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Yes Bank Ltd
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Ladies and gentlemen, good day, and welcome to YES BANK Limited Q1 FY '20 Results Conference Call.We have with us today, Mr. Ravneet Gill, MD and CEO; Mr. Rajat Monga, Senior Group President; Mr. Ashish Agarwal, Senior Group President and CRO; Mr. Raj Ahuja, Senior Group President and Group CFO; Mr. Rajan Pental, Group Head Retail Banking; Mr. Anurag Adlakha, Senior Group President and Head Financial Management and Strategy; Mr. Niranjan Banodkar, Head Financial and Investor Strategy. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Ravneet Gill, MD and CEO. Thank you. And over to you, sir.
Good evening, ladies and gentlemen. Thank you for dialing into this call, and I hope we'll make it really informative, incisive and productive. I will talk about certain key issues, which obviously have dominated the narrative around YES BANK, and which we've discussed over a period of time bilaterally, bring you up to speed on those. And then we'll get into a more detailed financial discussion around our quarter 1 results. If I was to summarize quarter 1, I would say that for the bank it was a quarter of consolidation. And when I say consolidation, I think there were 3 key attributes to that.The first and foremost was, of course, the ongoing management transition, which I think is now complete. The second part of it was given a CET1 of 8.4%. It was a quarter for capital optimization, and we would, obviously, talk about that in greater detail during the session of finance. And the third aspect of this whole quarter of consolidation was that as the macros were fairly challenged, and if we looked at the financial service sector itself, I think it creates unprecedented headwinds.In a scenario that had a backdrop of that nature, I think for us to be able to return to profitability shows the inherent resilience in YES BANK, and we will provide further data points on why we think the quarters ahead look very, very positive for us.I think it should be only right for me to first dwell on the asset quality, and while you will see that the BB and below book has grown from 7.1% to 9.4%. I think it is very critical to note that this increase has fundamentally come on the back of 2 exposures to large financial services players who were clients of the bank even earlier. But the ratings have subsequently deteriorated and now has become part of the BB and below book or the sub-investment grade book. I would also like to mention that the impact of these exposures was finding [ expression ] in our treasury income on the mark-to-market, and I think are materially responsible for our profits being far lower than what we thought we were able to generate for this quarter.Having said that, I think it would be now fair to say that our asset quality has stabilized. And I will provide a couple of data points for you with respect to that.The first and foremost is that in many discussions that happened around -- the whole asset quality issue around YES BANK, focuses also on our real estate exposure. And I thought that it would be good to be able to give you a sense in terms of what that exposure is looking like from a performance perspective.So our total real estate book, as we have disclosed in our quarterly results, is roughly INR 24,000 crores. 25% of this book has been captured and isolated as part of either the sub-investment grade book or then as NPA.Of the balance, 75% of the book, I can tell you that we have minimal slippages, and if I looked at the overall book, the real estate book, from the point of view of SMA-2, that number is just a little over INR 200 crores.Having said that, if I looked at the broader portfolio just to be able to give you a sense in terms of the investment grade book, the entire SMA-2 on the portfolio -- or entire corporate bank -- a corporate portfolio of YES BANK is only INR 404 crores.We do, of course, have the retail banking and the SME book apart from that. But as you know, the NPAs there are below 1%, and in many ways define the industry benchmark in terms of credit quality.So the book, I hope on the basis of the specific data points that I provided, will give you enough comfort that you know on credit quality, things have stabilized; and our revenue, our operating performance for the ensuing quarters should be a lot stronger.Let me then talk about capital. I have said this previously, and I would just reiterate one message, which is to say that the capital that we need is purely growth capital. This is not for balance sheet purposes. I am in support of that assertion, what I would say is that if you look at our PPOP, and I would go to the extent of saying, even if you looked at our PPOP in a quarter of consolidation, in a quarter of where we didn't have the -- all the growth capital that we needed, all that you would need is 8 quarters of this PPOP for us to be able to provide for any slippages that may occur in our sub-investment grade book.So I think it is important again to note that the capital that we're looking to raise is purely growth capital and is not capital that is being sought to improve our absorption buffer for provision.Given the franchise performance for the quarter, I think it gave us a lot of confidence, and more importantly, it has given a lot of confidence to the investors who have been engaged with us.We have had very strong institutional investor engagement and interest, both on the private side and on the public side. And investors have now come to recognize that our legacy issues are not granular, but restricted essentially to a handful of names. And each of those resolutions give material upside. So on that point, I would just reiterate something that we have spoken before, that we expect capital raising to be a quarter 2 event.Let me then move to some insulation with respect to liabilities. I think, overall, if we looked at our liabilities, they degrew by about 0.8%, and this in a market where -- which has been flourished, what we saw effectively speaking was that a lot of our SA went into FDs and our TDs have grown significantly during the quarter.But even as we capital optimized, and in some ways, rationalized credit on the corporate side, a lot of the corporate [ CRAR ] , which -- or a lot of our [ CRAR ] which came from the corporate sector, some of that we saw move away. But overall, I think the very fact that our TDs grew is indicative of the fact that depositors continue to have trust and long-term commitment as far as the bank is concerned.The last point that I would really like to talk about before we move to financials, is really around digital and innovation, which is something which I've often talked about to you collectively and individually.I think the digital leadership of YES BANK, which we talked about in the last quarter got further reinforced during this quarter.And I will talk about a handful of data points and statistics to be able to give you a sense in terms of how that is manifesting itself.I mentioned to you that in all of 2000 -- in all of the previous financial years, the bank had 1.43 billion UPI transactions. Just in the first quarter of this year, we have seen 768 million UPI transactions. And both in terms of value and volume, we are #1 in all 3 of these months of the first quarter. And even if we looked at the Aadhaar Enabled Payment, we continue to command or have grown our market share to 40%. And what is very important to