Axis Bank Limited (532215) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Axis Bank's Conference Call to discuss its Q3 and half year ended FY '20 results. Participation in the conference call is by invitation only. Axis Bank reserves all the right to block access to any person to whom an invitation is not sent. Unauthorized dissemination of the contents or the proceedings of the call is strictly prohibited and a prior explicit permission and written approval of Axis Bank is imperative. [Operator Instructions] Please note that this conference is being recorded. On behalf of Axis Bank, I once again welcome all the participants to the conference call. On the call, we have Mr. Amitabh Chaudhry, MD and CEO; Mr. Jairam Sridharan, CFO; Mr. Rajiv Anand, Executive Director, Wholesale Banking; and Mr. Pralay Mondal, Executive Director, Retail Banking. I now hand the conference over to Mr. Amitabh Chaudhry, MD and CEO of Axis Bank. Thank you, and over to you, sir.

Thank you so much. We welcome you all to a discussion on Axis Bank's financial results for the third quarter of financial year 2020. The financial sector remains subject to headwinds from credit quality issues, RBI's easy monetary policy stance over the past 12 months, along with a host of measures announced by the government should partly offset downside risk to growth. The structural changes in the corporate tax rates are likely to help boost capital investment and consumption in the medium term. Further improvement in global trade will likely support the domestic activity and help in sustaining growth in the medium term. This is, in turn, we are hoping likely to alleviate the stress on the financial sector in the medium term. In this context, let me now offer a brief synopsis of Axis Bank's quarter 3 results. Our quarterly operating performance has been steady. Adjusted for a one-off large recovery in quarter 3 financial year '19, the bank's operating profit has grown by 22% year-on-year. The environment remains challenging with banking sector loan and deposit growth at 8% and 10%, respectively. This is data reported in Jan 2020. In this context, our domestic business growth has been healthy. NIMs have improved quarter-on-quarter and the highest we have recorded in the last 10 quarters, while operating expenses have grown as we continue to take opportunity in this environment to make investments in branches and employees. On the asset quality front, slippages remain elevated, as we had anticipated and mentioned previously. After the elevated levels of slippage in the last 3 quarters, the stock of our BB-rated portfolio has declined substantially and is now in line with normalized levels. We have continued to focus on what is in our control, strengthening our balance sheet and being conservative when it comes to rating downgrades, asset classification, provisioning and our accounting policies. The bank now holds INR 2,558 crores of additional provisions for various contingencies, which is not considered in PCR. Over the past decade, we have built an incredible retail lending franchise and continue to steadily grow our market share across most products in our portfolio in this business, both secured and unsecured. As market forces have marginalized some players in this space, while some have chosen to vacate the space, the opportunity in retail remains large. We have continued to invest in widening our reach while upholding the high standards in terms of credit quality and underwriting. Actually, we have continued to strengthen our credit quality standards through this financial year. Risk-adjusted returns from the business are still looking very good. And our belief and desire to grow retail remains very strong. Jairam will comment on the kind of the quality of the portfolio we are seeing on the retail side. On the wholesale side of our business, domestic corporate loans grew 16%, even as we continue to maintain a cautious stance in the SME space. We continue to remain selective and focused on higher-rated plans for business. We have also added senior talent in the wholesale bank with a head of mid-corporate joining us recently. During this 9 months of this fiscal year, we have opened 365 branches, our highest in the last 6 years, to take the bank's overall domestic branch network to 4,415 branches. We are on track to open around 550 branches this fiscal, again the largest number of branches in any fiscal year for Axis Bank. Branch banking remains an integral part of our growth strategy, and we continue to make investments in building a high-quality liability franchise. We have also undertaken efforts to deepen the Axis franchise in rural and semi-urban areas in order to increase our market share in these regions and simultaneously help in further complementing our priority sector lending business. Our digital banking effort, which we started in this financial year, has been progressing well, and we have more than 400 highly skilled employees working in that space now across our digital and fintech platforms. We remain focused on creating fully digital end-to-end journeys for our customers, using advanced analytics and intelligent automation across business operations. These investments, we believe, are starting to show tangible results across the bank. Our subsidiaries continue to deliver strong operational performance. We have made significant senior talent infusions across our subsidiaries in Axis AMC, Finance, Axis Capital and Retail Brokerage businesses with the objective of improving our market share and simultaneously attaining scale in these respective businesses. The AMC business has been doing exceedingly well with 37% growth in AUM, backed by over 50% growth in the SIP book and close to 30% growth in client folios in the last 9 months. In a tough period for the industry, Axis Mutual Fund has stood out with its focus on quality portfolios and sustainable investment performance. Axis Capital continues to maintain leadership position in equity capital markets business. Axis Finance remains one of the top ROE providers in the business. We also continue to gain traction in implementing our One Axis strategy across the group and see tremendous potential to leverage the franchise to gain market share. During the quarter, we also launched Burgundy Private, our most exclusive offering, which caters to the high and ultra-high net worth segment of clients. With the One Axis approach, Burgundy Private will bring together the combined expertise of the Axis Group to cater to the distinct needs of this niche client segment. I'm delighted to share that after more than 10 months of effort, we have launched our new brand philosophy called Open a couple of days back. Multiple customer studies have shown that our customers see us as down to earth, caring and carrying a lot of empathy for our customers, and no one reflects us better than our branch employees. The Open philosophy is meant to reflect this reality. As you are all aware, Jairam is moving on after having served the bank for almost a decade. He has been instrumental in building our retail lending franchise, one of the best in the country, and we wish him well for all the future endeavors. We will make appropriate disclosures about his successor at the right time. There have been a few other role changes in the senior management team as well during the quarter. Amit Talgeri, who has over 24 years experience handling diverse roles, and was earlier the Head of Credit, Retail and Commercial Banking, has now taken over as the Chief Risk Officer of the bank. I'm also pleased to announce that Naveen Tahilyani, who brings with him 22 years of experience in Financial Services in both operating and consulting roles, has recently joined us as the Group Executive and Head of Banking Operations and Transformation. Naveen will lead Operations, Technology, Strategy and Business Analytics verticals for the bank. It has now exactly been 1 year since we laid out our 3-year GPS 22 Strategy for ourselves. Many important initiatives have been taken up in 2019, including strengthening our teams across the group, making necessary changes to the organization structure, carving out a separate vertical for mid-corporate MNCs, launching Burgundy Private, launching One Axis, redoing our values and our new branding theme Open. But most importantly, we have inculcated a culture across the bank to adopt conservatism in all our policies and practices towards creating a sustainable franchise going forward. We have supported these soft changes with investments in hard infra like our accelerated branch openings and investment in technology at a different level. We -- and to enable all these, we have raised a significant amount of capital during the year. Overall, I believe we remain on track on our GPS Strategy. That said, we recognize that we need to improve in a few areas. The bank's slippages numbers continue to remain elevated, and our CASA growth needs to improve. We expect both these trends to improve in the coming quarters. With that, let me hand over to Jairam to take you through the bank's financial performance in detail.

