City Union Bank Limited (CUB) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to City Union Bank Q2 FY '22 Results Conference Call Hosted by AMBIT Capital. [Operator Instructions] I now hand the conference over to Mr. Ajit Kumar from AMBIT Capital. Thank you. And over to you, sir.

Good evening, everyone. Welcome to 2Q FY '22 earnings call of City Union Bank. On this call, we have Dr. N. Kamakodi, MD and CEO of the Bank; and Mr. V. Ramesh, the CFO. Thank you, sir, for the opportunity of hosting you on this call. I'll now request Dr. N. Kamakodi sir to take us through the opening remarks, and then we will open the floor for Q&A. Over to you, sir.

Good evening, everyone. Hearty welcome to all of you for this con call to discuss the reviewed financial results for second quarter and the half year ended the 30 September, 2021. Belated Diwali wishes to you all and your family members. Hope all of you and your family members are safe following the COVID safety norms. As you may know, Bank celebrated its 118th Foundation Day on 31 October, 2021. The board approved the unaudited results to today, and hope you all have the copies of the results and the presentation. We shared with you all the following expectations for the current financial year '21-22. During our first quarter 2021 con call on 28 May, 2021 and first quarter financial year '22 con call 6 August, 2021. We expected the credit growth to be at mid-to-high single-digits if the economic environment and the COVID second wave behaves like last year for the year as a whole. Overall, slippages to closing advances to be slightly better than that of financial year 2021 for financial year '21-22. Slippages may be more front-loaded with increased slippages in Q1 and Q2 for financial year '22. Recoveries to be impacted because of the lockdown and non-functioning of government registration departments. And the courts are more sympathetic towards the defaulters than the banks. The gross and net NPA for the financial year 2022 to be slightly lower than that of financial year 2021 with a few quarterly spikes. ROA to reach the level of 1.3 percentage at pre-COVID level towards the second half of the next financial year '22-23. And the impact of the second wave on the growth and the slippages may not be as bad as we cuss to it for the financial year 2021. These are all the points which we discussed and shared with you all during the beginning of the current year. And despite the COVID second wave, performance during the period is in tune with the expectations whatever we shared during the earlier 2 conference call. The highlights of financial performance for Q2 financial year '22 and the first half of financial year '22 are as follows. Deposits recorded a growth of 12 percentage to INR 46,316 crores from INR 41,421 crores. Credit grew by 7% to INR 38,012 crores from INR 45,431 crores. Thus, business grew by 10% and presently stands at INR 84,328 crores. CASA recorded a growth of 26% to INR 13,411 crores from INR 10,646 crores, and percentage CASA to total deposits improved to 29% in Q2 financial year '22 against 26% in Q2 financial year '21. The growth in operating profit to INR 405 crores and INR 788 crores for Q2 financial year '22 and H1 financial year '22 respectively, registering a growth of 5% and 6% respectively to corresponding earlier periods. Net profit improved by 15% and 14% in Q2 financial year '22 and the first half financial year '22, and in unrelieved terms, both stands at INR 182 crores and INR 355 crores respectively as against INR 158 crores and INR 312 crores for Q1 financial year '21 and the first half financial year '21 respectively. ROA for the Q2 financial year '22 stands at 1.32% compared to 1.23% in Q2 financial year '21. Net interest income marginally improved from INR 445 crores in Q2 financial year '21 to INR 478 crores in Q2 financial year '22. And for 6 months period from INR 912 crores in H1 financial year '21 to INR 926 crores in H1 financial year '22. The figures are not exactly comparable because we did not have a recognition of NPA in the corresponding period in the last year because of standstill clause, but roughly we can compare. The net interest margin for the Q2 financial year '22 stands at 4.03% compared to -- and 3.95% for the -- compared to H2 financial year '22. The progress made so far is slightly even better than whatever we had said earlier or whatever we had discussed with you earlier. The credit growth was at 7% year-on-year basis and it might end up at a high-single-digit towards the year end as per the expectation we shared with you all during our earlier con calls. The number could slightly be moderated in Q3, but will increase in Q4 because of the base effect. If things establish, we will press growth pedal towards the end of the financial year '21-22. And 75% of the growth so far has come from maybe gold loan to a greater extent particularly in Q2 financial year '22. I was getting a few calls from investors asking questions about the loan book, which got ECLGS restructuring or both after the first call and also earlier. The concern expressed is that the percentages are higher than across many other banks. But we feel quite comfortable about the performance of this portfolio, and I will explain you what we think. Remember those accounts which are in stressed category on 29 February, 2020 were not eligible for ECLGS. MSME accounts with the SMA-2 status on 29 February, 2020. And other accounts even with the SMA-1 status on 29 February, 2020 were also not eligible for ECLGS. In other words, ECLGS are given only to those accounts which had satisfactory cash flow and proper track record during pre-COVID days and had temporary cash flow mismatches because of the COVID lockdowns. We have included a table in our investor presentation slides for September 2020 with respect to the performance of accounts which availed ECLGS and their movement over a period of time which clearly shows the reduction in ECLGS amount as well as the overall exposures of those exposures from the date of availment of ECLGS facility. In June 2020, there were about 3,480 borrowers who have availed the ECLGS amounting to INR 675 crores, and the total funded exposure was INR 4,457 crores, which got reduced to INR 4,367 crores in September 2021. If you keep the respective slides in your hand and compare this number, probably you will be getting a better comfort on what I am talking now. Likewise, in September '20 quarter, there were about 3,920 borrowers who had availed ECLGS, amounting to INR 838 crores and their funded exposure was INR 5,770 crores, which got reduced to INR 5,263 crores in September 2021. Remember, these are all the 2 numbers -- sets of numbers, which I spoke are not cumulative, I'm only talking about those accounts which received ECLGS in their respective quarters and how their balance