mention here is not just the point in terms how they seep into the data intelligence and the data analytics. But all these businesses are profitable on a stand-alone basis. Equally I think, the bank has been on the front foot. If you look at the [ vintage ] survey for the year, you will see that we have gone up many rungs across period categories, either in terms of quality of service or area of products, our market share. And it's something which will reinforce the view that we are not deemphasizing the corporate bank, far from it. And the fact that based on the quality of service, the quality of product offering and the quality of people that we have, our corporate clients continue to report very strong faith and trust in us.We have also steered on the front foot, even though I did mention that this was a quarter of consolidation, and we're now there, winning business. And some of those wins I would like to talk about. The first and foremost is, one of the most fiercely competed mandate for API banking was -- pertained to the single largest telecom company in the country, and I'm delighted to mention that YES BANK won that mandate.Similarly, if you looked at the whole BAC stars, mutual funds, cash management mandates, where they collect funds for mutual fund investment, YES BANK won that mandate.In terms of the government banking piece, based on our digital capabilities, we won fresh mandates from Maharashtra and the Telangana state government.And if you looked at the rankings that were put out there by Ministry of Electronics, Information Technology, among 56 public, private and foreign banks for digital payment performance in this financial year 2019, YES BANK came up on top.I have mentioned this to you earlier as well that -- and I'm sure that we believe that many of you share that technology is going to play a bigger, stronger role in financial services, that the statement that will cause, the disruption that we'll cause will be significant. And I would like to believe that YES BANK is better positioned to benefit from that and to be able to monetize and harness that opportunity ahead of competition.So overall, what I would say is that we have -- we feel very assured that we hardly ask that we put in this quarter have firmly put the house in order, if I may use that expression, and we can now start to look for very strong growth in the coming quarters.And if I could then finally say one more point, we had talked about sending our Senior Management talent for -- at the introduction of the call you heard of Anurag Adlakha here, who heads Financial Management Strategy for us, has had a very, very stellar career in banking, and many of you know him. And equally, as Head of Compliance, Governance and Control, we've had Rajeev Uberoi join us. Rajeev, again, comes from a very, very strong and successful career in banking across Reserve Bank of India around foreign banking and then the Indian private sector banking space. So we will continue to augment our management resources. We will continue to invest in people in terms of key businesses. Given the overall dislocation in the NBFC space and in financial markets, I think the opportunity to grow is very significant. And I would say that YES BANK is uniquely positioned to be able to get this proportionate share of the pie that is now becoming available.And I would like to thank you, each one of you for your support and look forward to your continued guidance and backing as we get on to even stronger putting.I will now hand over to Rajat to go through the financials. And then we are happy to take questions thereafter.
Thank you, Ravneet. I'll take these next few minutes to update on the specific financial performance of the bank in the first quarter for fiscal year '19, '20. As Ravneet has mentioned, this has been our return to profitability sort of a quarter. And in this quarter, our net interest income has been reported at INR 2,281 crores. This, of course, has been somewhat impaired by the impact of about INR 223 crores on account of interest reversals, resulting from slippages that took place during the quarter.The key performance on the other hand improved on a sequential basis, and our free provisioning operating profit therefore grew 48%, sequentially, to INR 1,959 crores. We are reporting net profit after tax of INR 114 crores for the quarter, and this is after absorbing INR 1,109 crores of impact on account of mark-to-market provisioning relating to investments in bonds of the financial services companies as was referred to earlier in the commentary.The loan book of the bank stands at INR 2,36,300 crores as of the end of the quarter, and it has grown at 10.1% on a year-on-year basis.Internally, the retail advances book has grown at 43.3% on a year-on-year basis and at 7.2%, sequentially, and it now contributes 18.3% of the bank's loan book and this position was at 14% of the bank's loan book at the same time last year.As such, the retail loan book also contributed to a 60% share of the incremental loan book of the bank during the last 12 months. So I think the situation on the retail banking side continues to be in good momentum. And it is acquiring incremental, sequential share of the bank's loan book every passing quarter.Some more statistics on the asset quality position of the bank, the credit cost incurred in the quarter gone by was 32 basis points. The bank is maintaining its credit cost guidance of up to 125 basis points for the fiscal year '19, '20.The provisioning coverage ratio of the bank is also maintained at 43.1%. Some statistics on the liability and the funding side of the bank, the deposit book on a year-on-year basis grew at 5.9%, now stacking up to almost INR 2,26,000 crores.Internal to the deposit book, there has been very good growth in the retail time deposits category. The retail time deposit book has grown at about 38% on a year-on-year basis and had 8.2% on a sequential basis. And it, as such, is now accounting for 28% of total deposits of the bank.The CASA ratio of the bank is being reported at 30.2%. This has seen a sequential reduction on account of somewhat weaker quarter and flows in the quarter gone by.While the deposit growth has been modest, however, within the internals of the deposits, we are seeing the Retail Banking business take incremental share, so the -- while the headline is a modest 6% growth, the interstate growth between retail is far higher, and therefore the nonretail deposit funding share is continuously reducing.The LCR position of the bank as at June 30, stood at 132.6%, and for the quarter as an average, it stood at 117.3% as compared to 111% in the sequential previous quarter.So the liquidity position of the bank has also been improving and the -- it was affecting in -- somewhat in also higher NCR as well as some moderation in -- on account of deferring to margins as well.The capital position of the bank stands at 15.7%. Within the total capital adequacy ratio, the Tier 1 ratio stands at 10.7%, and the CET1 ratio stands at 8.0%.The bank has taken some charge on account of capital in this current quarter, resulting from regulatory changes on account of unrated exposures, meaning this quarter, if any bank is holding unrated exposures, they are required to be risk weighted at 150%, irrespective of the underlying quality of the borrower. So typically, MNCs, some government entities do not readily provide ratings, and therefore there is somewhat of a penal risk weight that is also -- could be applied