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Yes Bank Ltd
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Ladies and gentlemen, good day, and welcome to the YES BANK Limited Q2 FY '19 and H1 FY '19 Results Conference Call. With have with us today Mr. Rajat Monga, Senior Group President, Financial Markets and Balance Sheet Management; Mr. Pralay Mondal, Senior Group President, Branch and Retail Banking; Mr. Ashish Agarwal, Senior Group President and CRO; Mr. Raj Ahuja, Group President and Group CFO; and other distinct leaders of the YES BANK. [Operator Instructions] Please note that this conference is being recorded.I'll now hand the conference over to Mr. Rajat Monga. Thank you, and over to you, sir.
Thanks very much, Rashad, and thank you all for being available to listen to the commentary of the bank's financial performance for the second quarter of fiscal year 2018, '19.Before we jump into our financial highlights, I think we wanted to just put a backdrop of the Indian economy, which we believe is continuing to grow at a decent clip, and we expect the economy to deliver a 7.3% performance on the GDP front. Of course, there are challenges on the global trade war front, rupee depreciation as well as some local technical issues that have emerged recently which have added to the -- somewhat to the risk of the growth outcomes of the Indian economy.The INR depreciation has cut both ways, I mean there are beneficiaries as well as sectors which should have to bear the cost, higher input costs, on account of depreciating currency as well as others who will benefit from higher imported -- better competition from higher cost of imported substitutes. That is on overall basis so we believe that the rupee depreciation will be more beneficial to the economy, provided it is not in excessive depreciation window. The currency has also seem to stabilize for the moment and which is looking better for the businesses as well as for the economy.In the backdrop of all of this, there are also expectations on the domestic inflation which are now looking only lower, and the expectation of the Reserve Bank of India taking more rate hikes is also falling off for the current financial year. Recent cooling off in oil prices is also aiding that outcome, which is a welcome from the standpoint of both the Indian currency as well as the Indian fixed income market. We now believe there could be another 20 to 30 basis points undershooting of the CPI from the current expectations for the fiscal year '18, '19.As far as the banking backdrop is concerned, the recent developments in the Indian financials -- larger financial sector landscape have put banks again in the forefront given the tightness in liquidity as well as availability of credit. And financing for certain financial services sectors where banks compete in for the moment is turning out to be beneficial for the banking sector in general in order to see both higher access to business as well as better pricing power, and that will progressively come through in the subsequent months and quarters as we go forward.As far as the bank's financial performance is concerned, we are reporting a sustained operating performance even though the environment has been volatile along with certain situations which have emerged at the bank level as well. And in terms of the specific operating performance parameters, we are -- like to report a 28.2% increase in net interest income, taking it to INR 2,417.6 crores for the quarter as well as the bank reporting a stable net interest margin at 3.3% as compared to the sequentially previous quarter.Between net interest income and noninterest income, the operating profit combined grew by 24.1% to a total of INR 2,366 crores, and the bank had an operating cost ratio or cost to income ratio of 39.2% for the quarter. The net profit of the bank, however, declined somewhat, about 3.8%, to INR 965 crores, based on the current provisioning related to the fixed income portfolio of the bank predominantly relating to corporate bonds as the yields and spreads had both get stuck in the preceding quarter, in the September quarter that is. In the current financials, the bank has taken an impact of INR 252 crores on account of MTM provisioning for the fixed income portfolio pertaining to the current quarter as well as has recognized INR 92 crores provisioning which were the carryforward from the previous quarter on account of the bank having exercised the option to defer the MTM losses to 4 quarters for the current financial year.Similarly, in the first quarter of the current fiscal year as well as the corresponding quarter of the last fiscal year, the bank was also enjoying the benefit of bond gains resulting from falling years where this have -- not had the opportunity to grew the same this coming quarter. If you adjust for the opportunity that we exercised same quarter last year as well as the incremental provisioning that the bank has had to take this year, the adjusted net profit for these 2 facts should have grown by 36.2%, which is a fairly heavy number on account of the other operating outcomes.The balance sheet of the bank continues to be in a fairly healthy growth clip. The Advances portfolio of the bank had grown about 61%, raising to about INR 2.4 trillion, and the bank has witnessed growth across all its subsegments. One of the segments, which will be Retail Banking, has seen a 103% growth on a year-on-year basis. So the portfolio has a little bit more than doubled in the last 12 months and is now taking a 14.3% share of the bank's Advances book. This share for this corresponding quarter of last year was 11.4%, so the bank has seen about a 3% improvement in the mix of Retail Banking loans in its portfolio.The deposits, correspondingly, also grew a healthy 41%, approaching to about INR 2.22 trillion, and about 33.8% of the bank's deposits are constituted by low-cost CASA deposits.The bank has also seen good improvement in the retail deposit area as well. The total of CASA and retail deposits now stands at 57.2% mix of the total deposits of the bank, and there has been encouraging sequential performance as well on the retail deposits, which have grown as much as 9% in just 1 quarter on a sequential basis.The risk-weighted intensity of the bank's asset portfolio continues to decline. The position as at September 30 of the ratio of bank's total risk-weighted assets to its total assets stood at 81.3%, lower from 81.6% that is presented in the June quarter and fairly lower than 84.3% mix that is presented in the September quarter of the previous financial year.The bank's capital ratios, total Tier 1 and CET1 stands, respectively, at 17%, 11.9% and 9.0% as at September 30, 2018. The bank did experience fairly high amount of seasonality in the loan growth towards the end of the quarter given the developments that were taking place on liquidity in other financial services businesses and had resulted in more than seasonal outcome in terms of double growth as well as consumption of capital, which we believe will also naturally come off as the seasonality wears down.The bank's asset quality position stands at a gross NPA level of 1.6% and a net NPA level of 0.84% as at September 30. The numbers are a slight deviation from the provisional numbers that the bank had disclosed on 1st October given that the primitive review as well as the internal review of the asset quality outcomes was -- had not been conducted, and there was 1 account for an amount of INR 631 crores which was classified as NPA post the review process. This loan is also expected to have a near-term recovery and an upgrade outcome maybe also after the third quarter of this financial year.The credit costs for the quarter stood at 18 basis points. And for the half year, the credit costs stood at 34 basis points in comparison with the earlier guidance