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ICICI Bank Ltd
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Good day, ladies and gentlemen, and welcome to the ICICI Bank Q2 FY '19 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Sandeep Bakhshi, Managing Director and Chief Executive Officer of ICICI Bank. Thank you, and over to you, sir.
Good evening to all of you, and welcome to the ICICI Bank earnings call to discuss the Q2 2019 results. Joining us today on this call are our Executive Directors, Vishakha, Anup and Vijay; President, Corporate Centre, Sandeep Batra; CFO, Rakesh; and our Head of Investor Relations, Anindya.Team ICICI is excited about the opportunities that the financial landscape has to offer, and the team has geared up to maximize the bank share of these opportunities. Our focus is on further growing our core operating profit through granular and grid-calibrated business growth. The core operating profit increased by 10% year-on-year to INR 52.85 billion rupees in Q2 of 2019. The core operating profit, excluding dividend income from subsidiary, increased by 17% year-on-year to INR 51.18 billion in Q2 of 2019. The domestic loan book grew by 15.7% year-on-year, led by retail growth of 20.5% year-on-year.The proportion of the loan portfolio rated A- and above increased from 63.3% at June 30, 2018, to 65.5% at September 30, 2018.Our funding profile continues to be healthy. The outstanding CASA deposits increased by 14.9% year-on-year at September 30, 2018, from INR 2.47 trillion to INR 2.84 trillion. The average CASA ratio was maintained above 45% during the Q2 of 2019.The team is taking a number of initiatives to expand the customer base and deepen the penetration of our products and services among its existing customers through improving and expanding our product offerings and sharpening our focus on specific micromarkets. We are making on making that delivery more seamless and frictionless by decongesting our processes and appropriately empowering our teams. Even as we focus on healthy growth in core operating profit, we remain equally focused on addressing the stress in the corporate and SME portfolio originated in the earlier year. The NPA additions during the quarter have further moderated to INR 31.17 billion, of which INR 13.04 billion represents the impact of currency depreciation on existing foreign currency NPAs. The corporate and SME NPA additions were mainly from the portfolio rated BB and below at June 30, 2018. The addition to NPAs in FY 2019 are expected to be significantly lower than FY 2018.Our gross nonperforming assets were INR 544.89 billion as of September 30, 2018. The provision coverage ratio, excluding technical/prudential write-offs, increased by 480 basis points sequentially to 58.9% as of September 30, 2018. Including technical/prudential write-offs, the provision coverage ratio was 69.4%.Since the last quarter, we have been disclosing our BB and below corporate and SME portfolios. This is decreased from INR 246.29 billion at June 30, 2018, to INR 217.88 billion at September 30, 2018.During the quarter, concerns emerged around the group engaged in infrastructure financing and EPC businesses. Our exposure to this group is primarily to an EPC company within the group and is primarily nonfund in nature comprising guarantees. This exposure has been broadly at the same level for several years now. The internal rating of this company was downgraded to BB and below during 2Q 2019, and the same is included in our corporate and SME BB and below portfolio at September 30, 2018. This exposure was standard as of September 30, 2018.Recently, there have been concerns regarding the liquidity issues faced by certain NBFCs and HFCs. Our total loan investment and nonfund-based outstanding to NBFCs and HFCs were INR 367.34 billion at September 30, 2018. The loans to NBFCs and HFCs were about 5.4% of our outstanding loans at September 30, 2018. Our lending has been focused on entities that are well-rated, have long vintage and are in the public sector or owned by banks and well-established corporate groups. We continue to do business with them, subject to appropriate risk assessment and pricing.As we've mentioned on our previous earnings call, our objective is to collaborate and bring all our capabilities together to be the trusted partner in serving our customers and become their banker of choice. Our focus is on further growing our core operating profit through granular and risk calibrated business growth. We expect the provisions in FY 2019 to remain elevated and are closely monitoring the asset quality. We look forward to building the business performance and shareholder value with support from all our stakeholders.With these opening remarks, I will now hand the call over to Rakesh.
