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ICICI Bank Ltd
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Welcome to the ICICI Bank earnings call to discuss the Q3 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.As you are aware, the bank has issued a separate press release regarding the matter of the former CEO. With the former CEO having separated from the bank and the completion of the inquiry, the bank's role in the matter is now limited to cooperating with regulatory and government authorities in their processes, and we would move forward with sharp focus on our business.Coming to our financial results, as we mentioned in our earlier earnings call, our objective is: a, to grow core operating profit in a granular and risk-calibrated manner; and two, to improve the provision coverage ratio and minimize the impact of NPAs of the earlier years on the bank's financial performance going forward.Our core operating profit increased by 14% year-on-year to INR 56.67 billion in Q3 of 2019. Excluding dividend from subsidiaries, the core operating profit increased by 18% year-on-year to INR 53.43 billion.The period-end CASA deposits increased by 14.9% year-on-year from INR 2.61 trillion to INR 2.99 trillion at December 31, 2018. The term deposits increased by 19.7% year-on-year, from INR 2.57 trillion to INR 3.07 trillion. While we continue to grow our deposit franchise, our focus is also on deepening the penetration of retail asset products. The domestic loan book grew by 14.4% year-on-year, driven by retail. The retail loan portfolio grew by 21.6% year-on-year.We continue to focus on new initiatives to leverage the growth of digital ecosystems and improve the customer experience. Entering into relevant partnerships is an important element of our strategy. During Q3 2019, we launched a co-branded credit card in association with Amazon Pay, the online payment platform of Amazon. We also refreshed our Trade Online platform for corporate and SME customers with enhanced digital capabilities.Even as we focus on healthy growth in core operating profits, we remain equally focused and -- on addressing the stress in the corporate and SME portfolio originated in earlier years.Our gross nonperforming assets decreased from INR 544.89 billion as of September 30, 2018, to INR 515.91 billion as of December 31, 2018. The gross NPA additions during the quarter were INR 20.91 billion, in line with our expectation that additions to NPAs in FY 2019 would be significantly lower than FY 2018. The recoveries, upgrades and resolution of NPAs through sale were INR 40.63 billion in Q3 of 2019, of which about INR 7.20 billion represents the impact of rupee appreciation on existing foreign currency NPAs.The provision coverage ratio excluding technical write-offs increased by 950 basis points sequentially to 68.4% as of December 31, 2018. Including technical write-offs, the provision coverage ratio was 76.3%.The BB and below corporate and SME portfolio has decreased from INR 217.88 billion at September 30, 2018, to INR 188.12 billion at December 31, 2018. Thus, the additions to NPA continue to be moderate, though we are closely monitoring the environment.There has been some pickup in resolutions, though the future pace and timing of the same is difficult to predict. The moderation in NPA additions, decline in corporate and SME BB and below portfolio and increase in provision coverage ratio gives us reasonable confidence that from April 2019 onwards we would be witnessing a more normalized provisioning level and profitability. We look forward to enhancing the business performance and shareholder value with support from all our stakeholders.With these opening remarks, I will now hand over the call -- hand the call over to Rakesh.
[Audio Gap] loan growth was 14.4% year-on-year as of December 31, 2018, driven by a 21.6% growth in the retail business. In the current year, the bank has bought retail loan portfolios, primarily retail, home and vehicle loans from NBFCs and HFCs aggregating to about INR 68 billion. Within the retail portfolio, the mortgage loan portfolio grew by 18%, auto loans by 10%, business banking by 41% and rural lending by 19% year-on-year. Commercial vehicle and equipment loans grew by 28% year-on-year. The unsecured credit card and personal loan portfolio grew by 42% year-on-year, off a relatively small base, to INR 392 billion and was 6.9% of the overall loan book as of December 31. We continue to grow the unsecured credit card and personal loan portfolio, primarily driven by a focus on cross-sell to our existing customers and select partnerships.Growth in the SME portfolio was 12.7% year-on-year at December 31. The SME portfolio constituted 4.9% of total loans as of December 31.We saw continued growth in domestic corporate loans. Excluding the net NPAs and restructured loans at December 31, the growth in the domestic corporate portfolio was about 10% year-on-year. The net advances of the overseas branches decreased by 5.4% year-on-year in rupee terms and 13.4% year-on-year in U.S. dollar terms. The international loan portfolio was about 11.9% of the overall bank book as of December 31. As a result of the above, the overall loan portfolio was -- the growth was 11.7% year-on-year at December 31.Coming to the funding side. Total deposits grew by a healthy 17.3% year-on-year to INR 6.1 trillion as of December 31. CASA deposits grew by 14.9% year-on-year to INR 3 trillion at December 31. The retail -- the total term deposits grew by 19.7% year-on-year to INR 3.1 trillion at December 31. The outstanding CASA ratio at December 31 was 49.3%. And on a daily average basis, the CASA ratio for the third quarter was 46%.Coming to the credit quality. The gross nonperforming assets decreased from INR 544 billion at September 30 to INR 515 billion at December 31, 2018.During Q3, the gross NPA additions were INR 20.91 billion