HDFC Bank Limited (HDFCBANK) Earnings Call Transcript & Summary

Thank you. Good evening, all. Thanks for coming on short notice. We have a few things on the agenda. We'll go through -- we have something prepared, a very short presentation, we'll go through that. And then we'll open it up for any conversations, any discussions around these things, and we'll take it from there. Okay. So if you go down to the first one, this is important in terms of how to think about what has happened to the net worth in its movement. You see, this is erstwhile HDFC Limited's net worth. You all know anchoring with the March '23, what has happened at INR 134,000 crores or INR 1,340 billion that you can see there. A couple of things. One is, there is a normal activity corporate actions, whether it is an ESOP or warrants or whether it is the income for the quarter and so on. So that's the INR 62 billion that you are seeing, right? It is an addition compared to what you have seen in March. Then comes a few adjustments that we will talk in detail, but that -- here, I'll cover a few things, and then we'll go to respective pages to go into the details of that. The first one is the alignment to the Indian GAAP accounting, moving certain IndAS to Indian GAAP. There are a few things here like bringing the investments book to cost where there has been an adoption to have it at a fair value. Now we bring that to cost, that's one item. And then there are a few more items, which is deferred acquisition cost that's held on the balance sheet. We charge off or the excess interest spread on the assigned loans we charge off and so on. So we'll go through the detail. There is a page to cover that. But that's -- in summary, that's the INR 118 billion or INR 11,800 crores which is there, right? The second one is the credit policy harmonization, which is, again, we'll go into the breakup of that in a page. But at a high level, to take away here is that INR 7,600 crores or so -- is something that is both from a specific reserve point of view as well as the contingent provision, a combination of that, adopting the bank policies in line with our -- with a minimum RBI regulation standards and harmonized for the bank policies, that's the impact of that. And as you would imagine, both of these, we'll go through that. Either they are timing or noneconomic, so we'll -- when we go into the detail, we'll do. The third item is important, and we can talk about the deferred tax liability reserve. This is something I don't have a page so I can cover a little more in detail into this because this is the 36(1)(viii) reserve that is required. Now profits coming from mortgage business, right, when you set up a reserve, gets a concessional tax rate, right? And there are some conditions. One of the conditions is that you need to appropriate it from your profit and loss or a general reserve and set it up into a special reserve account, right? That's a prerequisite. Once you set it up, then you get a special tax treatment on that. That's one. Two, in order to continue the tax treatment, you should not be utilizing that reserve, right? And if you utilize that reserve, then the -- in the year in which you utilize the tax, it gets taxed. And HDFC Limited for their part until now, what they've done in the past, they've gone through their Board to emphasize that it will not be utilized, right? So that means once it has not been utilized and at the Board level, a decision has been taken this is what we'll do. So there is no question of utilizing it to lose out on any future clawback of the tax rate. So that's why there was no deferred tax liability set up there. There is a reserve appropriated, but not liability set up. However, the same thing is available to the bank, too. So there's no different in the bank. Bank also will be setting up on these reserves. The loans have to be more than 5 years, and you'll be able to set up profits on those to a reserve, we will set it up. We will also be clearing that in the tax. So this is the cash tax benefit we get. And at this moment, we don't intend to utilize it either. But however, RBI regulation says, I think it's a 2013 circular. RBI regulation says that you should not just leave it at that, you need to set up a deferred tax liability on that, right? It's essentially a cash tax benefit received, however, not recognized from a capital or from a reserves and surplus point of view. That's what as simple as that, right? So it moves away from there into a deferred tax liability, which is not a payable liability at any time. But according to the regulation, we need to set it up. So we set this up. So this alone, if you look at it, the INR 49 billion is about 22 basis points to capital ratio, right? That's what this is. However, deferred tax liability by definition gets an offset against the deferred tax asset when you reckon for the capital. So essentially, when you offset this against the deferred tax asset, the net impact of this turns out to be about 10 basis points to capital ratio. That's -- so it comes down. It dilutes down to 10 basis points, not the 22 that you would see there because in the process of computation, you will net it against the deferred tax asset. That's the impact on this one. Then the tax effects on all of that, other than the tax item, the rest of them have to be tax affected. That's the INR 40 billion that you're seeing offset. Then we've shown separately the dividend because the dividend is a timing paid to shareholders. HDFC Limited paid an interim dividend before 1st July. The bank will pay the dividend. I think the AGM was held in August, and so the dividend was paid in August. So it comes subsequently when we close the September quarter, you will see the full picture of the bank also coming in. But at least here, we just wanted to show you -- segregate and show you that separately, not a net worth movement, but not because of any of these, it's because of a cash payment for dividends. Now...

Srini, I have a question because we are not going to discuss that. So anyways, you're not intend to use the special reserve and you are also going to follow the same accounting...

Benefit, benefit.

Benefit, sorry. Then why we get it through the reserves?

See, this is part of the RBI regulation 2013 circular says that you should do it like that. That is why on day 1, this is about INR 19,000 crores or thereabout is the special reserve already set up by HDFC Limited. We'll continue to have that special reserve. And this is the tax benefit that is accrued on that. There is no deferred tax liability. So we are trying to -- so essentially, this is taken out of the equity and put it as a deferred tax liability on the balance sheet. That's what is happening there. The cash realization of the tax benefit has either happened or is in the process where assessments are pending. So this is only a balance sheet segregation from equity into a DTL. So that is the 22 basis points impact. But once you net this off against the DTA, that's how the capital reckoning happens. It's a net impact of about 10 basis points there.

So the INR 62 billion of net accretion includes Credila...

No, Credila is not -- please take the mic and ask again so that you are clear.

So the INR 62 billion of net accretion of profits during the quarter includes gains on Credila or this is just pure accretion?

Gains on Credila has not happened, as of 1st July, not has it happened as of date. When it is done and closed, it will be reckoned at that particular time. So that is completely outside of this.

Because the reason I asked is the run rate is higher than the Q4 reported profits for limited...

