Ladies and gentlemen, good evening, and welcome to HDFC Bank Limited Q1 FY '23 Earnings Conference Call on the Financial Results Presented by the Management of HDFC Bank. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. Thank you. And over to you, sir.

Okay. Thank you, Faizan. I appreciate. Good evening and a warm welcome to all the participants. We can get started with providing the context on the environment that we operated in the quarter so that gives the backdrop of what was going on. Much of this quarter has been about inflation and price surges, as you know. Energy and fuel have been at the center. Supply chains have been disrupted, which created a major demand and supply gap. As we progress further in the year, we'll keep a careful watch on the development. We see opportunities in the marketplace in the current environment, supported by dynamic fiscal and monetary policy. Activity indicators released during April to June quarter indicate that economic activity continues to hold up well despite global risk. GST collections, manufacturing PMI, IIP, credit, rail freight, services PMI, et cetera, et cetera, showed robustness and opportunities in the economy. The RBI raised the policy rate by 90 basis points in the quarter taking the repo rate to 4.9. The Monetary Policy Committee also voted to remain focused on withdrawal of accommodation in a calibrated fashion to ensure inflation remains within the RBI's upper band while supporting growth. Accordingly, we have responded with appropriate lending rate increases. Now let's start -- let's got to -- let's talk about the 5 themes at a high level now. On the distribution expansion, that's the first thing, we added 36 branches during the quarter, and 250 more are in various stages of readiness to be rolled out. We have 15,618 business correspondence, an increase of 277 over prior quarter. Gold loans are now processed at just over 2,000 branches as against 1,340 branches in the prior quarter. It is well on the way to be a product offering in most of our…

[Operator Instructions] The first question is from the line of Mahrukh Adajania from Edelweiss.

Sir, my first question -- hello.

Yes. Can you hear us? Can you hear us now?

Yes, sir. Yes.

Okay. Go ahead.

Yes. Sir, my first question is on your CRB loans, of course, the Q-o-Q growth, excluding agri, has been good at 4%. However, we've been talking about doubling the book in 3 years. So that would probably require a higher run rate of growth. So how do you see the outlook panning out for growth in CRB? And also, if you could throw some color on -- you said that you probably gave up some corporate loan growth in the commentary. So what was that about? That's my first question. Then I have 2 more.

Okay. First, let's talk about the CRB loans that you talked about. The CRB loans had a robust growth of, call it, 28%, 29% year-on-year in the quarter. And we do have aggressive plans across various segments in CRB, both on the MSME side as well as on the agri side, on both sides where we have significant planned growth. This growth, I think we talked about this maybe a month ago in another forum that growth is predicated on, one, geographic expansion. We want to be present in more districts in the country to be able to capture the supply chain and the distribution chain flows, right? That's part of what we are trying to do, to be present everywhere so that we capture all of the chain -- distribution chain, supply chain, right, not just a part of it that we work with various other wholesale clients. We're able to capture in wholesome, not part. So that is part of what we are doing. The second aspect of that is also in terms of agri, again, physical distribution expansion, moving from about 1 lakh villages that -- as we do today. As I said, we want to go to close to 2 lakh villages. That's, again, part of how we want to operate and get to. There are enough opportunity. We see that they're good and that can come only by where we put our salespeople. We put our relationship people in the local place where the customer is, right? That is part of the distribution. The second thing is relationship management, right, which is in addition to having a physical, we also want to have our relationship now because most of the CRB is about relationship management. And we are expanding more -- adding more people into…

You said that 40 to 50 -- or maybe I heard it wrong. You said INR 40,000 crores to INR 50,000 crores was given up because of competitive rate or something like that.

Very good. Good point. Yes, I did mention that, and I specifically mentioned that so that I know that you will pick it up and ask, which is -- see, there was a rate dislocation in the quarter. Sometime around starting May, right, when the rates started to move up, there was a rate dislocation. Immediately after, our bank and so also others, started to move up on rates, and we did that. And as we move up on the rates, there were some customers who are offered lower rates by certain other market participants, and we do not want to cut back on our rates to keep them, right? We said that's fine because we do have a relationship. We do continue to have relationships with those customers, the INR 40,000 crores, INR 50,000 crores who went and took -- we continue to have, except that we didn't endeavor by price to keep increasing those shares, right? So we said that's fine to let go, so that somebody else can take it at a lower price than where we do. And that is what I alluded to.