moved in the subsequent quarters and what is their total balance at the second or '21 quarter. In the third quarter, that is December 2020, there were about 979 borrowers who have availed the ECLGS amounting to INR 299 crores, and their funded exposure was INR 2,168 crores, which got reduced to INR 2,035 crores in September 2021. In fourth quarter, there were about 244 borrowers who had availed ECLGS amounting to INR 192 crores, and the total funded exposure was INR 1,583 crores in the quarter of availment, which got reduced to INR 1,545 crores in the September 2021. In the current financial year, first quarter, there were about 43 borrowers who had availed ECLGS amounting to about INR 17 crores, and their total funded exposure was INR 144 crores, which got reduced to INR 142 crores in September '21. This clearly shows there is a reduction of exposure across all quarters in those accounts which got ECLGS borrowing -- who availed ECLGS. But remember, all these accounts which got ECLGS, they had 2 years of moratorium period, and they have to make repayment of this ECLGS amount in 3 years after the moratorium period. But what you can clearly see is that the exposure of those accounts -- total exposure of those accounts which received ECLGS is coming down quarter-by-quarter because the things are getting normalized, which once again proves that these accounts which availed are basically had, let's say, proper cash flow and proper track record during pre-COVID period. They availed ECLGS for your temporary cash flow mismatches, and our cash flows are improving and they are making and the overall exposure is getting reduced subsequently. During Q2, we have sanctioned ECLGS of INR 56 crores to 90 borrowing, having an exposure of INR 556 crores, taking the total exposure of all accounts which availed ECLGS currently to INR 13,889 crores who have received ECLGS to the tune of about INR 1,938 crores through ECLGS 1, 2, 3, et cetera. And remember, the ECLGS and all availed in multiple stages of 1, 2, 3 and all, that's why the amount of ECLGS whatever that was given, it slightly increased compare to our earlier expectations because the eligibility increased as we, let's say, moved subsequent to the COVID lockdown. Of course, borrowers with an exposure of about INR 588 crores has their account restructured and availed the ECLGS of about INR 83 crores. Of this total funded exposure of INR 13,889 crores, only 2% or INR 249 crores alone is in SMA-2 and about INR 198 crores has already turned into NPA, not very much different from the other regular exposures. The borrowers with an exposure of INR 11,533 crores – INR 11,553 crores who have availed ECLGS were not restructured, and they continue to pay their regular advances. So when I say the SMA-1 number and the SMA-2 number, remember, all these accounts, let's say, which are, let's say, not availed any restructuring or whatever it is, all accounts are making the repayments of their other term loans and the interest of their other cash credit limits regularly. And they will find the place in SMA-1 and SMA-2 if they are not able to repay their other, let's say, repayment obligations. So the overall SMA-2 number and the NPA number, whatever I have expressed, that is SMA-2 number of only 2% in this portfolio, almost similar to the overall portfolio of percentage, which gives the enough comfort to the cash flows of these accounts have by and large stabilized. And we don't see much problem going forward if things don't deteriorate from whatever we are seeing at this point of time, which we are fairly confident. And enough discussions have happened about the restructured assets, and I have spoken about our earlier restructuring exposure experience of 2020 in our December 2020 quarter con call. I'll discuss with you that about 20% of the restructured book, which was about 10% of the total advances in 2008, slipped into NPA in the subsequent to 2, 3 quarters. And we expect a similar behavior from the restructured portfolio based on the current trend. So once again, our expectation is that out of the restructured portfolio, our estimate and our confidence, I mean, tells that there could be about, say, 20%, 25% of them becoming bad over a period of next 2, 3 years. And you may ask, why then we, let's say restructured remaining 25%? The point is we don't know which 25% will become bad, and we have to see how things will go forward. So we are confident that based on the data available at this point of now -- at this point of time, 20% to 25% of the restructures at the credit portfolio may slip, but that's also over a period of next 2, 3 years. And we are seeing reasonable cash flow and the performance things and all coming back to the normalcy to a greater extent at this point of time. And in the June quarter earnings call, we clearly discussed that there could be another INR 400 crores to INR 500 crores of restructuring because of the, let's say, wherein borrower is likely to utilize COVID-2 facilities after the COVID second wave based on 5 May, 2021 RBI circular, which extended the restructuring deadline up to September 2021. And also, raised the threshold limit of restructuring to INR 50 crores from INR 25 crores. In Q2 financial year '22, we have restructured an exposure of INR 322 crores against the expectation of about INR 400 crores to INR 500 crores. And the total restructured quantum currently stands at about INR 2,448 crores, comprising of MSME portion of about INR 1,540 crores and COVID-19 resolution framework of about INR 686 crores, which works out about 5.9% of the loan book. By and large, the restructuring saga is over and RBI deadline is also over. Including all these ECLGS, restructured and all other accounts put together, overall SMA-2 on 30 September, 2021 is INR 1,048 crores, which is only 2.75% of the overall advances compared to about INR 1,216 crores in Q1 financial year '22, that is 3.35% of the advances. As we discussed in the earlier con call, our pre-COVID SMA-2 numbers used to be in the range of 5% to 7%. And things on asset quality, which is getting reflected from the SMA-2 is very much improving, that is what the data shows at this point of time. The RBI guidelines of daily marking of NPA started on 1 June, 2021, and we are clearly able to see the SMA-1 numbers moderating. Earlier, the identification of NPA used to happen on a daily basis, but the marking and freezing of account used to happen on the quarterly basis. But since the NPA marking also happened, the accounts are getting frozen for operations by the NPA borrowers. And hence, the borrowers are more conscious about keeping their assets very much within the permissible, let's say norms. NPA slippage during Q2 financial year '22 is about INR 298 crores compared to INR 482 crores in financial year '22, a reduction of 38% or more than INR 180 crores sequentially, showing