Yes, it will be equity-wise -- it's warrants and ESOPs are there. Yes.

Srini, Rahul. Sorry, I walked in late. Can you just explain again what's driving this DTL reserve? What items are driving this INR 49 billion?

DTL?

Yes, reserve.

There's only one item there. See, 36(1)(viii) of the Income Tax Act provides concessional tax rate to profits derived from funding for housing, right, as housing infra, et cetera, a few categories, housing, right? So a few things. One, it has to be more than 5 years of lending, so that's one. Two, you have to sit -- in order to claim that benefit, you need to segregate from your normal P&L or general reserve to a special reserve. You have to segregate. So if you do that, you get a concessional rate, right? If you look at HDFC Limited's tax rates, it would be about 20-something, 19, 20 or so, that you get a concession rate there. Now we will also -- bank also gets the concession rate going forward, right? We will have a segregation and we will do. However, under Section 41 of Income Tax Act says that this particular tax benefit will be reversed when you utilize that special reserve, right? So HDFC Limited made an affirmation through a Board and other processes to say, will not be utilized. The reserve will not be utilized, right? And so thereby, didn't have -- under the IndAS accounting, did not have a need to set up a deferred tax liability. However, the bank is required to set up because RBI regulation through the circular of 2013 says that although you will get these benefits, segregate and keep a deferred tax liability. That's the reason it is there. So cash benefit on tax realized or realizable, the assessment gets done. However, for the regulation circular that you're setting it up as a reserve, yes. Simply moves from one reserve to a deferred tax liability, not intended for a cash payment liability. Go to the next one. Yes. So this particular thing now tries to bring it into the bank, right? The bank has closed the 30th June or 1st July opening at INR 293,000 crores or a book value of INR 525, that's how the bank started, right? And we saw that in the prior page that INR 1,199 billion, if you go back to the prior page, that's the number before the dividend because we'll show the dividend separately, is the incoming equity that comes in after all of those adjustments. Then you have a share swap elimination. After that, you see a book value that is INR 530, right? INR 525 goes to INR 530 there. Then the dividend has already been paid for the HDFC Limited shareholders in the past. So that's the impact which is here. And then that gives the net of INR 519 on the day 0 as we open, right? On a consolidated book value, beginning of the period is INR 543. And with all of these things, it aims at INR 536, essentially about INR 13,000 crores, INR 14,000 crores of net worth gets added in. And that moves that book value on a stand-alone INR 519 to a consolidated INR 536 for a INR 754 crores of INR 1 face value share outstanding. So now getting into details of some of those either IGAAP alignment or the credit policy harmonization. We'll start with the top to say, deferred acquisition cost. In the IndAS accounting method that HDFC Limited followed, the acquisition costs are capitalized and amortized over a life, right, long life that gets amortized. In the IGAAP accounting, it will be taken upfront, right? So now when we adopt IGAAP, we need to -- whatever is hanging in on the balance sheet and will come to P&L over the life of various loans, now we need to take it upfront. So that's part of the INR 38 billion or INR 3,800 crores that we charge off. So again, as you know, that there's not a cash charge, this is timing, right? This is not economically anything different, except instead of bringing it over time, it brings it up front. That's one. Interest spread on assigned loans has been -- when a loan is assigned or sold in this case, there is a gain recognized under IndAS in HDFC Limited, that the interest spread that gets capitalized gets amortized over time. That's the INR 28 billion or so, right? Again, there is no particular cash impact to this. What is on the balance sheet, it's an accounting adjustment that moves and charges to the equity upfront rather than coming through the life of the loan. Now fair value adjustment. These are about 75%, 80% are listed equities, which are carried at fair value. We bring it down to cost, right? So that's the INR 4,300 crores. Again, there is no economic loss as such here, right? This is subject to market fluctuations, of course. What gets realized, ultimately whenever it gets realized. But the point here is that it is simply moving what is carried at fair value, which is at INR 4,300 crores higher investments and higher equity in HDFC Limited books. In our books, we just take down the investment value and take down the equity. That's the adjustment here. And INR 9 billion is various other things there, right? So that's in terms of INR 11,800 crores of various IGAAP adjustments that happened. Now coming to the credit policy harmonization, there are 2 things here. I'll start with the last one, which is the specific provisions on NPAs, right? That is the INR 3,800 crores or INR 38 billion. Essentially, HDFC Limited, if you notice, I have a method of how they will do reserving under IndAS. That reserving takes into account the expected loss. That's the IndAS method, takes the expected loss, not the realized loss historically. Essentially, future recoveries are not recurrent, right? In the IGAAP method and RBI regulation, RBI regulation specifies the minimum required for reserving, right? There's a formula, there is a minimum reserve that is required. And then every bank adopts and our bank adopts certain policies as approved by the Board in terms of how we set up reserves. So which means when an account gets into an NPA, what do you provide for. And as the account moves through various buckets to 120 or 150 or 180 and so on and so forth, how much do you reserve and at what point you are fully provided. That's every bank has got and we have a policy. So this is harmonizing that policy. So yes, HDFC Limited has got about 42% is the provision coverage ratio as the book before the day 0 comes into us. And as we do adopt our methods and in terms of the provisioning and reckoning of reserving, it takes the specific provision coverage ratio to about 74%, 75%. So essentially ramping up the fruition. Again, as you know that this is in terms of how the bank adopts and processes it. This is noneconomic, but more timing in terms of how we take it upfront in terms of what we do, right, to adopt to the methods that they -- and the policies that the bank has adopted. Then coming to contingent provisions. The bank has a policy of reviewing various accounts and then setting up certain reserves on a contingent basis. So this -- and HDFC Limited do not have such policies. So we are harmonizing that to say that if it were in the bank, this is how we would have reviewed and had certain contingent provisions. So this INR 39 billion or INR 3,900 crores is about 70 basis points. If you think about in the bank, coincidentally, we do have about 69, 70 basis points of general reserve and floating reserve in the bank. And so this harmonizes into that aspect of it. And as we go into the next page, it captures that, particularly the credit it captures. The first 2 blocks of numbers you see are the bank that you are used to see. In the past, we have shown you that first 2 blocks, where the June, it is 1.2% NPA. And we have given you also the breakup of the retail CRB and CRB ex-Agri and so on and so forth, right, we have given. And the net NPA is about 0.3% with a specific provision coverage ratio in the bank. I'm just recapping to anchor ourselves where the bank was as of June, 35%. Contingent and floating provisions were about 70 basis points, and the total provisions were 200 basis points or excluding the specific, it was about 110 basis points, right? So move to the right, after we do all of this harmonization, the GNPA as we open is 1.4%. Everything in the bank is the same. And then if you can look at the incoming, the individual NPA is 1.0%, and the nonindividual NPA is 6.7% as we take on the book, right? So that's -- and against this, there are specific provisions. And so the net NPA is 0.4%. It's actually 0.36% or 0.37%, I'm told, but it rounds 0.4% here. Specific coverage. I talked about that additional INR 38 billion or INR 39 billion or INR 3,800 crores that is added to augment the coverage in accordance with the bank policies and how we assess that without considering the recovery that is potentially possible there. So that's the provisions that go to 74 basis points. And the contingent provisions, which didn't exist there, we add it up. And so before and after, we are more or less at that kind of level on the contingent provisions, right? So similarly, the total provision is specific, is about the 110 basis points.