Okay. And sir, was that PSU banks or private bank?

Broadly it was across everywhere. So let's not go into the details, but across the landscape.

Okay, sir. And sir, can you please quantify the slippage figure as in the absolute amount, if you can?

I think I gave that INR 7,200 crores or something I did mention. That's 50 basis points or 0.5%.

Got it. And sir, how much of that would be from restructured?

I didn't give that, but I can -- I alluded to that slippage amount has got -- agri and the wholesale one-off which contributed almost to little more than 10 basis points. So net of that it was 0.4 or 38 basis points I alluded to. Some of them -- not the agri piece, but the other piece is the part of the restructuring.

Got it, sir. Sir, and my last question is on this merger dispensation. So, we did see a press release on RBI approving the merger, and it said which terms and conditions. So were there any dispensations? And if not, when would one hear about dispensations applied for, and also any clarity on HDFC Life stake?

Okay. Two things you asked, one is about the conditions of the dispensation. The no objection from RBI is on our application. And the conditions I think we mentioned somewhere. These conditions are -- for example, I'll give you some nature of some of those things how you can think about. When the merger happens, the banking regulations shall apply across all the portfolios and all the business lines. So that's part of -- those were the kind of -- I'm giving you flavor of some of those conditions. That's one. And there are some entities that will merge, and the licenses of those entities that will merge will have to be surrendered and then intimated to RBI. So those are some examples. And then when we apply and get approvals from various other authorities, we need to take those approvals to get back to the regulator with those approvals. And when we go to shareholder, whatever is the shareholder resolution and the approvals, we get it back to the regulator. So you can see that these are some -- I'll give you some flavor of how to think about those conditions. But you alluded to what about the dispensation of the glidepath of the forbearance. So that's not what it is. That is something separate, and that is handled as an item different from the application per se. And we continue to work with the regulators on that aspect.

Got it, sir. Sir, and my last question is on EBLR repricing. So basically, your reset for retail and corporate loans will be, what, 3 months, 1 month?

3 months or 6 months -- mostly I think it's 3 months.

Got it, sir. Sir, that was very, very helpful.

The next question is from the line of Hardik Shah from Goldman Sachs.

Congratulations for a good quarter. My first question is on the MTM loss. Can you share some color on AFS mix, modified duration, and under what circumstances one can use the IFR?

Okay. Hardik, thank you for bringing it up. The AFS book, broadly you can think about it as 3 components, broadly 3 components. One is the corporate bonds; the other is the participation certificate, primarily priority sector lending participation certificates; and the third one is the Government of India securities. These are 3 broad components which are there. Most of these -- the other aspect that you asked about the modified duration and how you think about it, about 2 years we can think about it is the tenure of the duration, and that's the time it takes to pull this too par. So from that sense, we expect that in a couple of years, they drift back, right, over this time period. The other aspect of the investment fluctuation reserve and what it means to these things, right? The investment fluctuation reserve is an appropriation of profit to set some reserves up. And we have investment fluctuation reserves which are slightly more than 2%. And at the discretion of the bank, at some point in time, we can utilize it, but we have not chosen to utilize the investment fluctuations first, because it's slightly more than 2%. It has to be I think regularly 2%. So there's no point in giving in. And given that this pulls back to par in a couple of years' time, and we're not comfortable to pull down the reserves and use it right now.

Got it. My second question is on the growth side. Growth on retail has been impressive. So what are your thoughts on its sustainability given the inflation concerns that you alluded to at the start of the call?