there.As the bank took a 20 basis point reduction in its Tier 1 -- CET1 capital on account of this regulation. The bank also took a 16-basis-point correction in its CET1 capital on account of a downgrade -- credit rating downgrades in its investment book, particularly relating to 2 financial services companies. And as I mentioned, that stood at 16 basis points charge.Every year, the capital required for the operational risk also increases as it is linked to the last 3 years of turnover of the bank's business. And as the years roll forward, there is an automatic increase in capital charge for operational risk and a 10 basis point of CET1 was consumed on account of this roll-forward.These 3 developments resulted in the bank's CET1 reducing by 36 (sic) [ 46 ] basis points, which is what has been the driver behind the reduction in CET1 headline from 8.4% to 8.0%. Sorry, I stand corrected, it is 46 basis points.Ravneet already highlighted the bank's leadership position in digital payments, I would like to add just a couple of facts there.The bank has very recently facilitated a first-of-its-kind issuance of commercial paper using blockchain technology. This will be the first-of-its-kind in Asia, where commercial paper issuance has been onboarded on the blockchain platform, which ensures the sanctity of the multiple participants that have to come together to facilitate a transaction.The bank's API banking platform continues to be a preferred program for clients, and we have crossed more than 1,000 customers that are using the bank's API banking platform, and have -- the bank has [ merged ] much of the lead and a bank-of-choice across many unicorns in straddling their services with banking using the API platforms.On the digital banking performance, as measured by the Ministry of Information Technology, MeitY as it is referred for short, ranked the bank as #1 among 56 private and foreign and public banks for the fiscal year '19 for digital performance lead tables.So as such, the bank continues to do -- occupy leading or near-leading positions in digital payments, which would be UPI or Aadhaar Enabled Payments or IMPS among others.Few more statistics on the balance sheet and the mix of the balance sheet. So the total assets of the bank grew at 11.6%. They now total to INR 370,000 crores.Within the loan book of the bank, the share of Corporate Banking has sequentially reduced from 65.6% as at March 2019 to 63.9%. And as I was mentioning earlier in my commentary, the share of Retail Banking has correspondingly increased from 16.7% to 18.3%.On a year-on-year basis, the change is a little bit sharper. So the Corporate Banking mix has reduced from 67.6% as at June 30, 2018, to 63.9%. So there's been about a 3.5% reduction in that mix and correspondingly a 4.3% increase in the retail banking mix has also been observed.And the -- another statistic on the balance sheet side would be the total risk-weighted assets of the bank, and they stood at INR 3,23,000 crores as at June 30, 2019.Some more data points on the asset quality position reported during this quarter. So while the growth NPA headline has increased to 5.01% and the net NPA headline has increased to 2.9%, the bank has maintained its provisioning coverage ratio.During this quarter, the bank has sold 1 NPA account, which would account for an exposure of INR 4.11 billion or INR 411 crores. This is to -- sold to an ARC.During the quarter, the bank experienced slippages of INR 6,232 crores. However, only there were some technical downgrades and upgrades, which accounted for INR 1,678 crores.The net slippages during the quarter would -- stacked up to INR 4,554 crores.The slippages from the corporate book were entirely from the accounts which have been previously disclosed as BB and below.On the asset quality front, the credit cost guidance is right with it, up to 125 basis points for this current year and 32 basis points have been utilized in this current quarter.Our press release and investor presentation also have the disclosure on sensitive sectors, so you can go through at your luxury. There has not been much changed as such between the last disclosed to this particular disclosure, and more or less stable.And lastly, some statistics on the bank's employees and branches as well as some mention on the recognitions that the bank received in the last quarter.So the bank employee strength as at June 30, 2019, stood at 21,745 employees, and the bank is operating 1,122 branches and 1,220 ATMs, and note-accepting machines.The bank was recognized 5th time in a row -- 5th year in a row by Asian Banker, as being the best trade finance bank in India. In the same award, the bank was also recognized as having executed the best corporate trade finance deal in India, the best financial supply chain management deal in India.The bank also saw its transactions get recognized at AAA Asia Infrastructure Awards, where it received the best deal in India award for transportation sector, for the utility sector as well as renewable energy sector. The renewable energy deal was also highly commended.The Global Finance Magazine also highlighted the bank as being among the 25 best financial innovation labs in the Fintech space as well as it being among the innovators in trade finance.The bank also maintained its leadership position in the net capital market space. In the quarter gone by, it was ranked among the top 3 arrangers in the first quarter in the private sector manufacturing category by [ prime ] the bank executed transaction across sectors, which will include renewable energy, both solar and wind, engineering, transmission and [ in risk ].And the bank has also starting to gain traction in the offshore debt capital market business. And in this quarter gone by, it also acted as a joint team manager to 3 high-yield offshore USD denominated bond issuances, which were largely done in the airports and the renewable energy space.And the bank also ranked as #3 MLA in the local currency syndication for the first half of the calendar year for sell down and refinancing of loans.As this was the summary of both the financial highlights that we wanted to communicate upfront as well as some operational and recognition outcomes that the bank saw in the quarter gone by. We will be happy to take questions here.
[Operator Instructions] The first question is from the line of Mahrukh Adajania from IDFC Securities.
So I had a couple of questions. Firstly on the defects. So there's a transfer between categories, and also there's been a sale of HTM. So were they defect gains? Or -- and in fact there's as well a write back in provisions on defects as well?
So the gains on account of the defects, in general, if I can say, treasury gains, Mahrukh was, INR 4.5 billion, so INR 450 crores.
Okay. And was there any write back of provisions on defects or on any other corporate bonds? I mean, there was a further write-off in TM NBFC. But was there a write back also?
Well, there might be some minor write in the write backs, but nothing of consequence.
Okay. And my second question was on the stress book. So on the watch list of INR 100 billion that was talked about last quarter, how much of that would have slipped?
So about, let's say, the rest, if I may address, which is about INR 4,500 crores, while INR 2,500 crores is from the book -- identified book. And the balance is from the BB and below book. And I'm excluding retail and SME for this math.
Right. So the BB and below book is the 9.4%, right?
That's right.
