HDFC Bank Limited (HDFCBANK) Earnings Call Transcript & Summary

Good evening, and welcome to the conference call hosted by HDFC Bank Limited to give an update on the merger. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. Thank you, and over to you, sir.

Thank you, Darwin. Good evening. Glad that you're all able to participate in such a short notice on a Friday evening, thank you. I presume you have gotten a chance to look at our stock exchange release of today. As you know, subsequent to the announcement of the HDFC Limited, HDFC Bank merger on 4th April '22, we had made certain requests to the Reserve Bank of India, seeking certain forbearances clarifications. We have since been engaging with the regulator in this regard. We have now received a letter from the RBI with regards to certain of these requests. We will first quickly walk through the key aspects of this letter and then open up the call for Q&A. On the priority sector lending, the bank is permitted to face in the ANBC calculation. ANBC is used to determine the price sector requirement by considering 1/3 of the outstanding loans as on the effective date for the first year. The remaining 2/3 of the portfolio shall be considered over a period of the next 2 years. Incremental loans, including the housing loan, subsequent to the effective date will follow the PSL requirement, this is as usual. Investments of HDFC Limited, including HDFC Life, HDFC ERGO and HDFC AMC, have been approved as investments held in the HDFC Bank. HDFC Bank or HDFC Limited are permitted to increase the shareholding to more than 50% in HDFC Life and HDFC ERGO before the effective date of the merger. HDFC Education and Development Services Private Limited, which is a 100% subsidiary of HDFC Limited today, operating 3 schools, covering over 4,000 children will be divested fully within 2 years from the effective date. HDFC Credila Financial Services Limited, higher education loan portfolio of over INR 10,000 crores, currently 100% held by HDFC Limited, shall be brought down to 10% within 2 years from the effective date and not onboarding new customers in this entity. On the CRR, SLR and LCR, HDFC Bank shall comply with the extant requirements of CRR, SLR or LCR from the effective date without any exceptions. On the interest rate benchmarks, HDFC Bank will undertake a onetime mapping of all borrowers of HDFC Limited to appropriate benchmarks and spread. Benchmarks would be as applicable to the bank such as the external benchmarks or MCLR. A time period of 6 months from the effective date shall be available to transition the customers to the new benchmarks on spreads. On the loan against shares, this is in respect of certain exposures of HDFC limited involving loans against shares towards promoters contribution of loan amounts more than INR 20 lakhs, all of these 2 individuals, HDFC Bank is permitted to hold these loans until the same or repaid or their contracted maturity. The response of the RBI in respect of certain of the other requests awaited expected to be received in due course. We thank the RBI and all of the regulators on the personnel who have been actively engaged with us to enable a successful continuation of the merger to this stage. Thank you, and we'll now open up the call for a Q&A session. Darwin?

[Operator Instructions] The first question is from the line of Suresh Ganapathy from Macquarie Group.

Srini, I am a bit confused on this priority sector thing. So just to get this a bit clearer, let's assume hypothetically that September 2023 was the effective date of merger. Now in your earlier clarifications you had said, assuming no PSL extension to be given, you have time for 15 months, that is till December 2024 to meet. Now what this rule state is that you will have to meet 1/3 immediately on September 2023, another 1/3 on September 2024. That means 2/3 have to be met before your earlier December 2024 100% requirement and maybe another 1/3 you have time till September 2025. Is this positive or negative? How do you interpret this as? Or is it relaxed or not relaxed?

It is relaxed. It is not in the way that you had mentioned. What it means is that the same example that you took September '23, the requirement for PSL kicks in 12 months later. So which means, in this case, September '23 means, it goes to September '24, right? And when you have to meet for September '24, you look back 1 year. And when you look back 1 year, then you see what is the ANBC there. And then on that, you need to keep PSL. So that means in October '23, November '23, December '23, you look back to October '22, November '22, December '22. And on that, you keep, right? So it is essentially, in this case, if you see, it is all moves to a 4-year -- or 3 years, 1/3, 1/3, 1/3 phases in, which means the first 1/3 is in the first applicable year, the second 1/3 in the second applicable year and so on. That applicable year is a year after.