of 50 to 70 basis points for the full year. The bank is also reporting an LCR position of 100.5% as at September 30, 2018, which is about 10% more than the minimum requirement by the Indian regulators.Some more statistics on the bank's profit and loss account. So the noninterest income have seen 18% growth on a year-on-year basis to INR 1,473 crores. And if we adjust for the bond gains of previous quarters, the core net interest income (sic) [ noninterest income ] will have actually increased by 38.5% on a year-on-year basis.That provisioning burden in the P&L for the current quarter stands at INR 940 crores, this is following a breakup. Out of the INR 940 crores provisioning on account of NPAs stands at INR 409 crores, provisioning on account of mark-to-market of investments stands at INR 345 crores and the provisioning on account of standard assets stands at INR 118 crores.Higher provisioning burden for this quarter has also resulted in some correction in the bank's return ratios, so the return on assets and return on equity for the current quarter stands at 1.1% and 14.4%. The book value per share of the bank stands at INR 118.4 per share.A little bit more breakdown on the CASA in terms of how the CASA grew, internally speaking. So the bank's savings account book stands at INR 49,338 crores, which is 26.5% growth on a year-on-year basis. And the current account book stands at INR 25,941 crores, which represents a 31.6% growth on a year-on-year basis.The current year has seen a fair bit of headwinds as far as the CASA opportunity in the market is concerned. That is on account of what I may call as a remonetization of currency that was taking place in the Indian economy. The bank saw a flux -- influx of deposits during the remonetization period, particularly into CASA. And during the so-called remonetization period, which has, I would say, been lasting for the last 12 to 15 months had seen headwinds as far as CASA accretion opportunities are concerned. The CASA mix, as I mentioned, for the bank's deposits stand at 33.8%. And with the situation now normalizing, we believe that the CASA opportunities will continue to look better.The business lines breakup of the bank's loan book, as split between Retail Banking, Business Banking and Corporate Banking, was 14.3% towards Retail Banking; 17.5% towards Business Banking, which is comprising of medium, small and micro enterprises; and the Corporate Banking mix was at 68% of the total bank's loan book. So this is 0.5% increase over the same position that it was about same time last year. Some increase has also been on account of some reclassification of advances as some of the medium enterprises grow, they also migrate to being serviced by the Corporate Banking teams. So about INR 800 has been the migration that has taken place in this current quarter.The bank's total risk-weighted assets stand at INR 3.02 trillion. And as I mentioned earlier, the declining ratio of risk-weighted assets and total assets now stands at 81.3%.Some more elements on the asset quality performance of the current quarter. The bank is reporting a gross slippage of INR 1,632 crores and with -- about INR 631 crores came from 1 single account that was highlighted earlier, which was identified in the after-the-fact review period. There has also been sale of 1 NPA to ARC in this current quarter, and that amount will stand to the effect of INR 446 crores. The bank has written off loans of INR 123 crores in the current quarter and has recovered or upgraded loans amounting to 467 crores in the September 30 quarter. Given this single loan account which is being lined up for a near-term recovery from upgrade, the bank is reporting a lower PCR for this quarter at 48%. However, the endeavor is to raise the PCR to 60% by March 31, 2019.The net NPA position, as mentioned earlier, stood at 84 basis points, which amounts to a little over INR 2,000 crores. Besides net NPA, the bank is also holding security receipts which stack up to 85 basis points of its book. The standard restructured exposure stands at only 8 basis points. The sum total of this special mentioned net NPA, security receipts and standard restructured exposure accounts adds up to 1.77% of the bank's loan book.Sustained position at September 30, 2017, was at 2.53%, and the position as at June 30, 2018, was 1.52%. So while there is a deterioration on a sequential quarter comparison basis, there is a significant improvement on a year-on-year comparison.While we highlighted this in the past as well, but we are just reiterating that the exposure of the bank on account of borrowers that have been referred to the recoveries, as you know, which is NCLT, from the first list as was announced a couple of years ago, the exposure of the bank is only 1 basis point to its advances and is 27 basis points of its advances to the names of borrowers which feature in the second list. The bank is also not expecting any ongoing consequences of the RBI circular which was released on February 12, 2018.The SMA-2 position of the bank's portfolio also is a steady, tolerable number at 15 basis points of gross advances. I would also like to give some sectoral exposure breakdowns starting with the housing finance company segment. The bank has 3.2% exposure to the housing finance companies, and 96% of its exposure is rated by several rating agencies at AA or better. For NBFCs which, other than HFCs, the bank's exposure stands at 2.6%, of which 90% stands at a rating of -- excellent rating of A or better. The bank's commercial real estate portfolio stands at 5.7% of its exposures and has currently no SMA-2 position in its portfolio -- commercial real estate portfolio, that is.So the bank is also disclosing the -- its position -- exposure position vis-à-vis infrastructure financing group, which has been in the news of late, and the total gross exposure of the bank is INR 2,600 crores which is all standard in terms of classification as per September 30, 2018. In the same group, we would like to report that the bank has no exposure to the parent or the NBFCs or the financial services entity of the group. The exposures of the bank are all with the asset rich subsidiaries or special purpose vehicles where we believe that the enterprise value of those individual companies commensurate to the debt level. And with the supersession by the government that has taken place, we are also expecting fresh developments to also take place in the next 90 days going forward.On a top down basis, the bank is also happy to share that the OpEx, the last 20 exposures, more than 90% by value within the top 20 exposures have an external rating of A or better, which is essentially indicating that a predominant portion of the larger exposure of the bank is to the lower-risk borrowers which are reflecting the external rating of A or better and has also been reflecting in the falling risk-weighted asset intensity of the bank's portfolio. The bank has also yet to receive any -- the report, a risk-based supervision report from RBI for the fiscal year '17, '18.There are some more sectoral disclosures on account of our nonrenewable energy where the bank's position has reduced, on account of telecom where the bank's exposure has reduced, on account of gems and jewelry where the bank's portfolio position is similar to the previous quarter; and in iron and steel where the position has increased by 30 basis points as a share of total exposure. So overall corporate portfolio also continues to be well performing where about close to 80% of the portfolio continues to be rated A or better on an aggregate basis. The bank's releases also have a sectoral mix, which is cutting the portfolio into different sectors, and we'll be happy to take any questions on that subsequently.Some more commentary on the bank's operations pertaining to digital banking and electronic banking, which