a declining trend. We believe that quarterly reduction will saw decreasing trend henceforth and reaching a pre-COVID level, maybe by Q4 or Q1 onwards, which will be inclusive of all slippages from the regular accounts, restructured accounts, non-restructured accounts, ECLGS portfolio. Everything put together, this is what we see going forward. And finally, probably, we see some light at the end of the tunnel. And whatever asset quality pressures are showing, much of release compared to whatever we saw in the earlier quarter. Hopefully, that situation stabilizes and improves going forward. In the earlier quarters, we discussed about the delay in legal recovery processes and how defaulters get the sympathy from the system. The arrest of former SBI Chairman will give you some idea on what I mean. Now the criminal cases are not uncommon on bankers when the recovery efforts are started. Even I have a case against me filed by a defaulter, and I had to approach Madras High Court for anticipatory bail, but things are showing definitely improvement. In first half 2022, we recorded a total recovery of INR 290 crores, comprising of about INR 210 crores from the live accounts and about INR 80 crores from technically written-off accounts compared to INR 108 crores comprising of INR 72 crores of live account and INR 36 crores from the technical written-off accounts in total H1 financial year '21. In Q2 financial year '22, we recorded a total recovery of INR 189 crores, comprising of INR 128 crores from live accounts and INR 61 crores from the technically written-off accounts compared to 84 accounts comprising of INR 53 crores of live accounts and INR 31 crores of technical written-off account in total in Q2 financial year '21. The current quarter recovery is the highest in the recent years, but still has to improve from here. The recovery will determine the ROA over the next couple of years. So we are taking all our steps under our command to improve this going forward. The numbers we see in Q2 and H1 financial year '22 and what we expect for Q3 and Q4 under current circumstances are very much in line or even slightly better than our earlier expectations what we shared with you all during the earlier con call in almost all the parameters of importance. During Q2 financial year '22, we had a treasury profit of only INR 11 crore and the H1 financial year '22, the same was at INR 61 crores against INR 52 crores treasury profit in Q2 financial year '21 and INR 130 crores in H1 financial year '21. The same was asked for our expectation because of the non-availability of favorable yield movement. For Q3 financial year '22 compared to last year, there will be a reduction in the treasury profit, but overall, profitability should hold up to a greater extent because of reduction in the provisions due to improved NPA recovery. The cost to income ratio for Q2 financial year '22 and H1 financial year '21 -- '22 was at 40.51% and 40.49% against 40.31% and 40.36% in Q2 financial year '21 and H1 financial year '21. The improvement in other income, including the collection from the technically written-off accounts resulted in maintaining the ratio at about 41% against our general guidance of 42% to 45%. The new accounting guideline we followed, the revised cost to income ratio will be at 43%, which will be coming into effect from the financial year end. But here, the major one is that the income from the recovery of technically written-off assets will go to the provisions, but not in the income line. And again, there will be a reduction in the cost to income ratio, but it will have a neutral effect on the overall ROA. It doesn't really matter in the overall profit after-tax. And thus, the operating profit for the Q3 financial year '22 and H1 financial year '22 was at INR 405 crores and INR 788 crores as compared to INR 385 crores and INR 741 crores corresponding period last year. The total provisions made during Q2 financial year '22 and H1 financial year '22 was INR 223 crores and INR 433 crores against INR 227 crores and INR 429 crores in Q2 financial year '21 and H1 financial year '21 respectively. In the same period last year, the provisions were not made H1 -- the NPA specific, but they are all taken as overall COVID provisions, and that's why we talked about the total provisions. Increase in provision on NPA compared to last year was on account of the availability of standstill clause during the Q2 financial year '21. The net profit for the Q2 financial year '22 and H1 financial year '22 was INR 182 crores and INR 355 crores as compared to INR 158 crores and INR 312 crores corresponding period last year. We touched ROA of 1.3% for H1 financial year '22 and increased step-by-step. For Q2, it is even slightly higher. If everything works out, we could see ROA of 1.5%, maybe even 1 or 2 quarters earlier than expected. So let us pray almighty for -- hoping things will get better as we move forward. The net interest margin for Q2 improved to 4.03% from 3.86% for the -- Q1 financial year '21 -- Q1 financial year '22. The reason for improvement of the same because of some improvement in the yield in the past showing some improvement seen in the yield and partly showing some decrease. The net interest margin should stay between 3.8% to 4.2% for the foreseeable quarters. On SR front, the outstanding of INR 143 crores as on 31 March, 2021, we have received a payment of INR 12 crores in Q1 and INR 13 crores in Q2 financial year '22, thereby making outstanding at 30 September, 2021 of INR 117 crores. During Q2 financial year '22, we have sold 66 accounts to the tune of INR 14 crores to ARC, with a proportion of 70% cash and 30% SR. So we hold the production of INR 83 crores against them as on 30 September, 2021. We also have about INR 40 crores of COVID provision, which we have not used so far, which is kept separately. After the last quarterly results, a couple of friends from the analyst fraternity asked me why we were not talking about digital and other technological initiatives our bank was taking. Their opinion was that digital is the current [indiscernible] and most of our peer banks were giving significant importance during the conference call and making market to think that CUB is not digital or tech-savvy. I assured them that I will make required decibels during the next quarterly call, and I hope those friends are listening up. Though we feel proud about our 117 years of legacy, though we are an old generation bank, we are almost at par with any new generation bank in terms of digital initiatives. I will take the next few minutes to explain the progress we have made in the efficiency improvement in all facets of banking using digital technology. We are one of the early adopters of technology among all the banks even before the arrival of new-gen banks. When the entire banking industry