The 6.7% that we are seeing as nonindividual GNPAs higher than the June number, rather March number for HDFC Limited. Because it's the denominator effect or it's a function of both numerator and denominator? That means I'm just asking if the number has gone up?

It has gone up. It is both. I think the March number was 3.7% or 4% thereabout -- reported number of HDFC Limited in March was that.

4% nonindividual.

Nonindividual, right? Now it's 6.7%. So it was a consequent to 2 things, right? One is that there's some amount of accounts that have gone into NPA. And the second is that from a bank, there are certain accounts that at the bank wouldn't do and would force certain actions to be taken. And that's part of the actions that have been taken, right, that we do not want. And so it is an NPA, we get that to be an NPA. That's part of 6.7%.

The COVID restructuring is the usual, there's nothing...

Yes, that's usual. There's nothing specific on the COVID restructuring.

That stays as restructured.

Whatever is in accordance with the COVID restructuring plan will be there, but that's part of the overall. There's nothing significant in terms of the overall here.

Srini sir, and the other part was in terms of when we look at it, the Stage 2 would have actually slipped into Stage 3 for HDFC, what you are talking about, say, 3.7% getting towards 6.7%. Because Stage 2 already had 53%, 54% coverage for them, then maybe it would not have actually resulted into an extra provisioning requirement.

Some of that would be Stage 2 going to Stage 3. So from a P&L point of view, there may not be much. But from an NPA, you will see that coming in.

Okay. And secondly, when we look at it in terms of the absolute number, it was like half-half. If say, it was INR 9,000-odd crores as of March, half was retail and half was non-retail. So whatever extra provisioning coverage was there maybe from 42% to 75%, that was more towards retail or that was more towards non-retail?

I would say that it's -- 40-60, 40% retail, 60% non-retail. That's the kind of the movement between those two...

40% retail and 60% non-retail.

From a policy harmonization and adjustments, that's about 40-60 or so, retail versus non-retail.

The Stage 1 and 2 provisions at HDFC Limited, which is to be there that has gone reckoned into...

Stage 1 and 2, which is not on this page, it is part of the -- either the total provisions or part of the provisions specific, which is included there, is about 45 basis points or so. The bank's general reserves, so to say, is about 44 basis points as of June. Here also, as we take and some day 0, if you see, the general reserves are about 44, 45 basis points. Essentially, that is the Stage 1 and Stage 2, which is there and remains at that about 44, 45 basis points.

And second is the markdown you've done of investments that you're holding, I mean, the HDFC's holding and the Yes Bank [indiscernible] and the markdown of HDFC Bank to fair value?

No. Subsidiaries are not carried at fair value. Subsidiaries are carried at the cost. So none of any of the investment adjustments has got to do anything with subsidiaries. Life is a subsidiary, Ergo, Credila, they are all subsidiaries. So that is not there. These are either listed securities, which I said 75%, 80% are listed securities. I don't want to name them for obvious reasons, listed. And if it's not listed, then there will be some breakup value used for certain nonsubsidiaries, that's the balance, 75%, 80% is listed. The rest is nonlisted with the breakup value accounting...

So just to understand, you would have now not changed any mark-to-market hit on those investments because it's taken directly at cost?

Correct. We will not face mark-to-market on those investments now.

So does the new regulations, which have come on investment, balance sheet and everything, so this will be held in that category, HTM, AFS or the fair value through profit and loss...

Excellent point. The point is that we have time until April 1 to reckon one of the other methods. We can hold it in AFS and determine that it will be held at fair value through P&L or fair value through equity. We have an option to determine which way we want to go. And we have another, call it, 6 months to 7 months to determine how we want to handle it. Yes, we have to -- you're right in thinking that will it -- there will be a reckoning that will happen on 1st April '24, according to that circular, yes.

Yes. My question, you mentioned that there are certain rating actions -- sorry, there are certain actions, which you probably didn't want to take on accounts. Is that what you mentioned for the NPL's rising?

We didn't want to take it?

No, no.

There are certain nonindividual accounts that the bank's risk assessment is not comfortable in holding, if that's your question.

No, but they are classified as NPL?

Yes.

You classified it as NPL?

Yes, if it is nonperforming, it is NPL. If it is performing perfectly, then it is not an NPL.

Okay. But they were performing earlier. Now they are NPL.

They are NPL as on the day that we took, right? If it was paying, everything was happening according to schedule, then even if the bank doesn't like, it is not an NPL. It will be part of various actions we take to run it down. That's what you are seeing in the portfolio, I think somewhere we're going to talk about that. The portfolio keeps going down to some extent before we assess and start to grow that.

