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“IndusInd Bank Limited Q3 FY15 Results Conference Call”
January 13, 2015
MANAGEMENT:
MR. ROMESH SOBTI – MANAGING DIRECTOR & CEO
MR. S.V. ZAREGAONKAR – CHIEF FINANCIAL OFFICER
MR. PAUL ABRAHAM – CHIEF OPERATING OFFICER
MR. ARUN KHURANA – COUNTRY HEAD, GLOBAL MARKETS GROUP
MR. S. V. PARTHASARATHY – HEAD, CONSUMER FINANCE
MR. SUMANT KATHPALIA – HEAD, CONSUMER BANKING
MR. SUHAIL CHANDER – HEAD, CORPORATE & COMMERCIAL BANKING
MR. SANJAY MALLIK – HEAD, INVESTOR RELATIONS & STRATEGY
MR. KALPATHI SRIDHAR – CHIEF RISK OFFICER
MS. ROOPA SATISH – HEAD, CORPORATE & INVESTMENT BANKING
MR. ZUBIN MODY – HEAD, HUMAN RESOURCES
MR. RAMESH GANESAN – HEAD, TRANSACTION BANKING GROUP
MR. SANJEEV ANAND – DEPUTY HEAD - CORPORATE & COMMERCIAL
BANKING
IndusInd Bank Limited January 13, 2015
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Moderator: Ladies and Gentlemen, Good Day and Welcome to the IndusInd Bank Q3 FY-15
Results Conference Call. As a reminder, all participant lines will be in the listen-only
mode. There will be an opportunity for you to ask questions after the presentation
concludes. Should you need assistance during the conference call, please signal an
operator by pressing „*‟ then „0‟ on your touchtone phone. Please note that this
conference is being recorded. I now hand the conference over to Mr. Romesh Sobti –
Managing Director and CEO at IndusInd Bank. Thank you. And over to you, Mr.
Sobti.
Romesh Sobti: Thank you. Good Afternoon to you all. Let me start by wishing you all a very Happy
New Year and like all of you we also hope that New Year 2015 will transform the
way we all expect it to and that the sentiment and confidence that has been built up
over the last 6-7-months to translate now into reality.
As far as our results go, we do not see too much of the actual market reality in our
results in the sense that we have continued the trending that we have seen in our top
line and bottom line growth. I think the „Investor Presentation‟ is available on the site
now. All the vectors show a healthy double-digit growth. So I am going to take you
through some of the headlines and highlight some of the features that we want to. I
think to begin with, top line growth has been aided both by Net Interest Income but
more by Fee Income. Net Interest Income, we were hoping will do more, because we
expected loan growth to be higher than the 22% that we actually have come out with,
and, of course, we had also expected that there will be a little bit of change in the loan
mix, we will talk about it later. Nevertheless, I think NII growth ended up at 18% not
only for the quarter but also for the 9-month period up to December 2014. Like in all
previous quarters, our Fee growth has exceeded Loan growth and total Fee growth
ended up at high of 27% and Core Fee growth ended up at growth rate of 22%. So, we
have kept the promise that Fee growth will exceed Loan growth as we have done in so
many quarters. Other than that, so the total revenue growth has come out to be 22%,
Operating Profit has grown 20% but quarter-on-quarter it grew 7% and at the end of
the day Net Profit grew 29% and quarter-on-quarter 4%. Other Income, just to go
back, actually grew quarter-on-quarter as high as 9%. So I think we are seeing pretty
robust double digit growth in almost all the headlines of the profit & loss statement,
not only for the 3-month period but also for 9-month period.
As far as balance sheet momentum is concerned, we have run ahead of the industry
growth by at least 11-12%. Our reckoning is industry grew by around 10.6% in the
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last declared data point. We grew by 22%. But now, as we saw in the last quarters as
well, Deposit growth has exceeded Loan growth. So there is a moderation in the CD
ratio, and our Deposit growth ended up at 23% as well. If you look at the breakup of
the Loan growth then the Corporate Loan book grew 32% and quarter-on-quarter 8%,
and the Retail Loan book grew 10% and quarter-on-quarter better than what we did
last quarter at 4%.
The other highlight, of course, is the growth in our CASA. So CASA momentum has
been maintained, within which SA has grown actually faster; SA has grown 32%
while CASA has grown 31%. And here also I think what is more material is the
quarter-on-quarter growth, SA growth quarter-on-quarter was as high as 7%.
Borrowings are now moderating as we move more and more to Deposits and as we
see some light at the end of the tunnel in terms of rate reduction there. So borrowings
grew about 13%. So I think that is the headlines on the P&L and the balance sheet.
Other than that, I think the other vectors that we measure in terms of performance are
the Interest Margin, so NIM improved by 4 basis points to 3.67%, as a consequence
of which both ROA and ROE have moved up marginally, ROA is now back to 1.9%.
Some moderation has happened in the cost-income ratio which has fallen by about 50
basis points and the other vector we see is revenue per employee, which has also
moved up slightly during the quarter.
Other than this, we look at the loan book that I talked about; the loan book actually
last quarter was 57% Corporate and 43% Retail. We were hoping that that will be
stable, but actually what we have seen is that during the quarter, Retail went down to
42%, so fell by a percent. So the new ratio is 58% Corporate and 42% is Retail, and
within that, of course, Retail side of course is two components; one is the Vehicle
Finance side, we will talk about more if you ask specific questions, but Vehicle
Finance side after several quarters of either flat or negative growth, we have had a net
accrual in our Vehicle Finance book. So at least we have seen some upward
movement, and the Non-Vehicle finance book continues to grow pretty smartly and a
Non-Vehicle finance book actually is now slightly over 7% of our total book. So that
is one vector that we have consciously driven through this downturn. We will talk a
little bit more about Vehicle Financing and the quality of the book, etc., and what our
expectations are subsequently.