for the quarter. The retail portfolio had gross NPA additions of INR 10.71 billion, with recoveries and upgrades of INR 5.8 billion. There were gross NPA additions of about INR 2 billion in the Kisan credit card portfolio. This segment generally sees a spike in NPA additions in the first and third quarter of the year. We would expect the additions to be higher in June 2019. At December 31, 2018, the Kisan credit card portfolio aggregated to about INR 180 billion, which was about 3% of the total loan portfolio.Of the corporate and SME gross NPA additions of INR 10.2 billion, slippages of INR 9.51 billion were from the BB and below portfolio, which we had disclosed during the previous quarter. These include slippages of INR 2.3 billion due to devolvement of nonfund-based outstanding to existing NPAs and slippages of INR 7.2 billion from other loans rated -- internally rated BB and below. The additions to gross NPA in the corporate portfolio may fluctuate on a quarterly basis. The NPA additions in FY 2019 are expected to be significantly lower compared to FY 2018.The recoveries, upgrades and resolution of NPAs through sales was INR 40.63 billion in Q3. The aggregate deletions from NPA due to recoveries and upgrades were INR 19.16 billion in Q3, of which about INR 7.2 billion represents the impact of rupee appreciation on existing foreign currency NPAs. The resolution of NPAs through sale aggregated to INR 21.47 billion during the quarter for 100% cash consideration. And these sales did not pertain to loans already referred to NCLT. The gross NPAs written-off during the quarter aggregated to INR 9.26 billion.The provision coverage ratio on nonperforming loans excluding the cumulative technical write-offs increased by 950 basis points sequentially to 68.4% as of December 31, 2018, compared to 58.9% as of September 30. Including the cumulative technical write-offs, the provision coverage ratio improved to 76.3% as of December 31 from 69.4% as of September 30. As the result of the above, the bank's net nonperforming asset ratio decreased from 3.65% at September 30 to 2.58% at December 31. The proportion of the loan portfolio rated A- and above increased from 65.5% at September 30 to 66.3% at December 31.As of December 31, the fund-based and nonfund-based outstanding to standard borrowers rated BB and below was INR 188.12 billion compared to INR 217.88 billion as of September 30. As we had indicated in our last earnings call, we are no longer separately disclosing the drill-down list as it is already included in the above disclosure of BB and below rated exposures.The gross standard restructured loans and nonfund-based outstanding to nonperforming and restructured accounts were INR 39.77 billion as of December 31 compared to INR 46.17 billion as of September 30. The balance INR 148.35 billion of fund-based and nonfund-based outstanding to borrowers rated BB and below at December 31 includes INR 97.4 billion related to cases with an outstanding greater than INR 1 billion and INR 50.95 billion related to 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 Q3.There were rating upgrades to the investment-grade category and a net decrease in outstanding of existing cases of INR 30.33 billion. One standard restructured account was updated during the quarter. There were rating downgrades of about INR 10.08 billion from the investment-grade category during the quarter. This includes downgrade of one account in the power sector and a few other accounts as well. Lastly, there was a reduction of INR 9.51 billion due to classification of certain borrowers as nonperforming.Coming to our exposure to the power sector. Our total exposure was INR 461.33 billion at December 31. Of the total power sector exposure, now about 32% is either nonperforming or part of the BB and below portfolio, including loans restructured or under RBI resolution scheme. Of the balance 68% of the exposure, 55% was to private sector and 45% was to public sector companies. Our exposure to public sector companies included about INR 15.67 billion to state electricity boards. Also, of the balance 68% of the power exposure, excluding the state electricity boards, about 81% was rated internally A- and above.During the previous quarter, concerns had emerged around a group engaged in infrastructure, infrastructure financing and EPC businesses. As we had mentioned earlier, our exposure to this group is primarily to an EPC company within the group and is primarily nonfund in nature, comprising guarantees. Loans and nonfund-based outstanding of this book were already a part of the corporate and SME BB and below portfolio at September 30, 2018. The borrower group is currently under moratorium. Therefore, the exposure to this group has been appropriately classified and provided for by the bank.The loans, investment and nonfund-based outstanding to NBFCs was INR 256.19 billion at December 31 compared to INR 241.9 billion at September 30. Similarly, the loans, investment and nonfund-based outstanding to HFCs was INR 93 billion at December 31 compared to INR 125 billion at September 30, 2018. The loans to NBFCs and HFCs were in aggregate about 4.6% of our total loan outstanding at December 31. The builder portfolio, including construction finance, lease rental discounting, term loans and working capital loans was about INR 194 billion at December 31, 2018.Coming to the P&L. The core operating profit, that is profit before provisions and tax excluding the treasury income, grew by 13.5% to INR 56.67 billion in Q3 from INR 49.92 billion in Q3 of last year. The net interest margin was at 3.4% in Q3 compared to 3.3% in Q2 and 3.14% in Q3 of last year. The sequential increase in net interest margin in Q3 was almost entirely due to interest collection from loans already classified as nonperforming. The domestic NIM was -- margin was at 3.72% in Q3 compared to 3.71% in Q2 and 3.53% in Q3 