So with reference to this RBI notification on the investment classification, so the 2 questions what I have. So one is things like in the initial recognition in the Chapter 4, the first line says that all the investments would be fairly valued. That is the first line what RBI is seeing. Then in the subsequent Chapter #5, subsequent recognition, they are saying that, again, in the HTM, they are saying that after the first recognition, HTM should not do mark-to-market. So does it mean implicitly that they are saying that securities sitting in the HTM at the time of initial recognition should be mark-to-market?

No. You're talking about the new circular?

Yes, new circular.

While this call is not strictly for -- session on the new circular, but I'll just cover this briefly. All investments are required to be valued at fair value at the time of initial recognition. And any subsequent measurement will be based on whether it is HTM, AFS or FVTPL. In the case of AFS or FVTPL, they have to be recognized at fair value on each subsequent reporting date with the MTM changes going either through their equity or through the P&L. And for HTM, it will continue to be carried at the day 1 fair value, which has been recognized at the time of initial recognition.

On day 1, there will be a fair value recognition.

Correct now. So like just to -- because like for the majority of banks like loan investment portal, it's much lower as compared to the similar residual maturity paper. So the current yield and investment book yield, there is a lot of gap. So it means that there is a loss in the HTM book setting for the banks in general. So if that is mark-to-market, then like would there be a loss that is to be taken through the P&L?

You have to wait until 31st March or 1st April because that is based on the interest rate curve that exists on that day. So if you do today, if there is -- the HTM book today is carried at fair value is below cost. There will be an unrecognized loss, which is there. And so if you do that accounting today, there may be that. But you have to wait until 1st April to say how the interest rate comes more, so thereby what the fair value is.

So I'm referring only to the Level 1 investments, not Level 2 or Level 3. So where we have a price readily available, for those, there could be a mark-to-market even in the HTM on the initial recognition date?

On the initial recognition, yes, but that is depending on the curve that is existing on 1st April.

Got it. And secondly, on this equity investment, which is like listed L1 investments, again, if we mark-to-market, like for the banks like us, ICICI Bank, the number would be in some trillion, the market value, for the share of investment that we have. So there would not be any kind of a loss. There would be a...

Nonsubsidiaries, or subsidiaries, we don't do that.

Sorry, sir?

For subsidiaries, that is not the method. For nonsubsidiaries only.

No. So because in the subsidiaries -- like there's a change in the bucket also.

For subsidiaries, you don't need a fair value.

No, but if it is a L1 investment, then?

Even then. If it's a subsidiary, there is nothing. It is a subsidiary.

No. But if it is like -- it's a listed securities, and we have a price for that, should not it be fairly valued?

No. So listed subsidiaries, there is no.

Okay. Got it.

Subsidiaries means it is out from there. Hold it at cost, yes. Okay. So that's on this provisions that we've talked about on the harmonization. Then if you go into -- kind of give you an indication of how to think about, this is erstwhile HDFC Limited certain numbers here. FY '23, you all know the IndAS, which is already there, right, which is there, FY '23 is there. And when you convert that IndAS to an IGAAP, on a pro forma basis, if you start from RoA, it's about, call it, 75% or so, right? There is a 25% that goes away. 75% is what is sustained there, right? And what does it mean? How to think about it? About half of it is to do with the dividends, the bank dividends that HDFC Limited gets, gets eliminated there. Half of it is that, right? Out of the other half, it is equally between the deferred acquisition cost that gets taken upfront and the tax rate change that happens, the impact of the tax rate change. So essentially, that's the kind of the way you can think about the RoA movement from IndAS to IGAAP is about half of that is to do with the dividends of the bank that will go away there. We have to eliminate that dividend because for the bank, it is below the line, and here it is above the line dividend that goes away. And then the out of the balance half, it's somewhere between the tax impact -- tax rate impact and the acquisition cost charged off upfront impact. That's what -- so you see the cost to income, 19% or so there, right? So that's the kind of how you can think about that. Then I'll take you to on column to the right, where you can see where certain levels of liquidity and certain levels of loan pricing that takes the margins 2.7% there and an RoA to 1.8%, raises on a pro forma basis, on an IGAAP pro forma basis, right? And more important is on the right -- to the top right that you see day 0, incoming day 0. That includes the impact of additional liquidity that HDFC Limited carried and brought in. So that takes that margin -- net interest margin to about 2%.

Is there a competition difference because HDFC Limited used to report a margin of 3.4% and you guys are reporting 2.9% as of FY '23?

Yes. See, I'll tell you the -- if you look at the HDFC Limited's net interest income, it's about INR 19,000 crores. That's also reported by HDFC Limited. I have done this margin based on DuPont basis, right, not based on loans or not based on interest-earning assets or anything.

Oh, based on DuPont.

Total. So INR 19,000 crores is the numerator of net interest income. And the denominator is the loans, which is slightly above 6.5 -- INR 6.7 trillion, I think is the balance sheet for that year. So that's how that is -- yes. So if you just -- I did a simple reported numbers math, and I've got there.

Should the excess liquidity, Q1 '24, present balance sheet will have that excess liquidity, right? So from 30th June to 1st of July, margin is changing from an average of 2.7% to 2%?

Correct. Day 1 incoming, yes.

So from an average of 2.7%, just 1 day, you're saying that the delta. So the entire excess liquidity was added towards the end of the quarter?

Towards the end.

There was a large impact of 70 basis points?

That is correct, yes. That is the 70 basis points. So that's the 70 basis points. And when you reckon that for the bank, it's about 25 to 30 basis points when you do that at the bank level. What does the 70 basis points do to the bank? It's about the 25, 30 basis points to the bank.

So now that's reconciled to the fact that you indicated that on this excess liquidity, margin will not be very high. So now using 25 basis points lower at the bank level. Your earlier stance that the excess liquidity that would be coming from HDFC in margin impact on forward accounting, that should not be very high...