Thank you, Sandeep. Good evening to all of you. I will talk about our performance on growth and credit quality during 2Q of 2019. I will then talk about the P&L detail and the capital position.First, on the growth. The domestic loan growth was 15.7% year-on-year as of September 30, 2018, driven by a 20.5% year-on-year growth in the retail business.Within the retail portfolio, the mortgage loan portfolio grew by 16%, automobile loans by 10%, business banking by 45% and rural lending by 19% year-on-year. Commercial vehicle and equipment loans grew by 20% year-on-year. The unsecured credit card and personal loan portfolios grew by 43% year-on-year, off a relatively small base, to INR 355.67 billion and was about 6.5% of the overall loan book as of September 30, 2018.We continue to grow the unsecured credit card and personal portfolio, primarily driven by our focus on cross-selling to our existing customers.Growth in the SME portfolio was 20.4% year-on-year at September 30, 2018. The SME portfolio constituted 4.6% of total loans as of September 30.We saw continued growth in our domestic corporate loan portfolio as well. Excluding the net NPAs, restructured loans and loans internally rated below investment grade in key sectors at September 30, the growth in the domestic corporate portfolio was 15% year-on-year. The net advances of the overseas branches decreased by 3.8% in rupee terms and 13.3% year-on-year in U.S. dollar terms at September 30. The international loan portfolio was about 12.7% of the overall loan book as of September 30.As a result of the above, the overall loan portfolio grew by 12.8% year-on-year at September 30.On the funding side, the total deposit grew by 12% to INR 5.6 trillion as of September 30, CASA deposits grew by 14.9% to INR 2.8 trillion at September 30, 2018, and the outstanding CASA ratio was 50.8% at September 30 compared to 49.5% at September 30, 2017.Now coming to the credit quality. During the quarter, the gross NPA additions were INR 31.17 billion, the retail portfolio had gross NPA additions of INR 7.6 billion and recoveries and upgrades of INR 5.92 billion. Of the corporate and SME gross NPA additions of INR 23.57 billion, about INR 13 billion represented the impact of rupee depreciation on existing foreign currency NPAs. The balance slippage of INR 10.5 billion was largely from the BB and below portfolio, which we had disclosed during the previous quarter. If included, slippage of about INR 0.54 billion from restructured loans, the involvement of nonfund base exposure of INR 1.32 billion and slippage of INR 8.28 billion from other loans rated BB and below. As the corporate portfolio is lumpy in nature, the additions to cross NPA may fluctuate on a quarterly basis.The NPA additions in FY 2019 are expected to be significantly lower compared to FY 2018, as Sandeep mentioned earlier. The aggregate deletions from NPA due to recoveries and upgrades were INR 10.06 billion in the quarter, the gross NPAs written off during the quarter aggregated about INR 3.89 billion, and the banks sold gross NPAs aggregating to INR 6.98 billion during the quarter. The sale was for 100% cash considerations.The bank net nonperforming asset ratio decreased from 4.19% as of June 30, 2018, to 3.65% as of September 30, 2018. The provision coverage ratio on nonperforming loans, excluding cumulative technical potential write-off, increased by 480 basis points sequentially to 58.9% as of September 30 compared to 54.1% as of June 30. Including the write-offs, the provision coverage ratio on nonperforming loans improved to 69.4% as of September 30 from 66.1% as of June 30, 2018.During FY 2018, RBI had directed banks to initiate insolvency resolution process for certain accounts. At September 30, 2018, the bank had outstanding loans and nonfund facilities amounting to INR 38.81 billion and INR 1.47 billion, respectively, to the accounts referred to NCLT in the list 1. The provision coverage ratio on these loans was 89.7% at September 30. The bank had outstanding loans and nonfund facilities amounting to INR 93.68 billion and INR 7.82 billion, respectively, to accounts referred to NCLT in the list 2. The provision coverage ratio on these loans was 62.1% as of September 30.The total nonfund-based outstanding to borrowers, classified as nonperforming, was INR 30.47 billion as of September 30, 2018. The net standard restructured loans were INR 14.13 billion at September 30, the nonfund-based outstanding to companies in the restructured portfolio was INR 1.27 billion at September 30.The standard loans under the remaining RBI schemes, namely 5/25 and S4A, excluding overlaps from drilldown which have been fully implemented, were INR 18.98 billion as of September 30, 2018. In addition, nonfund-based outstanding to borrowers under S4A other than standard restructured cases aggregated to INR 15.07 billion at September 30.Moving onto the drilldown list. The aggregate fund-based limit and nonfund-based outstanding to companies that were internally rated below investment grade in the key sectors and promotor entities decreased from INR 44.01 billion as of June 30 to INR 32.83 billion as of September 30, 2018. There was a net decrease in exposure of INR 0.66 billion and net rating upgrades of INR 10.52 billion during the quarter. The drilldown list has decreased from INR 440.65 billion at March 31, 2016, now to INR 32.83 billion at September 30. Going forward, we will merge the drilldown list with other categories in the corporate and SME, BB and below portfolios.As of September 30, 2018, the fund-based and nonfund-based outstanding to standard borrowers rated BB and below were INR 217.88 billion. This included gross standard restructured loans in the drilldown list, fund-based and nonfund-based outstanding of borrowers under fully implemented RBI schemes and nonfund-based outstanding to nonperforming and restructured accounts, excluding overlaps of INR 113.05 billion as of September 30, 2018 compared to INR 124.91 billion as of June 30, 2018. The balance, INR 104.83 billion of fund-based and nonfund-based outstanding to borrowers rated BB and below, included INR 45.5 billion related to cases with an outstanding greater than INR 1 billion and INR 59.33 billion for cases with an outstanding of less than INR 1 billion.On Slide 