of last year. Margin for the overseas branches increased to 0.77% in Q3 of 2019 compared to 0.05% in Q2 of 2019. The overseas margin improved sequentially in Q3 due to higher interest collection from nonperforming loans.The total noninterest income was INR 38.83 billion in Q3 compared to INR 31.67 billion in Q3 of last year. Fee income grew by 16% year-on-year to INR 30.62 billion in Q3. Retail fee income grew by 14.5% year-on-year and constituted about 73% of overall fees in Q3 of 2019. The retail fee income grew by 17.7% year-on-year for the 9 months period.The treasury recorded a profit of INR 4.79 billion in Q3 compared to INR 0.66 billion in Q3 of last year. Dividend income from subsidiaries was INR 3.24 billion in Q3 of 2019 compared to INR 4.45 billion in Q3 of last year. Other income excluding dividend income from subsidiaries was INR 0.18 billion in Q3, which was similar in Q3 of last year as well.On costs, the bank's operating expenses increased by 20.9% year-on-year in Q3. The cost-to-income ratio was 42.9% in Q3 compared to 43% in Q3 of last year. During the quarter, employee expenses increased by 27.3% year-on-year. It was due to higher provision on retirals. This reflected the decrease in yields on government securities in Q3 compared to an increase in yields in Q3 of last year. The bank had 84,749 employees at December 31, 2018.The nonemployee expenses increased by 17.4% year-on-year due to increase in sales promotion and advertisement expenses and expenses related to launch of new products. The growth in operating expenses was 13.6% year-on-year for the 9 months period ended December 31. There are significant opportunities in the market, and we would look at making investments for growing the retail franchise, expanding our portfolio and enhancing technology capabilities.Coming to provisioning. Provisions were INR 42.44 billion in Q3 compared to INR 39.94 billion in Q2 and INR 35.7 billion in Q3 of last year. The bank's net profit decreased by 2.7% year-on-year to INR 16.05 billion in Q3 from INR 16.5 billion in Q3 of last year. Coming to subsidiaries. The performance of subsidiaries is covered in slides 40 to 47 in the investor presentation. The consolidated profit after tax was INR 18.74 billion in Q3 compared to INR 12.05 billion in Q2 and INR 18.94 billion in Q3 of last year.Lastly, on capital, the bank had a stand-alone Tier 1 capital adequacy ratio of 15.14% and total stand-alone capital adequacy ratio of 17.15%. At the consolidated level, the Tier 1 capital adequacy ratio and the total consolidated capital adequacy ratio were 14.67% and 16.47%, respectively.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 growth. Your retail loan growth has been consistent, including mortgages, while given that HFCs were in a bad shape and, of course, your mortgage growth this time is inclusive of portfolio buyers as well. So wasn't there a chance to have grown your mortgage and other retail segments faster? Or is it now a planned strategy to really grow the unsecured or the higher-yield loans faster? Because banks were in a very strong position this quarter, so...
Yes, so there is no change in strategies or approach in terms of growth on the retail portfolio. So as you would have seen, the mortgages is a very important product for us. It continues to be more than half of our total retail portfolio. And the growth that we have seen across portfolios, the unsecured portfolio, that see a higher growth, but that is primarily because we had been underpenetrated on that portfolio. And the growth is coming off a smaller base. Otherwise, we are very happy with the growth that we have seen across segments. And as long as our risk and return thresholds are met, we are happy to grow the portfolio as much as possible within the market opportunities.
Okay. And you just had made a comment that corporate slippages can be volatile. We should just take it as a disclosure or are there some stress accounts, which could slip in this quarter or next?
No. So that is a completely generic statement made to the effect that corporate portfolio has individual accounts, which can be somewhat higher than INR 4 billion, INR 5 billion, INR 8 billion. So in a particular quarter, the number can be higher. There is nothing specific that we have in our mind on making that statement, Mahrukh.
Okay. And just one last question. Of course, sir made a comment that from April credit cards could start normalizing or coming off. But haven't we already peaked? Because last quarter, it was INR 38 billion and people thought it was the peak. Now it's over INR 40 billion. So how do we look at it at least for the next 1 to 2 quarters? Obviously, in FY '20 it will normalize.
Yes. So I think the -- so we only have 1 quarter, Mahrukh, the March quarter, and then we have talked about from April we should see a much more normalized performance in terms of credit cost and profitability. So as you know, there are some borrowers who are in various stages of resolution. So we'll see how that goes. And from next financial year, from April onwards, the way things currently stand, as you said, we should be pretty much running on much more normalized level of credit cost.
But any guidance on what the normalized level will be?
So there is nothing -- no specific numbers that we have talked about per se. But if you go back and see, it has been in the region of 80 to 100 to 125 basis points depending on the portfolio mix which is there and at which stage of cycle we are in. So once we kind of get over the current NPA levels, which are there, we'll talk about the outlook in terms of more specific numbers there.
Okay. And divergence, you received your final divergence report?
We did not receive the RBI report till date. So most likely, we will get it in the March quarter and then report accordingly.
The next question is from the line of Vishal Goyal from UBS Securities.