was facing opposition and strike against the computerization of the banks. Subsequently, after the arrival of new generation banks, we were the first customer of TCS in core banking implementation in early 2000. We were also the early adopters of alternate channel banking through both digital channels like Internet banking and mobile banking and bulk note recyclers, ATMS, et cetera. One of our earlier objective was that the customers should come to the branches only for operating lockers or probably to take gold loan or anything like that. And all other remaining transactions should be in digital mode, including opening up fixed deposits, loan against the deposits to online. We were the first bank to introduce those products of opening online fixed deposits and, let's say, taking [indiscernible] and we introduced first in the industry per se. I mean, just to tell you that we have always been at the forefront of, let's say, technology adaptation. The COVID accelerated the alternate channel adaptation. Before COVID-19, the Bank saw about 20% of the transactions happening through branches and balance 88% through digital channels and ATMs, cash deposit machines and things like that. Post-COVID, now only 4% to 5% of the transactions happening through the branches, creating a huge capacity for deepening and growth. The incremental staff number requirements for opening new branches will also be coming down, adding significantly to ROA. As you all know, we announced the introduction of the first robo in the banking industry, Lakshmi. Slowly, we upgraded the, let's say, robo to multi-lingual conversational chatbot technology using machine learning and the multi-lingual conversational bots are currently handling about 40% to 45% of our customer queries now on a daily basis. In this new banking era, we were one of the first 5 banks to introduce video-based KYC. The video-based and Aadhaar-enabled automated KYC handles about 95% of the new customer onboarding, while only less than 5% of account opening is coming through the old conventional paper forms. QR-based merchant transactions have grown about 500% by using scan and pay options. Apart from that, we have launched the UPI-based FD opening for new customers with the cap of INR 1 lakh currently. Also, our customers can subscribe to IPO and all using ASBA, using UPI and all by making required relationship with the UPI and NPCI and other companies. We are the first bank based in India to offer global payment initiative to track cross-border unwired remittances real-time. Also, we offer a range of wealth management services, like a Demat account, investment in mutual funds, health insurance, et cetera. As you all know, we are -- though we are not into small ticket lending for the consumption where automation and pre-approved functions are playing a big role, we have made multiple tie-ups with many fintech companies like Namaste Credit and all using the data analytics technology from various companies, providing data like alternate underwriting, increased credit to existing customers, predictive analytics and health as such. We have made a huge improvement in the credit underwriting processes using these technologies. Earlier, our credit officers used to take not less than 80% to 90% of their time to collect and collide these data, and only 10% to 20% time used for the application of mind and making credit decisions. But by using these digital initiatives, the data collection is made automatic and giving huge surplus capacity in credit department, improving the capacity both qualitatively and quantitatively. Renewal of our existing borrower accounts, which earlier used to take about 25% to 30% of the total capacity of credit operations are by and large automated to near 100%. Similarly, the management of early warning signals and all have also been automated to a greater extent. These digital initiatives are expected to have huge impact on the credit quality in future. Pre-approved top-up credit process for our existing customers are also in pipeline. You might have seen the approval given to our bank for online tax collection of direct and indirect taxes. Multiple application program interface, API are already up and running or getting ready. Account aggregator interfaces also with various data sources like CIBIL score check, score statements and all will enhance the credit management underwriting process in a big way. Relationship deepening through various campaigns and all are incrementally getting supported by these digital relationships created. Our new digital banking app is also set to be out. Remember, when you hear the talks about the automated lending or you hear only about the disbursements and not about the collection of money, just want to inform that we are almost on par with the best-in-class in terms of the digital adaptation in this new banking era, of course, without diluting our risk appetite. This I want to reiterate. So we are not, let's say, we are using all the technology to improve both the customer convenience and also on the, let's say, efficiency or our credit underwriting processes and all. At the same time, we are, let's say, using them only in the area wherever we are having our risk appetite properly fixed into. To sum up, overall, environment is stable as compared to our earlier quarters. Slippage and recovery are showing good positive signs. The treasury income may be coming on a lower rate as compared to last year, but the overall PAT should be, let's say, in the expected direction because of headwinds in the other areas. The gross and net NPA percentage have shown a mild dip in Q2 compared to Q1. We seem to be very much on track to have gross and net NPA percentage on 31 March, 2022 better than 31 March, 2021. Overall, the things are turning up very positive, much better compared to whatever we expected, let's say, during the fourth quarter or first quarter, some of them have already got reflected in the numbers also. At the same time, we pray the almighty that these situations could stabilize and improve from wherever we are. And also somebody asked me to talk about the recent Chennai flood and all. The Chennai flood currently is nothing compared to whatever we saw in the earlier flood of 2015 and all. We don't expect any major impact because of that at this point of time. If any new, let's say, hurricane and all comes, we have to see hopefully. The nature will also be supporting whatever we are seeing at this point of time. Overall, things are improving, getting better and better day by day. And hopefully, whatever expectations we shared you on various parameters in the earlier quarters, we are very much on track. And we feel we should be able to have a very decent -- we should close the year with a decent sort of numbers. With this opening remarks, let me open the forum for questions.

