HDFC Bank Ltd Earnings Call Nuggets: Loan Growth and Public Investigation

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

Loan Growth

Abhishek Kothari: Hello sir, congrats on your good set of numbers. I just had one question regarding loan growth. Typically you know, this quarter also the loan growth hasn’t been too fascinating over the previous quarter. So any guidance on the same going ahead? If I observe your H1 has been better H2 in terms of loan growth?

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Paresh Sukthankar – Executive Director: Two points. One is that we don’t have a guidance that we give on almost any financial parameter, but let me give you how the sort of track record has been and why we try and got a particular rate. As you know typically try and grow at about 4% to 5% or 3% to 6% faster than the banking system. Lot of that growth we try and achieve that as much as possible in the first few quarters of the years, and we then sort of typically try and hold this roughly flat. So this pattern of having grown little faster in terms of loan growth in the first couple of quarters and being more or less slightly flattish in terms of absolute loan outstandings in the last quarter or so is something that has been happening for the last few years, because the focus in the last quarter in particular, though it’s a focus that we try and maintain through the year, but even more or so in the last year, is to try and meet the requirements on private sector so the focus is much more on the PSL loans. Therefore the overall loan growth the rest of the loan growth tends to be flattish, but on a full year basis, we would typically outpace the banking system. I think this year for instance, the industry grew at about 17.4% or 17.5% and we have grown at 22.7%, so that 5% faster than that is what we have achieved. The loan growth has come from both wholesale and retail, although the retail loan growth has clearly been faster than the wholesale loan growth, so year-on-year wholesale loan growth was about 17% while the retail loan growth was a little higher than 26% odd. If I look at what happens to loan growth next year, I think that will again boiled down to what – at what pace we expect the industry to growth at. We do believe that the economy could grow maybe 0.5% or 0.75% faster than this year, in which case, it’s likely that next year the loan growth could be at somewhere closer to 17%, 18% because although this year ending at an industry level at 17%, for most of the year loan, growth was languishing at 15%, 16% at an industry level. So, we believe industry loan growth in terms of reality, not just a year-end number could be at about 17% or thereabout if the economy actually does grow about 0.75% faster than what it did this year, in which case, we would grow again 3% to 6% faster than that. So, I don’t see a huge change in the loan growth, unless there is a meaningful pickup in the economy itself.

Abhishek Kothari: So previous quarter when we spoke there was a concern in the CV portfolio, right? Any stress seen in that portfolio currently?

Paresh Sukthankar – Executive Director: The CV portfolio is still remain under stress, but has actually seen a stabilization under very, very marginal improvement on a sequential basis. So it has – that sort of suddenly bounced back to where it used to be, the answer is no, but it has improved on a sequential basis to some extent. There is a commercial vehicle component of that, the construction equipment component of the PTG portfolio still shows sign of stress and has in fact shown more or less similar NPL level or delinquency level. It has not shown any improvement and I would expect that that stress would probably continue for a couple of quarters…

Abhishek Kothari: So same level of delinquency that you saw in Q3, or is it much higher?

Paresh Sukthankar – Executive Director: No, it’s not higher, it’s sort of flattish; say, more or less the same level. So overall, I would say that between these two put together, I think there is – it’s sort of flattish to very marginally better. It hasn’t shown any trend of deterioration, but and as far as most other – on a combine basis therefore it’s very marginally better, because CVE is the larger component of that overall portfolio. In the same way and if I was to just extend that, most of the other retail products have also continued to be fairly stable.

Abhishek Kothari: Just one last question, what’s your risk-weighted asset at the end of the quarter?

Paresh Sukthankar – Executive Director: The risk-weighted assets INR3,05,000 crores.

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Public Investigation

Unidentified Analyst: Yeah, I have a question with respect to the public investigation that happened at Cobrapost hearing. Post that, I know it’s under investigation, just wanted to get a feel have you – are you relooking at your growth assumptions in terms of branch expansions and so on to put certain things in order in-house or – I know book keeping aside the investigation that is already going on.

Paresh Sukthankar – Executive Director: Sure. So I think, let me just make one or two points on this one. I think as you likely mentioned, the investigations are going on, but a substantial portion of the investigation have also made a reasonable progress in the last few weeks since this thing broke out. These investigations have covered what has been done internally through our internal audit teams. It covers what has been done through an independent forensic fact finding review which was done through an accounting firm and of course the fact that the regulators have also been doing their own scrutiny and so on. I think what is – the fear is that, all of these agencies or reviews have shown up that there has not been any transaction that they have come across which actually are in the nature of the transactions which have been alleged in the sting operation. So there are some six or seven types of transactions that have been alleged in the sting in various – of these snippets. There have actually been no transaction that have actually been found to have taken place and this is of that type, obviously the sting is not – those are not transaction which could have taken place, because that was supposed to be a sting, but transactions of that nature has not taken place – have not been found in any of these branches and this is which goes back to not just the period of the so called sting, but goes back to almost 12 months back. Separately in terms of whatever process – further process improvements and so on which maybe there that is also a track that is going on and there will be some improvements that would – there would be room for some of those which would come in place, but clearly there is no systemic or rampant issue, which shows a vulnerability or a weakness which seem to be the allegation of the suggestion in the sting operation. As far as the impact of that on growth rate or so on, I think as far as rolling out of new branches, especially our penetration of the rural markets that is driven by our rural strategy and financial inclusion and regulatory requirements in terms of being in rural and unbanked area. So, it’s both business and regulatory in terms of what the requirements are. I don’t think there is a direct connection between what our branch expansion strategy might be, and this particular thing because if there is any improvement to be done whether in our system, in the IT system or in – from a process perspective, I think that can certainly be rolled out or executed without any impact on whether we are adding X number of branches. Having said that, the fact is that our normal branch expansion used to be about 200, 300 branches a year. In the last two years, we stepped it up. March 2012, we added again 500 plus branches. This year, while we’ve added 500, about 200 of them are much smaller. So if you look at the regular sort of branches, which themselves are (wrong), these are in semi-urban areas as well, but not the mini branches, those would be about 300 and roughly 200, about 193 are very smaller branches. So that is really been driven by that strategy. There is, I think, more that I can add on this front at this point of time till the regulators come up with whatever are their final observations or final requirements from any other banks including us…

Unidentified Analyst: One last thing on that, will it have an impact on the fee income in terms of how you sell certain products in your branches across branches from a perspective of how it is portrayed?

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Paresh Sukthankar – Executive Director: Let me put it this way that the products that they have sort of focused on or that they have said that, you know, could be the subject matter of this – if you were essentially in the area of insurance and gold coins and so on. I think the fact is that, the actual volumes that have been achieved even during this quarter have held up pretty similarly, and obviously as you can imagine when all of this was top of mind and the heat was on, there could have been nothing that could have – even remotely and as I said there was no transaction that we found in any case, but which would not have in the most strict manner adhere to requirements that have been there. So, I would say that the impact if any in terms of fee income would be more to do with its intrinsic business aspects. For instance, the change in the mix of policy that have been sold and the impact that has on the commissions that are – that one earns on that. The fee – the impact on fee could be also driven by other regulatory changes like, earlier in the year we had a reduction in the debit card interchange and the ATM transaction fees both of which have actually had an impact on fees in this quarter as well. So, there will be impact on fees (relating) to general regulatory changes on pricing or other business related issues, but direct impact of this, we believe should not be there because our internal processes required these products to be sold in a manner that was not – that is – was not and is not inconsistent with what is required to be done.