No, no. I don't know, where we are -- this is to do...

Not aware of the fact that you raised the growth...

Yes, okay. So we did have an additional liquidity. If you think about the LCR as such, on a combined basis, we have about -- slightly above 125%. The bank is used to running LCR at about 115%. So at any point in time, over the last 4 quarters, if you see 112%, 113%, 115%, that is the LCR ratio. So we ramped it up, right? And thankfully, that has given us a good hand when the ICRR came in on a Thursday to be effective from a Friday. It gave a good hand in terms of the ability and the flexibility for the bank to place it as required. So that's part of...

Srini, assuming that no excess security would be required to maintain, we go back to 2.7%, hypothetically speaking?

Yes. If we don't need it -- if you don't make, keep any additional liquidity, and we manage through that's where we should. So just to hang in for a slide, I'm coming to that, right. Right, yes. Okay. So if you go here, for example, this is where I want to anchor you. The bank you have seen the first is similar to that other page -- 2 pages ago that I showed in terms of the credit, we showed to you here the bank. What we have seen in the past, right, on an interest-earning assets or on a total asset basis, you see the margin, which is there. And similarly, when you go into the RoA, the 2.1%, so the RoA, which is what you've seen. And in between all of those ratios that you've seen there, right? And I gave there for information, the earnings per share or the book value also is indicated there, INR 21 of the book value, INR 525 or the INR 543 on a consolidated. We saw in the first page or the second page also there. That's just anchoring ourselves to what the bank had previously given. Now if you move to the right, this is simply an IGAAP pro forma, which means just trying to say, hey, on a pro forma basis, with all of that, where does not go, right? That goes to the second row on a total asset basis, if you see the 3.7% or the 3.8%. That's where the cost to income simply is about a 300 basis points impact here. But if the numerator changes, the cost to income and since it's a ratio of a numerator, denominator changes too, the credit cost, you can see it goes down because you've got a 0.7% in the bank and a lower number that I showed you on the prior page in 0.3% or so in HDFC Limited. So that goes to 0.6% with an RoA of 1.9%, that in a normalized world, that's what you would see, right? If everything we're performing to how it was performing -- go to the prior page, if everything was performing, how it was performing in FY '23 or even to some extent, FY '24 first quarter. Go to the next page, this is what you would be seeing, right? But the life is slightly different, which is what we've been talking about to say that the additional liquidity entails some cost. And so thereby, there is some variation that happens, and we need to see how the quarter turns out. But at least, I wanted to point out that this is the kind of a pro forma if you use the prior quarter. And then similarly, the EPS and the book value, I want to leave the thought on that with you.

Srini, this is Santanu from BNP. Just clarifying one thing. In the March number, the NIM that you're stating out there, the pro forma NIM, this does not factor in the excess SLR/CRR.

It does not factor in. There is no additional SLR by the way. There is an additional CRR. And additional SLR or securities that we carry is our own because we are consummating a big merger that on our own volition, we carry additional reserves, but not necessary. Mandatory is the ICRR is mandatory. Everything else is our own approach to keeping results as we transition to a merged entity.

No. I'm talking about the SLR requirements on the NDTL component that has come in from the HDFC...

This is as usual, and yes. That's included in that. Yes. HDFC Limited also carried enough good amount of reserves on a normal business as usual basis.

INR 509 book value is net of dividends for both the entities, right? No?

Only HDFC Limited has paid out as of that day, the bank has not paid as of the day.

So the RoA, 16% is on the revised net worth, which is after all the adjustments done. So the base already takes into account all the needs that you have taken. And then you are...

Not the additional liquidity, that's all. For any other consideration...

Denominator is not your factor. Denominator could be one basis. That boosts it up because -- and as a part of merger accounting, you can pass all these entities to -- all these entries to the reserves, right? You don't need to make anything to the P&L...

Correct. That is correct. That's why it's already gone through the reserves, all of the one that I showed you there. But maybe there's -- the next page actually lays it out for you. There's the opening balance sheet right on the top that you see there, right, that INR 391,000 crores takes all of that into account. All those harmonization or the IGAAP adjustments, the dividends and the tax effect on those, on the DTL, everything is incorporated there.

So the 3.7%, 3.8% margin range that includes the excess INR 1 trillion of liquidity on limited?

No, no. It does not.

[Audio Gap].

We told you that the additional liquidity that we carry could be 25 to 30 basis points impact.

Okay. Okay. And actually, this is Rati Pandit from Nirmal Bang. And I have another query on the FVOCI investments.

No, just speak up, that's all. That is only for record.

I have a query on the FVOCI investments of erstwhile HDFC. They had stakes in Yes Bank, Bandhan Bank and other quoted and unquoted investments. So same would be classified under AFS reserve or it could go into FVTPL?

Yes. In the bank, those investments have been taken and marked to cost. That is part of the equity adjustment that we did. We took the investments value down and the reserves equity also down. That's the INR 4,300 crores of adjustments that we have done. There are 2 categories broadly, which is where it is listed and price available. All we have to do is take it down. And where it is nonlisted, breakup value whatever has been elected to be used, we brought that also down to cost.

Srini, Jai from ICICI Securities. On the cost to income that for merged the entity at 40%. This is like-to-like, I mean, HDFC Limited, the way under Indian GAAP would be 19%, right? So 19% and 43%, this is like-to-like with what we had shown on here, right?

Absolutely, yes.

So that includes the impact of amortization of some of the...

Correct.

Upfronted cost itself, right?

Correct. Yes.

This extra liquidity that we have of INR 1 trillion, in how much time, I mean, how many quarters we can exhaust it, we can use it or we will have to run down or we can have that kind of a credit growth? So like how much time would it take, basically?

See, there is no definitive time but it is, I will call it a few quarters, 2, 3 quarters, 4 quarters, I would say that we will take to utilize that. There is a purpose for which we built it up as such a big merger is coming. We -- and the teams -- the treasury team started fit to carry certain additional reserves, which is what happened. And we will run it down progressively. Both it's a combination of both growth on the loans as well as paying down certain borrowings as it comes up. So we'll utilize both of those angles to do it. But it will take a few quarters to go there.