Thank you, Amitabh. Ladies and gentlemen, good evening. It is my pleasure now to take you through the detailed financial performance of the bank during the third quarter of financial year '20. As always, do keep the investor presentation handy as we expect to refer to multiple slides there. Let me start with a summary of our quarter. There are 5 themes that summarize our third quarter performance. Number one, after elevated slippages, BB pool has reached normalized levels. Number two, operating performance continues to move in the right direction. Number three, loan book growth remains healthy while the deposit franchise had a steady quarter. Number four, the retail business momentum remains strong. And number five, we continue our leadership across various digital products. Over the next few minutes, allow me to walk through the details on these themes. Towards the end, we will also share the management's emerging outlook for the rest of the year. Let me start with the first theme, which is asset quality. Please refer to the asset quality section, starting with Slide 50 in the earnings presentation. Gross slippages for the loan book during the quarter were INR 5,124 crores. Slippages from the investment book were INR 1,090 crores. Of the total gross slippages, corporate segment slippages, including loan and investment book, were INR 3,891 crores. 81% of this came from loans and investment exposures to clients who are rated BB & Below at the end of the previous quarter. Slippages from the investment book were predominantly from one holding of bond issued by a significant housing finance lender. During the quarter, INR 410 crores of advances slipped due to technical reasons and were also upgraded during the same quarter. The net slippages were INR 3,792 crores compared to INR 2,770 crores in the second quarter and INR 2,124 crores in the third quarter of FY '19. Of the net slippages, INR 2,850 crores came from corporate, INR 220 crores came from SME and INR 722 crores came from Retail and Agriculture segments. During the quarter, the Reserve Bank of India completed the annual inspection process of the bank. The magnitude of asset quality divergence as of March 31, 2019, was well below disclosure thresholds. Any asset classification impact given full effect in the financials in this quarter. If you turn now to Slide 51 for a look at the bank's BB & Below book, you can see that the bank's BB & Below fund-based book reduced from INR 6,291 crores at the end of the second quarter to INR 5,128 crores at the end of the third. As you can see from the table, there has been an increase in the BB & Below rated NFB pool. During the quarter, we downgraded 1 large account in the telecom sector to BB rating in light of recent developments on ADR deals. Our exposure to this account was largely in the NFB space, which is why you see that increase in that pool. On the loan book, we also downgraded 1 account in the broking space in light of some recent developments. As you can see in the table, the investments portfolio, which was rated BB, declined materially, driven by the slippage of the HFC investments I mentioned earlier. If you flip to the next slide, Slide 52, you will see that BB & Below now forms 2.6% of the bank's corporate loan book, down from a peak level of 12.6%. We are now close within the range in which we saw the BB portfolio during more benign periods in our history. In fact, the last time the BB book was below 3% was back in financial year 2012. Moving beyond corporate lending. Our retail asset quality continues to remain under control. Net NPA ratios in Retail remained around 0.5% and below levels seen at the same time last year. Slippage ratio in Retail was marginally higher in the third quarter on the back of higher slippages in the commercial vehicles portfolio. As we evaluate our portfolio in Retail, we are seeing very steady risk metrics close to long-term loan in home loans, loan against property, personal loans and credit cards. There are 2 businesses in which there are signs of increasing risk, Commercial Vehicles and Micro Finance. The silver lining as far as Micro Finance is concerned is that the problem seems to be limited to 2 states, Assam and some parts of Karnataka, where together we have less than 10% of our Micro Finance book. We ended the third quarter FY '20 with a GNPA ratio of 5% and a net NPA ratio of 2.09%. GNPA at the bank level in rupee terms was INR 30,073 crores at the end of the third quarter, with a net NPA of INR 12,160 crores. Moving on to provisions. I request you to refer to Slide 56. Specific loan loss provisions for the third quarter were INR 2,962 crores compared to INR 3,352 crores in the third quarter last year and INR 2,701 crores in the second quarter this year. Other provisions include INR 535 crores towards the ongoing provisions for land assets, for which the book value hit, you might recall, had already been taken by the bank in the fourth quarter of financial year '19. With the provisions in this quarter, we have now fully undertaken the 100% provisioning of INR 2,209 crores against the land parcel. In effect, we now have 350 acres of nonbanking land assets on the book held at a net value of 0 on the balance sheet. The bank's provision coverage on nonperforming assets stands at 78% compared to 75% at the end of the third quarter and 79% at the end of the second quarter FY '20. The bank currently holds additional provisions of around INR 2,558 crores towards various contingencies. This is over and above the NPA provisioning included in our PCR calculation and the 0.4% standard asset provisioning requirement on regular assets. You will recall that over the last 1 or 2 quarters we have been mentioning and disclosing our SMA-2 levels, which we have started disclosing only 2 quarters ago. SMA-2 at the bank at the end of the third quarter was just under 0.35% of our loan book. During the quarter, we received one significant repayment in cash against security receipts. With that, the outstanding value of security receipts now stands reduced to INR 2,230 crores compared to the INR 2,878 crores at the end of last quarter. If you flip back to Slide 54, you can see the credit cost trajectory of the bank over the last few quarters. To give you a sense of seasonality, we have added a new chart this quarter, which depicts the trend in credit costs for the first 9 months of the fiscal year over the last few fiscal years. You will notice that credit costs for 9 months FY '20 stood at 1.95% compared to 2.17% in 9 months FY '19. As we look forward to Q4, there are 2 important monitorables that would influence credit costs. The first is recoveries, where there is a significant pipeline of large cases that have been in the resolution process for quite a while. The nature of resolution would have a meaningful impact on credit costs. The second monitorable is provision coverage. We continue to evaluate our provision coverage to identify opportunities to strengthen it even further in the spirit of conservatism in provisioning. Any actions we take in that direction would also have a bearing on Q4 credit costs. Over the medium term, we continue to expect our credit costs to be below our long-term average. Let's move now to theme number two, the bank's operating performance. I request you to refer to the section starting Slide 11 in the earnings presentation. Pre-provisioning operating profit for the quarter was INR 5,743 crores. You might recall that in the third quarter last year we had talked about a significant recovery in the iron and steel sector, which contributed roughly INR 800 crores to the operating profit in that quarter. Adjusted for that one-off recovery item, PPOP in Q3 grew 22% year-on-year. Profit after taxes for the third quarter was INR 1,757 crores, up 5% Y-o-Y. Net interest income for the quarter was INR 6,453 crores, a growth of 15% Y-o-Y. I request you to refer to Slide #16. As you can see here, net interest margin for the quarter improved 10 basis points Y-o-Y and stood at 3.57%. This compares to NIM of 3.47% in the third quarter last year and 3.51% in the second quarter of this year. Domestic NIM was at 3.7%. If you refer to the NIM waterfall chart, you will see that 6 basis points of NIM expansion was on account of improvement in average lending spreads; higher slippages, which led to higher interest reversals, compressed NIM by 7 basis points; while higher capitalization levels contributed 7 basis points, thus resulting in an overall NIM expansion of 6 bps Q-o-Q. As we look towards Q4, an important monitorable in this regard is liquidity coverage ratio. During the quarter, we received some regulatory guidance on LCR calculation methodology. You would notice a slight reduction in the overall LCR levels of the bank disclosed as well. Keeping up the right level of LCR buffer, over-regulatory minimums will likely be more expensive in the short term and might put a little bit of pressure on net interest margin. With that said, we continue to expect our NIM for FY '20 to be higher than NIM in FY '19, as we stated last quarter. Noninterest income for the third quarter stood at INR 3,787 crores. This comprises fee income and trading profit. Fee income grew 6% Y-o-Y to INR 2,775 crores. Please refer to Slide 18, where we have introduced a new slide this quarter on fee to assets. You will notice here that over the last few years the fee to assets level of the bank has recalibrated to levels that are approximately 30 basis points lower than what they used to be in years prior. Fee income growth was led by 20% growth in retail fee income. Corporate credits-related fees declined by 25% year-on-year in the third quarter. Trading profit stood at INR 515 crores during the quarter, primarily driven by gains booked in our equity and G-sec portfolios. Miscellaneous income for the third quarter stood at INR 497 crores, largely