On date, effective on September 2023, you'll have to meet 1/3 of the requirement, right? Earlier that was not the case, right?

No, no...

Suresh, the way you see this is, on the date of the merger, ANBC will get added. But only ANBC goes up on the day, we have 12 months after that to meet the PSL requirement of that ANBC.

Okay, okay. It is very clear. Okay. Then it's a clear relaxation. Okay, this is super clear, okay. Then the second aspect is, you have not mentioned in the press release grandfathering of liability. Is that allowed, not allowed? I mean, I don't know. There is no clarity on that, yes.

Okay. See, the stream of the amalgamation if you see provides that all liabilities, including debts or bonds or whatever, outstanding on that effective days that transferred, right? That is to the bank. And if you look at that last, but one paragraph -- last paragraph of our press release today or the stock exchange intimation today, we have written that, the bank will approach RBI with a crystallized amount of liabilities as of the effective date. So that means we don't know what the liabilities are today. On the effective date, whatever is the liability, we will get that list whatever is crystallized into the bank to the RBI. And as part of the scheme of amalgamation, that is part of what we had said that part of the amalgamation, the liabilities will move to the bank on the effective date, but it will crystallize, not now, it will crystallize on the effective date. At which time, we will go to RBI with that list of what is crystallized to the bank.

Okay, great. And what about increase in stake in subsidiaries? Say, for example, if you want to increase in HDFC Life, will you have to do before the effective date? Or can you do after the effective date? Is there a time line for that? Or how is that?

Yes, the time line is before the effective date, right? Which is what I alluded to, HDFC Life and HDFC ERGO, where we need to take it up, we -- either Bank or HDFC Limited, either of us can take it to cross the 50% mark.

So this will be through a fresh capital infusion or will be an open market purchase?

There is no particular guideline on that, but we will take a call as we have a few months to go, we will take a call during that time period.

The next question is from the line of Adarsh P from CLSA.

Sir, one clarification on SLR, CRR very clear you need to comply. Just wanted to check now since we have the clarification once you comply with CRR and SLR in basis, where LCR for HDFC Limited would have been, like could you just indicate basis your understanding, will LCR require you to hold more than what will be required under just meeting the SLR/CRR requirements? If you can just walk through the merger entity, any sense of whether LCR will require you to add more liquidity than what the CRR -- the SLR requirements would require you to.

Adarsh, the way to think about it is, it can. And if you think about the Bank, right, first -- in the Bank, the requirements, call it, the 4.5% CRR or the 18% SLR, we normally carry excess on that, right? If you look at our investment portfolio that we have, even as of March that we already published last week, if you see, that would be in excess of 24%, 25% or so SLR, which is there, right? So normally, and if you correspondingly look at the LCR, the LCR is about 115% or thereabouts, right? And it depends on what is the hurdle. Normally, the bank tries to run with a cushion on the LCR and that will be what we'll determine. It will also be determined by HDFC Limited has not published their financial results for March yet. But if you go back to their prior quarter earnings release per conversation, they've been in a path for building up more reserves. So that is the trajectory in which they were going. And so when the March comes later -- first week of May, you will know. And then on the effective date, that should be a kind of a trend that goes up there. So that's how we look at it that without any exceptions, that is how we need to manage and handle this.

Got it, okay. And my second question relates to the PSL part. Your clarification was quite clear. Just wanted to understand if you can just walk through assuming INR 6 lakh crores of ANBC for HDFC Limited the last reported number, first year would be like an INR 2 lakh crores in ANBC. Now against that you did have compliant PSL loans in HDFC Limited, then there would be a certain amount of bonds which can be excluded. So just wanted to understand where was the compliance to start with broadly so that we know what's the net number where year 1 actually require something or it's only year 2 onwards when you actually go to 67%, will you really have a requirement to really catch up on PSL?

Adarsh, the way to -- first, as you know that it is 1 year after, right?

Yes, yes. absolutely.