So margin, like this 25, 30 bps margin, which is a drag because of the that, that will automatically get reset at the higher level?

At the higher level over a period of time.

And your credit cost, 60 basis points is the benchmark from here on, that's the pro forma number so asking?

No. Look, you are asking me for future, how it's going to look like. I don't want to give you guidance, but all I can tell you is that the credit conditions remained benign in the past and as we see. There are certain pockets of credit that you see in the market, you hear about it, which is the small ticket unsecured loans or in certain category of SME loans that you are hearing and we are seeing. Not necessarily in our book as such because our book -- those portfolios have done very well. And we're not doing any small size as such. And our SME is more an integrated offering in terms of across security and as well as the relationship offering that it goes. So quite comfortable. But yes, but over a period of time, if you think where -- when will the credit costs revert to me, if that's your big question, it's -- we all like to know that, too, right? When will the credit costs revert to me. And what is the mean of credit cost? When it reverts, what it is, right? In the premerger, the mean was somewhere around 0.9% to 1% thereabouts, premerger. Post-merger maybe a 10 basis points lower than that. That's the kind of the mean. When does this revert to mean? That's part of what is the opportunity we have taken to use to ramp up some of the investments to. And once the investments lap its comparison, then we'll be in a position even if it's reverting to mean progressively, we are there to cover that well.

So of the roughly INR 7 lakh crore investment book on day 0, how much is SLR?

SLR, noninvestment and non-SLR investments you have readily there? We'll try and check, but as of quarter end, we will have it anyway. So...

But quarter end is sometime...

Srini, just one question. If you go to the merged balance sheet, if you do investments by total assets on pre and post, the number post is actually lower. Why do you say it is you carrying excess balance sheet? If I do -- 5,658 divided by 25,017, and 6,984 divided by 32,546, it is 21% here and 22% here. Why it is excessive?

It is not about that. It is -- when we say excess, it is about the liquidity reserves that are there in excess in relation to the profile of the assets. So our LCR ratio, what would have been at 115% or 125% from an overall -- so you model this not just based on the investments alone, it is based on how the inflows and outflows are assumed.

But in a normalized scenario, can you go back to where you started? Because the balance sheet will always be carrying excess investments at any given point of time, right?

Not required. What is the basis? Why you have to make that assumption that we'll carry excess investments?

For a normal business at usual -- you're carrying -- let's assume the premerger, you're carrying a balance sheet of approximately 22%. Why do you say that LCR becomes a greater mean point and not the SLR at which you are...

So if I may, so 2 things. One, that includes the cancellation of investments of HDFC Limited in HDFC Bank. You have to adjust for that. So that's sitting in investments, right? If you're looking at purely just from a math perspective, correct? Second, incoming book is not a bank book. As an incoming book, which is not a bank book, does not need to carry investments at a level that a bank requires. So your question will be absolutely correct, if I was buying another bank who was coming in at a level which needed to better certainly, right? You did your math, and I think you mentioned 21%, 22%. The requirement is only 18% of SLR. Everything else, which is coming in, even what's coming in would be at a higher rate than what was coming in required. And that's why if we look at it from that perspective, it's not necessarily that the entire investment book should continue to be my 23% at a stand-alone level should go up.

See, HQLA divided by the outflow, that's what determines the ratio. And there are certain haircuts taken on the HQLA. And then the outflow is a net outflow of what happens on the liability side, net of certain expected inflows on the asset side. So it's only one line in the balance sheet will not determine what sort of results and the ratios that move on.

Just what would be the CET1 ratio? You've given the cap add of 19.2%. CET1 -- and did you get any benefit on RWA?

The RWA density is about the 65% or thereabouts. RWA density is 65%, 66%.

That hasn't changed.

That hasn't changed because the RWA on the mortgage book will be lower. The non-mortgage book will be higher. So on a combined basis, it is a very similar level.

This does not include 1Q profit, right? Or does it -- 19.2% cap add?

It will include. It will include.

It will include?

It will include.

So 18.9%, also included in 19.2%...

Yes. Correct, yes.

Just on [indiscernible] your borrowings move to deposits over time, your LCR could automatically come down, right? So you will need to maintain key investment...

When the borrowings moves to deposits...

Because the propensity for an upclose higher than the deposit...

Over a period, yes, correct. Over a period of time, it will. And that is why it is very important. In a few forums, we have talked about it. Our goal is to see how do we maximize retail deposits where the LCR value is pretty high. And so thereby, the requirements are low. If you do non-retail, right, the LCR value could be anywhere from runoff of -- runoff for LCR could be anywhere from 40% to 100%. So there are certain wholesale deposits where the runoff could be 100%. There are certain wholesale deposits where the runoff could be 40%, right? And so there's pretty high kind of an LCR requirements, which are there for the non-retail. Our goal is as much as possible, that's why we are trying to focus to say, retail is where -- granular retail is where our interest is in terms of the growth.

But even if it moves to retail, you will still be able to reduce the investment?

Yes, it can grow itself because the retail can have anywhere between 5% to 10% from an outflow point of view.

This is Rikin from IIFL. I just wanted to check whether Credila sale gains are included in the pro forma number or not?

No. Credila sale, potential sale and thereby the gains on Credila are not included because it did not happen before 30th June, not it has happened on day 1 and has not happened as we speak now, right? It's still in the works, it's in the process. It will happen at some point in time, but there has to be certain regulatory and other due diligence processes that are in process.

Any change in the way contingent liabilities were looked at before and now? It largely remains same?

Yes. Yes.

And some of the -- I mean, contracts on -- hedging contracts on borrowings, et cetera, no changes there?

No. So they have all been -- taken in the bank, right, to the extent that it is required. The bank runs those derivatives book or the hedging book as we speak now.