Okay. Again, another good point, thank you. Retail growth, ever since we came back with the credit policy getting back to pre-COVID level, if you see over a period of 2, 3 quarters having quite good -- the December quarter was close to 5% -- 4.5%, 5%. The March quarter was close to 5%, similar rate. And the June quarter is 5% sequential. So year on year it's now crossed the 20% mark, the year on year, because off the base, because we kept going down and now we're starting to build up. Sequential momentum is there. Within the retail book, if you look at the one that I called out for, the vehicle segment, has been hampered by various supply chain issues. Despite that, they did grow well. We did have quite a good growth, but then if you put that to the side and give more time for that to grow, the retail, excluding that vehicle segment, grew by almost 25% year on year. So this is again a solid growth. Then the other aspect of how to think about the environment and the growth, we do see good amount of demand across most of the products from unsecured product to secured product to markets product to home loans and across everywhere we do see that, including the gold loans. I think we published that list of various products and the growth rate. So you can see that it's balanced across. Card loans, let's talk about credit cards, the last I do want to mention. The card loans do have very good spend, I think 24% or so sequential spend increase. Again, discretionary -- if you look at the discretionary, spends have gone up even more, right? This growth in the card spend is driven largely by discretion…

Got it. As a follow up to that, sir, what are your thoughts on the sustainable revolve rate going forward in the industry?

As the economy starts to pick up and people spend, which we are beginning to see, discretionary spends you are seeing is happening. Once those discretionary spends happen, you will see that the people will get back to the previous. See, over a period of 2 years, either in our bank or in some other bank, people were, call it, for lack of some other word, chronic revolvers. That means habitually revolving for more than 6 months, 9 months out of the 12 months. It has come down because either they are having a bad score in the bureau, or they're having a bad score with us, and they have utilized their limits, so have tightened and the limits are not given because we want to be cautious. So we need to wait for the things to come back and then they will start to spend and the [ revolve will start ]. We're quite confident that the customer base that we have and the type of spend that they do, we will get back to what we have seen pre-COVID from their spend habits and revolve kind of attitude on that.

Got it. Sir, last question on deposit rates. You've been taking the rates higher. So how should we think about this in the next few quarters as how much hike the bank would consider taking and how is the competitive intensity increasing on that front?

The pricing -- you are talking about more the time deposit pricing, because the other cards, of course, my savings account has been stable. The time deposit we have slightly only increased over the last month to 2 months, not taking it up all the way what has happened. And the way we think about that pricing is there are 2 elements to it. One, customer -- we're able to get to the right kind of a customer to have the deposit and what is the price sensitivity of the customer to get those volumes in? So that's always kind of what we do, engaging with the frontline, who in turn engages with the customer. We get that intelligence and discussion in ALCO to say how we are able to get those volumes and at what kind of a price point that we can get. And the second aspect of our determination of the price is also competitively priced. Competitively, pricing means looking at certain other banks to see that we are relevant in the market, and we don't want to be price leaders by pricing up anything. But at the same time, we have to be competitive within certain range. That is all. These are couple of configurations we do, and we discuss within ALCO as a team and decide how we want to pitch ourselves to the customer.

Got it. Thank you for your time, sir, and congratulations again for a good quarter.

The next question is from the line of Kunal Shah from ICICI Securities.

So firstly, again, just coming on with respect to the RBI's approval. Sir, any indication with respect to HDB Financials? Sir, when we look at it in terms of the scheme of arrangement, it says it is approved. So would we hear further with respect to HDB and HDFC Life or it's more or less there within the arrangement scheme?

The other question it was asked, HDFC Life, I didn't address it. I'll address it with [indiscernible]. Kunal, on the HDB, first, the RBI approval is an objection to the scheme of amalgamation that has been filed. The scheme of amalgamation doesn't have a role for HDB there. HDB is a subsidiary -- existing subsidiary of the bank and continues to be there. And so the scheme of amalgamation does not have anything to do with HDB. And so that is -- if anything we need to do, it's a separate conversation, it's a separate process and so on. So it is not combined with the scheme. We've filed the scheme and the scheme does not have anything to do with HDB. HDFC Life is currently a subsidiary of HDFC Limited, and it has envisaged that merger that it will be a subsidiary of the bank. There are 2 things in this. One, as an RBI regulation, a bank holding life insurance has to be 30% or below or 50% or above. Currently, HDFC Life holding is about 47.8% or so. There's a 2 plus percentage point increase that is required. And that is part of another regulatory approval that we have sought that we can go to 50% plus. And whatever the regulator finally tells us, we will have to comply with that. So that's part of what we are waiting for, and it's a continuous dialog that happens to see how we can get to more than 50%. Either we get or HDFC Limited will get to 50% plus before consummation of the merger transaction. So that's on HDFC Life.