[Operator Instructions] We have the first question from the line of Mona Khetan from Dolat Capital.

Thank you for the digital distinction. So my first question is on the MSME segment. Are you seeing any increasing pricing pressures for the borrower segment you update in? And what sort of demand pickup are you seeing in this segment?

See, the pricing pressure, as I have told in the earlier quarters and all are nothing new. Whenever you get into a segment of, let's say, decreasing interest rate scenario under surplus liquidity, this pricing pressure will always be there. So we are, let's say, like what we did in the earlier, let's say, similar cycles, we are always balancing the retention of the customer and overall, let's say, risk-adjusted pricing and also the, let's say, the compression in the margin. So the margin pressure is not something new, it had been there in the earlier similar cycles and they are there at this particular point of time also. And we don't -- at this point of time, it is not something which we have not seen in the past.

Got it. And on the demand side for the segment, because the last 2 quarters, looking at your growth, it seems you're more conservative, largely lending towards gold and loans or getting deposits, et cetera?

Yes. Though we are seeing anecdotal evidence and the signs of pickup, they are not yet, let's say, the -- there are -- you have to see it on both sides. We have not yet pushed to the growth pedal yet. And similarly, the growth -- the environment is also, though it looks promising, we are yet to see that on ground. So we are waiting and watching the situation for the future growth.

Sure. And lastly, on the restructured book, what would be your -- so you've made about INR 170 crores of provisions. Apart from that, what was the other standard contingency provisions that you hold? If I'm correct, it was about INR 55 crores to INR 60 crores last quarter.

See, we have about INR 40 crores whatever we made to COVID is still separate. Apart from that, on restructuring, whatever regulatorily prescribed provision is needed for the restructured assets or whatever assets, they are made.

Yes, so apart from that, do we hold any standard contingency provision?

That is exactly the standard contingency provision. Plus we have the INR 40 crore, which we kept as the COVID provision.

[Operator Instructions] The next question is from the line of Sri Karthik from Investec.

So my first question is, why haven't we moved to the new accounting along this quarter itself? Why did we have to [indiscernible] the next quarter?

See, the -- basically, they come into effect for the year-end accounts. Taking for the earlier quarters is, let's say, optional. And basically, it is revenue neutral on your -- because since you don't have much of a depreciation on your investment book, basically, the 2 differences which are coming, one from your recovery of technically written off assets and #2 is how you recognize your -- what you call investment depreciation. The final ROA number doesn't really change and we will take it. If required, let's say, we also had a change of auditors this time. So we will discuss with the auditors whether to take it with the third quarter or fourth quarter, we will take it all. It is mandatory from the fourth quarter.

So the second question is, we had roughly INR 800 crores of MSME restructuring before COVID hit us. Could you comment a bit on how that book is performing now, the INR 800 crores pre-COVID, let's say, December 2020 is the disclosed INR 785 crore?

So we have -- please refer to our number, what you call -- page number 38 -- in fact -- Karthik I don't have the separate figures between the pre-COVID and post-COVID.

No, need sir. I wasn't looking for the data.

Overall position is that, let's say, you can expect, let's say, the assets which are restructured during the pre-COVID, they will be slightly, let's say, having more stress compared to those accounts which got restructured post COVID.

Understood. And sir, last which is as we look forward for a recovery and, let's say, a more normalized situation, what sort of investments in branch network and employee base do you anticipate? That was the last question.

See, basically, we are, let's say, every year, we used to keep about plans for about 50 branches. We did not open -- we opened only 3 branches or so in the financial year 2021. And this year, probably, we may open about 25 branches. That is what we are planning, if everything works out. And planning to have probably 75 branches getting opened in the next year. In that, the increase in the headcount may not be more than 4% to 5% per new branch going forward.

We have the next question from the line of Darpin Shah from Haitong Securities.

You have been always mentioning about assets being secured and eligibility lower. But our coverage ratio 38% or 39% is still on a lower side, even if we compare to pre-COVID levels, where it used to be around 44%, 45%. So any thoughts on improving that?

See, the -- you look into the, let's say, the coverage ratio, including the technical rate of portion, which is about 60% plus. And since the recovery, whatever we are making from the technical written-off collection is included into the -- your income part and disclosed. You will [Technical Difficulty] that, let's say, our haircut maybe is about 20%, 25%, maybe because of the COVID another 5% extra or whatever it is, we feel we have significant surplus provision, which is needed.

And second thing, I missed on the part which you mentioned in the opening remarks about SMA-2. So if you can just repeat that?

See, overall SMA-2, currently, it's about 2.75%, which is even about 0.6% lower than the first quarter number, which includes from every category, let's say regular, ECLGS given the restructured portfolio, everything included. Overall, SMA-2 position is about 2.75% for the Q1, which we normally used to say during even the pre-COVID level of SMA-2 level of 5% to 7% percentage or so.