Srini, so you said that basically in the noncorporate book for HDFC Limited, you've already recognized the NPAs which were there, but is there any further stress which is there? And I mean any stress pool that you can talk about?

Maybe there is one page in the appendix. There's no stress pool as such. But I can point to you to some players. If you go down to the appendix on the loans here. You're talking about this nonindividual book which is there, right, which is the second row from the top that you're seeing. You've seen that it is having a reduction, sequentially or year-on-year, these are year-on-year numbers that you can see that. As of June, it is a minus 18% year-on-year. So to the extent that some of these need to be run down or have happened. And your question is whether anything more will happen? The short answer is there will be some. How far our credit is undergoing that assessment, you'll have to wait for a couple of quarters before it can stabilize and get back to that 0 and then start to get to that positive as we grow. Whether -- is that the book that we will continue to have? Yes, we will have that book. There are broadly 3 categories. The developer book, the LRD book and certain other corporate loan category book, right? We would have them, and we will work with them. There are certain things where some of the exposures we may bring it down, not necessarily take it out, bring it down, moderate it down. And we will take a couple of more quarters to see where that will come to stabilize. Part of the assessment that happens.

And the contingent offer that you have created in HDFC...

Any NPA, that's -- if an account is part of nonperforming as of June or as on day 0, July 1, it's part of the reckoning the provision, right? That's part of the specific provision. And if it is not, there is certain assessments that we do, and we carry certain contingent provisions, right, at any point in time to say that things that -- we don't see it now, right, but can happen at any point in time on things. So it carry part of the contingent provision, but not necessarily an account to account or at that kind of a level. So if can anything become an NPA in 3 months' time, 6 months' time, we'll have to wait through to see. That's not our hope, and that's not what we want to drive to. We want to drive good performance on that. But if inevitable something happens, we will face it and we will handle it.

So if it does happen, will you consume the contingent buffers?

What we utilize contingent, that's for another day to work on, but that's not the thought process, right?

The fair value adjustment in investment book is about INR 43 billion. What is the total size of that investment book, which you have fair valued?

The size of the total investment book only -- this is the equity book you are talking about?

Yes, yes. Just curious because you...

The total book is there in that other balance sheet, the differential that includes securities and nonsecurities.

The reason I ask is, you've gone from market value to book value and it has resulted in a loss of INR 43 billion.

Not a loss. It's a derecognition of gain. Yes. So it's not a loss.

Yes. So you can give the size of that book and the INR 7 lakh crore, if you can tell me what the SLR number is?

I don't have it right now...

Srini, Param here from Nomura. Go to Slide 6, where you're showing the margin of HDFC Limited. There is a decline of 20 basis points, FY '23 versus first quarter on an IGAAP basis. Can you explain the reason for that?

As part of additional liquidity cost, there is some cost, which is there. And the second thing, which is -- because it didn't happen like on the last day, somewhat, it happened in the quarter. That's one. And two is, also the loan. Like there are certain additional nonperforming loans that have added there where the interest wouldn't happen or the reversal have happened.

Okay. And one more question. Again, on an ongoing basis on the P&L going ahead, so if you -- when HDFC Limited had previously in 2018, they moved from IGAAP to IndAS, there was an impact on the P&L as well as a negative impact. So now going ahead, is there any positive impact on the P&L? I think last time it had come largely from the ESOP cost, which I think have now been normalized, IGAAP versus IndAS.

ESOP costs are there normalized, which is there. For us, I told you that from IndAS to IGAAP, there is a 25% reduction, right? That's about -- half of it is due to the dividends, HDFC Bank dividends and HDFC Limited. On the other half, roughly half or so is between the tax rate changes as well as the acquisition cost charge-off.

Okay. There's no incremental positive impact as such?

Not, nothing material, which is there.

One more on the PCR going from 42% to 75%. The provision coverage on the HDFC book going from 42% to 75%. So is there a change in assessment of these pools, which you thought were under provided in HDFC Limited or is just at the bank level is more than...

So one thing is that when you look at it, in the IndAS method, you look at cash flows -- net cash flows that recognizes incoming cash flows. In the IGAAP, we have not changed our assessment of when the incoming cash flows can come. It is simply the method in which you make the provision. That is what. So that means if you think even our own book, if you go to the next page, we do get recoveries. We do get recoveries of about 20 basis points. When I report it every year or every quarter, that's the 20 basis points recoveries that we also get, right? Because you recognize it and then you get a recovery at another time.

It's not for a change in thought process on the recoverability of the asset. It's just one accounting standard requires a different thought process. The other requires a different thought process. That's just the way you think about this.

In other words, assuming the economic value of the asset remains, eventually, you will have quarters where you will have credit costs dipping below 60 basis points because you'll actually recover those assets because that's the true economic value of that asset, right? So you can have that buffer as and when it comes.

We believe the economic value has not changed, yes.

Prakhar from Jefferies. Just wanted to check, for the long-term bonds that you have in editing from HDFC Limited, have you got the clarification from RBI whether it qualifies as the housing book or...

No. The incoming book, for the definition too, it doesn't, right? It is an exception that, if anything, that we need. We continue with the dialogue, but there is no -- there are no exceptions that are granted, yes, any of those.

Does that make any changes to the PSL? Like I think that was a central assumption at some point of time that the PSL may not be complied and some of the borrowings was also targeted in that fashion. But does it make any changes to...

No, no. Through another kind of a concession, the PSL is phased in with 1/3, 1/3, 1/3. So the relief is through another kind of a thing that has come in. Anyway, incremental borrowing is anything that we do. And from now on -- and we map it to affordable housing as an example. We'll get that released on an incremental basis. It's only the stock that we are talking about for exceptions. Yes.

And since you mentioned that the 2% entry or exit margin that HDFC Limited is making will basically normalize through 2, 3, 4 quarters as you deploy that liquidity on assets side. From a FY '24 perspective, you are generally indicated that the RoAs will be 1.8% or 2% in that range. So with the exit margin on that book being that much lower, would that guidance still hold up?