Congratulations on a great set of numbers, especially asset quality. So I think the question is about ROE and the targets we already set on ROE. And if you look at your competition with a very similar margin profile and almost very similar asset quality and provision coverage levels, I think they are looking at 18% ROE now. And your gross slippage was in fact half of theirs. So when -- what are the issues which are holding us back in terms of enhancing our ROE targets?
So Vishal, I think we have been pretty consistent in saying that in the near term we would want to get to a 15% ROE. And we have also said that at the end of the current financial year, once these provisions are kind of behind us, we will talk about a more medium-term target. So definitely, 15% is a near-term target, and that's not a medium-term or a long-term target. And at the end of this financial year, we'll talk about the outlook going forward as well.
Okay. And the other thing, I think, is about this interest collection from NPAs. So what is -- what would be the amount in this quarter because that number keeps like it's a little volatile?
Yes, it is volatile. So it was a higher number in the June quarter. It kind of came down a bit in the September quarter and has again gone up in the December quarter. So it would be in the region of, I would say, 15 to 18 basis points kind of a contribution to the margin for the December quarter.
For the December.
The next question is from the line of Kunal Shah from Edelweiss.
So firstly, in terms of growth, again on the corporate side, last time you were highlighting maybe in the...
Excuse me. This is the operator. Mr. Shah, may we request you to speak closer to the phone, please? We are unable to hear you.
Yes. So on the growth front, when we look at particularly on the corporate side, we highlighted that on the nonstressed, maybe, segments, we'll still look towards the growth. But in terms of the buildup, when should we actually start seeing it in terms of the numbers? Because currently if we look sequentially, it is still down on the corporate side. So how should we look at the overall corporate growth apart from retail and SME?
So from an overall perspective, the -- our approach is to look at how we can maximize the operating profit at each of the business level. And loan growth is not the -- not a specific target per se. So indeed, in the quarter, we could have grown our corporate book at a faster pace. There was enough opportunity. But as long as we get the right spread that we want, we would be happy to do that. So the growth is calibrated only to that extent. It also happened that last year, the December was a bit stronger. So that's why the year-on-year number doesn't appear to be as strong. Some of that will correct going forward. But per se, we don't have any specific loan growth targets. We would be happy to do lending business as long as it meets our risk and return threshold. And -- so that is the approach which is there. And at our growth, you should always look at the fact that the domestic growth of 14.4%, which is there, it is after considering significantly high level of provisions that we have taken over the last 4 quarters. That itself pulls down the reported headline growth by a couple of percentage points as well.
And when we look at it in terms of maybe the spreads, which we are looking towards, so obviously, the deposit profile would play a key role. And somewhat in terms of the CASA looking at the way other players are also growing, in fact in terms of the growth which is reported, 15-odd percent, that is still lower as compared to that of other private banks. So how are we looking at it in terms of shoring up this entire CASA franchise?
So in terms of CASA, if you look at the numbers of the banks which offer similar rates on the savings deposits, I think the growth that we have achieved over the last, I would say, couple of years has been quite consistent and in line if not better than the peers. So we are quite happy with the way the franchise has worked out in terms of the CASA growth. The fact is that when interest rates go up as they have gone up currently, the growth especially on the saving deposits and to an extent on the current account does slow down because people would put more money into fixed deposits, and that's something that we have also seen. So that's something that we are kind of planning for and budgeting for as something that will happen. And we will see a higher growth on the term deposits, and we are driving retail term deposits to the extent that we can. But all of this goes into our overall cost of funding, which is still amongst the most competitive amongst all the banks. So that is where we are. Of course, we continue to invest further in the -- in our CASA deposit franchise, both from a customer service point of view, leveraging technology, offering new products. So that continues to be the case as well.
Yes. And lastly, in terms of the provisioning breakup and now that the coverage has gone up so much, in fact in this quarter also there was a substantial rise, so do we see any further inch-up on the coverage now? Or it's more or less done given where our GNPL stand?
So I think we have talked about in the past that around 70% kind of a coverage ratio is where banks are kind of there. So we are now around that level, but of course, March quarter we will see. I think it will now more depend on couple of cases, which are at various stages of resolution. And hopefully at some stage, that gets done. Very difficult to say it gets done in the March quarter or gets done in the early part of next financial year. So to some extent, that will drive the coverage ratio. But the level at which we already are gives us a lot of comfort on the balance sheet.
And provisioning breakup?
Provisioning breakup in the sense that bulk of the provisioning is for the nonperforming loans. General provision on standard loans will be a pretty small number.
Okay. And any investments...
These are mostly public [ brochures ].
The next question is from the line of Manish Ostwal from Nirmal Bang.
My question on the operating...
Excuse me. This is the operator. Mr. Ostwal, we are experiencing disturbance from your line. Can you please check and then move forward with your question?Ladies and gentlemen, we move to the next question from the line of Gurpreet Arora from Quest Investments.
My questions are more pertaining to the regulatory changes, which are ensuing: a, the impact of the RBI guidelines with respect to working capital loans, which taken from April 1 for more than INR 140 crores, INR 150 crores. Now as I see in our cash credit and overdraft and loans repayable on demand are pretty high at around 25% of total loans and around 60% of nonretail loans. So how will this impact our provisioning requirements -- sorry, the capital allocation requirements and how will it impact our NIMs? That's my first question.
