HDFC Bank Limited (HDFCBANK) Earnings Call Transcript & Summary

[Audio Gap] Had a very we navigated this during this period, certain challenges over the last 4 months. Our people have kept step past focus on customer needs and build -- further build the franchise. It's been a very tough period, but I really am proud of them, and thank you to each 1 of them who really stood behind in continuing the strength in residential very so you've had a very -- I also sincerely thank the Board for their guidance and more so Keki Mistry for chairing as the Interim Chairman during this period. I also heartily welcome our new Chairman, Rajeev Kumar. We look forward to taking the franchise to the next growth stage. With the appointment of Mr. Rajiv Kumar, there is a sense of stability and a clear signal to minimize uncertainties in a very short time period. Coming to some of the accomplishments in Q1. The deposit growth continues to be relatively better than the historical Q1 trends. We continue to gain market share, both on an incremental basis and on a stock basis as well. Our productivity of the branch continues to move up, and we realize the benefits of the investments that we've done over the last 5, 6 years. Advances, as we had mentioned, Envision a while ago, I think we are on the verge of pressing the pedal. As you have seen, the Advances have done very well over the last 3, 4 quarters, and that continues -- the trajectory continues. We are focusing on certain customer segments for more to manage more longer-term opportunities. Our focus now, as I may have mentioned in the past and also in our annual report, we are trying to take customer service to a different level, especially in focusing on the turnaround time of our product and service offerings. We are now measuring it at a more granular level across the length and breadth of the country. We are reimagining our digital journeys and analytics so that we are able to have new levels of adoption. That should sort of bring in a fair amount of efficiencies in the quarters to come. As regards to environment, we see our policy responses have been very timely and effective. This is -- there is a very healthy credit demand that we are seeing in the system as we speak. We believe that the F&R policy window that has been offered to the banking system is a great opportunity, and we are focusing on that. We have spent a large part of the month of June in completing the documentation and approvals necessary from our side and also from the counter-body banks across various jurisdictions. The ECLGS scheme 5.0 is also a very good opportunity, and you will see fair amount of growth that we will pick up in the mid-market segment. Competition has been very intense, both on the corporate side where the spreads continue to be very thin, and we have been rather selective. But what we are also looking at a holistic primary relationship engagement. The deposit rates on the granular side has been reasonably stable, but on the nongranular side, I think rates have continued to remain elevated. This quarter, you may see some amount of mix change in terms of more nonretail shorter-term asset mix, the cost for funds moderation. These are all elements, which I believe are just tactically being managed. Fundamentally, the franchise continues to be extremely strong. And we will be stepping up the multiple product offerings and one customer view and you will see the changes happening in the quarters to come. Productivity is a very key focus, and you will see the outcomes of the efficiencies from our focus on digital adoption, the process reengineering, the kind of customer focus by the senior supervisory architecture, which will ensure that we are able to turn around the delivery time is much shorter than what we have ever enjoyed and what the best-in-class market is offering today. We have provided a fair amount of tools for deeper customer engagement, as I did allude in terms of technology. We are on the cusp of really -- of harnessing some of the gen AI technologies on our processes, and we do have a fair amount of light [indiscernible] programs that will go into production during the course of the year. Obviously, all of us realize that security is going to be an extremely important part of our our strategy. And we are focusing on seeing how we can leverage on AI to augment our defense mechanisms as well, where, of course, there are risks in the horizon in terms of the weather-related disruptions like El Nino and also the geopolitical situation in West Asia. But I think the country has whethered these reasonably well. I think we continue to remain very sanguine. We are prepared for as the country and hence the company in terms of weathering any such challenges in the future. I once again thank everyone for a wonderful performance, despite a lot of challenges that have happened over these several months. I think good times are here to come, and we stay committed to as customers and other stakeholders in terms of what HDFC Bank has always been to all these stakeholders over the last 30 years. Thank you so much, and over to Srini.

Thank you, Sashi. With that, let's open up the line for questions. We go straight jump into the questions relating to the earnings of the quarter. Please go ahead.

[Operator Instructions] First question is from the line of Mahrukh Adajania from Tata Capital Partners.

My first question is on margins. Do you think margins have bottomed out now? That's my first question. And what are the headwinds or tailwinds for margins? How would the [indiscernible] mobilization impact them? So that's my first question. And my second question is that IDFC Bank does require 1 more ED, right? So when will we hear of that appointment?