Then, of course, in terms of the Loan book diversification that continues the way it
was; very-very diversified Loan book. The highest exposure we have is in the Lease
Rental Discounting which is about 4% of our total book. On the Other Income side,
ended up at Rs.611 crores for the quarter, which was 9% above the Other Income that
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we showed in the previous quarter. And that of course is composed of Core Fee,
which grew by 22% and other trading income that grew by about 65%. Within Core
Fee, all the vectors showed an upward movement except in quarter-on-quarter
Investment Banking which as you know is a lumpy business. So if you do not get one
or two deals then I think the revenues get sort of spilt over. Other than that whether it
is trade and remittances or Foreign Exchange or Distribution, in fact, I would like to
highlight quarter-on-quarter Distribution grew by 16%. And I think that reflects the
improvement in the sentiment especially in the mutual fund industry, where we are
certainly seeing a strong momentum on Mutual Fund sales as part of our Distribution
Income. The other parts of it, Loan Processing, General Banking still showing good
double-digit growths. Investment Banking year-on-year grew only by about 1%, but
that is to be expected because this is not a business that is an annuity-based and there
is as I said lumpiness to this business.
The Interest Margin we mentioned was up by 4 basis points as our cost of funds fell
by 11 basis points and our yield on assets fell by about 7 basis points. So overall we
saw a 4 basis point increase in our Net Interest Margin. As far as credit cost go and
the quality of the book goes, I think gross and net NPAs have actually slightly
improved; gross NPA is down from 1.08 to 1.05, net NPA is almost flat, 1 basis point
down, but we have sustained our provision coverage ratio. You will notice that over
the last 4-5 quarters, as there has been stress in the system, many banks have dropped
their Provision Coverage Ratio. There are only I think 3 or 4 banks left now who have
a provision coverage ratio above 70% and we are one of them and we continue to
maintain 70%, and to maintain 70% sometimes we have to provide additional
provision just to keep our percentage at 70%. This quarter also there was some extra
provision on that score. The credit cost for the quarter came at 17 basis points and net
credit cost was actually 16 basis points as compared to 10 basis points in the last
quarter as we made some additional provisions on our existing NPA book, where we
felt that there was diminution in the value of the security, so we made some extra
provisions. And of course there were some movement on the gross NPA book and
some slippages on the Corporate side as well as the CFD side. Net slippages during
the quarter were about Rs.18 crores. So if you look at the 9-month period, our net
credit cost has come to 37 basis points, gross is 39 basis points. So we are well on
track to be well within the budget that we have set for credit cost for the year which
was 60 basis points. Looks like we will probably end up in the early 50s in terms of
the basis points credit cost.
If you look at more detailing in the Vehicle Finance part of our book, in the
Commercial Vehicle part, which is MHCV, our gross and net NPAs actually fell
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during the quarter. Also there was an improvement in the Two-Wheeler side; there
also we have improved our gross NPAs by about 6 basis points. But in Utility
Vehicles and a little bit on the Construction Equipment, the gross and net NPAs went
up slightly, but in absolute terms the materiality is small - Utility Vehicles just about
Rs.5 crores, and in the small CV is about Rs.3 crores. So by and large I think a stable
book and as predicted in the MHCV part we are seeing an improvement in the
delinquency profile of the book.
Finally, I think the CRAR is about 12.4% against 12.96% in the last quarter. Tier-1 is
11.5%, so I think we still have room to grow with existing level of Tier-1.
The only other point that I would want to make is that in the 9-month period YTD we
opened 127 branches. So we were 600 when we started, we are now 727 branches.
There are about 30-odd-branches which are almost ready to be onboarded and so
therefore we are on our way towards this 800 branch network that we actually said we
would have in the last quarter.
I think that is the summary really of the quarterly performance. So overall I think
satisfying performance. Market conditions still remain, I think the operating
environment still remains pretty challenging in the banking system. I think the stress
wave is yet to start abating. It is quite likely that accompanying the low credit growth,
there would also be I think a stressful performance from the industry as a whole. So
under circumstances it is a satisfying quarter. Any other remarks from anybody else
here on the table? And with that I think we will open the floor to questions.
Moderator: Thank you very much, sir. Ladies and Gentlemen, we will now begin the question-
and-answer session. The first question is from Vishal Goyal from UBS Securities.
Please go ahead.
Vishal Goyal: Congratulations, my question is actually relating to capital and your risk weighted
assets. So we are obviously seeing a much higher growth in risk weighted assets
versus your loan assets; in last quarter also there was roughly 20 billion additional
risk weighted asset which was added up similar to last three quarters. This is all
because of non-funded or CVA or UFCE or mix of everything?
Romesh Sobti: If you look at the breakup between the Corporate and the Retail, Retail generally has
a lower risk weightage, and if we are schematic lending which is EMI lending, then
you will probably have risk weightage of about 75% and most Corporate would have
a risk weightage of about 100%. So I think the trending that you have seen in our
growth in risk weightage over the last say 3 or 4 quarters is pretty reflective of the
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change in the loan mix and this moderation would only happen when the Retail part
of our businesses starts growing. So I think you cannot really pinpoint a particular
sector that we have chosen as a consequence of which RWAs are growing as fast as
you have mentioned. It is partly non-fund based, it is also essentially because of the
corporate profile of our Loan growth over the last few quarters.
Vishal Goyal: In last particular quarter, was there any adjustment leading to CVA or UFCE?
Romesh Sobti: CVA was in the Q1.
Vishal Goyal: Already behind?
K. Sridhar : We did have a slight increase in CVA compared to last quarter. The first CVA hit us
in the first quarter and there was an incremental CVA impact in this quarter as well.
Vishal Goyal: Even the unhedged foreign currency?