31 of the presentation, we have provided the movement in our BB and below portfolio during Q2 of 2019. There were rating upgrades to the investment grade categories and a net decrease in outstanding of INR 41.03 billion. There were rating downgrades of INR 22.76 billion from the investment grade category during the quarter. This includes downgrades to -- in the drilldown list of about INR 8.21 billion, fund and nonfund outstanding to a group engaged in infrastructure, infrastructure financing and EPC business and some other accounts. Lastly, there was a reduction of INR 10.14 billion due to classification of certain borrowers as nonperforming during the quarter.Coming to our exposure to the power sector. Our total exposure was about INR 481.5 billion at September 30. Of the total power sector exposure, about 30% was either nonperforming, restructured or a part of the drilldown list or under an RBI resolution scheme. Of the balance 70% of the exposure, 53% was to private sectors and 47% was to public sector companies. Our exposure to public sector companies includes about INR 16.14 billion to the state electricity boards. Also of the balance 70% of the exposure, excluding state electricity boards, about 81% was rated A- and above.The loan and -- the loans, investment and nonfund-based outstanding to NBFCs was INR 241.9 billion at September 30 compared to INR 219.15 billion at September 30, 2017. The loans, investment and nonfund-based outstanding to HFCs was INR 125.44 billion at September 30, 2018 compared to INR 101.74 billion at September 30, 2017. The loans to NBFCs and HFCs were about 5.4% of our total outstanding loans at September 30, 2018.The builder portfolio, including construction finance, lease rental discounting, term loans and working capital loans, was about INR 184 billion at September 30.Coming to the income statement. The core operating profit, that is profit before provisions and tax excluding treasury income, grew by 10.3% to INR 52.85 billion in Q2 of 2019 from INR 47.93 billion in Q2 of 2018. The net interest margin for the quarter was 3.33% compared to 3.19% in Q1 of 2019 and 3.27% in Q2 of 2018. The domestic margin was at 3.71% in the current quarter compared to 3.54% in Q1 of 2019 and 3.57% in Q2 of 2018.International margins decreased to 0.05% in Q2 compared to 0.3% in Q1 of 2019. Overseas margins reduced sequentially in Q2 of 2019 due to lower interest collection from nonperforming loans.There has been an increase in the incremental cost of term deposits for the banking systems since September. While the bank has been passing on the increase in cost of deposits to borrowers by hiking the MCLR and the incremental lending rate, the impact of the same on margins may come with a lag due to the lower recent frequency of loans linked to MCLR. The total noninterest income was INR 31.56 billion in Q2 compared to INR 51.86 billion in Q2 of last year. Fee income grew by 16.5% year-on-year to INR 29.95 billion, driven by the retail fee income growth of 20.6%, which now constituted about 72% of overall fees in the current quarter.The dividend income from subsidiaries was INR 1.67 billion in the current quarter compared to INR 4.11 billion in Q2 of the last year. The dividend income in Q2 of 2018 included the final dividend of ICICI Life for FY '17. The final dividend for ICICI Life for FY '18 was received in Q1 of 2019. Other income, excluding dividend income from subsidiaries, was INR 0.3 billion in Q2 of 2019 compared to INR 0.12 billion in Q2 of 2018.The bank's operating expenses increased by 10.6% year-on-year in the current quarter. The cost-to-income ratio was 45.2% in the current quarter compared to about 44% in Q2 of 2018, which excluded gains from a stake sale in subsidiary. The bank had 83,927 employees at September 30, 2018.There was a treasury loss of INR 0.35 billion in Q2 of 2019 compared to a profit of INR 21.93 billion in Q2 of 2018. Treasury income in 2Q of 2018, as you would recollect, included gains of INR 20.12 billion from sale of stake in ICICI General Insurance Company. Provisions were INR 39.94 billion in Q2 of 2019 compared to INR 59.71 billion in Q1 of 2019 and INR 45.03 billion in Q2 of 2018. As a result of this, the bank had a net profit of INR 9.09 billion in Q2 of 2019 compared to INR 20.58 billion in Q2 of 2018.Coming to subsidiaries. The performance of subsidiaries is covered in Slides 41 to 47 in the investor presentation. The consolidated profit after tax was INR 12.05 billion in Q2 of 2019 compared to INR 0.05 billion in Q1 of 2019 and INR 20.71 billion in Q2 of 2018.On the capital position, the bank had a standalone Tier 1 capital adequacy ratio of 15.38% and total standalone capital adequacy ratio of 17.84%.With this, we'll now be happy to take your questions.
[Operator Instructions] The first question is from the line of Mahrukh Adajania from IDFC.
My first question is on that movement in the BB portfolio. There's been very sharp upgrade, of course, one is steel, but what are the other sectors? And are these all because of internal ratings or [indiscernible] upgrade that are INR 41 billion, of which, around INR 19 billion is steel, but...
Yes, so the one larger count in steel, as you're referring to, that got upgraded during the quarter. As you're aware, these are all ratings based on the internal ratings of the bank which are done by the risk team of the bank. The other upgrades are spread across companies and included 1 case in which there was a change in management, which happened a few quarters back.
Okay, got it. And in terms of downgrades to BB, other than the group that you've mentioned, it's scattered across sectors or is it real estate because you had mentioned that as a concern developer, as a concern last quarter?
So in addition to that, as you said, if you look at the drilldown list which is there, the sectors covered there, that was about INR 8.21 billion of downgrades that we saw in those sectors. And then we had this infrastructure company and some other accounts which were there. On the builder finance portfolio, we are monitoring that portfolio closely. As of now, we are comfortable with the portfolio.
Okay. Got it. And just in terms of margins, again, you would have seen a lot of interest from NPLs. Is that the reason why margins rose?