Okay. So first, probably I'll take the first part of the question, how to think about the margin there are 2 aspects. One is the cost of fund is the biggest opportunity on the margin where compared to our historical norms as well as compared to what we have seen in the industry as such. There can be 40, 50 basis points change, but it is not going to change in a hurry. And there are the elements of that is one is the liquidity -- country's liquidity scenario needs to be slightly different than where it is. For example, even in the recent quarter, the average liquidity in the system was about INR 2.08 trillion. However, the peak was INR 5.5 trillion and the trough was a negative INR 0.3 trillion. So there's a big difference between the peak and the trough. And on an average, it we need that standard deviation to the average to be minimal so then there could be kind of an active kind of a market where the rates can stabilize well. And that's part of what the policy is also envisaged. And you've seen that FC&R or the swap window that isn't the direction to ensure that there's adequate flows and there is a stabilization of the rates there. So it depends on that. And that's what determines both the deposit costs, particularly the nonretail deposit costs. The retail deposit cost as various players in the industry have been circumspect and have been steady there. But the nonretail costs around retail deposit costs are being highly elevated. And similarly, the borrowing mix has not come off yet. We still remain at 11%. That continues to be a space that we keep watching. But again, it doesn't change in the short term and it doesn't change in hurry. Carbon mix, again, we've been relentlessly following up on the CASA. I mean on a quarter-to-quarter basis, we can't see and we don't judge. But on a yearly basis, for the year that went by, for example, March 26, for data got published across the industry. while we grew between 9.5%, 10% or so, we still gained market share on that, right, on that front. So we do envisage and we are positioned with our distribution and customer addition to get that. But again, that is a journey and not a kind of a shorter-term impact. So that remains on that. On the asset yield, asset yield is a function of whether if you ask me, whether the margins have bottomed out for the year, we can talk about, quarter-to-quarter, we cannot and we don't manage for the shorter term. The reason is there are timing in the year through which various types of loans get booked. And so we had to wait for the year to see. But we do think that on a full year basis, we are well positioned with our reach and our customer selection to be better.

As regards to the second question that you asked about enhancing the number of the whole-time directors on the Board. Yes, there are several milestones, which the Board is ceased off, including -- with the appointment of the new Chairman -- part-time Chairman, some of which all of you know, I think a fair amount of action will be visible in the short time period, and I would like you to sort of wait for the same.

Next question is from Pranav Gundlapalle from Bernstein.

Question is largely on the branch network where we had a big boost in FY '22-'23. Do you think that all the branches were added in that period are scaling up or have scaled up the way you would have initially expected? And the related question is on the SAR market shares, which have been incremental market shares have been largely flat line despite the branch additions. So what should change for us to once again start seeing meaningful gains in market share?

Yes, I'll first talk about the branch as such, right, from a branch vintage model. Yes, about close to 40% of the branch is for less than 5 years. And yes, those time periods that you mentioned, we did add -- made a significant addition to branches. If you look at the branch -- for branch metrics, we are about INR 330 crores per branch currently. And if you go back to the '23 time period, we were INR 266 crores per branch. And if you go back even further, right, it's less than INR 400 crores. So the point is the branch addition at an aggregate level, the early vintages are performing to the legacy branch vintages. And the legacy branch vintages are also progressing towards, what, 10-plus years and 15 years plus years will do, which is what is demonstrated in the average per branch when you see INR 330 crores per branch, it's extremely, very -- extremely productive in all of the best-in-class in the industry on a per branch basis. So the branches are behaving according to the model that is envisaged. One thing I want to mention is that while -- it's very important that the branches are the key arm to get the deposits in, branches are a very significant part of how we grow part of the retail assets and the small and medium enterprises loans, SME loans. The wholesale, the propcorporate loans get centrally managed through various relationships, but the branch level is where all the other segments operate. And the growth that you see there, these branches do deliver all of those things, right? I just want to leave the thought there. And in terms of the SAAR, the savings account that you mentioned, 1 thing that if you look at the household deposit growth in the country as such. When you look at the data that gets published by RBI across various categories, segmentation of deposits, household deposit growth is 1 of the lowest among ways, right? When you look at the corporates, when you look at the government and institutions and when you look at the households, the household deposit growth is one of the lowest. That doesn't mean that that's how it's supposed to be. That it's going through the phase of all. It's remaining in the single digits. And the way we have approached to address this is, there will be only a certain level of savings accounts anybody will have. And that is why the distribution reach and addition of the customers is about the increasing the unit. And so thereby the unit value can marginally go up, we need the unit. So this is about the unit economics that we need to drive. And at the same time, as we drive the unit economics, we are today a little more than 100 million customers. And as we drive the unit economics, keep the cost in check and under control on efficiency so that we scale this. That's what is happening is the scaling is happening with unit economics slightly moving because we are not counting on the household deposit growth to go from 8%, 9% to 15%. That may happen may not happen. But that's not our approach. Our approach is to increase the units to get that benefit. Sashi can add.