Sure. But there are no timelines in terms of where can we expect -- so the process is still on. The communication is still on.

That is correct, yes. That is correct.

Okay, sure. And secondly, in terms of the overall PSL or maybe as we look at in terms of the buildup towards the merger, so couple of points. One is in terms of the branch expansion, we have been highlighting that 1,500, 2,000 odd branches could be added. Maybe the Q1 was not -- maybe we have not seen that much of a branch addition. So when do we expect it? Is it post like consummation of the merger do we see that run rate, or we will start preparing for it from this fiscal and it will be more back ended? And the second related question is on the PSL buildup. So should we say that whatever PSL certificates were bought in FY '22 and RIDF investments which have gone up from INR 9,000 crores to INR 45,000 crores, that was maybe with respect to the earlier requirement, and we will start building up further to meet up with the HDFC Limited's merger? How should one see that?

Okay. Thank you again for that branch buildup that you asked about. This quarter, the branch buildup was lower, 36 or so, but we have about 250 branches in various stages of getting to be implemented. We're not going to wait for anything. The branch buildup is an organic process. Irrespective of any an outcomes, branch buildup with the right thing to do for the bank from a growth point of view, if that is where we are embarked on. And we see opportunity. Branch has got -- I think we've talked about it again in the past, branch has got 2 aspects to it. One you have a branch which develops the brand in the vicinity of where the branch is and draws in customers through brand attraction. The second thing is the branch is the congregation of our salesforce. If you don't have branch, you're going to have a sales office. You can call it that we would open X thousands of sales office. So we rather open X thousands of sales because the kind of travel that sales relationship managers need to do to in their outreach to meet a customer or a prospective customer, we want to keep it to 1 to 2 kilometers rather than to 4, 5 or 6 kilometers. It gets in better productivity and gets in better influence to consummate their transactions well. That's part of what we have envisaged and we're doing. So the branch buildup will happen. It's not waiting for anything. It's a question of a process to get that implemented. It's in progress to happen. So even in this financial year you will see some substantial branch accretion that happens. The second aspect that you touched upon is the PSL and you touched upon the RIDF on PSL.…

Sure. So PSLC what we bought INR 1 lakh crore, maybe with HDFC there is a scope for this to go up substantially from here on, because 80,000 has already gone up to 1 lak last year and maybe with this requirement I think there will be more and more maybe purchase of PSLC which could happen.

See, purchase -- again, as I told you, these are the 3, 4 elements that happens, PSLC, RIDF, organic PSL growth, and we do participation certificates. So there are several components are happening. And we have to balance the cost versus the returns that each one gives. So there is no one particular target. If you ask me, do you know whether this INR 1 lakh crores is going to go to X or Y, there is no predetermined formula that we operate. The formula is which gives you the best returns, what is the breakeven on indifference point between various instruments. That is what drives the decision and that is -- as you know, it's a dynamic decision because the price in the market is dynamic. It's not a fixed price. And so that is how that is determined periodically. And then the outcomes is what you are seeing.

Sure, sure.

The next question is from the line of Adarsh from CLSA.

Couple of questions. On the expenses side obviously you'll have indicated investments in branches and how we see people [indiscernible] within retail. Any sense on that...

Sorry to interrupt you. Mr. Adarsh, the audio is breaking from your line, sir. Please check.

Okay. Let me try once. Otherwise, I'll take it offline. So just on the cost side, any sense -- clearly you're in investment mode in branches and employees. So any path towards cost/income over the next couple of years?