If you're looking at it sequentially, Mahrukh, actually the interest collection we had, interest collection from nonperforming loans in the current quarter. But in absolute quantum, it was actually lower than what we had in the June quarter because the June quarter had the -- quite a big impact of the resolution of one of the seal accounts from the list 1 of the NCLT. So we did have interest collection in the September quarter. But amount, while being large, was smaller than what we had in the June quarter.
You want to explain the margin improvement?
So in terms of the margin, if you look at -- the funding cost has remained broadly at a similar level in the September quarter compared to June quarter. And we have been able to improve the yields somewhat. The fact that we have deployed some of the surplus liquidity onto the lending side has also helped on the margin. And as I mentioned earlier that there has been an increase in the funding cost that the system is seeing from sometime in September onwards. And then going forward, that will result in the funding cost going up, and we will be focused on trying to pass that on to the lending side as well.
All right. And what about the overseas margins? They've been so volatile. So where do they stabilize?
On the overseas margin, I think at the beginning of the year, we did say that it is so volatile because it is being driven by the interest collection on the nonperforming loans. Given the very high level of NPLs there, the core margins are -- is extremely low. So you will continue to see this volatility in the current financial year. And even the September number that you see includes some benefit of interest collection on NPLs. So I think it is -- as we get into the next financial year is when we should start seeing some stability there, otherwise, you will, indeed, find that margin to be volatile during the rest of the current financial year as well.
Okay. And just one last question. A lot of banks are kind of quantifying what recoveries they would get in FY '19 from NCLT cases, which are at very advanced stages of resolution. So would you have any such number for '19, '20?
We would report that number as the collections happen. There's no estimate that we have on that.
The next question is from the line of Kunal Shah from Edelweiss.
So particularly in the current operating environment, we had this entire strategy of congestion and decongestion with respect to the growth. So now do we see maybe more -- maybe the more segments getting into the congestion category? Or maybe given the opportunity which is there, are there few segments which get into the decongestion category?
So in terms of -- I think Sandeep had earlier mentioned about decongestion across the processes at the bank to enable business across segments. So that was the focus which the -- we have continued at the bank in the current quarter as well. In terms of opportunities, as you say, in the current environment, on the lending side, the opportunity is there across each and every segment on the retail side, on the corporate side and even on the SME side. And you would have seen that the growth across each of these segments has been quite consistent in the current quarter and at a relatively high level. So the opportunities are there in each of the segments, and we will, like Sandeep has communicated, would be focusing on risk-calibrated profitable growth on -- in each of these segments.
Okay. But overall, maybe because of the market share gain, do we expect a better growth? And even in terms of the pricing power now, maybe, again returning to banks as such, do we also see like NIMs broadly bottoming out? So maybe we could say that it has already bottomed out, and we should only see the improvement here on?
Kunal, as you're aware, the liquidity in the system is extremely tight. And RBI also has a -- we own the liquidity. So it is fair to assume that in the second half of the financial year, the funding cost will go up for all the banks including us. And as I said, we will be focused on passing on the increase in funding cost onto the lending side. But we'll have to just see how that plays out. So I would not want to say that margins have bottomed out for the system, per se. But our focus will definitely be to ensure that we pass on all the increase that we see on the funding side onto the lending side.
Okay. And lastly, in terms of this INR 821 crores, say, to a group engaged in infrastructure, so downgrades which have been there, so this is only with respect to the downgrades or even if we have any exposure to the SPV level, we would have downgraded that as well to that entire group? So how should we read at it? Maybe I read into it. So this is only the exposure to few entities or this is the overall exposure to that group?
No. So I just repeat what I said. So there were rating downgrades of INR 22.76 billion from the investment grade category during the quarter. INR 8.21 billion out of that included downgrades from the drilldown list, which is the power, steel, rigs and those sectors. That is INR 8.21 billion from all those sectors. Then there was downgrade that we had for -- towards the group engaged in infrastructure, as you mentioned, and there were some other accounts. There is no specific numbers that we have given for any specific account. These are the aggregate numbers. INR 8.21 billion is not pertaining to the infrastructure company. It is pertaining to the drilldown list in aggregate.
Entire drilldown list, okay.
Yes, that is power, steel, rigs and these sectors, which we disclose -- which we have been disclosing separately.
[Operator Instructions] The next question is from the line of Rakesh Kumar from Elara Capital.
Firstly, the question on the drop in the Tier 1 capital for the console entity. Why 60 bps? So...
No. So if you look at the standalone number also, there is a decline in the Tier 1 during the current quarter. It is in line with the growth that we have seen in the balance sheet for the quarter. And of course, it does not include the profits for the quarter. Any case, the profits have been on the lower side. But this is excluding the profit. So it is in line with the growth in the risk-weighted assets that you will see at the bank level.
But that number is looking, like, a quarter fall of 50, 60 bps slightly on the higher side.
It is because it is excluding the profit for the quarter. And the growth in assets has been there. We talked about the growth of -- on the domestic and the overseas book also, actually, in this quarter, in rupee terms, has increased sequentially because of the depreciation.
And the deposit cost being lower this quarter. So would this be onely due to the average CASA being on the higher side or there's any other thing, like, in this?