K. Sridhar : Not on the unhedged, there we did not have any.
Vishal Goyal: Nothing. So I think the bulk of the increase in this quarter is related to loan assets, is
that a fair view?
Romesh Sobti: That is right because for the unhedged portion the run rate is built into even previous
quarters.
Vishal Goyal: Your Tier-1 is 11.5% - that I presume is including profits?
Sanjay Mallik : Yes that is Basel-III.
Vishal Goyal: Last time you raised the money was at around 11% Tier-I. So, are we close to any
capital raise now because of that?
Romesh Sobti: There are options. First of all I think before we hit 11% we have a couple of quarters
to go. You can easily go for a couple of quarters, because normally we would see if
our Retail starts growing, then normally we will consume about 25-30 basis points in
a quarter. Of course, there is also the possibility of raising Additional Tier-1 and if
you do Rs.1,000 crores or a 1,200 crores odd of AT-1, I think that itself boosts your
Tier-1 by about 100 basis points, right. So I think we still have the choice of when we
want to do the equity issuance, when do we want to go to market. Of course, we have
always felt that we should keep high threshold on Tier-1 and I think our actions in the
next whatever 3 to 6-months will be in line with that particular requirement.
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Vishal Goyal: On the Consumer Banking yield, which has also improved a tad actually in this
quarter, but I think you are growing Home Loan and LAP book mostly if I look at
your Retail breakup. So where is this yield pickup coming from?
Romesh Sobti: There is no Home Loan at all in our portfolio.
Vishal Goyal: All LAP?
Romesh Sobti: Not only LAP, LAP actually is a lower end of the food chain in terms of pricing, but
the other elements like…
Sumant Kathpalia: We have grown Credit Cards a little bit, we have launched PL and we have launched
BL, which actually come at about 16% to 18% yields.
Romesh Sobti: BL is Business Loans.
Sumant Kathpalia : So there are products which are giving you that type of a yield.
Vishal Goyal: So I think it is PL and BL, because Credit Card is very small?
Sumant Kathpalia: Yes and plus we also participated in the DDA funding which we got a yield of about
19.6%.
Moderator: Thank you. The next question is from the line of Prakhar Agarwal from Edelweiss
Securities. Please go ahead.
Nilesh: Nilesh here. On the Retail business, if you can just give some sense on the
disbursement trajectory, how that has shaped up, because on the loan book, we have
kind of stabilized?
Romesh Sobti: You mean to say on the Vehicle Finance side?
Nilesh: Yes.
S. V Parthasarathy : As you mentioned the advances remain more or less at the same level. Disbursement
grew by about 17% in all quarter-on-quarter. In that there has been a significant
growth in Commercial Vehicle vis-à-vis the last quarter, which is about Commercial
Vehicle industry grew by about 50% and we also grew by 50%. We have outgrown
every segment in the market in all the areas where we are present. This is the first
time we have recorded something like close to about 17% growth after some lull
period of close to about 3-4 quarters.
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Nilesh: What is the absolute number of disbursements for the quarter?
Sanjay Mallik : The vehicle disbursements, Nilesh, are Rs.4,112 crores.
Nilesh: The Corporate yields have come off to about 10.9% roughly. I am assuming that is
probably closer to the base rate that we have and the incremental business has been
loans to small businesses. So just wanted to understand, how that is shaping up and
what is the outlook going forward, because the gap with Corporate and Retail yields
has again widened. So, going forward, if we are looking at the Retail inching up, can
we assume that there could be significant delta in terms of the overall yields going
up?
Romesh Sobti: If you look at the corporate yield in „Investor Presentation‟, Corporate yield for the
quarter is 10.93% which is below the base rate, so base rate is 11%, so there has to be
something else happening in the book to explain that and that is essentially that the
book is composed of a Rupee loan book and a foreign currency loan book as well. So
while our Rupee yield has remained almost stable quarter-on-quarter, the addition of
the foreign currency loan book which has actually grown in the last two quarters
actually brings down the blended yield. It does not impact so much on the margins but
brings down the yields because the spread there on the foreign currency book is also
pretty decent, otherwise we would not be doing the business. So that component is
now about 20% of the total Corporate book and that has actually grown in the quarter
as well and that is why you‟re seeing this sort of a distortion in the yield only because
of that. There are some banks who want to disclose their Rupee and foreign currency
yields separately, but that is the story.
Nilesh: But you mentioned the spreads are similar. Because when we compare that with the
other banks, there is a big variation between the domestic and the international
foreign spreads. So if you can just elaborate on that, if we were running at Corporate
yields at about 10.9%, and the assumption is that the domestic yields could be if you
are talking about 20% being international, roughly around 11.5-12% would be a fair
number for the domestic yields?
Romesh Sobti: No no that is the INR …. Domestic yield is about11.9%, that is right.
Nilesh: Is the spread similar between the two businesses?
Romesh Sobti: It is not exactly same, but the point is if the spreads were dilutive, then you should
have seen a reduction in our NIM. So no reduction in the NIM so we do selective
lending where we are very particular about the spread. So if you look at our landed
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cost on MIBOR plus whatever, and then we do our spreads and on that basis we find
customers who are willing to take that. So we are not doing spreads of 2% and 2.5%
on this one as well, otherwise makes no sense to do that.
Nilesh: Is there any internal cap to what level do we want to take this business up to, is there a
number to that?
Romesh Sobti: Not really, point is that any loan accretion has to be accretive to my interest margin.
The cap is really dictated by how much foreign currency we can raise. I think that is
more as far as we are concerned, if the quality of the risk is the same, if we are able to
raise money, then I do not think there is so much of a cap, because we are not taking
any currency risk at all.
Moderator: Thank you. The next question is from the line of Manish Ostwal from KR Choksey.
Please go ahead.
Manish Ostwal: On your Core Fee item, one is FOREX income, second is Investment Banking Fees.