Yes. So in terms of, I think, what the RBI is trying to achieve here is that the onus of liquidity management shifts onto the borrowers. And the lines, which are made available by banks are limited to that extent. And to that extent, the capital requirement will also come in. There will be -- of course, we have to how this kind of plays out. So there will be some impact on the capital requirement for the bank. But our own assessment is that it will be not something, which will change the position for the bank materially. On the margin itself, there is no -- very difficult to say a direct correlation to this. But from a liquidity point of view, I assume that many of the corporates will take a lot more of shorter-term demand loans to meet that 60-40 criteria, which is there, and the minimum maturity of that would be 7 days. So we will have to just see how it plays out. From capital point of view, there will be some impact, but it's not something which we will change our position materially from what we face currently.
So a follow-up on this. I mean, today, what would be the yield difference between a cash credit overdraft versus a working capital term loan?
It will absolutely vary across borrowers. Very difficult to give any indicative thing there. So -- it will have to evaluate -- it will have to evolve. And of course, at times we'll start keeping capital on the line. I'm sure that [ some state ] bank will seek compensation for that in terms of charges or a slightly higher yield, whichever is there.
Okay. My second question pertains to the mix of your advances with respect to fixed and floating. Now over last 3 years, what I have seen is that the composition of fixed as a percentage of retail and as a percentage of domestic loan altogether has been gradually moving up. So is it a conscious strategy to have a higher portion of fixed yielding loan book? Or you're not looking it that way?
No. It's -- we're not looking it that way because we manage the ALM accordingly. So in a sense that if we see, for example, more growth on the nonmortgage retail business, that is all fixed [Technical Difficulty]. Mortgages will be all floating there. And on the corporate side, it is virtually entirely floating rate, which is there. So we have had about 70% of our loans are floating rate, 30% is fixed rate. It would change depending on the growth that we have seen in each of the segments going forward.
My third question pertains to, I mean, to the impending guidelines regarding the cost of liabilities being -- SAR being linked to external benchmark. Have we done any internal study or ballpark estimate as to how it could impact our cost of SAR?
So that is the -- the lending rate will have to get linked to an external benchmark, which could be a repo rate or a T-bill rate. So of course, the challenge which will be there for the banks not just across the bank will be how closely correlated the benchmark will be with our actual funding cost. So that's something, which is there that basically between that will be there for all the banks as well. So the good thing is that, it starts off -- we have to do it on the mortgage portfolio and the MSME portfolio to start with. So it's not that entire the portfolio will move to this benchmark. The rest of the portfolio will continue on the MCLR. So we'll have to again see how it plays out.
A follow-up on this. I mean, what percentage of our loans would be linked to 1-year MCLR today?
I don't have 1-year MCLR. But of our floating rate loan, 80% now is linked to MCLR.
Sure. My last question, in last 1 year, has our technical prudential write-off policy changed? And what would be the cumulative amount for the current fiscal?
In terms of policy, there is no specific change in the policy on technical/prudential write-off. As you would know, on the corporate side, it is more on a borrower-specific evaluation, which happens for determining whether a technical/prudential write-off is to be made or not.
Sir, what will the cumulative technical/prudential write-off amount for 9 months of this fiscal?
We don't disclose that separately. The total stock at March '18 was about INR 172 billion.
[Operator Instructions] We move to the next question from the line of Manish Ostwal from Nirmal Bang.
My question, the operating expenses growth during the quarter which is 20% Y-o-Y. And since we have very strong branch network and we are also investing on digital side, so given the balance sheet growth of 14%, 15%, what kind of operating expense growth we should expect?
So as I said, this quarter had quite a significant impact of the provision that we have to take on the retirals, the pension obligations, which are there for a certain set of our employees. Because the yields declined quite a fair bit in the quarter, that provision increased for the December quarter this year. And on a like-to-like basis, last year, actually the yields had gone up. So the provisions were virtually 0 for December '17. That is the reason you see the employee expenses have gone up by 27%. You have seen in the past that the run rate there is more like a 12%, 13%, 14% at most. And so if you look at the 9 months period, which kind of averages out some of this movement in the yield and the impact on the retirals, the expense growth is about 13.6% for the 9-month period. So that may reflect somewhat better in terms of what the expectation is. But as I said, our focus is on the core operating profit. And whatever are the investments that we need to make for growing our retail franchise or the SME franchise and expanding our portfolio and enhancing our technological capabilities, we would make those investments.
Right. And second question on the overseas margin during this quarter. There is some recovery in the overseas markets. So what is the sustainable margin in our overseas business, sir?
I think in the last quarter also we said that the margin that we're seeing currently, it is virtually entirely coming from some of the collections that we have got from the nonperforming loans. And if that collection was not there, the margins would be closer to -- and in earlier quarter, we had a margin of 0.05%. So the margins we're having significantly impacted the NPL numbers have been high. And as you know, the book itself had actually also come down. And when that happens with a high NPL level, the margin gets clearly impacted. So I think next couple of quarters, the situation will be very similar. And if the NPL interest collections are lower, then the margin would actually be -- clearly be lower than what we have seen in the December quarter for the overseas business. But on an overall basis, the domestic business, the proportion of business is increasing. So at an overall level, the margin will have that benefit.