we've been highlighting in the past conversations and calls as well. And the bank, I think, continues to maintain a very good position in the IndiaStack of statements, whether it is UPI or IMPS and -- or AEPS where, if not the highest, the bank is ranking very highly in the Indian landscape on performance under these new payment channels. Correspondingly, on the bank's own payment channels, for example, the bank's mobile allocation is also showing very healthy trends. The bank has seen a doubling of registrations on a year-on-year basis on the mobile channel. The volumes and transactions have also grown 2x and 2.5x, respectively, on a year-over-year basis on the bank's mobile channel, and it is looking and emerging more and more as a preferred service channel for customers.Similarly, on the bank's card business, there has been a 48% transaction increase on a year-over-year basis for -- the number that the bank is currently looking at is 84 lakh transactions -- I'm sorry, that will be 84 lakh cards. The spend on the cards have also grown well on a year-over-year basis at about 56%. And currently, our quarterly spend at the bank you have seen on those cards is INR 1,213 crores.The bank continues to be much engaged with the various digital outcomes in its partner segments as well. The bank is offering services like cashless campuses to hospitals, schools. And very recently, we also implemented a solution for the Naval Officers Institute at Goa using the Tap & Go card, which is the first of its kind cashless defense campus which is using a YES BANK payment solutions.Similarly, there have been lots of engagements that have happened with the Indian smart city project where, very recently, the bank has implemented a smart city card cum wallet solution, which will be enabled with over 100 merchants in the Udaipur smart city project which will be using the BHIM payment interface. Also, the bank has launched, along with the Department of IT & Communication of the Government of Rajasthan, a co-branded arrangement under the Bhamashah Wallet, which essentially is being used to digitize the government to the public payment system. In the same line, the bank has also partnered with the Chhattisgarh Infotech Promotion Society, and the bank is on-boarding their citizen service centers and their banking correspondents to be able to digitize the payments of business for the public at large.Some commentary on these expansion and knowledge initiatives as well. So the bank's employee strength stood at 21,024 employees, which is a 1,427 employee increase in the September quarter. The bank had 1,110 branches and 1,781 ATMs. ATMs are also now morphing more into what we call cash recyclers, which are no longer just dispensing currency, but they're also taking currency deposits on an online business model.The bank has also received the reaffirmations of its credit ratings from Moody's on September 20, 2018, which reaffirms the bank's Baa3 rating with a stable outlook as well as ICRA on September 21, 2018, reaffirming the bank's domestic AA+ rating, now with a stable outlook. The bank has also raised our branch of Tier 2 capital in the month of September, totaling to INR 3,042 crores, which have been increasing the bank's total capital adequacy ratio. And these bonds were rated AAA by CARE Ratings and IND AA+ by India Ratings & Research, both with a stable outlook. During the quarter, the bank had also closed a $400 million syndicated loan facility, which was being issued out of its IFSC banking unit, which operates out of the GIFT City in Gandhinagar, Gujarat to help grow its business. The fee on account of this large facility has been expensed in the second quarter itself, which has also resulted in some increase in cost-to-income ratios correspondingly.The bank did receive some awards and recognitions in the quarter gone by, including being awarded the Global Winner in Payments at the Technology Project Awards from 2018 by The Banker, which is a London-based global financial publication under the Financial Times Group. The bank has also been moving towards more and more ISO certification and is currently having the benefits of having the highest number of ISO 14001 certified green financing facilities.The bank has also been included for the fourth year in a row in the Dow Jones Sustainability Index for emerging markets and continues to be the only Indian bank which is featuring in the Dow Jones Sustainability Index.The bank also received recognition as the SME Bank of the Year in India by the Asian Banking and Finance Retail Banking Awards, which were held in Singapore in July 2018.And with this, this was a summary of the commentary that I would have liked to present, and we will be happy to take questions on the bank's performance. Thank you.
[Operator Instructions] The first question is from the line of Mahrukh Adajania from IDFC Securities.
Just 2 questions. During the quarter, just sequentially, not year-on-year, exposure to NBFCs and to EPC has gone up sequentially. And what does the other financial services exposure mean because you -- the rich asset exposure is given separately, right? So that's my first question and then I have another one.
Sure. So Mahrukh, the other pressures of this exposure would include basically independent parties and banks, which are not NBFCs and not HFCs. So even the HFC, it will be included in NBFC. If it is a microfinancing company, it will be included in the other financial services. And we do have exposure to banks which also were included in the other financial services category. So the NBFC exposure has gone -- has been going up. And in NBFC, I'm offering new HFCs in that category. That exposure has been going on for the last, I would say, 12 to 18 months since the realignment of interest rates and liquidity has been taking place. So what we have seen is only a little bit of, I will say, a sharp shift that might be happening right now. But the progressive shift of financing for India seems to be already moving away from capital markets and more to banks. And this is manifesting exposure. On EPC, things are -- our view as a bank on EPC has become very constructive on the -- especially the -- a few years ago, there were EPC companies which were many and into various projects that they were undertaking, but the market has become far more reformed as far as the EPC segment is concerned and, therefore, you're seeing [ increase ] in the EPC segment, also reflecting the somewhat increase of the construction activity that is happening in the economy.
Got it. And my second question is in terms of your deposits, so have you seen any increased outflow of deposits in October? In September, it was fine. It showed the numbers. You discussed this separately in other call, October call, but has there have been any increase of different behavior in retail deposits after September-end?
No, actually, a better behavior, if I must say. So our current liquidity ratio, or LCR, is higher than what we had mentioned on the call. The deposit book is bigger, and it was -- I will ignore the September 30 deposit book because, usually, that has more inflows at that time because of the quarter-end activities, some repayments and balance sheet alignment by clients and all of that. So if I, let's say, ignore the quarter-end behavior, so the book as at this period of October, the deposit book is bigger than as at the same period of September.
The next question is from the line of Kunal Shah from Edelweiss.
So firstly, with respect to what you have disclosed earlier in terms of our estimate of 1.35% year-on-year for the last Q2, sir, what was the discretion which was used to gain liabilities both in the period and the [indiscernible]. But what particularly led to these prepay and what was the discretion which we earlier used? And now finally it's like falling into GNPA.