So it would be because of the average, CASA was higher in the September quarter. And on the wholesale deposit side, we have not been as aggressive in fundraising. We had some opportunities on the borrowing side to raise refinancing. So you would have seen that our borrowings have gone up during the current quarter.
The next question is from the line of Pranav Gupta from Birla Sun Life Insurance.
So my question is on the deposit side. So some lines are talking about good traction on the retail term deposit side and talking about shedding wholesale term deposits. So what is the kind of trend that we are seeing here for our bank, and how do you see it affecting the cost of deposits overall?
So we have also seen pretty good traction in retail term deposits during the September quarter, actually over the last 2 or 3 quarters, not just September quarter. The reason that, as I mentioned earlier, you would find that the overall term deposit growth for the bank is still relatively on the lower side is because we kept away from some of the higher-cost wholesale deposits because we had other opportunities of refinancing, and the borrowings had gone up. But again, as I said, I think in the second half of the year, the liquidity would get still tighter, and I think banks would need to rely, to some extent, on the wholesale deposits as well.
Okay, okay. And secondly, just data-driven question. Could you help us with the absolute numbers per CA and SA separately?
Yes. It's there in the presentation on...
Okay. Maybe I missed it.
Savings deposits was INR 2.07 trillion and current account deposit was INR 760 billion.
The next question is from the line of Nitin Aggarwal from Motilal Oswal Securities.
The growth in retail assets continue to be very strong for us, but the share of unsecured loans has now increased to 6.5% of total loans. So what levels will we want to maintain in our portfolio over the coming years for these assets?
So I -- we don't have any specific number in mind at all in terms of the proportion of unsecured retail loans in total loans, or for that matter, retail loans in total loans. Depending on the opportunities that we see, we would calibrate that number. As of now, there is a lot of opportunity that we are seeing by just focusing on cross-selling to our existing customers and as we mentioned to an earlier query that, that is one of the areas where we believe that there's still a lot of work that we can do by decongesting some of the processes and making it easier for our customers to access these products. So as long as we are able to drive growth through this, we would be comfortable increasing the portfolio. And we are mindful of the fact that currently, it is really not a large number per se. But the only focus for us is that the risk parameters we would ensure that we don't go beyond the boundary that we have set up. And within that, we'll be happy to grow the portfolio.
Right. And secondly, like, you indicated in opening remarks that provisioning will remain elevated over FY '19. Now as you get -- the technical coverage has already increase to 70%. Your coverage has also increased sharply to around 60%. So what is the reason, like, why are we so conservative on the provisioning side? Because slippages this quarter have been quite benign, investors assets have been coming off and the NCLT resolutions. I think we may see good recoveries there. So where do we want to take the coverage?
On the coverage, if you recollect, we had earlier said that by March 2020, we would want it to be at 70%. Of course, the way things have been moving, the coverage has been increasing at a better pace than that. So on provisions, you are right that the writebacks can happen, and provisions can be lower in a particular quarter. But it's very difficult to, kind of, be sure of when that happens. And in the interim, there will still be some amount of aging provisions that will come in as the nonperforming loans move into the deeper buckets on the doubtful and the loss category. So that is the reason for the current year. We are seeing that in the second half also, the provisions will be elevated. So compared to any kind of a normalized credit loss, it will definitely be a higher number in the second half of the year as well.
Right. And lastly, if you can share the SME 2 number, if possible?
We don't disclose that separately. We are disclosing the BB and below portfolio. As per our internal ratings, that is what we track internally as the accounts, which have greater risk of default compared to the rest of the portfolio.
The next question is from the line of Gurpreet Arora from Quest Investment.
A few quick questions. When you say that you're looking at risk-calibrated growth, what sort of credit cost are you envisaging for retail and nonretail going ahead? That's one. Second, the CD ratio has been -- the domestic CD ratio has been inching up for last 1 year. So any new steps are you taking to shore up deposit growth versus the advances growth? And third and last question, any retail loan mix is -- do you have in mind?
On credit cost, we have not disclosed any specific numbers in terms of each of the segments, per se. In the normalized kind of terms and the number should, of course, be much closer to a 100 basis point kind of a number compared to 300 to 400 basis points, where we currently have been running. But beyond that, for each segment, while, of course, internally, we have numbers that we track and monitor the portfolio against. We have not separately disclosed for each of the segments on the credit cost. On the credit-deposit ratio, you are right that the numbers have increased for us. I think it would have increased for almost all the banks. The way they look at, this is not just purely from a credit deposit ratio, we also look at the liquidity coverage ratio that we maintain, which we maintain comfortably higher than the minimum requirement of RBI, which is close to 90%. We are closer to 110% on that. We also look at some of the more stable and longer-term borrowing opportunities because compared to a wholesale deposit, they are much more stable and at points of time could even be of a similar cost or a lower cost. So we look at the overall liquidity by taking into consideration the credit-deposit ratio, the level of borrowings that we have and the liquidity that we maintain, which is reflected in the liquidity coverage ratio. So we are quite comfortable with the balance sheet position. And of course, we would want to grow our deposits, the retail deposits at an even faster pace and that's what we are focusing on. On the retail loan mix, actually to an earlier question I mentioned that we don't have any specific mix in mind, depending on the opportunities in the market. And our own risk appetite, we will see how that book grows and what proportion that is, because it'll also be a function of the growth that we see in the other segments, where, also, there are attractive opportunities on the corporate and the SME side.