See, it remains to be seen, one is, by the way, we have -- as a guidance, I just want you to go to this page, right? I just want to take this page, right? What we have talked in the past is that our RoA remains in a steady band of 1.9% to 2.1%, right? This is over a decade, if you see. This is what we have said. And all of the dynamics of the revenue, cost stacking up and the credit expectations that we have on all of that is what -- this is what historically we have done. So essentially, what we've been talking is that 1.9% to 2.1%. Now on top of this is what we talked about recently -- started to talk recently is about the impact that this can give from the last column that you are seeing, the additional liquidity can give to that in this last column that you're seeing is still the 1.9% that you are seeing, right? It can happen. So your broader question is that, hey, FY '24, when does this normalize to get there to be at your level? It is a few quarters away, 2 to 4 quarters, at least away in terms of how we could get back. And there are 2 things: one, utilization of the liquidity towards loans or paying down of some of the loans or borrowings. And second thing is that there is a mix change that can happen because you know that our retail mix, which is a high-yielding book is at a point where it touched a 45% low point. The total composition is now 47%, is starting to move up. And at some point in time, it was 54%. This is pre mortgage, right, goes up. So that -- part of that transition also needs to happen to get that margin. So it's a few quarters that we have to be patient there, yes.

Okay. So basically '25 is when you probably go back to the normalized RoA is how we should think of?

Correct.

Got it. And if at all, even at a later stage, so I have the -- I'll ask it, if there is any update on the activity on the deposit mobilization if you are actually able to share, that would be good, if that's possible. Especially the whole confusion around deposits versus bonds and if you can clarify what you're thinking...

Okay. So it's a good point you're raising. So the way to think about what we have been talking about is retail deposits is about 80% -- slightly above 80% of total deposits. That is the go to process, our branch, people stack. The management approach is to get as much as possible, the granular retail deposit without any kind of a rate that we try to incentivize through rates, right? It's simply how to get it through engagement relationship, right? That's go to. That's what is that percentage out of the total deposits that we get slightly above 80%, 80% around -- it's 82% last quarter, 80% is what retail. We want to continue to get that. Once it comes to non-retail, also we want to get, but not at any cost. And I'll give you an example, real, right? We have seen it in the recent times. A customer, a client, non-retail customer who's got deposits with us, comes in, and there are some competitors, peers, right, who offer rates 1-year deposit, offer rates 7.8%, 7.85%. This non-retail customer is actually 100% LCR runoff customer. So they've been 0 value to the bank, right, offer 7.8%, 7.85% shows to us. This is the offer I have, what do I do, right? In order to take the deposits, which is 100% runoff, any bank needs to borrow 4.5% from the market to place CRR because this 100% needs to be in liquid securities. And if a bank is running at an LCR, call it, 110% in their mind or 115%, they have to borrow another 10% to put another security on top of it, right? So this is the economics. So which takes that -- and there is a 12 basis points deposit insurance costs on this, right? And so if you add up all of this, this is north of 8%, 8.1% of thereabouts for a year deposit, right? I'll give you a real example that we have gone through in recent times, right? And it's quite a big customer with a big amount, right? We are not going to go into that to say, "Hey, I have a deposit I need." The bond economics are very good for this type of a customer, right, where we can go to a bond alternative. There's no deposit insurance, 12 basis points goes away. And if -- the yield curve is pretty flat, and so from a -- go down the yield curve to a 7-year, right? There is no premium on the yield curve, very marginal premium, right? You go to that bond for 7-year and an asset of an infra asset or a housing -- affordable housing asset gets you another 100, 150 basis points relief from a PSL point of view. So the economics are far superior. That doesn't mean we don't want deposits. We want all retail deposits more than what we want. We want to go get. On the wholesale deposits, we wanted for a relationship, but we will not be in the rate game, right? If you look at us, we published rates for more than INR 5 crores, if you see, we published the rates, right? One of the few banks or one of the only bank among the certain top banks, we publish the rates and we don't change, right? There's certain other banks don't publish those rates. And then the next day, they have an opportunity to outbid, which is I'll give you an example of -- one example of the 7.8% or 8.5%, 100% LCR. We said, thank you very much, you can go, right? And so that's part of -- we don't want to get caught with certain things when the economics don't work. And these are the economics. Deposits, we need all the time. So I don't want you to go away thinking that the bank is not requiring. We do need. We'll not play that non-retail rate game.

We will take one last question.

[indiscernible]. So that was indicated to be 125% already on a merged basis. So I was wondering what would be the further liquidity overlay heading into the quarter which led to such a sharp drop in margins?

Yes. That's a -- that is a point in time because towards the end of the quarter is where that came, and that is exactly what we have been saying that it's a buildup.

One is -- 2 is period end and not -- that's average.

Yes. Yes.

Understood. And also from a grandfathering perspective, the INR 6.36 trillion that moved on to the bank. About 40%...

What is this 6.36?

Total [indiscernible].

Okay. On the liability side, yes.

Of that, about 40% had a maturity into FY '24, as of March. I mean we do have the March balance sheet. So how has that been repriced into the longer maturity buckets?

I think the maturity profile is what, 15% or so. About 15% also in FY '24. Yes. I don't know where the 40% is, but it's about 15% or so.

So all of that has now been already moved into the longer buckets?

No, no, no. It's not necessarily, right? Some of this will come up for maturity. As it comes for maturity, we'll figure out...

The liquidity will be used, too.

What is this?

The liquidity...

Incoming SLR book. Yes, INR 112,000, I think, is the SLR incoming book. Somebody had asked for that. And the equity shares is how much? INR 1,500 crores at book.

Of that INR 112,000...

No, no, no. Incoming. Incoming.

Yes, I am saying the merged...

So with that, we thank you all for coming. One is on a happy note, happy Ganesh Chaturthi. And thanks for you all showing up and talking to us. Have a safe journey back home. I know it is a tough traffic out there. I appreciate coming in person. Thank you. Thank you.