The next question is from the line of Nitin Aggarwal from Motilal Oswal Securities.
My question is, again, on the ROE. If I do some back of the envelope calculation then adjusted ROE assuming stable coverage ratio stands closer to 1.3%. At our leverage, this implies that we are already at a striking distance of 15% ROE target. So do you think we can do better on this metric versus our guidance?
So I think the last guidance that we gave was at the beginning of the financial year to say by June 2020 we're looking at achieving a 15% ROE. And we have said that at the end of the financial year, we will relook at what the near-term and the medium-term targets are. So the trend in the core operating profit is the key that we are tracking currently and highlighting to you. So as you said, the trends there have been quite healthy for the 9 months and for the quarter.
Okay. And is there any specific composition of BB and below loans that we will like to have as the same has now declined to 5% of loans? And what has been our rating mix in terms of incremental sanctions over the past few quarters?
So I don't think there's any desired mix that we have of a BB and below loan portfolio, but we clearly acknowledge that as a bank with a large business across portfolios, there will be a certain set of portfolio, which will at any point of time, there will be a portfolio, which will be below investment grade. Most of these loans may not have been below investment grade at the time of origination, though there may be some broad segment where on starting base itself it would be below investment grade, but that would be a very small part. So there is no specific number we have in our mind. And the number has been normalizing, as you said, quite rapidly, and the current level itself is now a much lower number than where we were a year back on this. Sorry, your second part of the question was...
The rating mix of corporate loans in terms of incremental sanction?
We have not disclosed that separately, but if you -- we did disclose that, I think, a couple of quarters back, and the number was in upwards of 80% in terms of A- and above on the corporate side. That may not have changed much.
Okay. And lastly, like we -- this quarter, we had some tax write-back on account of DDA. So what is the normalized tax rate that we can look at over the next fiscal?
So on the tax actually, as you know, the tax provision that we take in, in any period is based on the estimate of the effective tax rate for the full financial year. So at any point of time, we have to estimate what our profits will be for the year, the composition of that profit and then compute the effective tax rate and apply the same rate for the 9 months period. So that is why on a 6 months to a 9-month period, the tax rate changes because of that. In a normalized -- this year, we have had the benefit of -- in the first quarter, we did sell 2% in ICICI Prudential Life Insurance, and that will be at a lower tax rate. And then some of the other items like dividend income are at lower tax rate. But on a normalized basis, I think, 28% to 30% would be where the tax rate you should assume for us.
The next question is from the line of Rahul Jain from Goldman Sachs.
Two, three questions. Would you be able to share what kind of spreads these would be earning on the portfolio buyouts?
We would be earning adequate to meet our hurdle rates. We would not want to discuss specific spreads on these portfolios, but we have ensured that the portfolio that we have bought is a granular retail portfolio, it meets our risk filters, and it definitely meets our return thresholds.
Yes, but would it be also covering for any possibility of any higher loss ratios also? Would you have....
We would have done a detailed analysis of the portfolio that we bought. And it's not that we have bought the portfolio only this quarter. In the past also we have bought portfolios. And looked at the portfolio, done stress testing and then determine what is the right level at which we should purchase the portfolio to give us our normal return on the portfolio.
Got it. Second question is the upgradations in the BB and below for the last 2 quarters have been quite healthy. What really is driving that? And if this is a kind of run rate then perhaps in the next couple of quarters, this number should meaningfully come down. So is this a way to think about it? And what really is causing such lumpy upgrade, which, of course, is a positive news? So what really is driving that?
Actually, the upgrades -- there would be specific cases, which would have got upgraded in the September and the December quarter like this in the December quarter and you would have seen our restructured loan numbers. One of the restructured loans, which was there for quite some time with us, has been now been making payment after all the moratorium conditions and all of that. So that got upgraded during the quarter, and that was a large number. Similarly, in the last quarter, there was one particular case, which got upgraded. So again, it's like virtually impossible for us to kind of comment on what could be the upgrades and downgrades from the BB or the above portfolio. But yes, last 2 quarters, there have been a couple of larger corporate exposures that have got upgraded. And that may not repeat going forward. That means, I don't think you should take it as a run rate at all.
Sure. Last question, how has been your experience on the early delinquencies in your mortgage portfolio, lab portfolio and SME loans? Would you be able to share some color on 30-day past due, 60-day past dues, et cetera?
So we don't really share the 30-plus, 60-plus. But I can tell you at an overall level, on the specific portfolios that you have mentioned, we have not seen any signs, which would kind of tell us that there is any trouble at all on that portfolio. Plus when we look at any of these parameters, we continue to be -- clearly be better than the system in terms of the trends that we are seeing on the portfolio. And like we have said in the past, across the retail [indiscernible] portfolio, currently the numbers that we are running at are clearly below any kind of a normalized trend that we would expect. So you should expect that there will be some normal increase in NPA additions and credit costs on the retail portfolio going forward. But nothing amiss on the portfolios that you mentioned at all, Rahul.
