under customer segment? And the third was, in terms of the number of -- what is the number of total retail customers that we have? And within that, what percentage of the customer base will be already opting unsecured products like personal loans?
So as far as this salaried segment, I mean we have a range of products, some of which customers will be eligible at the salary levels that you mentioned. But when it comes to the full range of products, whether it is everything from a unsecured loan or a two-wheeler loan to auto to loans against shares, to credit card, whether it's salaried or self-employed or small business, there, the product programs that we have look at a combination of credit factors including, of course, income levels. But we have developed -- we use several parameters to be able to make those calls. And to the extent that many of these customers have an existing banking relationship with us, a lot of the data that we look goes beyond the application or the profile of the customer including behavioral characteristics that the customer has displayed in their relationship with us in the transactional accounts. So we see opportunities for salaried retail lending, but we also cater to other segments. And within salaried, again, they are customers who [ may be ] open market and there are those who are salaried and who have their salary accounts with us. And our products are tailored to being able to meet those customers' requirements within our credit appetite and we have obviously done a lot of analytics to be able to provide them offers and to fulfill them as seamlessly and frictionlessly as possible. On the...
[indiscernible] that we have an opening up till now, retail products that you've been -- within that, are there any products that we would have turned cautious?
Yes, I don't think there is a product that we have turned cautious overall in the sense that we are cutting back overall. But in every single product, at all points of time including those products which on an overall basis we are growing, there will be some segments or there will be some geographies or some profile that we will be constantly tweaking in terms of, either rationalizing some part of our origination there or tweaking the pricing where possible or stepping up on some collection activities somewhere because portfolio management on the retail side is an ongoing process. It's only when a product generally blows out that you're going to take something -- take a very severe action of pulling back, which certainly is not the case for any product at this point of time. And on your last question, I don't think I have a ready breakup of -- from our total customers what portion we might have already lent unsecured. But if I look at it from the other point of view in terms of our origination of personal loans or credit cards, then even today, on an incremental basis, roughly 50% of our personal loans tend to be extended to customers who are -- who already have an existing relationship with the bank and these could be either salaried or self-employed or business category. But that's roughly 50% on the personal loan side and it's almost 70% on the credit card side.
And what is the total number of customers that we are having on the retail, [ please ]?
Our total customer base now will be about 40 -- 42 -- 42, 43 million. Since we just have about 15 minutes left, I would certainly urge each one of you, if possible, to stick to one question, but certainly not more than two.
We'll move to the next question, which is from the line of Abhijeet Sakhare from Kotak Securities.
I have a question on fee income. We understand that you have opened up your partnership on the life insurance side now deal with multiple life insurance partners. So in that context, wanted to understand how does it operationally work? So do you divide branches among insurers? Or do you split channels? So some kind of, I think, a flavor on that.
So we've not yet started all the products through the branch channels. But for the time being, what we have done is we've given each of the insurers some specific channel or segment, so that they can integrate into the entire banking system that we have. When we are selling insurance, we already have a pretty well-defined process, which includes calling from the bank itself, and so some of these newer companies that are coming onboard in this financial year at least, we're going to test them out with some smaller segments or smaller channels before we open it up for the branch channel.
Okay. So branches as of now are 100% utilized.
Absolutely.
Okay. So there is not thought on changing that immediately as of now?
They will. So once these new companies integrate into the entire process that we have, we will open all the channels to them, but it takes a little while for the newer companies to integrate their CRM, their processes into our systems and other back end processes because we run a pretty tight shop there. Once -- as and when those guys come up [ with terms ], we will let each party have a full access to all the channels.
Okay. So small -- next question was a very small clarification. The housing loan book has shrunk sequentially. Any specific reason there?
Well, just that in this quarter, we haven't done a purchase. I guess when we will do it next, it'll even out.
But there's no specific reason for not doing it this quarter?
Not really.
[Operator Instructions] We'll move to our next question from the line of Nilanjan Karfa from Jefferies.
Paresh, a question on the asset quality. You kind of also mentioned a long-term track record and then when I look at the last 20 years' data, right, not necessarily as comparable, but you used to have like credit costs of between 1.5% to 2% at a time when I think the margins would be upwards of 4.5%. And this relationship had broken somewhere around in 2011 and continues till date. Although of late, there has been a significant increase in the overall asset quality and therefore in the provisions. How should we look at it? I think I'm just asking the same question asked earlier, but in a different way.
Well, I mentioned this earlier, we don't have a guidance to either a gross NPA number or a credit cost number. I think our strategy on the portfolio itself in terms of mix, in terms of the way we go about our business, I think, is reasonably well understood. While we are looking to grow faster than the system and therefore we are looking to add market share in almost all our businesses, we are looking to do that while maintaining a fairly stable net interest margin in a certain range and asset quality that we believe -- or a credit appetite that we believe is consistent with the returns that we get. Now if you look at the historical range, we've been through various cycles. Some of the higher ranges on that gross NPA number was also linked to acquisitions that we did along the way. So -- but if you look at the core growth and you look at also the way the portfolio has evolved over a period of time, on a product by product basis, we factor in a certain expected loss, and as long as that is priced into the yield and we are managing to that expected loss, we are comfortable doing that business. I don't think our -- the philosophy -- this philosophy of growth or this philosophy of lending is changing nor is our portfolio taking a certain turn, which would change these broad parameters. But within that, whether it is closer to the 20-year average or lower than that, because an average is an average, it means it would have been almost an equal number at times, that would have been higher. So at this point of time, if we sort of remain in a range, which is not out of line with what we have been doing in the last few years, and yes, if there was a conscious change in the product mix, which was consciously taking on higher risk, which is -- which I'm not saying is the case, then that naturally would imply that we would have a higher yield and theoretically a higher NIM to absorb those losses. But I don't think we are going through any specific change in the mix or change in the growth rates which would result in that.