If you look at the quarter-to-quarter growth in the overall Core Fee, these two lines
contributed apart from some transaction-related fees, other lines like trade fees, they
are continuously seeing moderation. So could you comment on overall composition of
growth driver in the Core Fee income?
Romesh Sobti: This composition has not changed so dramatically, say quarter-on-quarter. So trade is
still giving us Rs.62 crores. Distribution Fee has actually improved even more;
Distribution Fee is now almost Rs.98 crores. General Banking Fee is steady, Loan
Processing Fee is steady. So there are some components which are steady
contributors. Some components that move up and down, so for instance, Distribution
Fee if you saw 2-3 quarters ago, Distribution Fee was hardly growing quarter-on-
quarter. Now Distribution Fee has started growing and Distribution Fee is a pretty
large component of my total fee, it is almost 20% of the total fee. That has happened
because of Mutual Fund sales have actually picked up. On the other hand Life has
gone down. So certainly I think Foreign Exchange income plays a big role. This is all
client-related income, so there is no Trading Income here. Trading Income is shown
separately, not part of a Core Fee income. So I think the trajectory in the future is by
and large going to be within these 6-odd lines. Some may grow faster than the others.
That is a function of what is happening in the market, for instance, Life as I
mentioned has shown a decline, but that was made up partly by Health Insurance that
we picked up and partly by Mutual Fund distribution. Investment Banking Fee is a
question of how many deals you can book during the quarter, and if in a quarter one
deal spills over, your Investment Banking Fee growth year-on-year, quarter-on-
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quarter sort of falls. But still we are showing Rs.50-odd-crores of Investment Banking
Fee. So I think the future trajectory is by and large going to be between these 6 lines.
One or two may go up and down or one or two may grow faster than this thing, but by
and large we stick and it is pretty well disbursed.
Manish Ostwal: On the Corporate pricing power, because we have seen very strong growth in
Corporate segment and as we are aware, yield in Corporate side that is lower, so in
terms of overall profitability contribution from that segment, should be dilutive to
overall ROA than otherwise. So how do you see the trend in terms of profitability per
se, especially price in Corporate segment for next couple of quarters given the
subdued credit demand in the system?
Romesh Sobti: If you are talking about our yield, you have seen as I just explained to a previous
question that yield is a function of the combination of foreign currency book and
rupee book, but the yield on our Corporate book still remains pretty healthy, I think it
is in the range of whatever 11.9% odd. So we expect that this yield will remain in that
11.5% or 12% range. You are right that at the top end of the Corporate world, lots of
players are chasing the same sort of Corporates and therefore yields have fallen there.
So even without cut in the base rate the margins over base rate have actually
moderated but that is for a limited set of Corporate clients. In the mid-market and at
the lower end of “S” of SME, we are not seeing any moderation of rates yet. That
moderation of rates will happen only when the base rate is cut, because only then they
will get the benefit of that. So going forward I think over the next quarter or so we do
not see too much change there, but over a 12-month period certainly I think all yields
will moderate whether it is Large, Mid or Small Corporate. But that will be
accompanied by a corresponding drop in the cost of funds, and therefore I think
margins will be sustained, in our case we hope that margins will grow as we increase
the Retail component of our Loan book.
Manish Ostwal: Two small data points; one is what is your proportion of wholesale funding of the
Term Deposits? And the average Saving Bank Deposit cost in Q3 FY15?
Sanjay Mallik : We do not disclose the savings rate. We have seen a downtrending, and as you might
know we recently reduced rate on the Savings Bank accounts less than Rs 100,000
from 5.5% down to 4.5%. So that will certainly see some downtrending on the
Savings Bank rate. To your first question, CASA is 34% and our Retail Term
Deposits are closer to about 25% or 26%, so rest is Wholesale Deposits.
Moderator: Thank you. The next question is from the line of Ashish Sharma from Enam Asset
Management. Please go ahead.
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Ashish Sharma: We sort of have seen a stable NIM for the last couple of quarters. But from a longer-
term perspective where do you see the normalized NIMs will stabilize? Do you see
from the current levels there is some headroom for increasing it closer to 4% level
just from a longer-term perspective?
Romesh Sobti: Yes, certainly, that is the target we are aspiring for, and aspiration is based on 2 or 3
assumptions. One is of course that our Loan book change happens. So when we go
Retail from 42% to back to 50%, the difference in yield between Retail and Corporate
today is 400 basis points, so if you move your balance sheet by 8% in favor of Retail,
on which you get 400 basis points then the arithmetic works out to about 30 basis
points on the improvement in margins only on this account (in reference to our loan
book). This is of course pre-tax , post tax that means another say 20 basis points, that
is one aspect. Second aspect is that we have a fixed rate book on the Consumer side of
our businesses. As your bulk deposit rates falls and as your CASA grows then I think
the margin on this fixed rate book should also be beneficial to us. The third of course
is the growth in our CASA, as CASA percentage keeps growing that should be
accretive. So I think if you put these 2-3 factors together, then our aspiration to move
up towards that 4% is fully justified.
Ashish Sharma: That you would take a couple of years, would it be a fair assessment?
Romesh Sobti: In couple of years we do not know who all of us will be here, so our timeframes are
much shorter, I would say, that we should look at the next 12-months.
Ashish Sharma: On the Digital strategy, we have sort of rolled out a lot of innovative products. Could
you just throw some color on further new products and innovations from IndusInd
Bank side or we are more or less done away with, it is now how the market will shape
up?