comprising of INR 383 crores of recovery from written-off accounts. Operating expense growth rate this quarter has increased over the last 2 quarter levels, reflecting our investments in wrapping up our employee strength and our branch network. If you flip back to Slide 14, you will notice that the bank's operating jaws for 9 months FY '20 remained very favorable, with revenue growth at 17% and OpEx growth at 6% Y-o-Y. For the third quarter, OpEx growth stood at 10% Y-o-Y. During the quarter, we made one change in internal process on cost accruals in the spirit of conservative accounting. This change front-loaded approximately INR 120 crores of Opex, which would in normal course have accrued over time. As highlighted during the last quarter, though we continue to remain focused on building cost consciousness across the bank, we are also investing aggressively to widen our branch network and investments in key areas like staff strength and digital. Cost to assets ratio stood at 2.07% as of 9-month FY '20 as compared to 2.13% at the end of FY '19. As we look forward to the fourth quarter, an important determinant of expense growth is likely to be the magnitude of the bank's participation in the PSL certificate market. At the industry level, growth in PSL advances, priority sector lending advances has lagged overall credit growth materially, and hence, garnering adequate PSL credit is likely to keep getting harder and more expensive from an OpEx perspective. We expect the bank's cost-to-assets ratio to consolidate before trending towards our goal of 2% in the medium term. Let me move to the third theme now, it is growth, starting with deposits. Slide #5 in the presentation. Banking system deposit growth continues to hover around 10%. In that macro environment, the deposit performance of the Axis franchise continues to be healthy. On a quarterly average basis, CA, SA and retail term deposits together grew 21% year-on-year. Within this, SA grew 12% and retail term deposits grew by 36% year-on-year on a quarterly average basis. CASA and retail term deposits together form 80% of the total deposits of the bank. If you look at Slide 7, we have introduced a new chart showcasing the medium-term growth performance of our SA franchise. You will see here that on average balance basis SA deposits of the bank have grown at 16% CAGR over the last 5 years. We remain focused on improving our granular retail deposit growth and our teams are working hard towards that goal. We expect SA growth to pick up from current levels in the coming quarters. Let me now discuss loan growth and the trends we are seeing across our key business segments. Domestic loan growth for the quarter was 18% Y-o-Y. International loans de-grew by 7% Y-o-Y. Retail continued to be the key growth driver, growing at 25% year-on-year. SME loans declined by 1% year-on-year. Lower utilization levels by SME clients and our cautious stance on the SME space are reflected in our growth numbers here. We expect SME growth rates to pick up in the next financial year. In the SME segment, term loans grew by 6% while working capital loans de-grew by 2% year-on-year, respectively. 78% of SME loan book is working capital and 86% of non-NPA outstanding is to clients rated SME 3 or better. In the Corporate segment, domestic loan growth stood at 16% and the international book de-grew by 21% year-on-year. If you refer to Slide 40, you will see from the composition of corporate loan book that 40% of corporate loans are short tenure, i.e., less than a year, and these loans have been growing by 29% year-on-year. The longer-duration loans, i.e., greater than 1 year, have declined by 1% year-on-year. Moving on to the fourth theme, the momentum in our Retail business. The bank's retail loan book has been growing at a CAGR of 27% over the last 6 years with significant diversification in portfolio mix. Growth in retail lending during the quarter was well diversified, with home loans, auto loans and personal loans each contributing 15% to 20% to the incremental growth quarter-on-quarter. Agricultural loans, loans against property, loans against deposits and SBB lending contributed 5% to 11% each. The bank's strategy on retail assets continues to be centered on existing customers of the bank. 79% of retail asset originations in the third quarter were from existing customers. 92% of the bank's credit cards and 87% of personal loan originations in the quarter were from existing customers of the bank. Retail fees continue to be the biggest contributor to total fees of the bank with a 67% share. Retail fees grew by 20% year-on-year, with fees from our cards business growing strongly by 26% year-on-year. Because of recent guidelines on merchant discount rate and interchange fees, we estimate an adverse impact of about INR 50 crores on our fee income every quarter. This is in lieu -- in respect to the current level of MDR announcements that have been made. If the announcement widen in scope and include the Visa and Mastercard networks as well, we will see a corresponding increase in that number. As of now, we estimate an impact of about INR 50 crores quarterly. Slide 25 highlights the strong growth of our wealth management business, Burgundy. We manage one of the largest wealth management businesses in the country with assets under management of INR 1.56 trillion as of the end of December 2019. Moving on to the fifth theme, digital and payments, where our strength and leadership position continues. Let us start with Slide 34 on credit cards. The bank had nearly 6.8 million credit cards in force at the end of the third quarter, making us the fourth largest credit card issuer in the country. In the third quarter, over INR 67,000 crores of card spends went through the Axis Bank network across our issuing and acquiring businesses. Slide 36 highlights the rising contribution of digital channels to business growth. 82% of all financial transactions are digital, 59% of all savings accounts opened in Q3 were through Tab banking and 41% of personal loan disbursements in the third quarter were through digital channels. The high levels of digitization and customer transactions, we believe, will help the bank normalize at lower cost-to-asset levels than in the years past. This transition does require significant CapEx, and we remain committed to making them as appropriate. Slide 37 highlights our strong position in the UPI space. During the quarter, we saw 526 million UPI transactions, with total transaction value growing over 2x year-on-year to INR 54,814 crores. We have a registered VPA base of over 75 million customers and a market share of 14% in terms of transaction volumes for the quarter. This huge base of customers and extensive transaction information are expected to form the targetable base for our cross-sell strategies of the future. During the third quarter, Axis Bank customers undertook transactions worth INR 1.57 trillion on the Axis Bank mobile app, a year-on-year growth of 56% in transaction value. The Axis Bank mobile app continue to feature among the highest-ranked banking apps with a user rating of 4.7 on Google Play Store and 4.6 on the Apple Store. Moving on to the bank's capital position, which remains very strong. The bank's CET1 ratio at the end of the third quarter, including profit for 9 months, was 14.33%, with a Tier 1 capital adequacy ratio of 15.54%. Book value per share as on 31st December 2019 increased to INR 306 from INR 298 as on the 30th of September. Over the last 5 years, which have clearly been among the more challenging ones in the history of the bank, book value per share of the bank has still grown at a CAGR of 11%. A quick look on our subsidiaries, where we remain focused on strengthening the team, building scale and gaining market share. Axis Finance, our NBFC business, has a loan book of INR 7,591 crores. The business continues to deliver great returns with an ROE of 19.5% and a net interest margin of 4.8% for 9 months FY '20. The gross NPA ratio of the business stood at 2.21% at the end of the third quarter as we saw 2 accounts in the real estate sector slip into NPA during this quarter. Axis Capital has executed 12 deals in 9 months of the financial year '20 and is in top position in the equity capital market deal rankings chart. Axis AMC, our mutual fund business, continues to perform very well with a 51% Y-o-Y growth in average AUM for Q3 FY '20, led by 42% Y-o-Y growth in the number of client folios. Equity and hybrid businesses comprise 53% of our AUM here. Invoicemart, the bank's digital invoice discounting platform, continues to do well and enjoys the market share of 42% amongst all TReDS platforms. Freecharge, the quarterly active base of Freecharge was approximately 11 million at the end of the third quarter. We continue to gain traction here on our strategy of selling the bank's financial services products on this platform to a new base of young, digitally native clients. The platform is likely to be an increasingly significant part of the bank's digital strategy. Finally, let me quickly reiterate our key elements of outlook for the remainder of the year. We continue to expect our loan growth to be 5% to 7% faster than industry. We reiterate our medium-term range of 3.5% to 3.8% of NIM. We reiterate our FY '20 NIM guidance that FY '20 NIM is likely to be higher than FY '19. Cost-to-asset ratio is likely to be impacted in Q4 by accelerating investments in branch network. Over the medium term, we expect to reach cost to assets of 2%. Q4 credit costs will hinge on 2 key items: recoveries from a pipeline of large cases and on any choices we make towards increasing BCR. With near normalization of BB and SMA-2 level, we remain confident of credit costs moderating to long-term averages over the medium term. With that, I come to the end of my comments. And at this point, we would be glad to take your questions.