So we did not exercise any discretion, Kunal. What typically was that every quarter-end, there is an NPA thrown up by the system in addition to what we published. But there is also a subsequent review of the debt servicing performance of the accounts. That happens as part of normal course and we have been doing a concurrent audit also for monthly debt servicing for the last 12, 15 months. So it is in the review that this account had come up and, therefore, had to be addressed as an NPA.
Okay. So this was like not 90 days or what you had said it which was thrown up by the system but financed maybe -- okay, and finally when we look on an account-to-account basis, we thought that, okay, this is something which would be SMA-2, classified as GNPA.
That's correct. That is -- because the disclosure that was given 1st October was right after the fact, there was no time for review. So this is something which will happen, let's say, every quarter we'll have to do the exercise where there will be a management review, there will be a concurrent review and there will also be an auditor review. So this is an instance which happened in 2 reviews.
Okay, sure. And secondly, in terms of the corporate banking fees that has been substantially lower. Sir, anything specific on the corporate banking side, fee side, where it is significantly lower as compared to the [ object brand ]?
The number that you are referring to, Kunal, I have is -- I don't know if you have the same numbers. So our corporate banking fees is about 15 crores lower than Q1. Are you referencing the same numbers?
Sorry?
The number I have for corporate banking fees for Q1 is 683 crores. For Q2, it is 668 crores, 15 crores lower.
No. So if we look on Slide #7. If we look on Slide #7, particularly in terms of the income breakdown. So Retail, Corporate, okay, and then Corporate Banking, so in million, if you look at that particular slide, so I'm not sure as to -- now this is random maybe from...
So I am looking at the slide. I think there is a color mismatch there. So the numbers I have actually were interchanged. We'll fix that.
Okay. So the 683 is 667. And finally, maybe in terms of the ForEx and debt market. That would have been lower as compared to the 460, would be around 222-odd crores.
That's correct because the last one, we still have bond gains of about INR 1.5 billion. And this time around, not [ everything ] bond gains and also dealing with provisions.
[Operator Instructions] Next question is from the line of [ Kishan Gupta ] From [ CE Equity Research ].
Basically, I want to understand like what is driving this over 40% growth in your corporate loan growth?
So this will be -- the growth has been happening over the last 12 months. So it is -- I mean, if you look at the growth, especially on a year-on-year basis, so we did have a very strong growth in the third and the fourth quarters of the last fiscal year. And the growth is being driven by 2 phenomenon -- 2 phenomena. One of them is the M&A that is taking place in the Indian corporate sector. So whenever there is an M&A that is taking place, the buyer of the asset also brings the banking to the table, a new structure of banking to the table when he is acquiring the asset. And we were pursuing those opportunities and have been pursuing those opportunities for the last 15 to 18 months. So as the assets, some of the assets were under -- possible NCLT, so we did participate in the banking of the assets that were purchased by the new buyers. So we bank the new buyers. There is M&A that has been happening outside NCLT as well in various sectors. So M&A in, for example, in direct facility, in cement, in telecom, in media entertainment. So the opportunity comes whenever there is a change of hands of an asset that takes place, and the buyer is looking at fresh banking and, therefore, you were able to participate in those opportunities. The good thing about the opportunities like I was commenting on an earlier part of the conversation was that the buyers are usually stronger. The ones that are buying today are usually the stronger balance sheets. And secondly, they are also financing operating assets in the process. So the growth is coming from our design wishes, be this for project execution, be this for, let's say, demand uncertainty of a new capacity. So it is being largely led by the situation that I was describing. The second phenomenon that possibly you can ascribe to growth, too, is also refinancing of bank loans that was prevalent, given in the last -- what it used to be and haven't done into the last 12, 15 months particularly. So as the banking sector has been following it and had a different degrees of disruption over the last 2 to 4 years. And as the borrowers are also looking at creating different structure of their own combination of banks and we also have opportunity to be able to selectively look at those situations. Of course, with clients, they will always want it to bank and/or wanted to get more deeper into their mainstream lending. So these will be the main reasons behind the profit growth.
And the sectors basically?
Those sectors are actually, if you see in terms of our -- you can easily make out from our exposure position last year to our exposure position this year. So the sector that has gained -- or lost, let me say, for example, sector that has lost are power, and the sector that we have gained is iron and steel, a sector that has gained is telecom in terms of the business mix, like we were also discussing. EPC, but there has not been -- EPC is more working capital. It's more because the EPC is getting more -- they're getting more projects, so it's not necessarily driven by M&A.
Okay. And is iron assets exposure already an NPA in your books or not?
It's standard.
It's standard as of now?
So we don't have exposure to the parent company. Our exposures are all to the special purpose vehicles or the downstream companies which are all asset rich.
But that's not -- will it be an NPA going ahead? As of...
So that is an uncertainty. That depends on also what the newly constructed board would also do. But as at September 30, the position of all the accounts in the group was all standard.
In this advance-driven extra provision for lesser exposures, could new people do something different?
No, we didn't -- our exposures are different. I mean I can't comment on them, but our exposures are different in structure and also in different entities.
The next question is from the line of Adarsh P. from Nomura.
A question on capital and growth rate. So you've run now capital to 9% CET1. So just wanted to understand how you'll manage to grow going forward? And in that context, how would other metrics look like, for example, OpEx also now eased, for that matter, so how can you set up ways then to cut down growth?
As I just said our attempt is, of course, that we have to preserve capital, so I think that's going to be a strong, I would say, underlying expectation from our side. The growth has to be, therefore, led by, let's say, prioritizing new business and also downselling the past business. So we free up capital from downselling the past business because a lot of the business there that we have done, some of that we have discussed in our previous conversations also, is through higher-rated borrowers. And therefore, we would be comfortably looking to sell-down these exposures. On the other hand, we are also looking at continuing the new business. So the strategy which was -- so far, because we could afford that growth, because we could finance that growth, therefore, we were assimilating the growth on the balance sheet. This balance sheet will have to be increased to now looking at next growth other than last growth, that is what we have said. So the focus will be more to the next growth which is basically saying will be net of sell-downs. So if there is -- in the fee opportunity exists, they exist on -- more on the new lending opportunities, and there might be some distribution like the opportunities also on the selldown, but that's the minority. The majority of this fee opportunities will be led by the new business that we are seeking. What will also help in doing the new business is that, in my opinion, the pricing power with banks over the last -- particularly, last 1.5 months, has improved tremendously. So -- which is also going to aid the earnings capacity both on margins as well as on fee.And speaking of margins, because they also constitute, I would say they dominate the top rank, the net interest income that is. I think that both NCLR repricing lining up for Q3 and Q4, a lot of it as well as the pricing power that we believe has come back subsequently with banks. I think that there is a case to be made to also look at improvements trajectory in margins, so we've been discussing that in the past as well. And the moment I overlaid this with also with, let's say, a strategy of more net growth as opposed to gross growth, the burden on the balance sheet and the efficiency of the balance sheet also improves. So we should also see a corresponding flow through in terms of productivity that will again come through more into margins as we flip into the net growth strategy.