Sumant Kathpalia: No, I think our Video branch has been a super success in my opinion, and I think we
have been able to have 500 calls a day now on our call center and we are getting
about 8,500 downloads a month on the application. That was just the first
introduction. We have a full payment strategy in place, so how do we want to
participate in the payment world, and I think that is something which is happening,
plus I think on the online platform we have a full strategy including alliances with
other institutions. When will it take off? I think in the next 6-months you will see a lot
of roll outs but this is confidential information and we would not like to share the
product and the roll out strategy as of now. But, yes, we have a road map, in next six
to nine months, and over a period of the second next month, the next month, you will
IndusInd Bank Limited January 13, 2015
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see a lot of roll outs happening in the payment and in the online space which will start
happening in the bank.
Moderator: Thank you. The next question is from the line of Hasmukh Gala from Panav Advisor.
Please go ahead.
Hasmukh Gala: As you said that the operating environment still remains very challenging in India,
what kind of deposits and advances growth do you look at over the next couple of
quarters from what we have been experiencing now?
Romesh Sobti: I think that correlation between GDP growth and credit growth has to sort of come
back at some time or the other. If you are saying GDP growth at say 5.2% then you
are seeing credit growth at around whatever the 11%. I think if GDP growth moves to
6% next year, then you could see credit growth in the vicinity of 15-16% and
likewise, plus there is of course a lot of suppressed demand because of the unleashed
locked up projects. So I would imagine that in the next fiscal, credit growth should go
back into that 15% to 17% range and I think the fiscal after that it should go back into
the 20% range as your GDP towards around 8% level. That correlation is the only sort
of formula that you have to really drive what credit growth is going to be. So this
quarter 11%, but now I think the oil companies have paid off some Rs.40,000-odd-
crores, so you may see a little bit of dip on that account, but if you look at a fiscal
next year, I would say that we would go back to the 15-16% growth rate.
Hasmukh Gala: Do you expect RBI to move on to reduce the rate and all that as it is demanded by all
the sectors?
Romesh Sobti: We all hope that RBI does that, but RBI has a very strong rationale for holding on to a
stance. Their rationale is based on the fact that they want a very clear roadmap on
how this country is going to manage its finances in the future, how it manages its
balance sheet, how it manages its fiscal deficit, and, of course, very-very steady
downtrending on the inflation side of the business. So I would imagine that the
Governor would probably wait to see the steps being taken by the government and
those steps will be enumerated in the budget. So I think there are expectations that
rate cuts will happen only after the budget. But we could have a surprise in the first
week of February when we have the next policy you could have a rate cut as well.
Hasmukh Gala: That maybe after the budget?
Romesh Sobti: We expect it will be after the budget, but next credit policy is on 3rd
of February, so
who knows it may spring a surprise.
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Hasmukh Gala: As far as our finances are concerned, the Fees Income and Other Income constitute a
very large portion of our PBT, and I think that has been there for last several quarters.
What is the reason that we are not able to get a higher NII, Net of Interest expense? If
you compare it with say some other well run banks, I think that ratio is something
around 45-46% whereas in our case it is 35%, that means your Net Interest Income to
Gross Interest Income.
Romesh Sobti: Essentially what drives Net Interest Income, one is Loan growth, second is yields and
third is the cost of funds. So if you take the Loan growth, our Loan growth has
moderated, so we used to grow in that 25-30% range, now we are growing from 20-
24% range, so that is one reason in the moderation of our Interest Income. Then, of
course, in our case is the change in the Loan mix. The higher yielding Retail book has
fallen from 50% odd to 42% and the lower yield in Corporate book has risen to about
58%. Third of course is the cost of funds as the CASA is growing I think that is
moving along lines that we wanted to grow. So that is why you see our Non-Interest
Income is now as high as 41.5% of our total income. But I think that once we stabilize
and rebalance our Loan book, I think we would get back to that 65-35 sort of a mix.
Hasmukh Gala: As far as the Fees Income is concerned, how confident are we that we will be able to
sustain the Fees at such a high level?
Romesh Sobti: The confidence can only be derived from 28 quarters of performance. So if you see 28
quarters we have shown that our Fee growth has exceeded Loan growth. So this
question was asked after 2-years also and then it was asked to us in the 3rd
year, 4th
year, 5th
year, 6th
year and 7th
year. But, seriously, I think that the DNA of the bank is
such that we are Fee-oriented. So the way we plan the expansion of our branches, the
way the branch manager thinks, he thinks only Fee and CASA, his mind is not
cluttered with so many other things. Thirdly, of course, there is a strong linearity
between branch network and Fee and CASA right. So fee is there in almost
everything. So when you look at the corporate relationship manager, he does not have
volume targets, he has income targets right, and he has a Return on Asset target. The
return on asset can only come when he gets Fee Income with lower capital usage.
That is why the DNA of the bank has actually been framed in such a way that the
emphasis on Fee will always remain. So we are not following anybody‟s model right
that we should also be 80-20 or 70-30. We want our Fee model is our Fee model.
Hasmukh Gala: Out of say Rs.522 crores that we have earned this quarter, Rs.169 crores is the foreign
exchange income. So that would be more pertaining to the LCs and things like that?
Romesh Sobti: No, actually we have earned Rs.611crores.
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Hasmukh Gala: No, that is the total, I am talking about only the Core Fee income.
Romesh Sobti: No-no, why Core Fee, the other is also fee. The color of Fee does not change, whether
it is the Core Fee or Non-Core Fee, it is a fee. One Fee comes from clients, the other
comes from non-clients. Out of 600 crores, Rs.160 crores comes from foreign
exchange income and that is the way it has been planned. The point is that we have
got in a very skilled and expensive Global Markets team 2.5 years ago and they are
delivering results, not only at the central treasury level but also in the geographies. So
FX income is also part of our DNA, it is in our blood stream that we must make
Foreign Exchange Income. Of course, the more you do Trade the more Foreign
Exchange you also earn. So Trade income is almost about 10% or 11% or 12% of our
total income. Trade and FX are related, then of course there is a Retail trade,
Corporate trade and Retail FX, Corporate FX. I think that is the way it has been
framed, it is not by accident, it is by design.