[Operator Instructions] We take the first question from the line of Mahrukh Adajania from IDFC Securities.

Question was on the composition of the watchlist -- sorry, of the BB. So from the breakdown that you've given, it appears that media doesn't form part of the BB. Is that the correct understanding?

Yes, it is. We don't have -- I don't know what you're hinting at, Mahrukh. It doesn't, yes.

No. So basically, in the first quarter, when we had now -- we stopped disclosing that, but when you had given 7 [indiscernible], media was probably part of it and then there was a downgrade of media accounts by rating agencies in December. So that...

Yes. So related to the groups that you're speaking about, all the accounts that we believe are stress are indeed part of our BB book. The outstandings have changed a little bit since our disclosure in Q1, but all those accounts are part of BB wherever we believe there are signs of stress.

Okay. And the other question I have is on the Telecom sector. This is more a general question. Sir, if a telecom operator or if a telecom company is in NCLT, what happens to the spectrum guarantees because most banks seem to have given annual spectrum guarantees? Do they get extinguished, or how does it work?

So this is a slightly difficult question in terms of when the account goes into NCLT. And so let's say, for example, there is a guarantee in, let's say, June and a company goes into NCLT in March, what we understand legally that guarantee continues to be active. And so therefore, at that point in time, if the DoT comes in and invokes that guarantee, we will need to pay.

Sir, if it's -- if it goes into NCLT later, then you don't have to pay?

No, then -- see, if the guarantee is invoked before that, then either we extend the guarantee or we invoke, and therefore, we pay off DoT and the company needs to pay us at that point in time. If the company doesn't pay, it's an event of default and therefore, by definition, that would drive the company perhaps to NCLT.

Next question is from the line of Suresh Ganapathy from Macquarie.