Okay. Good, Adarsh. Thank you for asking. But one thing was we normally desist from giving forward guidance on anything, but let me talk through so you will get an idea of what previously we have talked and our thought process, so you will factor that in. One, from a top line point of view, the growth is picking up. You've seen that over a period of time that the top line growth -- the top line I meant the volume growth was anyway there, but the mix is also we will see this quarter, similarly last quarter, the mix is also changing to get that the top line revenue, interest income -- our interest income growth component also moving up. You're seeing that come up. That gives you little more confidence and an opportunity to make the right kind of investments that you want because you want to feed that from a growth point of view. That's one from a balancing point of view. The second thing that also goes in our process -- are you there? You are there, Adarsh? We are not able to...

Yes, sir. I'm there. You go ahead, sir.

Okay, alright. Because suddenly we lost the control screen. That's why I asked. Okay. The second thing is in terms of the credit situation. So we've come after a pandemic credit kind of a scenario. As the credit gets benign, which is already you're seeing from benign credit environment, and when I say credit benign means I meant from a credit cost benign. That is part of what you have seen us make those investments. And making investments in people when the credit cost has been below what we have seen historically, what we have seen before the COVID, we have taken the opportunity to make those investments in expenses, both people, technology, as well as on branches. So these are the 2 considerations that we have always given, how to how to make those investments for the future by using the credit-benign conditions and how to make people opportunity of the top line growth so that you can balance the expenses. Now coming to the last aspect, which is the crux of what you ask, saying what is the cost to income and how we should think about. If you go back to the pre-COVID, our cost to income has been 39.6%. So full year before the COVID, 39.6%. You can call it 39%, you can call it 40%. We have always said that as the retail picks up -- retail is an upfront cost and the top line comes with a lag and comes over a 2, 3-year period. So you put the cost in and it comes over 2, 3-year period. That's the nature of that retail. Once you want to grow retail, that is the way it happens. And you're seeing that pick up. And we have said that, even through the COVID period even when we wanted to spend, we did not have the opportunity to spend. And we've been saying that we have been waiting for that opportunity to spend to get that retail back up, and now that is chugging along. And so the cost to income on an overall basis, call it, 40% or so which is the pre-COVID, quarter-to-quarter variations will happen. And if you ask Sashi I think he's told in the past in certain other meetings that quarter-to-quarter variations can happen because it's a question of a timing. But over a period of a year or 2 years if you see, you can touch 40%, but over a medium-term, 3 to 5 years, this is something as a forward guidance normally which we don't do, but for the cost to income what we see as an opportunity, we said it will get to the mid-30s, which is what we said pre-COVID but this COVID has put a halt to that -- changing the composition of the product mix as well as our spend mix. And as we get back to normalization and execute, we should get back to that kind of a trajectory over time.

Got it. Second question is related to asset quality...

Sorry to interrupt you, Mr. Adarsh. The audio is breaking from your line.

On asset quality, ex agri, safe to say that things have trended absolutely in the right direction?

Yes.

So what is the risk that credit costs [indiscernible]. Looks like most of the segments are [indiscernible] future?

You're talking about the credit, right? You're talking about the NPA?

[indiscernible].

It will be quite good if you see at an aggregate level, and it is not a component of the business as usual which is extremely benign because originated with a very tight credit conditions and it is also got a component of the restructuring some of them that who could not -- to whom we have given the opportunity to redeem themselves, to come back to normal life, right. And some of them have taken this opportunity on the restructuring and used it to come back to normal life, some of them who still struggle get into NPA, but on a combined basis you are seeing that it continues to get benign and better. Another 1, 2 quarters, we should see it even more benign.

Sir, this is useful. And that's it from my side.

The next question is from the line of Abhishek Murarka from HSBC.

Srini and team, congratulations for the quarter. So I have 2 questions, one on NIM and one on OpEx. On NIM, when does the repo hike that happened in May, June, when does it fully translate into yields? Would it be by the end of August or September? And also, if you can share the EBLR repo, non-repo, and fixed and floating break up for the loan book that would be useful.