Hasmukh Gala: Foreign Exchange income has also been helped in this quarter because the rupee
depreciated?
Arun Khurana: I think a couple of things, you are right, when there is more volatility, there obviously
is more hedging done by clients, and plus you had a downward movement in the
MIFOR rates which is used to hedge long-term currency exposure. So you did see a
lot of activity on both counts in terms of clients hedging long-term exposure which
they have contracted over a period of time as well as short-term forward contracts, so
that was….
Romesh Sobti: Plus also it is not just plain and simple FX, there are simple spot rate forward
contracts, there are structured transactions. We have as I said a skilled team now, our
treasury is no less than anybody else in the market including the foreign banks. We
can stand up to large corporate and show them structures which are as competitive as
any that a foreign bank can show. So that is the way this business has been built.
Moderator: Thank you. The next question is from the line of Manish Karwa from Deutsche Bank.
Please go ahead.
Manish Karwa: On your margins, this quarter we probably would have got 10 basis points of margin
savings because of the savings rate cut, and despite that margins have only gone up by
4 basis points QoQ, also, the high yielding products like loans to small businesses,
cards, etc., have also grown pretty fast. So, is there some inherent margin pressures
which we are seeing in some of the other products?
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Romesh Sobti: First of all, the assumption of 10 basis points coming out of a rate cut in the Savings
Bank that needs to be tested, because that assumes that a large part of this book lies in
the below lakh rupees. There is some moderation in the cost of SA, but it is not 10
basis points, I can assure you that. As I mentioned in a previous question, at the top
end of the corporate world certainly we are seeing pressures and yields are certainly
falling there, because if you do not reduce the interest rate they repay you, because
some other bank is already offering them low rate. But that is only at the top end of
this thing. In the mid market and all, we are not seeing any increase in yields, we are
not seeing any drop in yields. So there is a positive accretion in our interest margins at
the end of the day. It is not 10 basis points, it is 4 basis points. But the issue here is
the only pressure that we are seeing is the change in the mix. So, we were hoping that
this quarter our Retail will go up to 44% and Corporate will be 56% frankly, it went
down to 42% from 43%. I think that is the only one where is a pressure which is
being caused is that. That we hope will start getting reversed slowly over the next 12
months, and that is why we hope that the recovery in margins that we expect will
happen.
Manish Karwa: After the change in Savings Rate below Rs.1 lakh, have you seen any change in
Deposit accretion on Savings?
Sumant Kathpalia Not at all. We have not seen any change in our growth rates because of rate change.
Manish Karwa: Then should it not make a case for cutting Savings Rate more, especially given the
environment when the interest rates are in which ways coming off?
Romesh Sobti: There are two ways of doing it – one is to wait for rates to fall off and then cut; the
other is to do a behavioral analysis of how customers are behaving in every slab. So
when we cut the slab up to Rs.100,000, it is not done because one morning somebody
felt that we should reduce rates. It was a consequence of the fact that now we have a
branch network of so much long, their stickiness, how many products we have cross-
sold to that section up to Rs.100,000. Similar exercise is happening for the next slab.
The exercise is on to see whether we have achieved crosssell in the next slab, say
Rs.100,000 to Rs.500,000. And if we have cross-sold, then you assume stickiness and
then you take the decision. So, it is very much in our mind, I think the timing has to
be decided.
Moderator: Thank you. The next question is from the line of Rakesh Kumar from Elara Capital.
Please go ahead.
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Rakesh Kumar: The slippage in the Corporate Loan book for this quarter and if I see the comparative
number for the credit cost for the Corporate book for this quarter, that is Rs.49 crores.
So, what are the reasons that we had to make higher provisions for this quarter for this
book?
Sanjay Mallik : Basically, Rakesh, a couple of things – one is there was a little bit of a deterioration or
impairment in the collateral value of our existing NPA book, so we actually up the
provisions as a consequence of that, and there were some incremental provisioning
for the slight increase in our restructured book.
Rakesh Kumar: But if the collateral value, suppose, some portfolio is coming down, then would not
be ask for more collateral or like something similar, instead of just making a
higher…?
Sanjay Mallik : It‟s difficult for NPAs practically speaking, you always try, but it is not…
Romesh Sobti: Once it is an NPA, ability to get traditional collateral is pretty restricted. So we made
I think prudent provisions on our existing book. On the other hand, of course, we have
also held our PCR - Provision Coverage Ratio also at 70%. That is the explanation for
the fact that although the additional slippages are of certain value, the credit cost
shows a higher value.
Rakesh Kumar: Because of collateral value coming down, there are chances of NPA rise. So can that
happen in the next quarter or so of the rise in the NPA slippage of a Corporate book?
K Sridhar: These are one-off random movements. So whether it will get repeated next quarter or
not, we cannot predict at this point of time.
Rakesh Kumar: Secondly, the market risk allocation like that has gone up by Rs.1,000 crores quarter-
on-quarter. So how should we read this change?
Arun Khurana : Market risk components gone up because of the increased activity as I mentioned
earlier on hedging of clients‟ portfolio through them using long tenor hedges in the
form of derivatives. So that amount gone up quite significantly.
Rakesh Kumar: Are there chances that would decrease and we will decrease that hedging going
forward so that we can release some capital from there?
Arun Khurana: Yes, it just depends on if clients were to unwind or if we unwind the hedges with
them, so that is how it will go, otherwise, that is a number that you got to be with,
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right, it may not show such an increase in the future, that is what I am going to say or
it will not show perhaps such an increase in the future.
Rakesh Kumar: Around Rs.1,000 crores rise was there on the cash balance on a sequential basis. So
what is the reason like we are putting so much of extra cash?