One feedback and 2 questions. Amitabh, unfortunately, even under your tenure, some of the numbers are out before the results. And I think this happened even under your predecessor. And we want a stronger compliance with respect to your financial accounting departments because this is really a serious issue, and we don't want SEBI to get into this matter, right? So please do investigate as to what exactly is happening there. The second point is on the issue of 15,000 people leaving and all those stuff. Can you let us know how many people have resigned in the last 9 months? What is your thought process with respect to overhauling the brand system? Where exactly are people leaving? That's the second question. And the third question is, I mean, we still see slippages being outside of the BB & Below book. And even if I were to back calculate, the gross additions to the BB & Below book are about INR 2,000-odd crores. Now my point here is how much of this is attributable to the cyclical factors in the economy in the sense that in case economy continues to be at current level, there is a possibility that we could see elevated slippages, right, for you or these could be some one-off structural issues in older legacy accounts which is creating a problem?

I think I do want to respond to your first statement. We have put in a lot of process in place to ensure that none of the results leak out. I don't know what you're referring to. I will ask some of...

No, it does get leaked out because just to give you information, some of the members were...

Suresh, I did not interrupt you, please don't interrupt me, let me finish. The call is being recorded. Please let me finish. You have spoken your piece, let me finish mine. So we have put in a lot of procedures in place. I will ask some of my team -- one of my team members to reach out to you and understand and compare what exactly supposedly got leaked out. Obviously, we treat this issue extremely seriously. As far as we are concerned, when the results have been discussed, there is a war room, there is a control, all that is happening. So I'm really surprised. Thank you for sharing the feedback. And I will obviously try to find out what exactly happened. But we will obviously take this extremely seriously. You talked about the number of people. Our attrition has -- that article which you're referring to talked about 15,000 people leaving us in a span of a few months. That data is wrong. We have had net hires of 12,800 for the 9 months in comparison to 3,000 in the same time period last year. Our attrition rate has crept up, but our attrition rate is still around 19% for the overall bank, which is a couple of percentage points lower than what we believe our peer banks are operating at. So there is, firstly, no such real sign of concern. But yes, our attrition has crept up. So we do look at that data. We are evaluating where exactly things could be going wrong. The initial part of attrition in the bank came because we had announced a new structure, we had breaken up branch banking into deepening the current relationships and going after new relationships. It took some time to settle down. We have some other specific areas. We lost some people. Most of it is settling down, as we speak. So I don't see this as such a big problem as of maybe it was interpreted based on that particular article. Your last point about the BB Book & Below, let me just ask Jairam to kind of comment on it. But at the very macro level, our BB & Below book continues to represent where you should expect slippages to come from. The only slippage which has happened beyond the BB & Below book is something which has come from a direction from RBI and it has been done across various banks. Otherwise, it would not have happened. You should expect that to continue going forward in the future. Yet in this economy and in this environment, can you have unexpected slippages or unexpected things getting added to BB, yes, it is possible, very difficult to predict. And some of the corporate frauds which have happened, again very difficult to predict as to where a new fraud could come from. We obviously continue to evaluate our book on a consistent basis. And as Jairam has highlighted in his commentary, the number has come down to historical lows. On a very consistent basis, if nothing else, our slippages are coming from the BB book, at least 80% to 85% have tended to come from that book on a very consistent basis. We have disclosed in a very transparent basis our numbers on NFV and the investment book also unlike a lot of others who don't do that. We have also been bringing down the size of our corporate -- our corporate bonds book, which has now come down to INR 24,000 crores. So if you look at the data points across our portfolio, our confidence that going forward in the future, the slippages given our stock should reduce is only increasing, where, obviously, with a disclaimer clause that in this economy and what is going on, very difficult to predict where the new names would come from. Jairam, you want to add?

Yes, the one point that I'd add to that is in terms of gross additions to the BB & Below book, so Suresh, I'm not really sure, kind of the back of the envelope, so let me just tell you very clearly, in the fund-based book, we started with BB book of INR 6,291 crores. If you calculate from that 81% of wholesale slippages, what you will find is that slippage from the BB book was about INR 2,100 crores or thereabout and about INR 900 crores was the net addition to the BB book, which results in a closing book of INR 5,100 crores. So that's the net addition that has happened on the fund-based book. On the nonfund-based book, clearly, we have mentioned that there is 1 significant account in the telecom sector, on which we only had nonfund-based facilities which we downgraded during the course of this quarter, and that is the addition of roughly INR 1,300-odd crores that you're seeing in the numbers. And the investment stuff, of course, comes down because of the slippage of the HFC into NPA. So that's the movement on the BB book on all 3 fund-based, nonfund-based and investments.

We take the next question from the line of Vishal Goyal from UBS Securities.

I think referring to your comment of asset quality, especially in the BB and Below being at 2.6% and we've seen a fair bit of NPL formation in the last 9 months as well. So should we expect the slippages to now normalize from here because I think we are clearly running at like 1% kind of slippage per quarter? And I'm sure the peer banks are doing 50 basis points. So like when should we expect the slippages to normalize?

So Vishal, the way I treat this is the normalization of the BB level certainly -- and the normalization of the SMA-2 level certainly gives us confidence that the mother loan is of a much more manageable size now and back to more sort of historical benign period level. Clearly, unless something deteriorates in the economy, that should reflect in going forward a reversion to more standardized slippage levels, which would be, you're right, roughly 1/2 of where the current slippage levels are or a tad lower than that. So that's where one is headed, but the time frame, very hard to say. And your guess on this is probably just as strong, and we would continue to watch the economic environment to see if there is any further deterioration. But yes, we get confidence from the fact that our -- the source material has reverted back to normalized levels. So let's see how things pan out over the next quarter or 2 to -- as we get a sense of how long it takes for slippage ratios to normalize.

Okay. And the other question is on the expenses. I think you mentioned there is INR 120 crores of expenses which you kind of front-loaded. So should we not expect that in the next quarter, that INR 120 crores expenses will be lesser by INR 120 crores next quarter?

No, that INR 120 crores would have actually gotten spread over the next 5 to 6 quarters, which is what has gotten front-loaded here.

Yes, that's what I'm saying. You already took INR 120 crores, right?

Yes.

So is that a recurring expense or onetime?

No, no, no. That one-timer, you shouldn't expect to -- you should not expect to recur, no.

Yes. So to that extent, we should see operating expense lesser by INR 120 crores and whatever organic growth you are saying...

Exactly, exactly.

We take the next question from the line of Adarsh from Nomura.