If I can just follow up. My question was last on a relative basis. So you obviously had a very, very high productivity to start with. But if you see it relative to the system, it's actually come off a bit in the last 3 years. Same with the deposit growth, SAAR growth, et cetera, you had a very big delta of the system with a peer. That seems to be growing. So some color on what has changed? Like are you adding the same number of accounts and balances are coming off? Some color there that will reassure that you'll all get back to industry growth.

So Pranav, thank you for that. I mean, number 1 is you yourself alluded the fact that we've had a fair amount of investment in distribution over these 5 years. So our denominator has a fair amount of branches, which are -- which will start to generate more and more customers and hence, balances as we start to move into the 0 to 5, 5 to 10, 10 to 15 vintage of these investments that will happen. And you have seen in the -- in our presentation how the economics work for different vintage branches. Number two is despite that, the productivity may have come down relatively, but it's still one of the best in class in the industry. The second part of it is -- as Srini was saying, it is a fact that in the last couple of years or more so 3 years, the industry in the system were also playing with a fair amount of number of accounts, which were not necessarily behaving in an orderly manner. And what I meant by that is you did see a fair amount of or losing accounts as miles and that sort of started to increase in the banking system significantly. We needed to -- we use a fair amount of our algorithms and rule engines to try and see how we can bring to bring in some amount of quality acquisitions over the period of FY '20, '25 and '26. I think these are 3 -- or '25, '26, which is what you -- we did, and that was pretty much reflected in the slowdown in the new acquisitions because we were gearing ourselves to the new realm of better quality acquisitions. As we now move forward, you will and one should see a step-up in the in the -- as what Srini calls is unit economics in terms of the numbers moving up at the quality that -- and the kind of diligence that one would need -- one would necessarily need in this kind of environment, digital environment, and that is what we are trying to do. So I guess it was a matter of correction to ensure that we put in the guardrails, not to bring in unwanted accounts. I think as we move forward, I think we are reasonably confident that we not only will should reach reasonable healthy numbers in terms of annual momentum, depending on the capacity of the overall 9,700 branches, but also the quality acquisition value, unit value as well. So my hunch tells me that I think you should see reasonably healthy growth over a 1-, 2-, 3-year period in the same discount as well.

Next question is from the line of Kunal Shah from Citi Group.

Yes. So firstly, on margins. So now we are almost down to 3.4-odd percent, borrowing has also come up to 11-odd percent, and we had highlighted that it can come down to 8x. So not much room left out there. Obviously, it's a competitive environment. But with this franchise, where should we eventually see margins settling down because earlier, the expectations were much higher, but now it's falling a bit and what would actually lead to this? What are the levers available for the same so? That's the first question. Second is when you look at it on the FC&R deposits, last time we were quite active, we mobilized the largest chunk. So if you can just guide in terms of you mentioned like documentation is on, but what is the kind of number which we would look at or maybe the market share in the overall FC&R deposits that we would want to target at this point in time? And thirdly, on CEO, re-appointment, if you can just highlight in terms of where the process is because it's now due. So has it been already applied to RBI would there be announcement from the Board in terms of the approval, and then we would see the application to the RBI? So if you can just highlight in terms of the process where we are in terms of the CEO appointment, yes?