Romesh Sobti: It is just a point of time event, we manage cash that now we have three going to four
currency chest. So we do not like to keep excess cash even in the branches, so that is a
monitor able item. There could be some transitory happening, that is why this sort of
have happened. It is a dead asset, so we want to minimize it.
Moderator: Thank you. The next question is from the line of Nikhil Bhatt from Barclays. Please
go ahead.
Nikhil Bhatt: If you could just put up the Basel disclosure on the website, I cannot seem to find it
on the website?
Sanjay Mallik : Yes, it will be done there.
Moderator: Thank you. The next question is from the line of MB Mahesh from Kotak Securities.
Please go ahead.
MB Mahesh: A couple of questions. One, this cost of deposits that we have seen a decline. Is this a
function of the wholesale rates declining in your portfolio or is it the mix between
domestic and international deposits that we have?
Romesh Sobti: I think it is a function of two or three factors. There is a small decline also in the bulk
deposit rates and the CD rates. Then of course, there is an increase in the CASA
percentage as well. And in the foreign currency borrowing also I think we have seen
some rate coming off, but there are marginal sort of the interest reduction in the cost
of funding on foreign currency borrowings.
MB Mahesh: If I just extend this, if I keep the current deposit rates in your framework, is it a fair
assumption that we will see another 20 odd basis points decline over the next one
quarter or do we think we need further rates to come down to see a decline in deposit
rates?
Romesh Sobti: CD rates have come off, Q3 may not have captured the full extent of the decline, so
we would see some of that actually coming into Q4 as well. But whether it is 15 or 20
basis points, difficult to say.
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MB Mahesh: The reason why you chose borrowings as one of the medium for this quarter for
growth given the fact wholesale rates was lower, can you explain why?
Romesh Sobti: No, that is mostly refinance.
MB Mahesh: That is a cheaper source for you at this point of time?
Romesh Sobti: There is no stat, so you save the statutory liquidity ratio (SLR) part of the thing and it
is longer-term funding, that is more important. This refinance is generated by our
Vehicle Finance book, to the extent that we have Vehicle Financing we are eligible.
On the cost side the only benefit is that you do not have stat.
MB Mahesh: Two questions. One, can we have the Used Vehicle Financing book in the portfolio
for this quarter? If I need to see the vehicle finance portfolio to grow at about 10-
12%, today, we have seen disbursements growing by about 17%. So, if I have to see
the loan book growing by 10%, what is the kind of disbursements that you need is the
broad question?
S V Parthasarathy : Close to this kind of a percentage increase every quarter, it is about 20% increase in
every quarter should mean an annual increase of close to anywhere between 10% and
12%. Used Vehicle Finance disbursement wise it is about 20% and then asset wise it
is about 15% of our Vehicle portfolio.
Moderator: Thank you. The next question is from the line of Prashant Kumar from Credit Suisse.
Please go ahead.
Prashant Kumar: Just on your Retail portfolio, wanted to get a sense on the non-vehicle retail part of it,
in the sense that could you give us some color in terms of what is the roll out strategy,
how many branches have you already rolled out, what is the sourcing strategy, are
you focusing on internal customers, what percentage is being sourced from DSA, and
some medium-term targets that, how the mix is going to shift from vehicle loans to
non-vehicle loans.- just wanted to get a broader perspective on the non vehicle part of
the retail portfolio?
Sumant Kathpalia: We have rolled out four products as of now – one is LAP, the second is Credit Card,
third is Personal Loans, the fourth is Business Loans. We have now rolled out in the
last quarter Agri Loans, Loans against Shares and Loans against Credit Card
Receivables. Those are the seven products which we have rolled out in the Retail
Non-Vehicle portfolio. Today, we are about 10% of the overall Consumer book. We
believe that we will be about 15-18% of the total Consumer book in the next 12-15
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months. That is what our strategy is. We have rolled out all the products which were
required to be rolled out and we would see the impact coming in the next quarter or
early next year.
Prashant Kumar: Just wanted to understand on this Foreign Currency Loan book as well as like could
you give us some more details is it Trade Finance Loan or Term Loan and have we
grown this portfolio very recently, and when we say that this is 20% of Corporate
book, then it is 20% of Large Corporate or the Total Corporate book?
Romesh Sobti: 20% of the total Corporate book – large, medium and small. This book was always
there, it has not suddenly appeared, but the values were much smaller. The book has
actually grown over the last whatever 9 or 12 months. It is a mixture of say some pre-
shipment finance which is of shorter tenors and some longer tenors of 12 months or
so. So it is a mixture of short term 90, 180-day sort of trade finance pre-shipment, and
also a little bit of the 12-months tenors. It is fully matched, it is back-to-back on the
funding that we raise. Of course, there is no currency risk that is carried by us at all.
We only lend when we get decent margins.
Moderator: Thank you. Our next question is from the line of Nilanjan Karfa from Jefferies please
go ahead.
Nilanjan Karfa: First question is, you talked about this cross sell based on the behavioral pattern. Just
want to find out, where do you book your Savings Account when you do your ALM
and if you can talk about how it has changed in the last couple of years?
Romesh Sobti: ALM is based on behaviorals in terms of longevity, right, so you do behavioral tests
as per RBI guidelines, and we do these tests I think once every six months, we find
that actually less than 10% of the portfolio shows volatility, and this volatile portion
is therefore in your ALM when you structure liquidity, put into the short-term buckets
and the rest of it goes into actually three-year buckets, because that is considered core.
Similarly, you do behaviorals for the Current Accounts; the Current Account of
course show much higher volatility element, in our books it has been shown to be
around 15% odd, so that 15% is taken in the short-term buckets, the rest is in your
long-term buckets.
Nilanjan Karfa: When you do the liquidity ratios under Basel III, so this short term volatile portions
which is essentially what you are saying 10% in Savings and 15% in Current
Account, that goes into the net funding ratio calculations, is that right or it is not?
