HDFC Bank Earnings Call INSIGHTS: Deceptively High Yield on Investment, Trading Gains

On Friday, HDFC Bank Ltd ADR (NYSE:HDB) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Deceptively High Yield on Investment

Mahrukh Adajania – Standard Chartered: Just wanted a couple of things, firstly why is the yield on investment – why does it appear to be so high, maybe some investments ran-off end of the quarter or something like that?

Paresh Sukthankar – Executive Director: The investment yield actually has moved up slightly but not quite so much. So there really isn’t a distortion, its’ probably the actual – since you’re looking at end period sort of numbers, it’s probably distorting. Between the fourth quarter of last year and the first quarter of this year, the yield on investments actually has not moved virtually at all, the 10% to 15% basis point difference, but not really. So, it must be just a question of your looking at the end period advances when you’re looking at the yields.

Mahrukh Adajania – Standard Chartered: Break-up of provisions into specific general and floating for the quarter?

Paresh Sukthankar – Executive Director: So of the total credit provisions which are there of INR475 crores, so of the total provisions of INR487 crores, the credit related provisions are INR475 crores and those of that INR475 crores roughly INR60 crores is the general provision and roughly INR240 crores is the floating provision.

Mahrukh Adajania – Standard Chartered: The floating provisions of course will be used only for contingencies which are predefined?

Paresh Sukthankar – Executive Director: Well, I think regulations on floating provisions are pretty clear that you can make provisions as per the Board approved policy which is what we had done and any use of floating provisions is permitted only with prior RBI approval. I mean you need a Board approval and then thereafter an RBI approval. There is of course as you know a discussion paper which had been released by RBI on dynamic provisioning, and as and when that gets translated into final guidelines, the discussion papers seems to suggest that both general and floating provisions would ultimately be part of what they were looking at defining as dynamic provisioning, but all of this is still work-in-process I guess. So at this point of time, the floating provisions can be used only with prior RBI approval.

Mahrukh Adajania – Standard Chartered: Just one last question, whatever little aggression that we’ve seen to NPLs in the quarter, that would be just one account or scattered?

Paresh Sukthankar – Executive Director: Well, we haven’t seen any particular sort of spurt in NPL formation, so the increases that we have seen would be typically part of our regular retail portfolio and maybe a couple of accounts on the corporate side. But we don’t have any biggies that would have distorted the formation. In fact, if you look at the total gross formation on a year-on-year basis, it’s not very different on a sequential basis, in fact, it is marginally lower in terms of gross formation of NPLs.

Mahrukh Adajania – Standard Chartered: Would you give the slippage number, just on…

Paresh Sukthankar – Executive Director: We don’t sort of give the (pickup) on a quarterly basis.

Trading Gains

Manish Ostwal – K.R.Choksey: My question on the trading gains, actually the trading gains this quarter we saw a strong rebound so – is it in equity or GSEC trading gains?

Paresh Sukthankar – Executive Director: These are GSEC trading gains. In fact these are where we had mark-to-market write downs, given the deals eased off, this is really a recouping of negative mark-to-markets which had been there on the GSEC portfolios.

Manish Ostwal – K.R.Choksey: Secondly, last few quarters, we have seen that the Bank is showing very strong growth in the forex income, so how do you see that income high growth sustainability of that line item? And secondly, is there any one-off during this quarter included in the forex income?

Paresh Sukthankar – Executive Director: No, we don’t have any meaningful one-off in the quarter as far as FX incomes are concerned. Yes, there has been, I would say, in the last three or four quarters, we probably had two or three quarters out of four slightly stronger than normal, which I guess primarily reflects the fact that because there has been volatility in the dollar/rupee, you had much higher levels of customers hedging their exposures. So, this is not a huge sort of spurt in any one particular segment. But as far as sustainability of it is concerned, I think as far as our – to the extent that a lot of this is customer based, it lot depends on what flows continue to come in from the customer side. But there really isn’t any one-off in this quarter as such.

Manish Ostwal – K.R.Choksey: So, is it right way to look at stability of forex market would result into normalization of your forex income?

Paresh Sukthankar – Executive Director: The FX revenues are a function on the customer side of the volumes and the spread. The volumes are a function of periods when customers tend to cover more, which is when they see two-way movements and they are seeing volatility. If there is a trend in the currency in one direction then you obviously have only the importers or only the exporters tend to cover. So, clearly, in a period when there is two-way movement and the market is seemed to be uncertain, you tend to have more customers looking to hedge their exposures. And to that extent, the volumes or the total level of the business tends to be higher, which is what sort of flows through.

Manish Ostwal – K.R.Choksey: And third, in items of your loan book growth especially, retail loan book growth we have seen very strong growth in the CVs book whereas, whatever indicator we got in a CV industry there is a slowdown. So, whether this is largely attributable to market share gaining thing or still you are seeing a very strong traction in that book?

Paresh Sukthankar – Executive Director: Yeah, I guess it’s primarily market share gains. Again, we’ve significantly increased our geography in the last year, year and a half in the CV market in particular in the LCV space. So, yes, there is some continued traction, although I guess it’s moderated from perhaps the peak days that we ourselves had seen in a couple of quarters earlier. But we continue to see reasonable traction on the LCV front in particular.

Manish Ostwal – K.R.Choksey: This home loan book, we saw the contraction of 4.6% quarter-on-quarter, so could you explain what is the reason for the contraction of such kind?

Paresh Sukthankar – Executive Director: Well, in this particular quarter we haven’t done any buyout yet.

Manish Ostwal – K.R.Choksey: Okay.

Paresh Sukthankar – Executive Director: So, if…

Manish Ostwal – K.R.Choksey: So it is scheduled repayments?

Paresh Sukthankar – Executive Director: Yeah whatever scheduled repayments would have happened and obviously, typically once a quarter or two installments in every month and after six months, we’ve obviously continued the origination, but as the portfolio seasons and we take it back, so, there may be a quarterly variations, but at the end of it we would still expect to see reasonable growth on the home loan side as well.

Manish Ostwal – K.R.Choksey: Within the retail book the other two segments, which is generally perceived to be risky segments, one is the personal loan the second is credit card, have been growing very healthy pace last few quarters so and generally these sectors – these segments are perceived to be risky. So what is your comment on going forward growth on those things?

Paresh Sukthankar – Executive Director: I think in fact if you look at both these pieces they have been growing at roughly these rates for the last few quarters. Between the two, that is between cards and personal loans put together, we’re at about 20% of the retail book, which is not very different from what it has been, may be the difference of about 1% in the composition of these two in the total retail loan book. Our own experience in terms of asset quality delinquencies losses in both these products still remains very, very stable. So, we continue to grow these products in segments that we are comfortable.

Manish Ostwal – K.R.Choksey: Lastly, I want two data point only, one is the, what is the risk weighted asset number at June end, and secondly what is the mix of your wholesale deposit and total term deposit?

Paresh Sukthankar – Executive Director: So the total risk weighted assets as of June is INR259,000 crores odd.

Manish Ostwal – K.R.Choksey: What is your wholesale mix in total deposit?

Paresh Sukthankar – Executive Director: I don’t have it off the top, but it typically tends to be about 25% to 30% of the fixed deposit. I mean that’s – I don’t have the exact data.