And you'll have to wait and see how we build. As you know, our goal is always to build organically as much as possible. But one thing that we have always said, right? The availability in the market for small and margin farmer and micro is not that easy, right? For organic build or for inorganic build, it is always post kind of, particularly given the rate of growth that we have seen, the SMS, small and margin farmer and micro, is something that we are always on the proud to see how do we go and meet. So we will -- we expect that those 2 -- while we will accelerate, we will do certain other strategies to see how we should comply with those. And again, that matter will come up a year after, depending on how we build our organic book.

Got it. No, Srini, the question I was asking is, as a starting point, on their books, if you can just recall that number, maybe you've mentioned it in some of your merger calls earlier. What was the PSL-compliant book to start with there? And any form of bonds, which was an exclusion from ANBC, if you can kind of mark those 2 numbers out, please?

Yes. No, we will not be able to mark anything now, Adarsh, because they have to publish their 1, March results. And 2, this situation is as of the effective date what comes in. And that's what gets used. And then that is for determining the requirement, right? The effective date. So we are a few months away, not even the data that's available is December, and then now we need to look for March and then the effective date. That's the requirement. And what we need is going to be 15 months from today. So we are all various guesses in terms of what sort of a composition in terms of book building that we will have from now to then. But for your general thought process or whatever other computation you have to see, we have always mentioned that the small and marginal farmer and micro is something that is very scarce. And that is what we said there will be some costs, and now you can see that the cost is about 1/3 in the first year of whatever assumptions you had and then the obligation is 2/3 in the second year and 100% in the third year after the first year.

Makes sense, Srini. This is useful, and congrats again on the path to the merger.

Thank you, Adarsh.

We have the next question from the line of Rahul Jain from Goldman Sachs.

Just a few small clarifications. First is on this interest rate benchmarks. So as you move to the new structure under the Bank, any -- how would the structure work like? Would the interest rates can also change when you undergo this exercise for the borrowers on the home loan side?

See, one thing is that when we migrate and make this mapping from existing to new, there are certain things beyond -- before a certain date, I think it is 2019 certain date and for certain other portfolios, some 2020, there is a date. Before that, MCLR is a good benchmark, and then there is an appropriate bank assisted spread on top of that, that gets to a rate, right? That's how we will approach it. And the second thing is that where there is an external benchmark that has come into work, then that is also a choice for the customer where external benchmark with a spread on top of it is also a rate. But at any time, think about the customer's point of view, the rate can't be at a detriment to the current number. Otherwise, the customer has got a choice to exit, right? He can refinance anywhere else. And so it would be competitive for the customer, and our goal will be to continue the relationship and grow further with the relationship.

Understood. So when we migrate to this bank structure, we'll have to offer the option to the customer to select like you explained, external benchmark plus some spread, et cetera. That's a fair understanding, right? We'll have to offer that option is -- yes.

Yes, we'll offer that option, and our goal will be to continue and grow further with the customer.

Got it. The second one is what else is spending from the RBI in terms of the critical components, so you alluded the liability structure or whatever the liabilities that would be eligible or grandfathered? Apart from that, anything else which we need to know of?

Yes, there are a few things we are still in dialogue. For example, loans for acquisition and development of land is something that we have said in the past, we still continue to work through that process. Any lending to core investment companies, right? That is something. Projects that are under implementation, the guidelines, which are not applicable to housing finance companies, but applicable to banks, we have to go through that aspect of it. And another aspect of it is there are immovable properties, which are rented by HDFC Limited or they are vacant and we need to deal with that to continue because they are part of the properties that we acquired. So these are some of those things which are there.

Understood. That's very helpful. Just two small questions. Any other operational costs that we need to incur to do all this customer mapping and the change of brand, et cetera? Will that be a significant cost that we need to be mindful of or not really? Any other operational costs for the merger? Yes.

These are operational costs, not in the context of our cost base that you have seen that these are big. But yes, there will be certain operational costs that we will spend, but that is in the regular course of business that will be part of what we will do.