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Sanjay Mallik : Yes, that is the way it is, so 10% and 15% goes into your shorter term outflows and
the rest is in the longer term outflows.
Nilanjan Karfa: Just wanted to get a sense, what is the range of interest lending yields in the business
that you do across the portfolio - Consumer and Corporate – specifically, I just heard
some business is done at 4% I think that is true for a lot of other banks, just
wondering what those are?
Romesh Sobti: There is no lending below our base rate, that is the first starting point, our base rate is
11%. Now foreign currency lending is not linked to base rate, right. Foreign currency
lending is you borrow at LIBOR Plus whatever and then you lend on a match basis,
keeping your spreads which we hope are 3% to 4%. If you look at the rupee lending
range, the rupee lending range starts from the base rate, because we are not allowed to
do that at below base rate and goes up to the high of 24%. So 11% on the Corporate
side and 24% on our Two Wheelers within the Consumer Finance and Vehicle
Finance business, so that is the range that we have.
Moderator: Thank you. Our next question is from the line of Nitin Kumar from Prabhudas
Lilladher. Please go ahead.
Nitin Kumar: Having done so well on the CASA, are we looking to like revise our target under
Pillar 3 of below 35% that we have for 2014-17 because we have done like 500 basis
points improvement over there, so are we still staying at 35%.
Romesh Sobti: So you see a subtle change in the slides. Now we have this thing Greater than 35%.
So if you remember the previous three year plan, we said that we should get to 35%,
now we have said we should go beyond 35%. And aspirationally that should be 40%,
jump of at least 5% every plan period. So greater than 35% aspiring towards 40%.
Nitin Kumar: What is the outstanding ARC sales that we have today?
Sanjay Mallik : Outstanding ARC is the same as the last quarter, no change.
Moderator: Thank you. The next question from the line of Pradeep Agarwal from Phillip Capital.
Please go ahead.
Pradeep Agarwal: I just want to know what has been the restructuring for this quarter?
K Sridhar : 55 basis points. We do not talk about specific names.
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Pradeep Agarwal: If you can throw some color, this is in nature of which sectors or the number of
accounts?
Sanjay Mallik : We do not give sectors, it is only 3 basis points, it is not like some huge movement,
our entire Corporate book is quite diversified, so you will never see something only
coming from one sector.
Pradeep Agarwal: So, if I ask you other way, in terms of gross additions, what has been the basis points
addition over last quarter, would that be a materially higher number than 3 basis
points?
Romesh Sobti: No, it is the same, 3 basis points marginally. From Rs.309 crores to Rs.353, Rs.44
crores.
Pradeep Agarwal: Secondly, on the provision side, if you can provide the breakup in terms of standard
assets and investment depreciation and NPA?
S. V Zaregoankar : Depreciation reversal is Rs.38 crores and standard asset provisioning is Rs.11 crores
plus.
Pradeep Agarwal: Lastly, if you can help me with what has been the Savings Bank account number of
client base and how that has moved over the previous quarter?
Sumant Kathpalia: We are doing about 55,000 customer acquisitions a month on the Savings Account
base and we continue to do an ATS of about 45,000 to 48,000, average ticket size on
the customer acquisitions per account. So it is Rs.250 crores to Rs.260 crores of new
acquisitions a month.
Moderator: Thank you. The next question is from the line of Vaidyanathan from Kotak Mahindra
Bank. Please go ahead.
Vaidyanathan: Just wanted to check on the increase in your market risk capital charge, roughly RWA
increase of Rs.1,000 crores. You did mention earlier that these were all due to client
hedging, but would that explain the entire increase, or are there prop positions which
you have taken, on which the market risk charge applies? In the first response to an
earlier gentleman, you mentioned your Corporates are mainly at 100% risk weight.
Does that mean they are all at kind of BBB category and that is the kind of the
average or the median rating for your Corporate book?
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Sanjay Mallik : Just to answer the second part very quickly is a blended risk weight based on funded
and the non-funded portfolio along with any risk weights related to CVA or unhedged
exposure, so all that goes into credit risk weight.
Vaidyanathan: Agreed, but does it come to 100 for your Corporate book, I mean?
Sanjay Mallik : It will be higher than Retail, yes.
Vaidyanathan: Suppose I take Retail at 75, like you said, and if you say 100, so 100 would be like a
BBB book?
Sanjay Mallik : No, the point is, you are not really comparing apple-and-apple, because when you are
looking at risk weights to total assets, there are off balance sheet assets which are
contributing to your credit rating. Factoring that in as well, it can go as higher rating,
100% yes.
Vaidyanathan: On the market risk charge, if you could ..
Arun Khurana: A large portion of that is on account of client-driven transactions, both across
forwards and derivatives.
Vaidyanathan: And derivatives primarily to cover the foreign loans which you mentioned?
Arun Khurana: The long-term exposures of clients.
Vaidyanathan: Not specifically the foreign currency loans which you mentioned they would have
taken from you?
Arun Khurana: So it is not only that, right. So they have got foreign currency loans like public sector
companies, have large long-term foreign currency loans, because MIFORs came off
quite significantly in the last quarter, there was a lot of activity that we saw from that
sector, so these loans were not given by us, but they were hedged by us.
Vaidyanathan: So that could still be a credit charge on them, right…?
Arun Khurana : Absolutely, you are right.
Vaidyanathan: So that you added on to the market risk, is it?
Arun Khurana : Yes, so the CVA is separate, the market risk RWA is separate.
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Moderator: Participants, that was the last question. I now hand the floor back to Mr. Sobti for
closing comments. Thank you. And over to you, sir.
Romesh Sobti: Thank you very much for joining us. Till next quarter then, good bye.
Moderator: Thank you, sir. Ladies and Gentlemen, on behalf of IndusInd Bank that concludes this
conference call. Thank you for joining us. You may now disconnect your lines.