Right. I'll squeeze in this question specific to GST. How are you looking at your SME or MSME customers in terms of their turnovers, or more importantly, we had this huge hope about these people coming from unorganized to organized segments. So what has been your experience so far?
I think it's still very early to take that call. I still think that, that is something which will happen, but it's not going to happen in months. It'll probably happen in a few quarters because, remember, it's not that these customers will suddenly, because they have to bring in more on their books, the financials which will reflect this will come next year or thereafter and based on those financials and then sort of with the added information that we get on a transactional basis would we be able to take in names that were otherwise not reflecting their full level of activity in their books. So I think from a medium-term point of view, this still remains an opportunity for the banking system that players who are so far not able to access financial services from the formal or the banking sector might be able to -- might be potentially customers for banks. But it's too early. Right now, we haven't yet quite seen that.
And on their own transaction overall volumes, are you still seeing some pressure? And would it therefore imply our underwriting to these guys are tighter than in the past?
Yes, you certainly -- I don't think they have been through the transitional pain completely. Things are -- I think they're getting used to the new regime and the logistical and the reporting and other issues, which they have to deal with. But I don't think the transitional impact is through yet for most of those customers.
The next question is from the line of Hiral Desai from Anived Portfolio Managers.
So just had one question. As an external investor, when we look at the cross-sell ratios for you, is there a number or something that you can share, which gives us an idea on your ability to internally cross-sell? How has that changed over last 3 to 4 years?
So our ability to cross-sell has certainly improved to the extent that we've been able to not just collect, but analyze -- and digest and analyze and put together products, make offers which are much more relevant to the customers. So I think these score cards that we have built for various products and therefore the ability for us to across various marketing campaigns as well as to figure out the -- from a credit perspective or from a fraud perspective the use of analytics to improve the ability to cross-sell has certainly been much better. And in addition to the managed customers being offered those products through the person who is managing the relationship, the digital channels are getting customers to see those offers popping up when they access any of our digital channels is also helping. So we track this, of course, that's not a data that we put in the public domain, but we do track this in terms of the number of products that we've been able to offer and the customers have been happy to take from us across products, which are both are slightly higher...
The thing that you can share here in terms of numbers or percentages or anything of that sort?
No, we haven't done -- on customer level penetration data, I don't think we have put ever in the public domain and I wouldn't be doing that at this point of time.
Okay. And the other question was on the, specifically, on the retail piece. Both from a stock and flow perspective, what percentage of our book maybe comes from top 20 cities? So I'm just trying to understand how much of...
I don't have that data readily available with me. But across some of the retail products, it could be fairly high. I mean, let's say a product like -- take credit cards, it would still be -- or personal loans or let's say even loan against properties, some of these products it would be fairly high in the top 20 cities. But if you look at products like two-wheelers or even auto, it's fairly well dispersed across metro or urban and semi-urban.
The next question is from the line of Sachin Sheth from ICICI Securities.
Just a quick question on the liquidity and the rate environment because we saw this huge flow post-demon and that seems to have fairly slowed plus RBI has been sucking out the excess liquidity. So when do you see the battle for deposits start to heat up and increasing deposit rates?
I think that's a great question because we're probably at that inflection point sometime right now because we've seen somewhat muted deposit growth for some time post-demon -- post the initial flow of the demonetization, which you rightly referred to, but it wasn't an issue because loan growth was also muted, right? Now that we've seen a pickup in loan growth, you already seen, special banks, to perhaps look at slightly higher deposit rate, which in turn therefore tends to flow through into a slightly higher MCLRs. And in this sort of a demand-supply environment, given that there has been a change in this stance from a monetary policy point of view, and for instance, from January this year, the LCRs for banks have also been increased, all of this clearly tends to nudge banks towards a slightly higher interest rate regime from a -- just driven by deposit rates being that much tougher to come by. So I think it's not sudden or it's not huge, but I think we are gradually getting into that sort of a mode over the next few months, I think.
The next question is from the line of Dhaval Gada from Sundaram Mutual Fund.
I think will probably have to be the last question because we are almost coming to the end of the call. But, go ahead.
Just a [ 3 rate-giving ] question, the upgrade, recovery and write-offs for the quarter and the employee count.
Sure. Employee count is about 86,600.
Yes, so the additions and the reductions are both going to be including the NIM, which was -- there were increases and reduced -- reductions. So the additions were INR 4,588 crores, the reductions were INR 4,056 crores, which included the upgradations as well.
And write-offs?
Write-offs during the quarter were INR 1,000 crores -- INR 1,040 crores. Okay, I think we've ran out of time. We've probably been able to address most of the questions. Maybe if we couldn't accommodate a couple of them, I'm sorry about that. But hopefully, the questions that you wanted to ask might have been covered by some of your peers earlier on. Once again, thank you for being on this call. As I'd mentioned already in the beginning, it's a quarter where we did see strong balance sheet growth, although the growth rates were a little distorted based on where we were in December last year. Margins were roughly stable. Some improvements on the fee growth side resulting in revenue growth outpacing operating expense growth. And the bottom line being at around 20% in terms of growth rate. Thank you once again, and have a great day.
Thank you.
Thank you. On behalf of HDFC Bank Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.