Got it. A small one, how big is the loans against shares booked at Limited that you talked about here in Point 5?

I think, again, the March numbers will have to come out. But if you go back in time in the past, that's anywhere from, I think, INR 1,000 crores or something like that. There are certain things that are individuals, I think, is about INR 2,000 crores. And then there are some core investment companies, another INR 2,000 or INR 3,000 crores. So that's the kind of range in the past. So we'll have to see right now what it is after they publish.

The next question is from the line of Mahrukh Adajania from Nuvama.

Congratulations to Srini, to you and your team. My question is just in terms of HDFC's nonindividual book, obviously, not the March numbers, but up till December, what was the book that will not stay on the bank's balance sheet? So of course, there's loan against shares that is disallowed, but there will also be a lot of other runoffs that the bank may want to make just because their business -- your business model is a bit different from HDFC. So what is the quantum of that book? And how much of that earlier identified book has already run off by December?

Mahrukh, thanks for asking. But that's part of what we said is pending to go through, right? Some of the loans for acquisition or development of land, the core investment companies. And so there are a few things that are pending to sort out. We'll know in due course about those.

Okay. And my other question is again on priorities. So what would be your outstanding RIDF at the end of March? And then also, I mean, how will you make the decision whether to generate organically or buy from outside or invest in RIDF? I know you run through a few of these points at the earnings call, but I thought I'd just check again.

One thing, our RIDF, if it's not published, there is a time frame to publish the balance sheet in full form, that would come. You'll see that. That's one. Second, in terms of what you asked, see, the way to think about it is doing the priority sector through an organic growth is the number one process that we follow. And for that, exactly what we established this focused commercial and rural banking group with an expansion to villages from a little less than 100,000 villages to this March, I mentioned last week that 165,000 villages and by March '24, we target to go to more than 200,000 villages. So that's part of how we need to have the reach to get the growth in the priority sector, particularly, I'm talking about the priority sector that has got the farm related, right? It could be small and margin farmer, agri-related and micro enterprises. There's some dual qualification as possible. So that's coming with the reach, both branch reach as well as our ability to go and cover to those predominant villages. That's one thing. Now there are certain -- even after you go to all of these places, there are some limitations in terms of getting to what we need to get from a total requirement point of view. Then there at that stage, you go into the alternatives, right? The alternatives are -- IBPC is an alternative. So you buy from somebody else or a co-lending, on-lending is an alternative, which also we embrace and we do that. And we also go into PSLC in the market where you pay some money and you buy some certificates. That is also possible. We do PTCs, pass-through certificates, that we hold as investments, right? That is also a choice that we do. And the last is, of course, the RIDF. Now which one of these means what? That's the breakeven analysis that happens all the time depending on the cost of each one of these. That's part of the modeling that tries to look for the breakeven that -- which is optimal at any given point in time and availability. So something may be very optimal, but not available in the market. So according to both optimization model as well as availability model, that is where you prioritize and go for it. I hope that gives you an idea of how we think about it. There is no one kind of a straitjacket model that gives an answer. It is something that gets periodically done, at least quarterly done reviewed and determined.

Yes, that makes perfect sense. And Srini, at the time of the merger and even on earnings calls, you had run through the penetration you have made in mortgages post the merger announcement. At the time of the merger, there was a certain level. And then, of course, even in terms of HDFC Bank penetration into HDFC's mortgage customers, certain levels were given. So where -- what is the status now?

No, no. That -- see increasing the penetration is a task -- is a kind of our objective post the merger, not before the merger because we haven't expanded anywhere to offer mortgages across all the bank branches yet. And similarly, we have not started to offer bank products to HDFC Limited customers yet. These are all work in progress. The integration team is drawing out plans to start executing post the merger.

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

Srini, Just one question. Post the merger, what is the approximate book between MCLR and let's say, fixed rate and other kind of benchmarks that you would have?