The [ background ], not the corporate book. Got it, got it. And just one more question again on stress loans, that there has been -- there is likely to be a regulatory change in AP, which is one of the biggest or the fastest growing markets for renewable energy, and there was investments after FY '17 in 80. On the renewable front, yearly rose sharply. So what would be your -- I mean, total exposure to AP and in general, the amount of renewable exposure? And do you see any risk?
So AP is not a risk in our portfolio. I mean it will be a small minority proportion, maybe single-digit percentage of our exposure at -- exposure to AP as such from our renewable energy portfolio.
Okay. Well, what would be the size of the renewable energy portfolio?
Renewable energy portfolio as a percentage of our loan book would be -- I would -- I mean, I will repeat the number later when I get the exact number. It will be about 4%-odd of the loan book.A lot of the renewable energy is routed, you should understand, via the intermediate -- so AP, for example, in this instance is also not -- it's negotiating with the intermediate entities, which are the off-takers from the power producers.So there is a -- or should I say, a buffer in the middle as such. And this is, I mean there is -- I'm sure there is a little bit of politics in play here. So contracts will be upheld firmly.
The next question is from the line of Amit Premchandani from UTI Mutual Fund.
This INR 1,600-plus crores upgrades, all are from the technical slippages or there are some genuine updates also?
They're all technical slippages. All of them, the entire INR 1,600 crores.
And of the INR 25 billion which slipped from BB, the rest, how much slipped from BB and below? Sorry, INR 25 billion from the INR 10,000 crores. And the rest, how much slipped from BB and below?
About INR 2,100 crores.
If you exclude the retail and SME slippages...
And what is the retail and SME slippage?
A little over INR 100 crores.
Okay. And the revised watchlist is this INR 10,000 crore and reduced by INR 2,500 crores? Or it is INR 29,000 crores of roughly the BB and below?
No. The watchlist remains at INR 10,000 crores. Even though just INR 2,500 crores has slipped out of that.We continue to watch the INR 7,500 crores very closely. But in terms of the overall composition and the size of that watch list, nothing changes at all.
And what is the meaning of this watchlist if INR 2,100 crores slips from outside this watchlist?
So I think when we put out the watch list, we were very close to -- or we were just initiating the whole process with respect to equity raise, and we thought that we should proactively be able to tell investor of where the potential slippages could occur.These were accounts in which there were repayments coming up and where we didn't think that the cash flow really would be in a position to support the -- for them to be able to meet their liabilities.Eventually, the slippages didn't occur. So I thought maybe we were a little bit more conservative.But the balance that you talk about, I mean, I think I would tend to look at them more as slippages in the normal course of business, even though they came out of the watchlist and -- but very much from the BB and below book.
And sir, how do you rate the overall risk management function in the bank when BB and below book has moved from 2.5% to 9.5% in 2 quarters?
So I think what needs to be really clearly understood is, and we have mentioned this in the last quarter as well, that the increase in the sub-investment grade book came essentially on the back of 3 very large exposures. And even if that book has increased in this quarter, it comes on the back of 2 of the investments that we had, again, to these very entities, which as I mentioned earlier during the call, during the last quarter were still investment grade.So I would again like to emphasize this point that this is not a large granular book, which is the sub-investment grade. It is concentrated. It's a handful of [ rates ]. And so to use these as a reflection on the overall risk management function in the bank, to my mind would be inaccurate. If it was a very large granular book, I would have definitely seen substance in the point that you have made.
And sir, how much of this 9.5% BB and below was originated or sanctioned in July to September 2018?
That will not be a significant amount, Amit. I mean we're not be able to say that it was 0 because we'll have to go back and double check that. But I don't think it will be a significant amount in terms of sanctions.
And finally, this 125 bps, does it induce the NBFC mark-to-market hit which you have to take from the bond portfolio?
No, it does not because it's not being classifying the MTM provisions in credit costs because they could also be simply on account of interest rate movements. And it is not, I mean, we can discuss and argue that, but it is not easy to delineate how much of that is credit cost and how much of that is relating to interest rate yield movements.
And how much of it have you taken to that MTM -- sorry, the bond portfolio of these 2 NBFCs?
So in this quarter, INR 1,100 crores.
I mean, in terms of percentage, it is 50% or 25% or?
It will be between 20% and 30%.
The next question is from the line of Sameer Bhise from JM Financial.
So I wanted to ask, within the BB and below pool, are there any loan exposures which are also there in the bond portfolio which just got downgraded in the quarter? Or is it just bond exposures and loan exposures are not there?
So I'm just thinking aloud. So theoretically, if there was a loan exposure, it will also be there in the BB and below category. But in terms of this [ quite quick recollection ], there will not be -- there might be a small loan exposure. It's mostly bonds.
Okay. And so effectively, none of these 2 entities were in either BB and below or any of the watchlist discussions that were there last quarter? Is that a fair assessment?
That's correct. Because their credit ratings, which were available at that time, were, in 1 case, at investment grade, and the other case, [ far below ] investment grade. Yes.
Yes. Fair enough. And any specific sectoral bias to the slippages this quarter?
No. We don't see any particular sector which dominates the slippages in this quarter. No. Not really. And this will come back to the point that -- the previous question that you asked with respect to the bond portfolio. While one of the entities was not captured because like we said, it was investment grade during the last quarter, the second is part of a group which is very much present in our sub-investment-grade book where the entire funded, nonfunded exposures were captured. But since the bond portfolios were, at that time, investment grade, that was not included.
Okay. But is there any entity which have slipped from the group, otherwise which is obviously not the financial services entity?
So one entity which was part of the watchlist from that group had slipped.
Okay. And I think that would be a reasonable proportion of the INR 6,200 crores of gross slippages.
Yes, let's -- if you don't mind, let me just not speculate in terms of [indiscernible] Single account would not be right.
The next question is from the line of Saurabh Das from Franklin Templeton.
This is Saurabh. Am I audible now?
Yes.
Yes.