Got it. Just one last question, sorry. On the aggregate slippages side, would you be able to share how much actually came through in this quarter? And was this because of farm loan waiver or those were normal delinquencies? That's it.
The opening thing -- about INR 2 billion is what got added on the portfolio -- the rural portfolio. So that would largely be these farm loans linked to KCC. Whether they are directly linked to a farm loan waiver or not, that is difficult to say. But yes, a farm loan waiver does create an environment where some of the delinquencies go up. And these loans -- the way these loans are structured, the payments are fixed monthly. So you will see spike in these additions in the June and the December quarter. So again, as I said in the call earlier that in June 2019, you would expect this number to be higher. This year in June, it was upwards of INR 3 billion. In June '19 as well, it will be higher, given the kind of environment around us.
[Operator Instructions] We will move to the next question from the line of [ Mohit Bansal ] from [ Ajinkya Money Private Limited ].
Sir, my question on the portfolio buyers has already been answered. I just wanted some color on how you're treating NBFCs back and relationship with NBFCs going forward considering what has happened with IL&FS and the news flows yesterday?
So on our exposure or incremental lending to NBFCs and HFCs, again, as we said in the last call, we are really open to lend to NBFCs and HFCs as long as our risk and return thresholds are met. So we have done incremental business with NBFCs and HFCs, and we have talked about some of our numbers in terms of the outstanding that we have. So there's nothing specific there that we really have to add. And of course, we are also -- we also looked at opportunities to buy retail portfolios from some of the NBFCs and HFCs as and when those pools were available during the December quarter. We have also been talking to some of them to see if any kind of partnerships can be worked upon in terms of origination of loans. So there are lots of areas where we are looking at working together with them as well.
But would you be able to throw some light around the total exposure versus how it's planning out right now in terms of repayment?
That's what. The total exposure we talked about in the opening itself is that our total loans, investments and nonfund-based outstanding to NBFCs was INR 256 billion at December 31 and to HFCs was INR 93 billion at December 31. So those are the 2 numbers which are there. In aggregate, the loans are about 4.6% of our total outstanding loans.
Okay. And in terms of repayment?
In terms of repayment...
Meaning, how are the repayments as of now? So as of now, you're seeing there's no pressure in terms of repayment?
So we are quite comfortable with this portfolio, and we are not seeing, as of now, any worries on this portfolio in terms of the performance of the portfolio.
The next question is from the line of Jai Mundhra from B&K Securities.
Sir, just wanted to know one clarification on our retail slippages. So are we on daily marking and daily reporting basis? Or this is done at the end of the month or quarter-end?
So the -- on the NPLs, we follow a certain policy. It is not on a daily basis for the retail portfolio.
Sure, sir. And secondly, sir, if you can just mention the sector of the loan: a, which was upgraded from restructured book; and b, where you have managed to sell those loans for 100% cash?
So on the first one, we have not disclosed the sector per se. On the second question, the sale which is there, it was actually the mode of resolution for that loan was through a sale. So it was a -- there was no haircut we took on that -- on the loans, and the resolution was through a sale. So it was kind of a -- because the mode of resolution was sale, it gets reported as a sale, but otherwise it was pretty much a lighter settlement in other cases.
Sure. And so in this case, let us say if you have got 100% of your dues back so that would -- I mean, is that the correct understanding?
Yes. So for -- yes, that is the correct understanding.
So that will not get reported in your other income, right?
No. So we report all the incremental provisions or write-backs in the provision line item.
Okay. Even if it is 100% -- I mean, even if it is, let's say, technically written-off.
Yes.
The next question is from the line of Adarsh P from Nomura Securities.
Question regarding margins again. You mentioned interest collections impact was about 17, 18 bps. Just wanted to understand this a little bit more. Sometime when you have a large repayment from a very large account, you can account some of it in interest income as well. And I would believe that as you get into relatively higher LGD cases NCLT-2 and other NPAs, the interest accounting of that will not be as high as some of the accounts there. The LGDs have been relatively low as you see the NCLT resolutions happen. So I'm just trying to understand when I try and look, firstly, is that understanding fair that the one-offs are materially large and as you get into higher LGD cases, it will not be this high?
That's a correct statement per se generally. But I guess what happens is that in these loans, like, for example, in some of the larger loans in this quarter that got settled, we got the entire principal and interest, and that interest shows up as interest income from NPL. And that will not, of course, repeat every quarter. But for example, in the June quarter, one of the cases that got settled steel case under NCLT, there the redemption was such that again a part of that income -- a part of the collection came in as interest income for all the banks, including for us. So it is going to be a number, which will be up and down on a quarter-on-quarter basis. So as I said, for the current quarter, it's about 17, 18 basis points. And as I mentioned that increase in the margin in the current quarter compared to September quarter was kind of entirely because of this reason, the last quarter the interest collection would have been a lower number, say, 9 or 10 basis points. But this will be a variable, and there is no way that one can really estimate it out. The good thing is that the money, which then comes back to us, that gets deployed and on that we get interest income. That is the more important part actually.
And just to simplify this on a 9-month basis vis-à-vis last year if you exclude these interest collections, what would be the margins on a more clean, steady-state basis?