Sure. Is it fair to assume that the 100 basis points credit cost can be achieved over next 2 years, maybe FY '21?
It -- we have not said anything specific. But definitely we should get to a normalized credit cost by then. It also depends on the expected migration to IFRS or NDS. If that happens, it could happen earlier than that.
Sure. And just one last clarification. We had mentioned about some ROE targets in a couple of presentations back. So we still hold onto those targets?
We had talked about a 15% ROE. So that is something that we are kind of still focused on. Like we mentioned in the last quarter's call also that, that is an initial target. And beyond that we will reassess and see where we would want to target our ROE on. In the interim, like, we, again, mentioned in the last call that our focus is to increase the core operating profit for the bank and within the risk parameters.
The next question is from the line of Akhilesh Gupta from Reliance Nippon Life Insurance. [Operator Instructions]
This is [ Jagdish ] here from Reliance Nippon Life Insurance. Are we making our FCNR(B) -- FCNR deposit risk competitive in line with current currency depreciation?
Yes, so that, we always calibrate those deposit rates depending on what -- where the market is, and what is the all-in cost comparable with the domestic market. So that's a calibration that we do on a regular basis.
Okay. Any increase in FCNR deposits...
Any increase in FCNR deposit rates you are looking going forward? And any increase in the deposit amounts which we are getting right now?
On FCNR, in specific, we -- there is -- very difficult to comment. So you're depending on the opportunities and the market rates, we would see how that's fixed in, in terms of our cost.
And what about domestic deposit rates? Are we increasing the deposit rates in the light of tight liquidity conditions?
So I think you have -- you would have seen that in almost all the banks have increased the bulk deposit rates over the last couple of months. On the retail deposit rates, we had increased it in September quarter once, and we have increased the MCLR, the lending rate also a couple of times in the last quarter. So these rates are calibrated with what the liquidity and the competition is. Our expectation, as I earlier said, is that there would be some increase in these rates in the second half of the year.
The next question is from the line of [ Aadesh Shrivastava ] from Nomura Securities.
Yes, Rakesh, a question on liabilities. Can you just quantify as a percentage of our term deposit, what's retail and what's wholesale? And what are you seeing in terms of -- retail, we can still check, but wholesale, what have you seen rates go up by?
So the wholesale deposit rates, I think, the best way for you to look at it is, if you look at the CD rates, they are a good reflection, generally, for -- where the wholesale deposit rates are. So the wholesale deposit rates have clearly gone up above 8%. And then it depends on every day and every week in terms of where the rate is for the banks. And in terms of the -- we have not separately disclosed the breakup of term deposits into retail and wholesale, but a larger proportion of the term deposits would indeed be the retail deposits.
It will help if you can quantify that, given that it's so sensitive now that the wholesale funds have increased by a larger quantum. It'll be great if you can just indicate, broadly, what the mix would be.
Sure. So going forward, we would consider doing that.
Okay. And Rakesh, just again getting back -- in this context, getting back to the margin question of when you say that we don't -- margins may not have bottomed out for the industry. CASA cost is not moving up, retail moving up slowly, and the whole MCLR effect and the spread improvement effect will come through. So is it not very logical that the NIM improvement could end up being pretty sharp over the course of next 2 to 4 quarters for a CASA-heavy bank like ours?
That is what the endeavor will be. But as I said, it will be a function of how sharply some of the wholesale rates go up, because at some stage that may have an impact on the retail deposit rates as well. So it's very difficult to kind of comment on that. And given the current liquidity scenario, as you see, the sort of funding cost is indeed going to grow. I think a sharp increase in margin for the banking system in the next couple of quarters may not be the way it will play out.
No, I'm just saying, may not be 2 quarters because wholesale will be short in nature in terms of duration, so it'll go up very quickly maybe in the third quarter itself. They take a little more longer once rates stabilize so even at levels we are today. Once that happens, I think it will seep into margins over the course of next -- maybe after a couple of quarters, right? Because only like 25% of your funding would be wholesale and rest is retail, which is not going up by the same quantum. So...
So that would be the endeavor. There are lot of variables in this at some stage. The retail deposit rate itself, if the gap is too high with wholesale deposit, banks may end up increasing that. So we'll have to just see how it plays out.
And second question is relating to, you kind of spoke about the overseas margins. I know there is the NPA effect playing in. But like, how does it, mathematically if you can just explain, how does this reversal in margins start maybe next year onwards? Would the infused capital that helps the margins? Or because the -- or you are fully written off the bad loans and hence, margins will start to -- just wanted to understand mathematically as to what the turning point would be there?