My question is on capital raising. So if you can share with us any visibility on time line, first. Second, that in the event of a delay, are you looking for a [ drastic ] sell-down? And isn't it already high time that we aggressively do that? I was hoping to see some of that in this quarter itself. And lastly, do you envisage any regulatory actions since we are already at 8? Any further drop from the CET1 levels will possibly trigger prompt and corrective action?
So if you look at the fact that -- churning of the balance sheet, I mean, then I talked about capital optimization. That was a very big element of -- churning was a very big element of that. In the last quarter, what we had said was that we will look to granulize our balance sheet. And due to that, we were able to churn our corporate portfolio and grow the more granular retail portfolio. I think if you see, not just for the previous quarter, but even on a more long-term basis, the bank has demonstrated the ability to be able to churn its portfolio to be able to optimize capital, and I think it was no different from -- in the previous quarter. And we continue to do that regardless of any concern that we may have with respect to the timing of the capital raise. So that is something which is a very high priority. And when I talked about capital optimization, that's what I essentially did -- alluded to.As far as the capital raise is concerned, the interest from investors has just gone over a period of time, both public and private, which has opened up multiple options for us. And as I mentioned earlier in the call, that we continue to see it as [indiscernible] as a quarter 2 event.
Regarding any regulatory actions or...
Yes. Sorry. No, so we don't -- look, I think we maintain a very close dialogue with the regulator and very openly and constructively shared all the developments with respect to the bank operations, balance sheet, et cetera. And I don't see any of that being on the...
But when the dialogue [ help us see ] not below CET1, I mean, does the regulator have that lever to...
No. Obviously not. But the point I'm making is that in terms of the bank performance, that is very transparently communicated to the regulator. So there is nothing that should surprise the regulator. And we don't see, frankly, a situation arising wherein we will drop below the regulatory threshold. We think we have multiple levers. Again, I will just put this on record. We think we have multiple levers to ensure that we don't get into that territory at all.
Yes. Because meanwhile, on one side, we are trying to keep the loan book static. We are trying to optimize within that to bring granularity. So then events like NPAs are beyond our control. And just in 1 quarter, a few NPAs resulted in 20, 30 basis points of [ temporary ] consumption, which we can't -- any further [ approved ] since we already at 8. So that's where the sense was behind the question.
Yes. I mean, I completely agree with that, and the sense of urgency is not lost on us. I think 2 points I will just make over that, that I think there was a concern that the market did expect some time back in terms of whether we would be able to meet our credit cost guidance. If you see the compression of our portfolio, specifically the portfolio which was sub-investment grade, which is part of the watchlist, do bear in mind, all of that was front-loaded. And despite all of that being front-loaded and getting no recoveries from any of those in this quarter, we only just consumed 32 basis points of credit cost. So we feel completely confident in terms of being able to meet our credit cost guidance of 125 basis points. But more importantly, the point that you made that slippages are -- could erode capital and then take us into dangerous territory is fully understood, and we are very cognizant of that.
The next question is from the line of Henrik Milton from Coeli Asset Management.
This is Henrik here. I have 3 questions. The first one is Rana Kapoor. And I'm just wondering, to what extent is he still a part of the bank, except for being owner?
So the key answer to that is that other than the fact that he is the largest shareholder of the bank, he has no involvement, executive or nonexecutive, direct or indirect.
Okay. And he will not be a part of the bank for the next couple of quarters? I think that is -- for now, he is out of the picture, so to say, for...
Yes. That's correct. Unless something else changes, but that's the base case.
Okay. Now the big picture of the nonperforming loans, just to be simply clear, regarding the NPL trend, if it's improving, going further or if you see something else coming on the next quarter?
So as I mentioned, that we think that our sub-investment-grade book has now completely bottomed out. I gave you a sense in terms of what the real estate portfolio is looking like given the fact that, that is a question that often comes up from investors and analysts. And I also gave a sense in terms of what our overall corporate book looks like. So I would say that when I look at the near to medium term, I think it looks very promising. And I don't see any material slippages outside of what has been already indicated and clearly put out there in the market.
Okay. And then you have some promising achievements on the retail side. I'm just wondering, when you grow on retail, is it better pricing versus competitor? Or is it better services? What is it that makes you taking market share on the retail side?
I think there are a couple of very clear factors. It's definitely not pricing because we will not compete on pricing. I think the performance of retail, and which has been very impressive, comes on the back of a couple of things. First and foremost, I think we have been very solution-driven, and we have come up with very specific solutions for certain industries, which has given them a market leadership position over there. Second, I think if you look at it from the point of you'll use a technology and use of -- a customer usage, I think they are setting the benchmark across-the-board. And the third is that the whole usage of data analytics in terms of pitching the right product to the right client, pricing it correctly, setting the right limit is something which is now beginning to pay off in a big way. Also, I think what the battle of the business did was that out of 1,100 branches, the strategy is now absolutely aligned branch by branch based in terms of what is the business potential of the catchment area of that particular branch, what kind of product we should be offering there and what kind of people should be managing those branches. So I think a combination of very a solutioning-based approach, great data analytics and, third, products which are suited to specific industries are the real factors behind the very impressive growth of retail. I can promise you, it's not being driven on the back of pricing.
The next question is from the line of Nilanjan Karfa from Jefferies.
A couple of questions. At least when I look at the corporate rating profile and the total below investment-grade book is about, what, INR 20,000 or INR 19,000-odd crores, out of which 1/4 is investment. I believe in our annual report, we had this number close to only about INR 500-odd crores. So there has been a very substantial jump in the investment-grade book, whereas you report only 2 investments where we had to take an MTM downgrade. Is my assessment right?
Sorry, Nilanjan, I have not understood.
So if you look at this INR 294.7 billion of BB and below, right? That's where the number is, right?
Go ahead, yes.
So 25% of that is investments?
Correct.
Right. And the annual report of March '19, if you look at that -- the disclosure of...
Subsequent to March '19 downgrades.
Correct. And that's a pretty large number. It goes from like INR 5.5 billion to close to about 75.