The next question, just a follow-up on this. Earlier, you used to mention that when SMA-2 book is around 6% to 8%, you see slippages of 2% to 3%. Now that our SMA-2 book has already fallen sharp 3%...

You are too greedy. We say that incrementally, we are able to see about INR 180 crore, INR 190 crore reduction in the slippages in Q2 compared to the Q1. Going forward, it will further decrease to reach what you call pre-COVID level slippage in the, let's say, towards the end of the year or next year. Let us see what will be the new normal SMA-2 number when we reach that position.

[Operator Instructions] The next question is from the line of Jai Mundhra from B&K Securities.

I have a couple of questions. First, sir, if I look at the growth, then if I remove the gold loan, then the book has actually de-grown on both Q-o-Q and maybe Y-o-Y. I just wanted to separate out outlook on your gold loan. We have seen a very phenomenal growth here. Maybe the environment has also supported. But how do you see the gold loan going ahead? And then what is your sense on the rest of the book?

See, the -- as I told you, we have not pushed our growth pedal in the non-gold loan credit. And now only we see, we should be probably doing that from the end of, let's say, financial year. When the growth of other credit increases, correspondingly, the growth of gold loan will also decrease. This is how we have managed the growth in the past. So the -- you are right, and probably bulk of that, you may be seeing -- you can correspond with the reduction in the ECLGS book and all whatever we have shown, these numbers will be tallying now. So we are now -- once we see things stabilizes, we will start pushing the growth in the non-gold loan advances when the incremental growth rate in the gold loan will moderate.

Right. So -- but how do you keep the gold loan panning out, sir, I mean, gold loan growth, you had some slack, you had ticked up maybe part of that was also held by environment also. But do you -- how much should one expect on the gold loan side there?

That's why I say, let's say, the overall gold loan, let's say, to achieve the overall, let's say, growth numbers for what is required for your -- to take care of your incremental expenditure and the profitability growth and things like that, we will balance the gold loan growth in tune with the whatever growth we achieve from the non-gold loan thing. Suddenly, for example, towards the -- sometime sooner, okay, I'm getting comfortable, I start pushing the pedal for the gold -- the non-gold loan under regular advances, and we are able to see growth. To that extent, the resources will get diverted from the gold loan front, and you will have moderation in the growth of gold loan.

But the gold loan business is also very good business side for incremental basis without use of much of a capital, not much of an asset quality change. So I mean, what is the need to balance that out? I mean, shouldn't you have -- correct me if my understanding is wrong, but gold loan also looks like a pretty good business, right? So why shift -- I mean, why counted as [indiscernible]?

See, 2 things you have to keep in your mind, not, let's say, the bank's gold loan yield will be lower than that are -- don't confuse with the gold finance companies. My cost structure will not support the cost-to-income ratio if I purely concentrate on gold. And there is a limitation on how much gold loan I can do in the -- in each branch and all. So the -- it can -- to some extent, we, what you call, supporter of growth and as I have always maintained, gold loan will get focused at places wherever I don't have anything else to do. My average yield of gold loan is only 8% to 9% percentage, not 21% like gold finance companies and the cost for the operations of us is much higher than an equivalent gold finance company. So you cannot basically compare.

Understood. And on the [indiscernible], what would be your sort of, let's say, the SME borrowers utilization level as of now in unit utilization? And how is that panning out? Of course, the revenue should be rising. But as of now, we also have the challenge of sanction limits not getting utilized or cash credit facility not being utilized, if you can comment on that?

It is hovering about 80% -- 75% to 80%. It came down, let's say, during the lockdown and all after the -- even when the ECLGS and all started, it came down to maybe 70%. It roughly -- even with pre-COVID level utilization level it has almost reached.

Second question is, sir, on the notes to account, you have mentioned that SpiceJet is now -- is now tendered into ICA and hence out of this. If you can comment on what happened, I mean this was -- was this account restructured? And why did it move out?

See, basically, they have a cash credit account with us. We originally interpreted that, let's say, when the term loan companies were those other banks, which let's say, restructured the term loan part, we also find that restructuring in the integrator agreement as a banker. Now let's say, when we ask for let's say, real meaning of that, we were told that since we have not restructured any of our portion and the repayment terms and all continue as such, like whatever that has happened pre-inter creditor agreement, it should not be categorized as a -- restructured as a ET, let's say stand taken by, let's say, regulatory stand which is taken and hence, that recategorization was done.

So the account has been sort of, let's say, ICA has been signed, but this is outside RBI onetime restructuring window. Is that...

You can view this way. Our facility has not got affected in any way. It is just continuing like what it was earlier and what it is now, both are same. That's why it seems there is no change in the terms and condition of our facility. Our facility need not be construed as what you call restructured.

And your exposure is what is mentioned here, right? That is the entire exposure, some INR 10 crores something?

No, INR 100 crores.

And then one more question, sir, just a small clarification. I mean, just to follow the accounting team, we also follow gross slippages basis, right? Now we have moved to daily tagging. So account which gets obsoleted within the quarter maybe within the financial year that gets reported in both slippages as well as recovery?

No. From the, let's say, quarter beginning to quarter end, both those dates are looked into. And intermittent slippage and upgradation will not be counted as slippage.

Last question. On your digital thing, so you have given a lot of information, and that is very helpful. If you can comment, sir, for an external person, how should one judge a bank in terms of their technology adoption? So in a way, you have certain products and processes but most likely, they will be replicated amongst all banks, sometimes maybe 1 or 2 quarters lag. So most of them would have same products, same technology, same processes. So how should one look at the digital preparedness from an external perspective?