Is this from your business undermanaging the containment cycle, but what about capital raising plans on equity because 9% is still low, you still want to make growth, so...
Yes, so net growth will mean that we will maintain guidance. And capital raising that we should have to able as we already as you know, we are already, I would say, permission by the board and the shareholders as we all have all the approvals with us so we don't have to do any formalities on top of that. But for capital raising, I think, in my opinion, we will have to put some more certainty on the table including a certainty on the succession process that is underway and I think capital will be a logical conclusion out of that. So we want the uncertainty at least to be resolved and then capital raising can become available. So I think I'm talking about now weeks and months, I'm not saying that we will raise capital at a specific point in time, but we have to first resolve the uncertainties and capital should be a logical outcome.
Next question is from the line of [ Anover Fall ] from [ Ward Perry Management ].
Can you please share some details on the mark-to-market revisions on the corporate bond portfolio? Were there any specific corporate bonds that are writing at loss? Why are we capitalizing in this quarter particularly? And what gives you comfort that it is onetime?
So the mark-to-market loss, some of it has been from both the government bond yields moving up and the spreads on corporate bonds also moving up. This is as far as the second quarter situation is concerned. Third quarter provisioning that we took in this quarter was about INR 350 crores. Out of which, about INR 90 crores was a guide forward because you also had disclosed about our mark-to-market losses in Q1, but at that time, there was no bank had given out a window to temper the absorption of losses for -- over 4 quarters and we have taken that window up to deliver about INR 92 crore carryforward and about INR 250 crore result of change in yields from June 30 to September 30. And if you look at today, the government bond yields are lower than September 30. I cannot say that this is a one-off because it depends also on how the interest rates move in the December quarter. But like I was kind of alluding to earlier in my commentary at the beginning is that we do expect that the recent developments around rupee, oil, inflation are pointing to a flatter rate increase, tragically, and therefore, maybe a more relaxed bonding environment. But I am not saying that it will be what will be the Q3 outcome because I can't predict what will be the position because we mark-to-market our bonds to our date, which is September 30, the next we'll mark-to-market will be the December 31 date. So very hard for me to begin to say what will be our position on December 31. But I can only tell you what we believe and because of tax which are pointing us to -- towards that belief.
Understood, but of the 345 crores, were there any specific corporate bonds that you held which resulted in a surplus in that share of loss?
No. Relatively losses will be proportionate more to the math will work more in terms of [ addition ] and division. So yes, I do hold a bond, a AAA bond of a very large Indian manufacturing entity. That particular bond is also my largest holding, and is -- not my largest division, but it is the largest holding. So that will have to convert a proportion of share. So about of half of my provisioning will be on account of that AAA corporate. And I just have to apply the current bond yields which are prevalent as of right now. As in as of today, we also can compute INR 100 crore write back off of provisions but like I said that does not matter because the competition was done only actual years that are -- that on December 31, 2018.
Next question is from the line of Manish Karwa of Deutsche Bank.
My question is on liquidity. In post-September, in the month of October, how has been the trend on your retail deposits, on wholesale deposits, in fact at what rate are we borrowing wholesale deposits now and are they substantially higher than what you were doing earlier? And on the asset side, you're being, that you think we look to sell down assets. Has that been happening, as in actually have you been able to sell down some assets and contract them back on the balance sheet side?
So both -- let me start with the asset selldown , yes. It is just that is the beginning of the quarter and most banks are not yet looking to, let's say, deliver on their own targets. So the assets can now usually build up towards the middle of the quarter. And we have a large pipeline that we are working with. I think the second quarter, if I remember, we had about INR 10,000 crores to INR 15,000 crores of assets that we were able to sell down in the second quarter. So if you repeat that simply, I mean that gives me the firepower for, let's say, raising capital. And we also -- incidentally, we also now topping the Indian lead tables on Bloomberg for the domestic M&A mandated leader in syndicated lead tables. That is basically what it is showing to you is because of our loan syndication efforts. And in terms of liquidity, we -- so I was mentioning a bit earlier, so one is the some of while liquidity is possibly LCR so that income passes, how much of the liquidity is there, what is the surplus and what is the subsequent release so all of this is encompassed in this year. So LCR is only higher as of today. I don't know the exact number of yesterday, but it will be 5% to 10% higher than it was on September 30. So what was 101%, we should be at 106% to 111% in terms of the LCR. So the liquidity on the balance sheet has only increased in the meantime. As I was mentioning a bit earlier that if I have to the smoothen out the quarter-end sort of activity on deposits, I leave that out because like-for-like comparison would be what it was today and what is the book at same time last month. The book is across-the-board bigger. So our CD, CASA will be -- across-the-board there will be -- in a month you will see only 1% or 2%, 3% type of movement. It is not likely you will see a dramatic movement. And on the question of cost of funds, so there is, I would say, a tightness that we have seen in the liquidity market, so that is also reflecting in our costs. We have increased our retail deposit rates last week. I will say, we were behind on our written deposit base so we have gone and increased the retail deposits rate to at least catch up with where the competition is and other banks have also raised their rates. So we had in the 10 to 20 basis point range, some will be a little bit lower, some will even be higher. If you look at and you can compare the deposits, of course. Something a few banks will be, I would say in a different orbit because they are not seeking deposits because of their BS -- BPS payments, et cetera. So as far as the universe is concerned, we are actively competing for deposits, I think we will be a lot higher on certain buckets and then much lower, because you also don't want to compete head on with the -- another bank. So if some bank is offering a good rate for 13 months. I don't want to necessarily bet on that rate and then compete still for 13 months. I possibly would offer a 10 basis point, 15 basis points higher rate for 24 months or 18 months, so that we are at least creating a little bit of a clearer market for us for the deposits business to be start. And the retail banking team is telling me that they are good for a 5,000 crores to 7,000 crores increment of retail deposits in this current quarter, for example.