Mathematically, you're right that given the provisions which are there. There could be some amount of transfer of capital, which happens, which is within the branch itself. There's no impact, per se. That is something that may happen. But I think, more importantly, there are nonperforming loans, and we are indeed hoping to collect on some of them definitely. Timing is a very difficult thing to estimate there. And in the interim because the interest collections on NPLs, they are, by definition, going to be lumpy. So for example, in this quarter, we had interest collection on the overseas book, and after that the margin is 5 basis points. So without that it actually would have meant that the interest expense was higher than the interest income. Just given the level of NPLs which are there, and -- because we have not grown the book in the last 2 or 3 years, that kind of compounds it more from a margin perspective. So as I said, as we get into the next financial year, hopefully, we should see more stability on the margin there.
The next question is from the line of Amit Premchandani from UTI Mutual Fund.
Just a question on the remaining liquidity rate that's there...
Amit, we can't hear you.
Amit, I'm sorry. Amit, your line -- the audio from your side is not clear. [Operator Instructions]
Am I audible now?
Yes, it is.
Yes.
Yes, on the prevailing liquidity scare on the NBFC side, are we getting many opportunities to lend -- or lend to NBFCs or buy out portfolios? And how are we using that opportunity, and what are the internal gaps in terms of NBFC lending?
So as you yourself said in the current environment, there will be opportunities for lending to NBFCs, HFCs for buying portfolios from NBFCs and HFCs for private sector purposes or even otherwise. So these are options and opportunities that we are looking at. And all of this, of course, has to be within our risk appetite. So we are open to lending to NBFCs and HFCs and even buying portfolios, retail portfolios from them.
And another question from a long-term point of view, we have been hearing over the last 4, 5 years during the current credit cycle that a large part of the portfolio which is under stress is of accounts or relationships which were like going back to 2 decades and all that. And we have -- how sure you are that similar kind of NIM lending will not be done in the next credit cycle?
In terms of the -- we have articulated that over the last 2 or 3 years, in terms of our approach on the corporate lending side. And if you look at some of these sites that we have put in the presentations, that talks about the movement in the rating category of the loans. We are a lot more focused on the higher rated categories, and we have seen that movement as well. We are focused on the concentration risk that we have talked about. And we have given some of the numbers there as well. And of course, at an overall portfolio level, the proportion of retail loans going up itself increases the granularity of the portfolio. We are separately disclosing the BB and below portfolio as well to -- for -- because that is the early indication of how the portfolio is behaving. So we are completely focused on this, Amit. And I think, over time it will show up in the numbers as well.
But just the approach towards lending to big names, and assuming that all will be well because of the names. That will approach will change permanently for you?
So the lending will be based on the risk appetite that we have. And based -- and we are focusing clearly away from some of the project financing and M&A financing that we have done in the past. So you're right that in terms of the approach. It is going to be a more granular and better rated exposure.
The next question is from the line of Mayank Bukrediwala from Goldman Sachs.
Just 2 questions. First, in terms of the provisioning coverage that we have already built up on the NCLT 1 and 2 list, so that's already at 70%, it's even higher on NCLT 1. What is the extent of provisioning writebacks, do you think that could come out from there, specifically on NCLT 1? And by when do you think we could see some of that provisioning coming back?
So on the NCLT, there is one case which is currently kind of ongoing and all of us are aware of the progress there. It is quite public. So as and when that kind of concludes and banks recover on that, it will be -- it will result in a writeback for banks including for us. They will, of course, as I mentioned earlier, be -- further provision that comes in because of aging of some of these loans based on the RBI guidelines which are there. Overall, it is very difficult to kind of comment on the quantity and timing of the writeback on this portfolio, let me just see. We are hopeful that we should get a reasonable amount of writebacks from some of these loans, but we'll have to just wait and see when that happens.
So at an overall level on the entire NCLT, we do expect writebacks to come in. Like, we expect LGD to certainly be less than 70%.
It's very difficult to say, given the way the entire process is. It's not something which is frankly within the hand of bank, it is a process under NCLT. We have seen only 1 or 2 resolutions which have happened yet, and bulk of the interest is -- has been on a sector like steel or cement or a couple of other names. Many of the other borrowers which are there, especially in the list 2 that RBI had given out to banks. There is a lot more of exposure to power and -- some of the ATC companies, where the recovery may not be that good. So we'll have to just see how that plays out on -- through the NCLT process.
Right. Just one more question. I just want to get a sense on the loss we have recorded on the U.K. bank subsidiary, just some color on that. And also in terms of asset quality, what are the NPLs in that at the moment?
Sorry, what was the last one?
The NPL levels in the U.K. bank subsidiary, and some color on the loss that came through in this quarter in the U.K. bank subsidiary?
In terms of loss, we have talked about earlier that it is essentially because of some of the provisions that we have taken on the nonperforming loans, which we have in the U.K. subsidiary. Quite a bit of those loans are India-linked loans and have faced a similar kind of stress that we have talked about on the domestic and the overseas branches book. So that is where we are in terms of the U.K. portfolio. So for the current year, we will have to closely monitor that and see how it plays out. In terms of the aggregate net NPL at the U.K. subsidiary is about $190 million as of 30 September.
The next question is from the line of [ Sachin Kumar ] from [ Vashish Capital ].
Sorry, I missed the first 30 minutes. Could you share what is your exposure on the infrastructure company?