I'll handle the margin then. So first is, Kunal, thanks for asking that. One is I do want to mention that the borrowing mix, which is at 11%. We don't expect that it will just settle at 8% or 9%, right? The industry is more like a 5% or 6%, right? So we do think that the maturity should take care of that to some extent. And the growth, overall growth should also take care of it to the balance of the extent because as the growth happens, and you don't need to fund only through borrowing. So then the borrowing percentage will go off and come down. Now that's one. Second thing connected to that, you asked is, what is the longer-term margin where does this settled, right? See, again, as I mentioned, both from a -- when you benchmark and see against us against the peer group and so on, the cost of fund elements that needs to play out are very much intact, and those are being.

[Technical Difficulty] Ladies and gentlemen, thank you for your patience. We have the line for the management connected I request you to help serve the line drop, please?

Okay. Thank you. Kunal, where did it get dropped because somewhere the cable?

So you were mentioning that cost of benefit -- cost of funds benefit is yes to play out. Yes.

Cost of fund benefit will play out, and it is very much in the works both in our annual review of plans and as well as for strategic review. It's very much where we envisaged and receiving the attention of various verticals to get that, right, both from a mix of products within the deposits. as well as mix of borrowings within that very much there to get that. On the asset side, I was -- that's where I think it got cut off. On the asset side, the mix of assets is also an important contributor for our over-term margin. Today, we are at a 52% retail mix. At our kind of an experience that we have seen, we were at about 60% or so. And we always have thought that India's consumption component of the GDP is at about 60%, and that's where we want to be. As far as the retail mix is concerned, because that's why we mirror the economic growth and fortunes in the country, so we can be putting in tandem with that. And so that mix of the asset is also an important contributor.

As regards to the third question that you had on the reappointment of the MD, I can share with you that the GNRC and Board is fully seized of the matter, and that is work in process. And as they arrive at a conclusion, we will certainly make the necessary announcements in that regard.

And as regards SRG, as I mentioned, even in 2014, the base start to pick up only in the second month of the announcement. The first month, life in 2014, I think we have spent a fair amount of time in the documentation part of it and the approvals, both internally and also the respective counter-party bank. And you will see in the month of July, August, September, we have certain milestones. I'm sorry, I can't sort of put a number to that in a public domain, but you will see a very handsome or that's the endeavor to ensure that we are reasonably strong and significant market share. We can go to next.

Next question is from Shehadri from Emkay Global.

So a little bit of a follow-up on Pranav's question on deposits. So am I to understand that decline in the CASA ratio is temporary or a passing phase? And as your customer acquisition engines start to fire it, we will see a restoration also seeing the share of wholesale deposits rise albeit not by a large amount, but it's gone up from 17% to 20%. And you're right that does reflect what the RBI, has been talking about in change of the composition of deposits. So being a large bank, do you think that even if the system continues to gravitate towards wholesale and non-CASA deposits, you'll be able to get back to your earlier ratios once your customer acquisition engines start to bear fruit?

Okay. Let me try and attempt that is. First start. The endeavor and our vision is to reach tools somewhere near the premerger levels or just around the time of the merger, which was around 38...

Post the merger, yes, 38 and before that, we were 40.