And just a second question, 1 asset and 1 selldown of asset, would you say that the divergence, the board, whenever it comes out would -- better this asset may have been the effect -- likely to be effective in the divergence thing and since that has been recognized that number will be a reasonably lower number?
So it's hard for me to say, but I can definitely say that for March '19. So -- and I can also help you with the CRO, but the number that we will sort of -- so the accounts have been downgraded for development that took place in the second quarter. And therefore, the -- then they helped me realize in the March '19 divergence, yes, they will help me realize in the March '19 divergence. Ashish, you want to add?
I just wanted to say that the RBI/RBS exercise that you got, deflect the divergence and asset classification, is that it goes retrospective, because, so far as Rajat has mentioned for last year March 31, 2018, any subsequent development with expected recognition is potentially could be part of divergence it's something that will not help the RCS divergence. So to answer your question, this will have no impact in IFRS in March 2018 sense. Having said that, as far as when we receive that in 2018, which has not yet been received by the bank. Overall, in our opinion, from a P&L impact perspective, we definitely are not expecting anything that is materially revert in any incremental meaningful rate cost for '18, '19.
And last of all, which sector was this asset and how are you -- why are you confident that you'll be able to upgrade this? What makes you that confident?
This is an account. This is part of a diversified group. And the status of the bank for this exposure is contingent upon a real estate of one of the assets. For this definitive agreement has been signed, in fact, we have received an advance subject to certain continuation of conditions particularly for the deal to kind of consummate over the next few weeks. So if all goes well and CPs are met then we -- and given the fact that a binding agreement has been signed in advance has been received, we are fairly confident that we should be in a position to resolve this substantially in Q3 of 2018, '19.
Okay. So you're saying that there won't be any loss? Or there will be some loss on this asset?
Effectively, we will have enough suspend we should be in a position to ensure that the accounts, one, get partially [ beated ] and therefore, we must be in a position operated during the Q3 subject to the fee that is consummated, depending on the early advantage.
The next question is from the line of Nitin Aggarwal of Motilal Oswal Securities.
I have 2 questions. What sort of provisioning are we building in towards the IFRS exposure when we guide for the true cost of 70 basis points for the system? And do you think there is any upside to this position? And second question, besides the selldown strategy that we talked about, are we also expecting any major rundown in the large corporate portfolio over the second half, particularly related to that and see if you can lift up lending with it? And if you can share some numbers on that?
So I think the -- IFRS is still not, I would say, a very -- a situation which we have a very good estimate about. But when we are working our credit costs, if we view the worst case from IFRS, I think the credit cost will be nudged in terms of from being under 70 to being more than 70, but still maybe less than 80. So the situation in IFRS is evolving, right? You are also tracking that on a day-to-day basis. There is government information. So we know that there are assets in the group, but it still depends on how the transition of the various assets is handled. So there are good assets. There are also some not so good assets. So thankfully, we will be sort of finding assets mostly in the good assets, relatively speaking. It's not like everything is good, but is it mostly good. So it is again a concern of how the IFRS I would say moves from here. Like I said, if there is expected, I would say middle-ground outcome, we will be within our 70 basis point guidance. But if we took pricing the worst from IFRS, we will be in a slight bust, maybe up to 10 basis points on the credit cost outcome. So that is our current estimate on credit cost. We are also have -- we are also are having a good visibility on recoveries of our bad loans. So I think that also is something that will help us mitigate more than half of IFRS. So the recovery of cost is I mean, one can be very easily optimistic about this, but there are tangible discussions including the accounts that Ashish has described. There are 2 more accounts where there is a takeover for healthcare companies that is about to take place, so we should be able to also get it back, the classification of those assets as well as the provisions. There is a breakdown of I would say another INR 5 million to INR 6 million of recovery from another couple of accounts. So there is also a lot of recovery that is lining up. So I think I will not say that we will definitely miss the certainty but I say depending upon how these things evolve we might have to maybe adjust the 70 to more like an 80, but that is -- I'm not saying that it will happen for sure, but that if things just don't go in terms of our current expectation then yes, we will have to nudge the credit cost higher. But that is not something that I would lead a discussion. And the second part of your question.
Yes, second question. So it wasn't a rundown in large corporate portfolio if you are looking at any? And depending on what you can share.
I mean you can say it will become high single digit thousands of crores in terms of that and no option. We are not saying we have to run it down but they will not have an option.
And lastly if you could share the estimate 2 number for the first quarter '19. First quarter, this was June, versus quarter, how much was last quarter?
I am not guiding that number, but hopefully, before we finish the call, we will be able to add that.
The next question is from the line of Sameer Bhise from JM Financial.
Just quickly, wanted to check have you made any provisions on this particular slippage which was after the end of 30 September period?
Yes, of course, I mean this is the statutory requirement of the provisioning.
Okay. And just based on how they ask you to do that in terms of cash realizations, et cetera, et cetera?
Hold on. I will just procure the details. Stay on the line.
Sure.
So for me the principal loan value that we sold was INR 450 crores. It was sold at a receivable value of INR 340 crores. And 15% percent of the INR 340 crores was received in cash.
Just finally what proportion of the real estate book is externally dated?
It will not be the majority. It will be the minority. So this is limited, it would be mostly various activity exposures. And I mean the ratings would've been minus A- to BBB- maybe also depending upon the size and scale of the project and the developer they could also be below investment grade ratings. In our internal modeling, because I don't know if real estate companies do project-specific ratings. They might do -- so let's say there is a developer. He has another balance sheet, he might rate that, but project-specific ratings are not very common.
The next question is from the line of Amit Premchandani from UTI.
Getting around to the project part. What is the kind of monitoring ability you have in the real estate portfolio? And given the problems you're facing in liquidity provisioning in most of the housing kind of companies, do you see the risk in that part of the portfolio? And is that a significant in your cost structure?
Let me answer your question from the prior question last time from Nitin, because on the estimate acquisition as of June 30, 2018, it was 50, 5-0 basis points, including the accounts that we are highlighting which shift INR 231 crore account that slipped in the September quarter. So to answer your question, Amit, now and I will take Ashish's help to get into the technicality of the moratorium and structure and design, while I'll maybe address the other questions as far as the consequences of. So we will have a very specific exposure only. And I -- we don't have any projects where we have a MTM co-financing.