That's correct. That -- again, those are concentrated across 2 financial services groups.
So that's entirely -- okay.
Just to name, as I mentioned earlier, that this entire migration to the sub-investment-grade book has come from just 2 financial services names.
Right. And...
Sorry. Just to add, there will be about approximately INR 15 billion or INR 1,500 crores provisioning also on those exposures. Maybe a little bit more than that, I don't have the exact number.
I kind of lost you there. Sorry, what is INR 1,500 crores?
Provisioning. So this is the graph exposure. It has also been provisioned. That is what I was just telling you.
Right. Okay. Okay. And did you also mention, Rajat, that corresponding to these bonds, the loans are probably not there at all. Is that what you said to an earlier question?
That's correct.
Right. Okay. And you also said that these downgrades in the bonds are not part of that INR 10,000-odd crores that you had mentioned last quarter?
That will be in below book of last quarter. That's correct. Because at that time, all these bonds were investment-grade or better.
No, no, no. Not the BB and below but in the INR 10,000 crores that you had mentioned.
We were not even there in the BB and below. INR 10,000 crores was a substrate of BB and below.
Yes. So INR 10,000 crores was actually cut out of the BB and below book. These are not 2 independent numbers. The INR 10,000-odd crores were drawn from the BB and below book of INR 21,000 crores or INR 23,000 crores.
Sure, sure. Well understood. And Ravneet, in your opening remarks, I might have misunderstood. But did you say you need 8 quarters of PPOP of a similar kind of a PPOP that we delivered in Q1, which will be sufficient for provision of that entire book? Did you say something like that? Because that's a pretty large number.
So what I was saying was that it was said especially in context to the capital raise. So the question that very often comes up is that, do you need capital to be able to absorb more provisioning? Or is it actually growth capital? And I was just highlighting the fact that our PPOP is enough to be able to provide the provisioning on our BB and below book, and for that, we don't need incremental capital. The incremental capital that we're looking for is really more from the point of view of fueling growth.
Okay, okay, okay. Sorry. And just one probably last question. The SMA-2 that was discussed was INR 404 crores, and that's entirely corporate, but is it a like-to-like comparison of about INR 2,400-odd crores that we disclosed in the previous quarter or that INR 2,400 included everything put together?
INR 2,400 crores was the full bank at that point in time.
Do we have a comparable number of…
No. That number is not readily available. But the INR 2,400 was a full pool bank-wide but we have yet to disclose that number.
The next question is from the line of Adarsh Parasrampuria from Nomura.
I have a question. Can you lend a little bit more credibility to the watchlist that we've discussed? The reason why I say that is even it will -- during our first quarter results [ there was no ] certainty you could offset some of these investment markdowns and recognition that you've done in BB and below. Could have they at least been considered into the watchlist, right? Because watch list simply denotes what's probably with reasonable certainty, decent problem set, which will require provisioning and NPA recognition guide. So the first question is like, just because it was not BB and below but decent certainty that's around, why wouldn't the watchlist not have it then? Two is, now the difference between BB book -- BB and below, and the watchlist, what's your comfort qualitatively, quantitatively, whatever you can kind of add some credibility to that, please.
So as we mentioned previously, the watch list was actually derived from the sub-investment-grade book. So it's not as if that these are 2 separate pools of asset that we were looking at. Now if you see historically for the bank, what we do provide is a sub-investment-grade book only. We don't provide a watchlist. As I mentioned to you, in the spirit of transparency and being more proactive, we -- within the sub-investment-grade book, we identified a pool of assets where, like I mentioned earlier, there will be payments coming up and where we thought that cash flows will not be sufficient for the companies to be able to meet those obligations. And there could have been potential defaults. And at that time, we had said that even though we put a contingency provisioning of INR 200,000 crores on that watchlist, when we declared the results at that point in time, the entire watchlist was actually current. I mean, there was no contingencies in that watchlist. But those [ pertained ] slippages that we had anticipated, in the spirit of transparency, had gone out there and [ slammed into ] the market. The slippages that have occurred outside of that watch list have occurred from the BB and below book itself. They haven't come from other parts of the portfolio. So whatever slippages have happened may have not been entirely captured in the watchlist but have come entirely from the BB and below book, of which the watchlist was only a substrate.
So given that your slippages are coming from -- if I take the full number coming from a larger pool, what comfort should one draw? And this is not like just 1 quarter or 2, but say in 18, 24 months through the cycle kind of recognition that the bank will do. Between that INR 30,000 crores number of BB and below and the [indiscernible] whether it's INR 15,000 crores or watchlist, including some of these downgraded investments, what do you think comfort on that INR 15,000, right, when your client [ comes out ] that -- what's the comfort that you have there, not just for like a couple of quarters but if I take an 18-month horizon?
So again, like I mentioned to you, that the watch list of INR 10,000 crores doesn't change. That watchlist was put out there for a very specific purpose. And like I said, that even though only 25% of that watchlist slipped, we continue to monitor the balance 75% very closely.And regard to the sub-investment-grade book is concerned, what I told you was that one of the parts of the portfolio which often comes up for discussions is really the real estate book. And in the real estate book, I provided very specific data points to be able to provide comfort, that, that book is not shared the way sometimes real estate is currently perceived. So I gave you a sense in terms of the 5% to 25% of it was provisioned already in the BB and below book. And for the balance, 75%, there are hardly any overdues or SMA-2.Similarly, if I look at the overall corporate book, I give you the sense that we would have roughly about INR 404 crores of SMA-2. I think that should give you a fairly good hint in terms of the ensuing quarters being relatively stable from a provision perspective.
Okay. And the second question is, can you just talk a little bit about more like normalized fees and margin, especially corporate fees and margins, where do you see? What you reported vis-à-vis how things can pan out basis? You had a bit of fallen CASA, but obviously, now your liability side can consolidate. So some sense on visibility around margins and corporate fees.
