HDFC Bank Ltd ADR Earnings Call Nuggets: CD Ratio and Margin Details

HDFC Bank Ltd ADR (NYSE:HDB) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

CD Ratio

Manish Ostwal – K.R.Choksey: First question on the CD ratio, CD ratio has been hovering around 80% to 85% band in the last few quarters, so why we are having such a high CD ratio and could you throw some light on the liquidity position of the Bank?

Paresh Sukthankar – Executive Director: Sure. So, we’ve consistently had a slightly higher CD ratio reflecting the high level of capital that we have. So, when you look at from a funding point of view, apart from the deposits, obviously we fund ourselves from, one, there are floats, which do not show up as part of the deposits, but which are there on a core basis. In fact if you look at the Annual Report, you’ll find that there are on a regular basis, floats which come under other liabilities, which are an ongoing source of funding. Secondly, there is of course the Tier-II and there is the equity capital. So when you look at the CD ratio adjusted for the floats, the subordinated debt and of course, the overseas advances – we don’t have a large overseas portfolio, but we have about a couple of percent of the book overseas. We adjust for that, then the CD ratio would be about 76%. The Bank has always been essentially funded from deposits and the – from a funding and gaping point of view, it’s a fairly well matched book, which is why both from a liquidity and interest rate perspective, we’ve been through cycles of tight and loose liquidity and higher and lower interest rates. Through these cycles we’ve been able to maintain a fairly comfortable liquidity position and a fairly stable net interest margin. So, that really hasn’t changed.

Manish Ostwal – K.R.Choksey: Secondly, during the press conference, you suggested that retail and wholesale contributed 45% and 55%, respectively, to incremental slippages. So could you share key retail product segments and the key sectors in the wholesale segment contributed this NPAs?

Paresh Sukthankar – Executive Director: I mean – so, basically, what I am saying is that, the gross NPAs slippages on a regular quarter basis have in the last few quarters tend to be more on the retail side and we have not had too many slippages on an ongoing basis on the corporate side. We’ve had some in every few quarters. In this quarter if you look at the slippages, we’ve had slippages from both wholesale and retail, roughly in line with the proportion of the basic loan portfolio as well. So, point number one, if you look at the NPAs too, the NPA percentages for wholesale and retail, it’s not that there has been a sharp increase in any one of them. It’s been roughly the incremental NPLs in line with the existing loan mix. Within retail, for the last few quarters we’ve had continued slippages on the Commercial Vehicles and Construction Equipment side. That has continued in this quarter. It’s not necessarily got any worse in terms of percentages, but it has continued to slip. So, if you look at the December quarter and you look at then the March quarter sort of flattening out a little, this quarter is again more or less in line with the last December quarter in particular. Apart from that, we’ve had some NPLs on the gold loan side, where it’s not that we are under collateralized in terms of being less than or more than 100% LTV or whatever, but to the extent that whatever were the approved margins, if there was some irregularity because those margins had not been met and that irregularity had been not completely cleaned out in 90 days then we would have had some NPLs there. Other than that, for the rest of the retail products, the NPL movement has been negligible. So, broadly, I would say the retail NPA portfolio trends have been similar to what we have seen in the last few quarters as far as the CV and CE business is concerned. For most of the other products, really it’s been very similar in terms of at least NPA accretion. On the corporate side, we had a few names which did become NPL in this quarter. They don’t have any (inbuilt) very small single-digit sort of NIM. So it’s not – there is no concentration in a particular industry or a particular group or anything of that sort, but has contributed to a little less than half of the total NPLs…

Manish Ostwal – K.R.Choksey: Quickly, Sir, could you provide the risk-weighted asset number, sir?

Paresh Sukthankar – Executive Director: Yes, the total risk-weighted assets under Basel III is INR3,25,900 crores.

Manish Ostwal – K.R.Choksey: This provision number of 527, could you break the floating in the specific provision?

Paresh Sukthankar – Executive Director: Yes. So between of the total the general plus floating provisions are INR80 crores, the rest are the specific provisions.

Manish Ostwal – K.R.Choksey: Lastly, this trading (indiscernible) during quarters or it is largely because of (indiscernible) in corporate bond or some Forex proprietary trading gains also…

Paresh Sukthankar – Executive Director: That is entirely bonds.


Margin Details

Nitin Kumar – Quant Capital: Sir, the margins have held up very well during the quarter, so can please explain us to what kept them steady, maybe some details on that as to – because now they have now come closer to the higher end of the range?