Just for the exposure you are seeing that?
Well, I would say the majority, yes, but in minority cases, we might have another [ majority share ]. But mostly it will be single lenders. So we are not sharing, let's say, the current various projects. I mean, they will be highly successful projects that undertook many multiple hundreds of crores. So the project-specific design will be 200, 300, 400 crores a quarter financing for sure. I mean it could be -- there would be a handful of projects in the country which would see that kind of financing requirement. If you take line of sight. We will finance line. So we won't see a direct overlap from I can see was the point I was making. Ashish, do you want to talk about the moratorium subject and number of factors?
The moratorium the structure of the financing was effectively the assumption of the stage of construction where we get into the project. So we could have, for instance, gotten into the project which is somewhere in between, we could have gotten into the project when it is largely completed, we could have gotten into the project which is still at early stage and depending upon this stage of the project that we are in, would we have the -- or would this be moratorium. So of course, the ones that are early would obviously, for obvious reasons would have longer mortgage, but in this kind of situation we effectively will rundown the exposures, by and large, by the time the project is completed. But increasingly, given the current state of the market, the financing of the project, and those were happening at a stage where the -- given the fact that the market is to be first that the project will sell largely completed are the project that are selling and therefore if you're financing your real estate today, the mortgage that holds will be longer because, unless the project gets completed the sales process somewhere either direct or the sales -- the majority part of the sales will happen towards the construction has progressed. So I'm sorry, I'm not sure that I'm able to answer your question fully, but effectively, depending upon the stage, expect the moratorium of the underlying financing will be redundant.
In terms of the number of projects you may have funded and in terms of construction timelines how many of them are exceeding their timelines generally? In terms of sales that you have of the projects, how many of them are meeting expectations in terms of percentages?
That is a little difficult for me to kind of give you that number, I don't even have it off hand. But we don't have a situation where maybe in a couple of projects during the year where the COD and I don't know how to define COD really in the real estate project, but having said, that the project manager needs to define it, where the COD has -- where the loan is still outstanding and COD has not been achieved.
But in these projects then that were -- they have property, you have escrow on that, right? That you have payments in escrow, right?
That's correct.
So there's no moratorium investors on the EBIT side?
No there is no connection that's coming also need to be used for construction, right. So you cannot have a situation where the collections are entirely used for debt servicing and there is nothing that is received for constructing the underlying project. So while yes, escrow is there, but when you get into these projects you basically have a formula built in up front where what goes in for construction and what comes in for debt servicing is defined, and that is the way we continue to function to ensure that, by the time the project gets completed, the underlying debt will be paid provided you are getting into the project which is early stage. But if you're getting to the project when it is completed and that is kind of the seasonal financing or -- on the project which is partially constructed but still needs to be sold where you could potentially be financing and paying debt.
And most of it is residential?
A large part of it is residential. But more like 65% to 70% will be -- 75% will be residential and the balance will be commercial which is -- which could be a combination of LRD group commercial building.
If you could just reiterate in which areas these are portfolios?
Let me also just maybe add a few things on the real estate side, so one point I wanted to add is that you are looking at are -- some in our portfolio. So the position that the bank had as at April '17, so I'm going 18 months back, a part of that book has already been repaid. So if you look at the cycle of repayment is also and real estate has had its share of issues including amortization and EST, et cetera, kicks in. So the exclusion that Ashish was mentioning, we have a minimum 20% repayment for loan escrows. So whatever connection is coming into the escrow, at least 20% of that is used for debt service. And of course, we have the control to release the monies to the developer for construction. They have to take an MLC from us on each and every step. So we also know at what price that they will have corresponding to what money is coming in. So we'll have full visibility on the -- because we have project-specifics, because they're escrowed, these are deep controls that we also exercise on top of the real estate portfolio, and because we are more sold in the full year also in full, I would say, position to exercise that control. And in terms of the structure of the market, and I think that might be discussing this in the past as well, the real estate market is slow. Mid-income is doing very well, and if I have to divide our real estate residential portfolio also building luxury and mid and low income we will be 20-60-20 in that mix.
Okay. And geography if you'd like.
Mostly Mumbai, Bangalore and Delhi. So these 3 cities will constitute about 80% of our portfolio.
And for the RBI approval of EDPs and also in terms of them versus our in line of views you have in terms of the process. So when can we expect the announcement?
I don't know if they will like allow me to speak for them. But what we know is we know very well we have a January 1 deadline, so we are working back as far as the [ state ] is concerned. And we've also been making periodic announcements as they are the new steps that the board has taken, including the appointment of search committee, members of search committee, the appointment of the executive search firm, this is going to do that task. All of that has been done. I think now is the year where it will take up some weeks to be able to now put that short list together as get interview process going, and I am hoping that this should be over by mid-December when we should have been able to also make -- the board will have been able to make the recommendation to RBI by that time. So we also do RBI 1 month to 1.5 months, hopefully, 1 month, to also be able to give us and turn around our request. RBI also has to inquiry for the executive directors, RBI will have to do due diligence process at their end. As part of their due diligence process, they will record the recommendation coming from the bank to all their internal departments on any noting or no objections. So the process will take it's final shape in large organizations so we are hoping that we will be able to keep with these timelines that I described to you. And also using sufficient bank for the regulator.
Net next question is from the line of Manish Shukla from Citigroup.
My question is on IBU. We do have a target in mind in terms of what exchange this can be on your balance sheet. That's one. Second, in terms of end-use modeling from IBU, can you give some color in terms of the nature of the borrowers, project finance versus working capital? And is that included in the sector-wide portfolio breakout that you gave?
I will take Ashish's help on the second question, but the first question, in terms of size, I think the idea will remain a similar percentage of our total assets in terms of size. I do remember us having to accelerate, but I'm not able to confirm to you right now. But I do think the limit is 10% or lower for IBU. I remember I proposed a limit, so but I don't know that is how it finally ended, but I will confirm that to you separately. The last part of your question on whether we include IBU in terms of the secular exposure, I can confirm we do include IBU as part of the secular exposure. And I think I'll ask Ashish to also address the context of the kind of business that is a part of IBU.