See, precisely for the same reason I did not talk about that in the past. But what -- later I understood that people are -- have started thinking that we don't have any such thing. The entire purpose of that is to, once again, to reiterate your own the -- whatever statement you made now. We are also at par will the best in the industry. This is the one line, let's say, inference, this is what I wanted to make sure. And that's why I have also quoted a few technology initiatives, say, for example, robotics and all, which we were the pioneers earlier. On and off, we are also pioneers in few products is what I wanted to let's say convey.

The next question is from the line of Anand Bhavnani from White Oak Capital.

Sir, just wish to understand, would there be any overlap between our gold loan customers and the SME and if yes, what percentage of our gold loan would be coming from SME promoters to whom SME would have lend?

It will be insignificant. Nothing material. Because the bulk of our gold loans are less than INR 1.5 lakhs. And most of them are also directed towards the, let's say, agricultural lending in rural and semi-urban branches. The overlapping between the businessman and this is nothing material.

And out of our current branches, how many branches would be doing the gold loan product?

Out of 700, maybe about 300 to 400 branches.

And given that we have not done in the remaining branches, we don't see potential there. Is that the right assumption?

I will rather answer your questions this way. All the rural and the semi-urban branches will have gold loan as a product. The urban category branches, which are, let's say, for example, let's say, having a present, let's say agricultural bank, something like that. Basically, in PM, most of them will be having gold loan. On metro branches, maybe only 10% of the branches will have gold loan as a product.

The next question is from the line of Avinash Tanawade from Dalal & Broacha.

I just want to know, our tax rate has been around 29%, we've always lower in last quarter. So what is the reason? It is around 19% last quarter. So any specific reason? And what would be the stable tax ratio for us. [Technical Difficulty] So I was talking about the tax rate, we have seen a tax rate of around 29% this quarter, which was higher compared to the 19%. So what would be the average tax rate which we can consider for a year? And why the -- what is the reason why we have a fluctuating tax ratio?

See one of the reasons which will determine the tax rate if you are, let's say, technical rate of portion, that is one of major thing which will be, let's say, making this difference. So we expect overall annual tax rate to be hovering around, say, 24%, 25% also.

And we saw a reduction of around 160 employees in the quarter, which was in last 3 quarters, we are pertinently seeing a reduction in a quarter-on-quarter basis. It was around 5,886 employees, which has reduced to around 5,663. Any specific reason for that?

Yes. I spoke about this in my opening remarks also. The manual transactions happening inside the branches have come down by 50% during the, let's say, COVID period, which is, let's say, creating, let's say, a lot of surplus capacity within the system. And I have also mentioned that going forward, the incremental number of staff requiring for the new branches will also come down. And that's why, whenever there is a -- exit happens, we are, let's say, moderating the fresh entry so that we will be increasing the efficiency. And I have also given -- I also told that this will have a significant impact on the ROA also going forward, particularly on the -- over a period of time. It may not be immediate, but over a period of time, there is going to be incremental efficiency over there.

Last quarter, you had talked about some INR 400 crores of restructuring, which we have done in Q1 or Q2, where you have given a moratorium of 6 months, and we saw a negligible [indiscernible]. So how that portfolio is performing now in Q2?

Yes. That's why I gave the holistic number on that without doing too much of hard splitting. Including that portfolio, overall SMA-2 number currently is about 2.75%. And whenever I spoke about the incremental slippages, the expectations includes the slippages from the restructured portfolio also.

There are many banks were going for new kind of avenues like co-lending and kind of a thing. So are you looking for some of these options for future growth preference?

Definitely, we will look into. I won't say it is not in our cards. But we will do it at our terms by, let's say, identifying a proper partner, going through, let's say, small portfolio, testing the behavior through cycles, before expanding it and taking it as one of the main avenues of growth. What I can definitely say is that for the next 3 years and all we would have definitely started co-lending, but it will not be a very significant proportion of our overall book even 3 years down the line. Once we get the total comfort and a grip over how that segment is confirming and what amount of, let's say control we have on that portfolio, we will take a further call on that.

The next question is from the line of Mahesh MB from Kotak Securities.

Three questions from my side. Sir, one on the -- I don't know if it was asked, I just got dropped off quickly. Quarter-on-quarter improvement in yield and advances, any specific reason for that?

One of the reasons is the reduction in the slippage and the corresponding interest reversal.

And the SMA, you filed SMA-2. It is for the entire portfolio, right? Not about INR 5 crores?

No, no, it's for the entire portfolio. We always give for the entire portfolio, it's for the entire portfolio.

And SMA 0 and SMA 1 also, can you give some qualitative comment?

What I can definitely say is that it is improving. Adding all, it should be around 8% to 10% totally.

As compared to, let's say, pre-COVID?

Yes, SMA number, that's what I explained, the SMA numbers are better than pre-COVID. And particularly, after the daily marking of NPA is done, it is putting extra pressure on the, what you call the -- overall, SMA, let's say, 2 number on the SMA, one number are by and large, is the same. 1,048 is the SMA 2 and 1,118 is your SMA 1. After the -- I mean, they have given the exact number to me, compared to the, what you call the -- after the daily marking of NPA starter, it immediately freezes the account operations. And hence, the propensity of the borrower to keep the account on order is much better compared to now.