Jairam, a question or 2 questions. So the first one is on some of the one-off costs that you mentioned, right, which is likely to come through. So first one was the LCR impact on NIMs, which seems to be a change of calculations to kind of recurring liquidity that you will need to take in the balance sheet. Similarly, PSL, you did mention that you'll probably have drag from PSL. And then maybe front-ended cost is okay because that's more a one-off now. So can you just quantify how material this would be in terms of NIMs and the OpEx?

Yes. So we're not putting specific numbers as a guidance on this, Adarsh. But what I'll say is, that there is a -- given some of the trajectory that we are seeing with respect to yields, et cetera -- let me step back. If you look at how our underlying yields and spreads have done, you see that spreads have actually improved quite materially during the course of this quarter. Had it not been for the higher interest reversals, our net interest margin would have increased a whole lot more. So looking at those higher spreads, you might anticipate a much stronger continued improvement of NIM with some of the things like changes in LCR, et cetera, certainly put a break on. And that's why we've -- when we updated our NIM guidance last quarter to say it would be higher than last year, we are not re-updating it and we are staying with that same guidance. We are saying that NIM will be higher than last year and not going anymore aggressive on that NIM is where I'll leave it. As far as PSL certificates, et cetera, are concerned, and the fact that PSL is getting more expensive, that is -- that's certainly an important component of where costs could end up going. In the first 9 months of this financial year, you've seen costs of the bank have actually not grown that much at all, 9 months to 9 months. It has been a 6% growth. So it's actually been very, very modest growth. But you might see some catch-up happening in -- as we get into the next quarter. We still expect from a full year perspective that the cost to assets will be better than last year. We still expect that the overall cost growth and -- cost growth would be under where we expect the loan growth to look like. So you should continue to expect the trajectory on OpEx to assets towards the 2% that we spoke about, but there is a temporary sort of 1 quarter thing that you might see if things pan out the way we -- if some of the negatives that we have pointed out do play out. So we are working on it. We will see how that is and we are not quantifying a specific number at this point.

Adarsh, you also have to understand that whatever we do on the PSL side, on the certificate side, ultimately, in the long term, there will be an advantage because we'll have to take slightly lesser RRDA bonds, hopefully, and that would reflect positively on our NIM. So that's very difficult to quantify. We just -- I think we just thought it was important that we highlight this point so that all of you are aware of it. But at the bank level, we are monitoring that, the whole strategy around it very, very closely.

And Amitabh, the second question is to you. When we look at the corporate bank, right, the fee has been contracting for like 5 years now and still contracted this quarter. And the -- so you talk about maybe the competitive intensity there, reduced growth. Fees have gone down. You're still having like 4% slippage, which we normalize. But I'm just trying to think about when you take a 2-year view from where we are today, how good or how bad is the profitability of even the corporate book and even on a normalized level, right, taking -- considering that the corporate book still falls. There is very little growth. And where do you normalize on slippages or credit cost for the corporate bank?

So Adarsh, a couple of things. One is that if you look at Slide 18, we have tried to bring out the fact that our fees in -- to average assets was at a certain level and now it is normalizing around 1.35% to average assets. That's point number one. Point number two, please understand and appreciate that as we are pivoting the wholesale bank to higher end credit, you can either get the money in NIMs or you can get the money in a combination of NIM and fees. And we obviously are trying to go in a certain direction. Also, if you look at the proportion of 1-year loans and how it has moved in this year in comparison to last year, you will see a pretty substantial change. And you don't earn fees for -- while we're showing good growth there, you don't earn substantial fees for doing shorter tenure loans. Now that's one part of the story. Second is that as we are trying to push Axis Bank, it will be doing more with its wholesale banking clients, over a period of time, we expect the fee income to start picking up. I mean we have started that journey. We are going and having conversations with our clients that actually should get its rightful share in the fee side of the relationship. We do expect that it will improve. And so over a period of time, you should see some upside coming from there. We are, again, not quantifying it. But if you look at combination of cash management, FX, LCs, trade finance and stuff like that, you should see an improvement. Other thing which has kind of hurt us a little bit is that we are a very, very large player on the syndication and the debt capital market side. We remain a very large player. But we are very focused on ensuring that we syndicated out very, very quickly. Now there are 2 strategies there. Earlier we were sitting on it, we could earn more. Now we're getting it out much quickly to ensure that our overall risk profile is under control. So you do that, that also impacts your fee. So there's a combination of factors at play. On a trend line basis, we are doing all the right things. And as we keep doing them, hopefully, the fees will become more granular and will start growing. Rajiv, do you want to add anything to it? Rajiv says he doesn't want to add anything.

Next question is from the line of M.B. Mahesh from Kotak Securities.

Just a few questions. One, again, to Rajiv, on this question which was asked earlier with respect to the LCs. Just wanted to understand in the past when you [indiscernible] and Videocon, can you just give us some clarity as to what you have seen out there as to when and how does the LC gets booked in such instances where a company chooses to not continue its operations?

So this is guarantees...

This is guarantees. When will the guarantees get invoked?

So sort of, we've got another sort of example as well where a company like RCom is in NCLT, there are some guarantees while the guarantees have expired. In a sense, they continue to be active. So what exactly is the question that you're asking?

No, the question is like how long is it applicated alive the contract?

See, first and foremost, as there are some guarantees which are -- which have an expiry date. And as per the new act, the guarantee is valid for a 1-year period from the expiry date. There are some guarantees which are auto renewal, but in most -- most guarantees have a clause there where the bank has the right not to renew at any point in time if there is deterioration in the asset, et cetera, et cetera. But in general, the guarantees typically are valid for a period of 1 year from the date of expiry.

And irrespective whether the company is there or not, the government can choose it even if the due date falls after the company is not in operations?

Yes. So I mean you're now talking about sort of litigation, et cetera. But as far as the guarantee is concerned, it's an unconditional and irrevocable guarantee. And so therefore, just because the company is in NCLT does not mean that the guarantee is invalid.

Perfect. Second, on the same question, can you give us some color as to what you have in the BB & Below today in terms of sectors?

Yes. In BB & Below, the non-funded side, I mentioned earlier, is predominantly the Telecom one. The funded side, the big 3 sectors are Infra, Power and Hotels, which together are about 60%.

Perfect. And my last question, again, to Jairam for you. You initially mentioned that there was a change on LCR from -- at least advisory came from RBI. Can you just give us some color as to whether...