So I think I gave you the number for the December quarter. That's about 17 to 18 basis points lower. That is core margin if you exclude interest collections. Of course, the entire interest collection will not be 0 in any particular quarter. It may not be 20 basis points also in a particular quarter.
Okay, understood. And second question is we had the inquiry report coming out on the ex-MD and CEO, what I wanted to just understand is for the current management team and the various inquiries, what -- these sort of inquiries relate to the current state of top management of the bank? If you can just kind of highlight, as you know, many times, it relates to specific people, board, the bank. But as of now, the top management team of the bank, which inquiries either CBI or any other internal, external inquiries relate to the current top management team of the bank?
This is Sandeep Batra. I mean, as far as the ex-CEO is concerned, we have put out a press release, and we believe that the matter is over. As far as CBI is concerned, clearly, their -- if you see the CBI, where the bank has been said it is a victim, but it has also named certain officials clearly because they were part of some sanctioning committee, and we will be cooperating with CBI in the past, and we have been cooperating with CBI in the past and continue to do in the future. So as far as our understanding is concerned, I mean, whoever has been named will certainly cooperate with CBI. In our understanding, these -- there is neither any allegations nor any material to suggest any fault of any other member or individuals, which have been named. And it is really not appropriate for the bank to undertake any further investigations of the matter. But we'll certainly cooperate with any regulatory authorities.
And last question relating to the same press release put out. This relates more to disclosures not being made. Is there any conclusion in the report about wrongdoing? Or that was not the domain of that report itself?
So we have given the complete detail. So the summary of the report is part of the press release.
The next question is from the line of Nilanjan Karfa from Jefferies.
Quick question on the prudential write-off. It looks like on a sequential basis, the numbers are down probably about INR 13-odd million. Would that be a fair number? And would that, therefore, be -- did we earn anything out of it? I mean, part of it is probably coming in other income. So any clarity there? Second is, when is the right time to think about our investments in foreign subsidiaries? Because I believe of the multiple questions raised about the ROE profile, there is a significant amount of drag which comes from the foreign subsidiaries as well as foreign loans. So commentary both on subsidiaries as well as the branches of the domestic bank there. And final question. Any -- just the understanding of the total fee income, what percentage is retail, SME and corporate? And within retail, if you can just give some color on how much is coming from the debit and credit cards acquirer and issuers included? Those are the 3 questions.
So the first one was on the -- you said on the prudential write-offs -- technical write-offs?
Yes.
So there -- as I said earlier, any recovery that we make from such amounts, we take it as a matter of practice to the provision line item itself. So there is -- so it will all be reflected in the net provision that you see for the current quarter, that may be net of write-backs either from technical or prudential write-offs or write-backs from earlier provisions made on certain loans.
So if I get it right, so in this quarter, we actually reversed the results and past about, I think, INR 120 crores to INR 130 crores, right, through the P&L as well.
Well, you're talking about the results, is it?
No, no, no. Sir, 2 things, 2 things. You mentioned that the delta in the prudential write-off, which I think is, let's say, broadly about INR 1,300 crores, INR 13 billion. You say whatever has been recovered is -- has gone through the provisions line?
Yes.
Right? On top, I think there is about INR 120-plus crores, INR 1.2 billion, which are reversed from reserves and again passed through the provisions?
Yes, that is something that was relating to the provisions that we have taken through the reserves for the -- in which they're probably there, which can be taken through reserves. And then in the next 4 quarters, that has to be reversed through the P&L. You're talking about that?
Yes. So combination -- my intention is to get what was the clean provisions on NPLs, ignoring what has happened in the past and ignoring, let's say, whatever years has passed because of the prudential write-off declines? What is the clean provision number out here?
The provision number is a net number of all of this. We could take it off-line.
Gross number. Sure, we will take it off-line. We will definitely take it off-line, Rakesh.
Yes, net provision is what we disclosed net of all these items. The second question on foreign subsidiaries, actually, as we have said in the past, say 5 or 6 years back, our total investment in the equity of these subsidiaries was close to 10%, actually at the peak about 12% of our total net worth. That has now come down to less than 4%. So the drag on this account is -- of course, it is there, but it's now less than 1%, maybe 0.5%. So that is not really as much of a key. But of course, separately, we are completely focused on how we can improve the profitability there because the rationalization of capital has already happened in terms of the capital repatriation and the dividends that these 2 subsidiaries have faced. On fee income, we have said that about 73% of our fee is coming from the retail business. We have not given further breakup of that in terms of the credit cards and debit cards. We will consider in future if we would give that. We have not given it till now. So I will not put it right now here. But in future, we'll just see if we will give a further breakup on the fee revenues.
Ladies and gentlemen, with this, I now hand the conference over to the management for the closing comments. Over to you, sir.
Thank you very much. As we mentioned, focus will continue on growing risk-calibrated operating profit. We believe that the overall ecosystem provides [ scale wins ] to the banking system, and we'll follow the strategy quarter-on-quarter and we stay committed to our guidance on 15% ROE by June of '20. Thank you very much.
Thank you very much members of the management.