Okay, yes. First on the NIM, the repricing started in May and there's a cycle, and there's at least a 3-month cycle, and some of them are a 6-month cycle in terms of what happens. So that's on the menu. And so it is not just that. It is also got to do with the deposit cost. So just the repricing on the repo on the T-Bill just doesn't do it. It's also what happens on the cost of funds. But then we do expect that this is a tail-end of the rates going up. And if you think about the second aspect on the NIM that you asked in terms of the fixed and variable, about 45% of the book is fixed and 55% is floating rate. And some of them call it -- out of the 55%, 48% which is called 27%, 28% of the total book is repo and a 1/4 call it 13%, 14% of the total bank book is T-Bill. So that's the kind of from a mix point of view, pricing point of view, you can think that's how it moves on.

So just extending that for the NIM outlook. Of course, you will know that there would be a certain amount of uptick in term deposit rates as well. So just generally, would we still expect a retail and CRB proportions to rise in the loan mix and the expansion that you see in the yields outpacing the TD uptick. So do we expect these 2 things to continue for the next let's say 3 to 4 quarters?

Yes. From a NIM point of view, it is also -- rightfully you're focused on the mix because that is what makes it right, because individually things can go. If the mix don't come, it takes a little more longer time. The mix, as we speak now, is still at 45%-55%, although the retail grew at 5% and the corporate was 0 and the CRB was 2.7% sequentially, the mix is more or less the same. One quarter it doesn't take -- it takes a few quarters for the mix. And last quarter we put out the chart in terms of how long it took for that mix to come, retail 55%, how long it took for that retail mix to come to 45%, and there is a path. Year by year it shows how long it took. While on the way up, it could be faster because the rate of growth on the retail and the demand in the macroenvironment we see on the retail is higher, so it could be faster. But yes, both the inherent demand we see in CRB and in retail is quite good and high. And one other thing I want to be cautious and tell you too, just because we think we see good demand, if there is a great demand in wholesale, we are not going to turn down the wholesale loan just because the NIM has to come up. At the end of the day, what matters in terms of these decision is does it give good returns, at the end of the day, ROA, ROE, does it provide the right kind of returns. If it does, it goes through. But from an inherent demand point -- because I did mention this because March, the same conversation happened, and we saw the wholesale come in with a greater vigor for a growth in March quarter. And when it came, I was not able to go back to say, by the way, we talked about retail and CRB having a faster growth rate -- inherent growth rate but wholesale has come. So should I decline wholesale? No. So as I said, we should go with whatever the demand which is there. We like the customer, we like the credit, right pricing, gives you the return, should go. And so that is the kind of a decision making that happens. But inherently, retail and CRB are having a good amount of demand.

Got it, got it. And the other question is on OpEx. So can you share some sort of targets on how much you want to hire for the rest of the year and also what is your tech spend this quarter as a percentage of overall OpEx, where is that trending?

Okay, yes. Two things. One, in terms of the hiring, there is no predetermined -- hiring depends on the productivity. We measure all products, all geographies, branches, non-branches, customer segments in terms of the productivity, which means the RM and the salesforce to the customers or to the sales unit. So it depends on the productivity that comes, and continuously we drive the productivity up. So we have a model -- a best-in-class model, and we will periodically look at who and where it is suboptimal, and we drive the productivity. So that's part of how we do. And the people addition we do as necessary to meet those opportunities. When the productivity is saturated, we do need to add to get the more volume. So we're not shy of adding because it brings in better volumes and better relationships. Then there are other aspects in terms of the technology. Yes, I think in the past we have said the technology spend to total expense is 8%, 9% or so. That's stable over a longer period of time. That's kind of a range in which it operates. So quarter to quarter it can move around, but broadly that's where it is.

So it would be in that 8% to 9% range this quarter as well.

Quarter to quarter it can be different, but broadly that's where it goes, yes.

Okay. Got it, Srini. That was useful and all the best for the following quarters.

Thank you. Ladies and gentlemen, this would be the last question for the day given the time. I would now like to hand the conference over to Mr. Vaidyanathan for closing comments.

Okay. Thank you, Faizan. And thank you to all the participants who dialed in today. If you still have more questions or need any clarifications, feel free to get in touch with our Investor Relations team. We'll be happy to engage. Thank you. With that, we'll sign off for today. Bye-bye.

Thank you. Ladies and gentlemen, on behalf of HDFC Bank Limited, that concludes this conference call. Thank you, for joining us and you may now disconnect your lines.