Just to give you a profile of the credit side of the balance sheet of IBU. The effective IBU business comes from oversea of Indian corporates. We don't do stand-alone companies which have no India intakes. That is number one. That is the guidelines that we follow so we don't undertake any often hanging risk until and unless there is a domestic guarantee that we have relationship. The need of facility will spread to the kind of product that we do that. It's a combination of project finance that we have done. We have done working capital which is, for example, for the overseas subsidiary of Indian companies, and we have also done acquisition finance. And some part of our -- at around 25% to 30% of our business in IBU will also be participation growth where we have acted at least in the -- of construction where acquisition finances has been called, the underlying corporate has actually gone ahead and done the refinancing of the existing exposure which they may have taken for, and that's why provision finance activity. It's more or less, I'll say, largely most mixed across all these products.
So curious I will assume that for almost all of your IBU relationship, you first have an exposure to the corporate on your domestic balance sheet or on the automatic balance sheet?
Yes, by and large yes. That could be 3 exceptions, but definitely not a situation where that group doesn't have India presence and we don't have either the stable liability type relationship.
My second question is on selldown. Did I get the number right between INR 7,000 to INR 15,000 crores kind of the selldown last quarter?
That's correct.
What is the nature of the buyers because I mean the sense that we get is that most banks and some of the larger NBFCs also keeps saying that they are going to selldown and we know for sure that NBFC banks are completely out of the market? So just curious who are the buyers of these assets.
The NBFC banks are in the market. Of course, not all of them are there. But including the PCR bank are still looking at validated loans. So this, I would say a majority, maybe 70%, 80% of the selldown we will do directly to the issue banks. Then we have selldown revenue in IBU as well. In IBU even at non-NBFC Indian banks but in Indian space.
But I'm assuming that the larger producer banks obviously won't be there.
No, they are also there. So we have had -- we could have done, let's say, in terms of selldown to, if I'm correct they will all large and in private sector banks, but of course the PSU banks will be larger. All Indians would have a beer.
Lastly, can I ask a question on real estate. Of the residential real estate project, what proportion would be under construction and what proportion will be completed projects?
So we are digging for that information, Manish.
The next question is from the line of Krishnan ASV from SBICAP Securities.
My question was around the selldown strategy. Number one, given that the rest of The Street is aware that you are looking to selldown, does that entail some sacrifice on spread that's partly to do with how the economic environment, that's number one. Related to that, you did mention that you have identified largely the earlier exposures that you have given for selldown. Would you be willing to sacrifice certain elements of fee just to be able to preserve this capital a lot better on this vehicle capital efficiency. Would you be willing to take a sacrifice on your fee income opportunity just so that you will manage capital better?
So what we do, Krishnan, is when a loan is to be sold down, that decision is not necessarily an after the fact decision. So the decision of selling down is recorded in our credit approval process itself. And if we have a fee on that particular loan, we also set aside a portion of that fee to facilitate syndication because the -- and that's what the practical M&A role will be. And if you look at -- while outside India, there are also levels of M&A, there will be senior and not-so-senior leader engines in a transaction. And the fee is also graded from high to low as we go from the top M&A to a junior M&A in the transaction. So the fee as we recognize on the loan is already at the same time set aside for the -- and of course, it's an estimate at that time, because the incoming banks also would have a fee. And that fee is set aside as a provision. So we are not bringing into us future earnings, these earnings have been set aside already. There can be some more, some less, because these are cost estimates at the start. And we are looking at we have to work in, the expectation and the incoming and also know that we have done the heavy lifting on the transaction. So that is also something that banking sector mutually recognizes. And we cannot say that I will earn a fee higher than you have taken. Which gives us a [ selldown ] bank.
But in this kind of an environment, then the rest of the world knows you are looking to sell loan assets?
Well, we sell down for a living. I mean, we are the #1 MLA in the country. I mean we can always discuss situations where nothing can happen, but this is what we do. We are the first. We have teams. There are other banks also who have appetite for assets. Middle ground, or EBIT down. If we don't do that we will just reach only [ another day ].
And this is a sign you will typically find appetite for well-written assets from within your exposure. Does that mean that a single exposure looks typically less superior for a while?
So new business that we are getting as far as corporate banking is concerned is also upward risk. So we have to see the incremental cases also amplified and if we look on the banking, we are also very good risks. So today, if you are doing new business in the corporate sector, it is actually generally over risk. Generally speaking, I'm maybe over-generalizing, but you will find mostly acceptable risks in the current banking environment.
I mean, my past point been using design portfolio just to figure out because your CET1 now is at 9% including profits. Right?
Yes.
Does it reach a certain stage where you are willing to first scale back on growth given that you needed a certain -- you need an element of certainty before you can go to the market and raise equity. You're already sitting on the early 2019 that's an additional PO 1 and will you be willing to then sacrifice a bit of growth, sacrifice certain spreads of these just to make sure that you're able to tide over this period a little better?
So Krishnan, if what you are saying is I am at a dead end then the answer is yes. But I have to be at the dead end. Well, there is -- I mean the option you have given to me is what if there is no alternative, what will you do? If there is no alternative, we will prioritize preserving capital. And we also know the situation will be -- the situation will be everybody has left for the couple of months, right. January 31, we have to have a succession plan in place. For all you know, by March 31, we will have also raised capital. But since there are no loans today, there is no point maybe creating a dotted line to an outcome when there are lots of question marks along the way. So as and when the certainty from our side emerges, I think the rest will naturally follow. If that means that there will be, let's say, a growth versus capital tradeoff, we will trade that off in favor of capital. However, like I said, we do think there is also a middle ground recently and be able to get -- do new business because I mean there's no point shutting shop. You would want to do new business, like I was saying, new business is generally coming which is very good on the rating business and also has further distribution potential and use the next net growth as the target and trace that off the chart.
My second question is related to the asset which you recognize as an NPL during the October 1 to 23rd period now. So that's 631 crore excluded. Will you please just give us some sense of when this was originated? And how long this has been in your book?
Very long, is 4 or years.
So it will be for 4 years for your program.
So this would have been an exposure as of March '18 as well.
This would have been yes, on the books of marketing as well. That's correct.
Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments. Over to you, team.
So I thank everyone for listening in to this call. And we are sorry that we had to postpone the call a little bit, and apologies are due for that, and thank you for your patience with me.
Ladies and gentlemen, on behalf of the Yes Bank, that concludes today's conference call. Thank you for joining us, and you may now disconnect your lines.