We have not disclosed our exposure to any specific borrowers. So as you would appreciate, as a bank we are not able to do that so. We have said that our exposure, which was there, it is a part of the exposure that has got downgraded and it's a part of our overall BB and below portfolio that we disclosed.
The next question is from the line of [ Pranav Tendulkar ] from [ Rare Enterprises ].
I just wanted to ask you what are the risks parameters and risk frameworks that you are using to help your retail engine grow, because I see that your retail engine has actually started working very well. And so things like credit scores and things like how many common people are there in the retail liability side and asset side. Are there pricing differentials for various things because those things will be important and those things will matter after some time?
[ Pranav ], this is Anup. Hello? This is Anup Bagchi. So I think it's a great question if you're on the retail side. If we broadly breakup [ the daily group ] one is unsecured and the other one is secured...
Sorry, sir, we can't hear you clearly.
Can you hear me clearly?
No, you're sounding very distant.
So broadly, if we break up -- now can you hear me?
Yes, now we can hear you, thank you.
Yes, yes. So broadly, if we break up the retail lending into 2 parts, there's secured and there's unsecured. So on the unsecured part, essentially our credit scoring model has inputs which is more than the CIBIL and the credit bureau. Because credit bureau, we think that it's only a lag indicator, it's not a lead indicator. So you'll see that, of course, the 2/3 of all our lending is being done to our current customers. And in the current customers, liability and the transaction behavior is a very, very big input to the credit scoring that we finally do, okay? And particularly because, as you know, we are very, very strong on the salary side, we are of very, very high frequency looking into the liability side. So that's a very, very big part on the unsecured part. Now on the secured part, so while we do income estimation, that is 1 part, we have to be very, very careful on the collateral that you get. The 3 big estimates that we do is that, a, what is the quality of the collateral? And by quality of the collateral it means that what is the valuation of that collateral, number one. B, what is the salability of the collateral? Third is, when you sell, what is the realizable value? And we look at into parameters only if there's a concentration within an area, et cetera, et cetera, et cetera. So we have to just make sure. And on the valuation side, we have a very large internal team which does valuation. So we don't rely that much on the external valuation. We have a very large team which does internal valuation, because as you know the delta between the yields that you get on secured and unsecured is quite large. And so the collateral value, realizable value has to be very, very critical. So that is another big input into our input. And if you look at our credit cost, and we routinely benchmark credit cost. The 2 things we do. One is we routinely in absolute sense we benchmark our credit cost. Second, what we do -- also do is that all the files that we are not able to do with doesn't pass through our filter. After 6 months, with a lag of 6 months or 1 year, if they've taken a loan outside, we are able to figure out whether our rejections are proper or improper. Proper is, if the credit cost was higher on that portfolio, which we left out. And I'm going to share with you that we -- internally they are quite satisfied with what we reject.
Right, right. Sir, just last question from my side, what is the business banking subvertical in retail consists of...
The business banking subverticals are loans, which are of typical size of INR 1 crores, INR 1.5 crores. So it's a small ticket business loans. And they're mostly collateralized. In fact, all of them are collateralized.
Okay. So the collateral will be lap or business cash flows?
No, no, collateral will be -- so there'll be 2 collaterals. One collateral will be his own cash flows, et cetera, et cetera. The second collateral, definitely, will be either a self-occupied property or commercial.
Right, right. And are these sole banker relationships? Like all...
Yes. Most of them will be sole bankers. I mean, INR 150 lacs, INR 1 crore, there is no multiple bankers, sole banker. On that property we'll be the only person.
Okay, because that portfolio is actually growing very fast, and it will be a very good ROE accretive if you can manage the risks. That's why.
Yes, yes. So far, so good.
The next question is from the line of Krishnan ASV from SBI CAP Securities Limited.
My question was around the NCLT list provisioning and generally, the fact that you have reached about 30% provisioning along with technical write-offs. How soon do you need to get to 100% on your NCLT list 1 purely from an aging provisioning? Because bulk of your NPAs are residing in the Doubtful 1 or D1 category or beyond. So just a sense of how soon will you need to hit a 100%, just because of the aging-related provisions.
So it will be spread across quarters. So depending on -- because that's a completely timebound thing. When 4 years get completed, you have to move to 100%. So that will be distributed over the next several quarters in terms of the portfolio moving from that 40% provision requirement bucket to a 100% provision requirement. So a lot of that would, indeed, come in the next financial year, if we were to continue as per RBI guidelines and Indian GAAP.
Right. And just assuming we move to NDS at some point of time in FY '20. Could you just give us a sense how your internal ratings mirror the kind of loss given defaults that you are envisaging across the various rating buckets? I mean a broad sense of what you rate at AA and above versus what you rate just below that.
So for each of these internal ratings, based on the experience of the portfolio, we have probably default estimates which are there. And that is what will be considered under NDS for making the provisions on the stage 1 and stage 2 category. So beyond that, I think, once we kind of move over to IFRS, so NDS is only when we can comment on more details on that.
Ladies and gentlemen, due to time constraints that was the last question. I now hand the conference over to the management for closing comments.
Thank you for your time this evening. And Anindya and I will be available for any further questions that you may have. Thank you.
Thank you. On behalf of ICICI Bank, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.