So as far as the fee part of it is concerned, one of the things that we had changed from an accounting standpoint in the last quarter was that we would, going forward, amortize the fee over the life of the loan rather than recognizing it upfront as was the practice previously. Having said that, that is not the only reason for the decline in fee. I think the main reason is that we were in capital optimization mode, and in that environment it would have been unwise -- imprudent to be able to go out there and do some very large underwriting, which would have generated the fees. So we decided to take a pause on that. And like I said, more -- churn the portfolio to be able to invest and create capacity for some of the other businesses that we want to grow more aggressively going forward. I would say that for post our capital raise, you will see a lot more intensity with respect to fee. Obviously, the fee has 4 elements to it, which is -- one is the corporate finance, second is retail, third is transaction bank and the fourth, of course, is financial markets. If I look at it from the point of view of this year, the fee on retail was up almost 23%. If I look at it on the transaction bank, it was up almost 6%. But given the fact that we did not do any of the large underwritings on the corporate finance side, that number came off. I don't think it really is representative of us discontinuing a business or deemphasizing a business. It really is a timing issue. We think that the market opportunity for that business today is stronger than ever given what has happened to the broader financial services industry, the tightening of the credit market. I think, today, there is much better opportunity for that. But like I said that, that really is a function of capital -- import capital. You will see a lot of adjacent growth over there. I think I started -- the second question was around NI?
Yes. On margins, yes.
On margin side, I mean, one of the things, which we, of course, saw really was -- or rather what I articulated in the last quarter was that from being very -- or almost single-mindedly asset-led, we would become a lot more liability-led. A lot of our retail strategy, a lot of our transaction banking strategy is in terms of growing the liability business. On the back of digital I think we have been able to make significant headway there in terms of the entire government banking business, which is, obviously, the numbers -- the highest liability contributor as far as the country is concerned. And even in this quarter, where I think we had headwinds in terms of new issue, in terms of the operating environment, I think the retail part of it grew quite significantly. I think where the -- our cost of funding was a little impacted was, like I mentioned, that some of the corporates who maintained cards with us, they saw a little bit of depletion in that on the back of rationalization of credit, which was part of our entire capital optimization strategy. I think once we go back to being at full throttle in terms of corporate credit, I think that piece will come back, bring down a lower cost of funding, which goes -- retail is working on as well. And I see that normalizing and actually increasing fairly soundly in coming quarters.
The next question is from the line of Anand Laddha with HDFC Mutual Fund.
On the BB and below exposure, you can give some color like in terms of sectoral -- which sector they come from, that will be helpful.
So I think, it's -- again, like I mentioned to you that if you really were to look at that sub-investment-grade book, it actually comprises of essentially a handful of names. It's not a very big, granular book, which is suffering from stress coming out of the cycle, which could be an industry cycle or whatever else it is. This is not a concentrated sectoral exposure, and this is just a handful of names, which are -- one of which is diversified, other could be in businesses which are entertainment, financial services, et cetera. So no, there is no sectoral color to the sub-investment-grade book.
Okay. And if I [ can go ] within the sub-investment grade book, a lot of exposure -- there are a lot of M&A deal or resolution are likely to happen. If you can give color, suppose a deal happens in the media industry, what sort of book reduction can happen or a deal happens in a diversified [ corporate loan ] then what sort of book reduction can happen?
So I think we are really well collateralized in these exposure and -- if a resolution was to happen. And you mentioned 2 of those names, I think, a resolution is very imminent in the third large exposure also. And I think if these resolutions were to come, I think, I just mentioned at the beginning of the call that investors are now beginning to realize that it's just a handful of names and if there's even a single resolution, the upside is material. I will tip that even from a credit standpoint that if resolution was to happen in these names then we expect -- definitely expect some of these resolutions to happen in this quarter, it would lead to a material reduction in our sub-investment-grade book, material reduction.
But at this point of time, you don't want to quantify what number that can be?
The only reason I don't quantify it is that these resolutions are underway. We'd like to see them clear and spelled out. Some of these have got reported in the media, which I can tell you are exaggerated. I think these resolutions are going to be a lot friendlier to lenders, to investors. So I don't want to hazard a guess, but what I can definitely say with great certainty is that it will lead to a material reduction in our book.
Okay. The other question, the bank has been doing a lot of structural finance also holding company level sort of lending. If you can say, what could be the rating of those lending? Is it a part of A or a part of [ BBB ] book?
So first and foremost, our lending -- you said -- one was holding company offer, the other part that you talked about?
I said structural lending part at the motor level funding or a holding company level lending. If I had to look at rating of those lending, it will be a part of what, BBB book or a A book -- A rated book?
So actually, if I look at a majority of our holding company financing, it is part of our BB and below book. I don't think there is anything of any substance outside of that.
Okay. So like, typically, a bank does a stress test. So you could have done some stress test on your BBB book. So is there any probability that some part of that can fall into BB book or below in next -- over next 2 to 3 quarters or next 12 months?
I could say that our BB book will be -- so I mean given the fact that some resolutions now look imminent, I would think that, going forward, actually our sub-investment-grade book should fall considerably.
No, no. My question was on the BBB book. So is there any probability if you do a stress test, some part of that BBB book can fall into BB over the next 2, 3 quarters? How comfortable you are in that?
I'm reasonably comfortable that, that won't happen.
Perfect. And lastly, on the margin side, if you can give some color like what sort of margin do we expect? And what about lending rates on the corporate? So what about IBU advances on the corporate side and what is IBU advances on the retail side?
Anand, the yield roughly stacks up to, I would say, maybe corporate yield would be 9.75% to 10% range in terms of averages. The retail yield would be between 10.25% and 10.75%. SME will also be in the 10%, 10.5% average. The averages. Of course, the range of corporate yields will be a lot higher. Let's say, the AAA yields will be closer to, let's say, 7%, 8%, and some of the structural deals are, let's say, real estate transactions side also be 12%, 13%. So the spread is higher. The spread in SME and retail will be narrower, but the averages would be, like I was saying, about a little less than 10% for corporate, a little more than 10% SME and about 10.5% for retail.