And my last question, sir. We've done quite well on the recoveries front. Should we say that the underlying environment for recoveries when you put assets on the ground has seen significant amount of attraction from set of investors to take over that collateral or you have had to cut prices to clear the inventory out?

Maybe you can say that, let's say, as the more and more our recovery people go and sit with the borrower over a period of time, testing each patients, finally, things are coming to a, let's say, finality when they find -- I mean at few occasions, as I always told, maybe 5% extra target is something which we have reconciled ourselves for at a broader level. But the main issue is that the action, whatever we started, let's say, about 1.5 years back, we continue with the, let's say, separately notice getting the symbolic possession applying to the courts for the physical possession and also continuing the negotiations, starting with the DRT. So finally, things have to take a shape. We were also, let's say, our patients was also getting tested, the borrower patients was also getting tested. So finally, people are coming to some amount of negotiation table and taking a call. And that's why we are able to see some amount of movement in whatever that is happening after a long time.

The next question is from the line of Rakesh Kumar from Systematix Group.

Sir, 2, 3 questions I have. So firstly, just like the gross NPA numbers are kind of quite stable. But just wanted to understand the health of non-gold agri loans. The book is certainly coming down because all that agri loan book is growing. But the non-gold agri value how that is behaving overall. If you can give some takes?

It's, let's say, the -- it's nothing alarming. The -- let's say, for example, the -- he's asking for the non-gold agri loans. The things are, let's say, better, you are able to see if things are organizing up better, unlike earlier period, when we used to see more of unorganized lending in the agri, which used to get you into the problems at the earlier stages. Now we are able to see much of, let's say, people getting organized now particularly in the agri lending also. And the comfort in managing that over a period of couple of cycles and all have been reasonably good, particularly after the, let's say, the insurance scheme and all, which has come for the agricultural sector. Earlier and all when 4,5 years back, I mean, before the, let's say, adaptation of insurance system, when the floor are drought, the borrower will lose the money, and the banks will not get to the, what we call repayment. So those other things which are taking a share now, they are definitely improving the ecosystem to a greater extent.

Secondly, sir, we might have already reduced the AFS duration, which was around 3 years as reported for the end September. So -- but this number was looking slightly on the higher side, considering that rates are going up. So have you already reduced the number because it will also impact the investment book yield? So I just wanted to understand.

See, that is an ongoing process. So that's why we have reduced it -- the calls, whatever we have taken in the, let's say, earlier this thing, like if you look into that portion, the AFS portion per share has only a duration of 1.33. And for HTM thing we have to balance both our yield and also your duration. And we -- and -- whatever incremental interest income we get because of that extension of duration, when it is better, we take the fall in this team portfolio.

Actually, sir, in the Slide #43, it was written 3.06 years compared to 1.33 years in September '21, I think the return has increased.

I looked at the other way. So we constantly watch that, and we balance this.

And sir, return of book has increased quite a lot. So the recovery from that portfolio would also be -- could be quite strong going ahead, I think, because of -- including the recovery that we have done from the technical write-off in these 2 quarters and the write-off that we have done in these 2 quarters, number is close to around INR 1,300 odd crore number roughly. So the recovery rate from there also, I think number would be quite strong. Is it right to assume that?

That is our wish, and we are working for that.

And sir, just a last question, sir. The credit risk spread that we had to arrive at a lending rate. So for the MSME, we would be more comfortable raising that creditor spread in the rising interest rate scenario? Or like how would we...

Yes, in the earlier cycles, it has always happened that way. The margin used to expand in the increasing interest rate scenario and used to contract faster during the decreasing interest rate scenario.

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.

Anybody else is waiting in the queue or nobody is there in the queue.

Right now, sir, we do have one participant. Would you like to proceed with this?

Yes, we will not close it. We will answer, no problem.

We have the question from the line of Franklin Moraes from Equentis Wealth Advisory.

So just wanted to understand from the perspective of the MSME borrowers, where does the level of business activity stand right now compared to pre COVID levels? If you could give the trend of the last, say, 3 to 4 months after the month of November?

See the -- expect those who cannot run the business and got eliminated from the systems by and large, for the others, it has even slightly inched up over and above the pre COVID level of activities to a greater extent. There could be a few exceptions. But at the aggregate level, we could definitely see things inching up past the pre COVID level.

Ladies and gentlemen, that was the last question. Over to the management for closing comments.

So thank you all for attending this con call. And once again, I want to summarize that things are improving and getting -- the light finally, at the end of the tunnel is visible, we feel. Going forward, things should be turning positive and even slightly better than whatever we saw or whatever we shared with you all during the earlier quarters. This is the assumption that once again, okay, you don't get any more shocks, be it COVID third wave or Zika virus or another, what we call hurricane coming into Bay of Bengal or whatever it is. Overall, things are improving, and the confidence level across is increasing and we are also looking forward to see things improving on all assets as we go forward. And also, the technology part, I repeated you, we are incrementally, let's say, looking into to ensure that we are not lagging behind in the changes that are happening without compromising the risk appetite, whatever we have defense. With that, I also would like anybody having any extra questions or any data point, you can always get in touch with Mr. Ramesh, CFO, Mr. Jayaraman. And I think the contract numbers are given in the presentation. So with this, I once again thank you all for participating in this con call and I thank the AMBIT for organizing this call. Thank you all once again.

Thank you very much. Ladies and gentlemen, on behalf of AMBIT Capital, that concludes this conference. Thank you for joining us. You may now disconnect your lines.