Yes, yes, yes. It was a general advisory which is applicable to everybody. This is about certain categories of deposits and what the runoff rate assumption on those categories should be and that's what updated, which actually made some of the lower runoff categories a bit smaller in size, which is the impact that you see in a slight reduction. And you saw that our LCR number for the quarter fell from 119 to 113 or something of that order and -- which means that over the last few days of the quarter, there was a meaningful drop in LCR because this rule got updated in our system towards the last few days. So we -- all of us, of course, want to steer well clear of the 100% line. And so we have a little bit of a buffer that we try to maintain. And that buffer then is, needless to say, sort of negative carry or 0 carry. So there is an expense associated and NIM cost associated with maintaining that buffer, which increases if low runoff categories on the deposit side reduced, which is what has happened.

And you've been able to quantify that impact on margin?

We have, but we have not disclosed it as -- the overall margin disclosure for us remains the same, that full year margins will remain higher compared to last year. Medium-term margin guidance 3.50% to 3.85%.

So just to clarify, Adarsh -- sorry, we are looking at -- sorry, Mahesh, sorry we are looking at, obviously, that we take short-term measures to ensure that our LCR is at a certain level, which we have done. But we are also working towards some of the medium-term and long-term measures. So very -- in a way, it's sometimes very difficult to quantify also what the impact would be because -- it depends on how well some of these measures play out. So rather than giving guidance, we have just kept it at a macro level. But we are letting you know something like this has happened, yes.

No, understandable. I just wanted to just check what was the nature of the change.

Next question is from the line of Kunal Shah from Edelweiss.

Yes. If I heard you correctly, you highlighted that in Q4 the credit cost would also be dependent in terms of the stance on the provisioning coverage or maybe you look to inch up the provisioning coverage further?

Yes.

So currently, we are almost at 78%, 79% and excluding the technical write-off, we are at 60-odd percent. You clearly said like there are significant recoveries which are there in the pipeline which would further provide comfort and there is a contingency provisioning of INR 2,600 crores. So maybe what's the reason for to further inch it up from the current level where we have contingency as well as we are seeing the recoveries in the pipeline as well? We are at 78%.

So Kunal, see, if you hold the rest of the audience on this call, I'm sure you will hear a lot of commentary that the bank does need to increase the provision coverage in some pockets. You're right. It's not like provision coverage in the bank is weak, it is not. At 78%, we feel fairly good about where things are. However, if adequate -- or if a certain amount of recoveries come in, in the fourth quarter, it gives us an opportunity to use the proceeds to actually enhance the provision cover or some of what is left. I will point out that in sort of "the best of time" Axis' provision coverage used to be in the low 80s, 80% to 82%. We are almost there now, but not quite. So there is a little bit of room for us to improve ourselves on that ratio. We will see depending on how the recovery environment goes in the fourth quarter and how some of the developments in NCLT, et cetera, progress.

Yes. And on the Power sector side, we have seen resolutions of late. So in 1 or 2 accounts -- 1 account, we have been a lead banker with a significant exposure. So maybe particularly on the Power side, are we seeing the overall resolution picking up the pace and we expect that to continue for a while?

We saw some in the second quarter. You might recall that we had 2 significant recoveries and upgrades in the second quarter from the Power sector. This quarter, not much story to tell. There is 1 significant account in the next quarter which we are watching closely. Let's see how that plays out. But as we all know, it has been a perilous thought to try and predict NPLT time line. So we will not attempt that.

Okay. And thirdly, in terms of the SME, so currently also, the run rate on the SM in terms of the slippage has been quite controlled, but we are seeing maybe slightly conservative stance. So what are we looking? Maybe is there the SME dispensation benefit, which is there currently sitting, which will accrue in the next year which we would be worried about? And how are we looking at the behavior of the entire SME space?

Right. See the dispensation benefit does not accrue to us in the SME business because what we call SME tends to be slightly larger businesses than the ones that you're referring to. Those will actually show somewhat in our retail business under the category that we call SBB. In SME, in general, we are seeing kind of -- the weak economic activity has meant that when somebody upstream in the value chain is actually facing some trouble or lack of sales, et cetera, a lot of people down the chain are facing their own issues. The most stark example being, let's say, the auto value chain and dealerships, et cetera who are facing a brunt of some of the auto sales issues that we see in the market. So we have been, as you've rightly pointed out, very cautious with respect to growing this business over the last 5 quarters or so. This quarter, we've actually de-grew Y-o-Y in size. So far, we haven't seen a significant increase in slippage ratios. Net slippage ratio right now continues to be at levels that we have seen in the last couple of years. But we are watching that space closely and we will let you know if there's anything else. Rajiv, you want to add something?

So I can -- I agree with what Jairam said. I mean, I think, the underlying economy is weak and the relatively smaller balance sheets continue to struggle in this environment. However, we've been fairly proactive within this portfolio. And so therefore, we have not seen any large slippages at this point in time. I must mention that we do -- we have cut lines, particularly in the supply chain finance, which is part of our SME business. From a growth perspective, we are also seeing that working capital utilizations are actually significantly lower as compared to what we saw last year or even the year before. I think, clearly, that is a manifestation of the fact that the underlying business momentum is relatively low. And some of these factors just go out to say that it makes sense for us to be a bit cautious on the SME sector for a bit longer.

Okay. And just lastly to Amitabh, maybe when he joined in, I think most of the metrics, if you look at it a bit in terms of OpEx to assets or credit cost, it's still hovering high. So is the overall ROE target getting pushed back, say, much further than when we -- what we envisaged earlier?

No, we are keeping -- sticking to the targets which we laid out in GPS 22. I think what has happened is that we have seen because of the frauds and the economic cycle, some of the assets slipping into NPL which was not expected. I think once the economy recovers, I do believe that at least some of these assets will come back. But even if you look at on a year-to-year basis, I expect in the next 2 years we should be getting to normalized levels we've been talking to the market about. I, necessarily, do not agree that our operating metrics have not improved. I do believe that a number of our operating metrics are moving in the right direction. Our loan growth is quite good. Our -- if you look at our capital ratio, if you look at our NIM, if you look at our OpEx to assets, I mean, there are a lot of things which are moving -- if you look at, for example, the SMA-2, it has come down to levels which a lot of the best quality peer banks are seeing. So if you look at number of operating metrics, I think there's real calibrated and consistent improvement across the last 4 quarters because of all the work which bank has been doing in the last few years and what we've been trying to do in the last 12 months also. And by the way, we have created a pretty large cushion also in this year in terms of our provisioning and what we have in our kitty in terms of extra provisions, which we did not have earlier. We have written off the land which was sitting in our books for a long period of time. And now we have more than 350 acres of land at 0 cost. So there are a lot of things which have moved in the right direction. But yes, I mean, there are areas which we ourselves pointed out which we need to work on and we'll continue to work on them as we go forward.