And [ all kick on ] the margin side.
So margins -- Anand, actually frankly speaking, core margins are running at between 3.2% and 3.3%. However, the interest reversals on account of recognition and non-accruals are the ones which are largely impacting. So if resolutions, as we are expecting, work out, they will also have a corresponding beneficial impact on margins. So the core margins are already at 3.3%. So some of these one-offs, which are -- which have been, let's say, we've been observing them for the last 2 quarters, possibly there will be 3 quarters as well have been -- we are having to report lower margins in terms of the disclosures. And the other part is the activity on CASA. While first quarter I will not attach too much of trend because it's seasonally usually weak as far as CASA is concerned. Our average CASAs are maintaining or give or take they're there, even though the headline CASA is little lower from the sequentially previous quarter. And there is room to improve. Retail share of funding is going up. The CASA that we have, let's say, relatively lost is not the retail CASA as much as the other retail CASA. So the prognosis continues to be, I would say, as it has been that we should be looking at improvements coming on the liability side impacting margins for the better. However, currently we are hurting on the asset yield side because of interest reversals and non-accruals resulting from NPA recognition.
The next question is from the line of Manish Shukla from Citigroup.
So when you guide for a 125 basis points credit cost, what is the coverage that you're assuming, either on the increment of NPA or on the stock of NPA by the end of the year?
So again, I think, we -- our current PCR is [indiscernible]. There's very clearly an intention on our part to really take that up to 60%. But for this year, we will maintain PCR at...
Okay. Fair point. Coming to the BB and below, the size of the BB and below at the end of last quarter was about INR 180 billion, am I correct there?
[ 2.3 crores ] INR 230 billion. This has gone up to INR 290 billion.
So that essentially means that if you assume INR 45 billion for INR 110 billion addition during the quarter? Is that the right number? So you said INR 45 billion slipped the NPA during the quarter? And the stock is now at 295. That means INR 110 billion at least of addition?
I have not done that math, but I'm assuming you've done the math correctly. So the slippage has from the...
BB and below.
Say the question again.
So the slippage from BB and below you said is INR 45 billion as of last quarter. So that was INR 230 billion minus INR 45 billion. And now the stock is [ 295 ], so that delta is INR 110 billion.
Yes, that's correct.
So INR 110 billion is downgrade to BB and below in this quarter.
So give or take, yes. INR 110 billion, yes.
Okay. And as we see daily in the news reports at the pace of rating downgrades as far as the rating agencies are concerned, that continues. So they're doing December, and now only 5 accounts have like 2 BB and below going from 2.5 to 9.4. So just wanting to understand, just going back to your comfort on not much further addition to this pool from this going forward.
Like I mentioned to you that if I look at our portfolio, which typically tend to be sensitive, and which attract attention from asset quality standpoint, I did mention that our total SMA-2 book is -- for the corporate side is INR 404 crores. And for the real estate side it's INR 255 crores, which is part of INR 404 crores. INR 404 crores is for the entire book. So we think that the exposure that we have now from portfolio perspective from individual counter-party perspective, in the foreseeable future, we don't see any slippages into the BB and below book.
Okay. And lastly on capital, the resolution was $1 billion, a 10% dilution. Does the 10% dilution still hold?
So no. So I think, likely as clarified in the last 10 round, the 10% was not something that was self-imposed by the Board or by the bank. That was the advice that we have got from proxy advisors that if you go for an enabling resolution then investors typically don't agree to more than the 10% dilution, but if you have a separate deal, price, size, all in place, then they will give approval for more than 10%. So the option to go beyond 10% is very much on the table.
Okay. Sorry, last question. Was today's Board meeting attended by the RBI nominee director?
So Mr. Gandhi was in California. And he was in VC for the entire Board meeting.
Ladies and gentlemen, due to time constraints, we will take the last question that is from the line of M.B. Mahesh from Kotak Securities.
Just have a couple of questions. One, if I look at the [ herein ] table which you reported on March 31, there it shows roughly about INR 25,000 crores, which was up for maturity for a period of 90 days. Just trying to understand, you guys repaid that -- this much amount of money during this course of this quarter because the loan book seems to be flat?
So I don't have the table you're referring to right now in front of me, but yes, the funding continues to be on an ongoing basis.
No, no. I'm just talking about the loans. The loans shows roughly about INR 25,000 crores which are up to a maturity period of 3 months?
Although that could also be behavioral classification on account of overdraft and [ CC ] facilities because a part of our loan book does not have a set maturity, so we look at the observed behavior of that book, and we ascribe that to the future. But usually, those loans will also be, let's say, a rollover, or those companies will also continue to have working capital requirements. They will keep the money utilized.
Okay. Okay. And the second question on the retail side, was there any direct assignments which -- on the back of which the growth in retail has been much faster because we are seeing a fair amount of securitization which has happened in the market?
No. I think the entire growth has been organic. It has not come on the back of buying out any portfolios.
Okay. And final question, do you have the -- what's the definition of retail term deposit, sir?
So the grand banking deposit is what we classify as retail deposits.
Is there a quantum under which you...
INR 2 crores is the RBI threshold in any case.
Maximum?
Maximum, yes. So it used to be INR 1 crore, but RBI has lifted the definition of retail to INR 2 crores.
Ladies and gentlemen, that would be the last question for today. I now hand the conference over to Mr. Ravneet Gill for closing comments. Thank you, and over to you, sir.
I would once again like to thank you all for dialing into this call. As I mentioned, this was really a quarter of consolidation. And I think the way we have been able to navigate that -- navigate through that gives us a lot of confidence in terms of our performance going forward. Thank you, once again, for your support. And hopefully going forward, we can surprise you on the upside. Thank you very much.
Thank you very much. Ladies and gentlemen, on behalf of YES BANK, that concludes this conference. Thank you all for joining us. And you may now disconnect your lines.