Our fixed rate book is about 45% or thereabouts, right? That's my memory, 43%, 45% is a fixed rate book. This -- I'm talking about premerger, right? Post-merger, you have to increase the denominator by 1/3. And then there should be no other fixed rate in the incoming book, I presume, but at least 43% or so is the fixed rate in the existing book. Then in the floating rate book, MCLR linked is about 6%, which I mentioned in the earnings call of 6% of the book is MCLR floating rate. .

And the entire book to which incoming will all be in EBLR, right?

Incoming will be currently PLR, which is the lending rate determined by HDFC Limited. And that is the mapping that we will do once it comes. One to one mapping and make an offer to those customers within a 6-month period, we will work it out, where we will have certain external benchmarks plus a spread and certain MCLR plus a spread. And then the customer has got a choice to take that, right?

Sure. And in terms of the next few steps, you have to go every 30 days to the NCLT for an extension, is it?

Yes, that's right. I mentioned it last week that we filed the papers with SEBI, 28th or 29th March. Once we get that clearance, then we have to go to the mutual fund holders. So that's -- we're going through those kind of processes right now.

The next question is from the line of Yash Gujarati from Citigroup.

This is Kunal over here. So firstly, in terms of -- yes, bonds getting classified as long-term bonds. So that is allowed, even though it's not highlighted anywhere, but maybe to be knocked out.

That's the process. Prima facie that's not allowed because without any exceptions, we have to meet the CRR, SLR and LCR. The concession, if anything need to come as that, these bonds are not issued by the Bank. These bonds are issued by HDFC Limited, right? And so that's part of the process to say how to recon that as part of -- as though issued by the Bank, the only then it comes, and that's not here.

So this is not a part of this entire thing from the bank's perspective. Okay.

Yes. That is -- we need to get an exception for that, if you need to assume because the Bank didn't issue that.

Okay, okay. And secondly, in terms of HDFC Limited holding in other banks, and your discussion with RBI in that respect, is it allowed? Is there a time line wherein you have to offload it, anything on that effect?

No. Those are normally within the permitted. Those are all very minor investments, right? So they are not exceeding those thresholds.

Okay. So not exceeding thresholds, so no discussion, no...

No. You're talking about the investments of HDFC Limited or...

No, so HDFC Limited holding in banks, which is there. Okay, so maybe once that gets into it HDFC...

Like the Yes Bank or the Bandhan Bank, those are within the normal thresholds.

Allowed.

So everything is allowed. So there is nothing. Okay. And lastly, in terms of the asset classification. So when we look at it, it clearly says in terms of asset classification, but how would be the provisioning treatment? So would it be like entirely get absorbed into the floating and the contingency buffer which we carry because today, when we look at it against the 1% in Stage 3, we have almost 0.7 and we have 8% on the nonindividual portfolio. So overall, HDFC is still carrying 2.2-odd percent of the overall advances as of provisioning. So whatever is beyond the stage 3 that will get classified in either of it. So there is nothing on the provisioning side, which you see?

Yes. No, we'll follow the extent guidelines that are applicable for a bank. And appropriately, on day 1, when we take it over, it will be taken over in the Indian GAAP method. So that means we will translate all of that to Indian GAAP, and that is part of the day 1 reckoning. And from then on, it follows the bank model of how we do, which is standard assets follow the standard process and any NPA assets follow the NPA process in terms of determining the provisions how we progress from there.

Okay. So at the time of transitioning, we are not seeing any release or anything required on the...

Yes, depending on the day of the balance sheet, we'll have to reckon, their carrying reserves versus an Indian GAAP assessment of what the reserves are. And that's the harmonization process, yes -- the GAAP harmonization process.

Yes. So that will happen. So that will still happen on day 1.

Yes.

Ladies and gentlemen, due to time constraints that was the last question. I now hand the conference over to Mr. Vaidyanathan for closing comments. Over to you, sir.

Okay. Thank you all again. You took your time to get engaged with us on this. Anything more, we'll keep the dialogue open and keep talking over the next few days. Have a great evening. Happy weekend. Bye-bye.

Thank you. On behalf of HDFC Bank Limited, that concludes this conference call. Thank you for joining us. You may now disconnect your lines.