And if you -- as Srini has eluded, obviously, there has been significant change in the household savings pattern over the last 3 years more so. So what are we trying to do? We are trying to see how we can gain more incremental market share on our low-cost funds much more than what we have as a stock share. That's the first part of it. Obviously, our appetite to grow is much more. So there is a need to even grow our time deposits. And the result is because if you need to grow, then you would need a certain amount of time deposit growth, which invariably over the last couple of years has been much higher than the and the low-cost funds growth rate. So therefore, the CASA ratio has been a little bit on the lower side. So the thought process that we have, as shined mentioned, is that we are probably now after putting in our guardrails in terms of what kind of customers need to come in into the institution from an acquisition perspective. I think we are now ready to prep the pedal. I think that is what I think the entire franchise is driving about and maybe over the next 9 months, we will see -- we hope to see a fair amount of change in the acquisition numbers and hence value. If that sort of really changes the growth rates to be much better than our time deposit growth, I think that will be wonderful. But obviously, the world is not so perfect. And having said that also, I mean, if you are also 50% of your balance sheet is nonretail, which is wholesale, you cannot really ignore that particular franchise as well. We cannot sort of pick and choose what we want. We need to ensure that we are there for all the needs of the corporate customer, whether it is for deposits, whether it's for cash management, whether it's for any other type of facility as long as the appetite is there for us. So yes, this particular quarter is, as I said, we are now not looking at a quarterly measurement. We want to see at the medium to long term. I think while this quarter, it could be 20% mix in terms of deposits, et cetera. But I guess, these things then normalize and in the medium to long term, I think it's been more or less stable, which is what we have seen over the last 10 years. Our focus is going to be on retail in terms of -- because that's where you get the advantage on deposits the way on the cost of funds. But at some point in time, from a holistic relationship perspective from -- even we need to patternize some of the capital markets and also the corporate segments as well. But be as it may, whilst margin is something that I think a lot of us have been focusing on. For us, there are areas that we want to first because margin will play out as we move forward. I'm sure, assuming all things remaining same from year -- from next year, they will be the base typical way of. And how this sort of plays around is not something that I'm necessarily focusing. I need to be in the market. We need to be competitive. But we want to be competitive in such a way that we are able to garner a lot of efficiencies arising out of our -- are enhanced and stepped up focus on customer service, which will bring down turnaround time, and hence, we'll bring down the capacities, the back end, which will move to the front end, which will see a fair amount of efficiencies over the next 2, 3 years. This is how we are planning strategically. And if in the bargain in the process, the outcome also sort of helps us in getting a better low-cost funds proportion and hence, better margins, I think that's a kind of a bonus as well. So we are very focused on 3 or 4 things, customer focus to the level of obsession, riding on technology, especially in terms of embedding AI in our journeys Three is trying to ensure that a daily operating rhythm just reduces the turnaround time for product and service delivery for -- is stepping up and releasing a lot of capacity and the customer facing in to be able to engage more with the customers and hence, more of business momentum coming about, which is growth. And then the very fact that we are cutting down on turnaround time, efficiency should lead to better cost to earnings efficiencies as well. So this is an offset, which is what we are looking at. And if in the bargain that we also sort of get the benefit of improved CASA ratio, CASA mobilization over the next 2, 3 years, I think that's going to be a jam in overall strategy.

Just a quick follow-up. Given your investments in front-end tech and customer service, do you think there's also an opportunity to increase wallet share in existing in vintage customers? You were talking about customer acquisition be a driver, but do you think that, that's also an opportunity?

Yes, absolutely. Because, see, the moment we start to focus on that and when we try and create a kind of best-in-class experience, why would any customer move out? I mean, rather he would -- that's one of our key objectives, gain market share within the -- within our existing base itself or even from a new-to-bank acquisition as well. So that's going to be our next 2-, 3-year journey, and they're all seized of this. We're not sort of too worried about the segmentation. I mean we need to be agile in any customer segment that we are participating. Today, we are focusing on more and more in the retail and MSME segment. I'm sure we have a strong hold in the corporate segment. But even on that, with the implementation of new technologies over a period of time, we have been prioritizing more on the retail and MSME segment. But I'm sure that given the wholesale corporate and capital market segment will also get that, and that will also sort of see kind of a change in terms of the wallet share.

Thank you. Sashi, one thing I do want to add is that while there is a relentless pursuit for CASA, granular CASA that includes current accounting too, from the retail merchant type of customers. Time deposit continues to be a very big opportunity because only 14% of our customers have time deposits with us. So there is an enormous opportunity for a deeper penetration on that. And so that's it's not -- this or that, it's both. I just want to...

Yes, sure.

[Operator Instructions] Next question is from the line of Suresh Ganapathy from Macquarie Capital.

Yes, sure. Just 2 questions. One thing is your PAT growth or your earnings growth has been lacking your balance sheet growth, right? If you look at last year, if I look at this quarter, it's been just 5%. Balance sheet growth is well upwards of 13%, 14%. So are you confident over the next 2, 3 years, you can get earnings growth above balance sheet growth because you're going to grow at 15%, would earnings prove well above that? Are you confident of doing that? That's the first question. The second question, I mean, one of the biggest aspects post the merger is that staff decline in CASA down to 34%. I know there are several reasons for it. All of your peers are at 40%. And you RBI's own financial stability report has explicitly talked about that, the correlation between rates and CASA is breaking down completely. So it doesn't mean that rates are going to go down, CASA may go up or anything like that as per Reserve Bank of India's own report. So how can you go back to the level of 40%. So just wanted to want to answer for these 2 questions.