Paresh Sukthankar – Executive Director: To be honest I think in the last quarter also in the March quarter we were at 4.6 but the core net interest margin was at 4.5, because typically in the last quarter of the year we tend to have some annual receipts, which is why – but essentially it’s been – if we knockoff the core element to it and look at the total then what you’re saying quite rightly is that at roughly 4.6, this is at the upper end of the range. I must say that again 4.6 is a rounding off of 4.5 something 4.5, 4.6 or whatever, but it’s still. What has happened in this quarter is that both funding cost and yields came down by about 10 basis points, which is reflective of the fact that from where we were, I am just keeping – I remember, this is we’re talking still June, right. So we’re talking about what’s happened in the last couple of days, but when you look at the fixed deposit rates from where they were in March for instance or February, March and coming down to June, you did have drop in the one-year fixed deposit rates on retail and across the board I would say between 25 and 50 basis points sort of reduction in incremental fixed deposit cost. Obviously, that changes the fixed deposit book cost very gradually, but that clearly had an impact. CASA was on a daily average basis, very marginally lower, in fact, although the point – March CASA and the June CASA as of the last date of the quarter looks couple of percent lower. On a daily average basis, it was not so much lower and which is why there was no reduction in NIM as a result of the lower average CASA. So, whatever was a reduction in cost of funds was essentially a result of the lower fixed deposit rates and that was almost exactly offset by the lower yields that we had on the loan book. On the loan mix, we get the incremental growth during this quarter. We’ve actually grown – if you look at the total in absolute terms, we have roughly a just under INR20,000 crores of loan growth from March to June, and actually almost close to about two thirds of that came from corporate because in the March quarter, typically the corporate loan book tends to get sort of moderate a little, so from there, if you look at the incremental growth, the growth has actually come almost two-thirds from the corporate book and one-third from retail book. So the mix actually for this quarter has been a little more biased towards corporate and that would also have resulted in slightly lower loan yields, so which is how the net interest margin has remained flat.

Nitin Kumar – Quant Capital: Does that also partly explain as to why the fee income growth was also very muted during the quarter?

Paresh Sukthankar – Executive Director: The fee income growth actually, the one line which has clearly come off pretty sizably and this is something which has been happening over the last couple of quarters, but you know took a further dip in this quarter was the third-party commission in earnings. We’ve clearly seen some reduction – well, we’ve seen for some time the reduction in terms of fee rates as a result of the change in mix of insurance and so on between away from ULIP and so on, that has been happening for some time, but volumes have also been moderating there. So that was one line which saw a lower growth. The other fee lines have been more or less the same. So we don’t have a large portion of fees which come from retail loans. So it’s not that that would have caused the fee income piece, and in fact, one of the positives of our fee composition has been that it’s more – for most parts of it, it’s not linked to loan growth, it’s more linked to transactional banking, it’s link to third-party distribution. It’s now – some little bit of it also coming from the investment banking activities, trade. A lot of these are not sort of using the balance sheet. So that’s really where the fee income has been slightly muted. Of course, on the FX part of the fees, clearly that has been impacted by the fact that both from an export and import flows point of view, the growth there has been that much lower, although we have seen volume growth despite what’s happening in the macro environment. We have seen volume growth on the actual customer FX close, but trading volumes have been that much lower…

Nitin Kumar – Quant Capital: Sir, you mentioned that the Bank has benefited from the lower fixed deposit rates. But, like, what is the outlook on the borrowing costs and the FD rates going ahead, especially after the recent measures announced by the RBI?

Paresh Sukthankar – Executive Director: So, clearly, whatever was the decline in retail rates, which – and our expectation until day before yesterday was that this might continue over the next couple of quarters now stands changed, I mean, at the shorter end, whether it is CD rates or deposit rates, there is no question of further decline. Whether the rates will show an upward sort of bias sort of (historically) – whether there – there will be some division, it will really depend on how other banks and how the market as a whole reacts over a period of time. Because just now, it’s just the immediate shock or impact of what the measures might have been. Obviously, none of us know whether this is something which these measures are here for a few weeks or a few months. Obviously, therefore, depending on how long the tight liquidity conditions last and what the actual banking system borrowings are and therefore, what it is doing to the overall cost of funds that would determine what various banks do on deposits. Either bank deposit rates remain where they are and then other than the impact on bond yields and so on, they may not be necessarily a transition or a transmission of that to deposit and loan rates, but if this continues for a period of time and the liquidity conditions remain or get even tighter than where they are right now, then Banks would probably be encouraged to – or could be induced to increase their deposit rates and then that could have a cash cutting effect on lending rates. So right now, tough to say, but clearly the downward bias seems to have been arrested for now.