[Operator Instructions] Next question is from the line of Nilanjan Karfa from Jefferies.

I wanted to delve on the LCR question. If you could clarify which segment has been sort of -- the weightage has been downgraded because it has not come out in the public domain. So a little more clarity on that will help. That's the first one. Second is on PSL. Now PSL target is something based on last year's balance sheet, right? So why did we leave it to the fourth quarter? Was it a strategic mistake to that extent? And a data question, if you can -- in the last 3 quarters, what was the gross slippage into the below investment grade book, if you can tell us -- tell me that, yes?

All right. So your first question, Nilanjan, on LCR. The LCR effect is about taking a category which was at a low runoff rate and actually defining the scope of that category a little bit more narrowly than was originally defined. This is -- I don't think RBI is going to release a circular on this. This is a privileged communication that regulator has had with banks, I don't think I'm in a position to actually talk about the details of that. So let's just sort of leave it at that. I will reiterate that while we wanted to bring out that there is something that has happened here, I don't want to overblow the importance of this one item. Our NIM guidance has not changed from last quarter. We continue to feel confident about where NIM is headed. So let's not sort of overanalyze that LCR point. On PSL, yes, you're right that PSL applies on last year's ANBC. But remember that PSL is now done on a quarterly basis. Unlike the past where PSL was an annual affair, now PSL requirements change every quarter based on what the 4 quarters ago ANBC was. So year-end is actually no different than any other quarter end. So at any point of time, when you start -- when you have the realization that, hey, you know what, the asset growth of a year ago has gotten to a point where the delta from a PSL perspective needs to be caught up through commercial measures, you will need to go ahead and take those actions. I will also reiterate the point that Amitabh made in a prior response, which is that PSL is expensive, either way you do it. Either you do the PSL business by booking higher risk -- some of higher risk assets or you go ahead and purchase PSL from the market, taking some of the similar risks or kind of offering much better yields to the issuer or you take it as OpEx by buying PSL certificate. There is a cost associated with PSL. Sometimes it comes with OpEx, sometimes it comes with margin compression. We are trying to optimize in our minds what is the best way to do it. So there was a third question that you had as well on...

The data of gross additions to the below investment book...

I will say for this quarter that the BB book, the sort of net addition was about INR 900 crores. The gross was, give or take, about INR 1,200-ish crores, somewhere in that range, and the net was sort of the balance reduction or upgrades out of that.

Next question is from the line of Ravi Singh from HSBC.

Yes, 2 questions. One is on domestic loan growth, which have been quite healthy for 4 quarters. If you could highlight a few things we have done, which is driving this growth and...

Sir, this is the operator. I'm so sorry to interrupt, sir. Requesting you to please use the handset mode while speaking as we're unable to hear you.

Is it better now?

Yes.

Yes. My first question is on domestic loan growth. It's been quite healthy for 4 quarters. So if you could highlight a few key things we have done which is driving this growth and your view on the sustainability of domestic corporate loan growth? And secondly is on the auto loans growth, again very strong in contrast with underlying industry trends and some of the other peers numbers. So if you could comment on these 2 things, please.

Domestic loan growth in the corporate book, we've been identifying certain segments in which we have been not as present in the past and we have started some lines of business there. We've been talking a little bit about mid-corporate. We've been talking about this now for 3 quarters that mid-corporate is a segment where we've had no presence at all and we want to take some exposure there. And you see some opportunities in that space. We also continue to see market share gain opportunities by consolidation that is happening and refinance opportunities that are turning up. We are still not seeing any large sort of CapEx or new credit that is being written. So to a large extent, we are still in the refinance domain but with much better-rated corporate and -- as you can see in our rating distribution. One other thing that has also happened in corporate is that the granularity is actually getting better. A point which I didn't mention in the opening remarks, but some of you might have seen in the earnings presentation, is that the top 20 single borrower as a percentage of Tier 1 capital continues to fall and it has now fallen to 86%, the lowest it has been pretty much since we started tracking this metric about 10 years ago. So clearly, we're getting much more granular within the corporate business as well. So there are no large sort of big wins or sort of big 6s that Rajiv and team have hit that we want to talk about here because there's a lot of granular work that has gone on. Oh, there was a question that you had on auto and sort of what's going on in the auto business. Firstly, I will reiterate something that I said before, in terms of where is growth coming from. In Retail, it's coming all across the board. We have good growth in auto, we have good growth in home loans, we have good growth in small business lending and sort of pretty much across the board. In auto loans, we are increasing our share of used cars. Used cars are now up to 15%. We started a few years ago from very low base here. So that is something that is helping us. So even as the new car market is going through some trouble, used car market is doing quite well. And the other thing that I'll point out is, given the size of the book that we have in auto, the disbursement growth versus portfolio growth is -- it can sometimes be misleading. In auto, for example, our portfolio growth is in the mid-30% kind of range, but our disbursement growth is about 20%. So just over 20% is what our disbursement growth is. But because we don't have a large book, which is -- which we need to continue -- which has repayments coming in and which -- so we don't need to run as hard to stay in the same place. So disbursement growth-wise, we have had solid growth, but nothing as large as what our portfolio growth has been.

Okay. And this overseas loans, will it remain flat at current levels or do you expect that to -- see that decline?

In absolute terms, yes, I think we have found the bottom here.

We take the last question from the line of Sameer Bhise from JM Financial.

Just 1 quick question. You said the security receipt book has declined due to the cash impairment. So there are no P&L implications for this, right? It's just redemption of SRs.

Yes, correct.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Jairam Sridharan for his closing comments. Over to you, sir.

Thank you, everybody, for taking interest in the third quarter earnings of Axis Bank. I wish you all a very good evening.

Thank you. Ladies and gentlemen, on behalf of Axis Bank, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.