IDFC First Bank Limited (539437) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the IDFC First Bank Q1 FY '23 Conference Call hosted by ICICI Securities. As a reminder, all participants lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kunal Shah. Thank you, and over to you, sir.

Thank you, Mike, and good evening, everyone present on the call. Today, we have with us Mr. V. Vaidyanathan, Managing Director and CEO; Mr. Sudhanshu Jain, CFO and Head of Corporate Center; and Mr. Saptarshi Bapari, Head of Investor Relations from IDFC First Bank to discuss the Q1 FY '23 earnings. Over to you, sir.

First of all, thank you very much, Kunal, for organizing this for us. And for all of you investors who have joined us this evening. Thank you. I think in a way, you've been very patient investors with us in a way we've tested the patience I think, for the last 3 years with one issue or the other. But I think really, I must say, you pass the test, and we tested you hard. I think that we've come a long way and now we can quite confidently say that the foundation is well built for the bank. We have a really strong deposit base, 50% pass-off, we're able to raise deposits quite comfortably now. Of course, we even take during the period of COVID over INR 2,500 crores. So that should give us some confidence. But the fact that we're continuing to raise strong deposits even after dropping interest rate is really heartening for all of us at the bank. Now with the deposits, let me say, that one of the foundational items for a bank to be able to raise the profits, which we have now with rate. Now on the lending side, frankly, we always felt that we already had a tight and tested model that has been running in the combined history of both banks put together, so to say, for close to 10 years now, our loan book has been component of a 30% for quite a long while. And that machine is holding up very well, both the ability to disperse and more importantly, the quality of that lending continues to be strong. Later in the conversation depending on where the conversation goes, we'll share with you specific indicators about how each of the items about the so-called through-the-board population, i.e., the quality of origination, quality of customers coming into the bank, we share that with you. We will share with you how the check bounce of how these customers amounting the tech or what the trend is on presentation. Number three, on presentation if the return we go and collect. So what are those percentages. Number four, how are the vintage cohorts looking like, we'll share all the data that with you how the conversation go depending on your level of interest. But let me just say that all those numbers are looking very good, and that gives us a picture about -- that is directly translating into what the SMA numbers for the bank are. Again, the SMA numbers of what the numbers were, let me say, even pre-COVID, people thought that have we caught on the COVID, pre-COVID, we not caught up like better. So SMA-0, SMA-1, SMA-2, literal product after product, segment after segment and at the overall bank level, they're all lesser. Now naturally, the SMA is low, then flow into NPA will be lesser. So we are quite confident and then the NPA guidance that our credit loss for the Q1 is a little bit less than 1.5% or then we guide for the retail NPA to become less than 2%. All of them have a basis. We've just not been saying it without basis. So the short point is, therefore, that the asset quality numbers are looking quite good. The third item, if you move on from deposit assets and asset quality and the fourth items that comes to profitability. Now as such, profitability is concerned, again, I think something is very significant about our bank. I'm not sure how many you have spotted it. But if you've noticed for the last 3 years, our loan book has not grown very much. It has grown by 6% compounded 3-year CAGR, but I don't think people have really spotted that the operating profit of the bank, the core operating profit that is ex treasury, that number, especially because we all know operating income is trading income, it count on it. But the -- if you noticed, FY 2019 let me say, the annualized of the second half was pre operating profit, both Capital First and IDFC Bank put together post-merger annualized was INR 1,105 crores. Now 3 years have gone by, we've spent a lot of money building various capabilities and all that. But despite all that, our operating profit has risen to INR 2,753 crores, and that's grown at CAGR of 36%. So core operating profit growing at a CAGR of 36% year-on-year, is good for us and gives us confidence in the business model we're building. And the second thing is that last year, in FY '22 or FY '21, our core operating profit, that is basically NII plus fee minus OpEx, that has driven by 44%. Now we are feeling within us that this number into FY '23 should rise by another 45-odd percent and our own internal modeling says that into FY '24, this could rise another 45%. So if the core operating profit starts compounding like this, I think it really augers well for the bank. Now after core operating profit comes the provisioning line and then rest is freight P&L. So I'll just take it in that way. Now when it comes to the provision line, we have pointed out to you that despite the second wave when there was no moratorium and our currency non-required associate provisions, despite the serious first quarter of last year, our overall credit loss for the last year was only 2.4%. Now this year, we're guiding for 1.5%, and frankly, we feel we'll meet that very comfortably. And therefore, this sort of a strong operating profit opening up for the bank, if our credit loan is 1.5%, rest of the math we can do about what it will do to the ROA and ROE. Now I want to just wait for when you look at the ROA. I think one of the very significant events that have happened in the life right now is that the core let me say, the preprocessing operating profit last quarter. Sudhanshu, what was it -- was INR 19,000 crores -- I think INR 980 crores. Sudhanshu will take you through when you see the numbers. So INR 986 crores, let me round it off INR 1,000 crores with a provision of INR 2 million. So INR 1,000 crores of pre-provisioning operating profit for the bank is really fantastic. It gives us a lot of confidence. And therefore, even if you take a normalized provisions, credit cost of 1.5%, it gives us a lot of fate for profitability. And I want to take you back in time for 2 quarters to just study how much progress the bank has made that in the first 4 or 5 quarters of the merger of the bank, the issue was not provisions. The issue was bank never had profits, never had pre-provisioning operating profits. So provision normally for every bank is like for any reasonable good bank is same 1%, 1.5% of average book. But our problem was that we never had the operating profit. So therefore, for example, last Q1 of FY '22, when the COVID second wave happened, at that point of time, the -- we had provisions, but we didn't have operating profit. Now for the bank to have an operating profit of INR 1,000 crores, it's a very big thing because now we have the space to be able to take normalized provisions and be profitable. It is frankly our heed that our banks have never posted a loss again in its life. I used the word, I'm carefully calculating the thing, a fee, the reason just because to be technical and legally right. But otherwise, generally, we don't think it will happen again because now we have very, very strong operating profit, which means that our bank will continue to pronounce compound equity, which we can very confidently and safely sustain up. Now -- that now translates to return on assets. Now return on assets front, but before I go to return matter, can we just read up 4 numbers to you, if that will help you understand this. The Q2 of FY '22, our profit was -- the PAT was INR 152 crores. Q3, it jumped by 85% to PAT to INR 281 crores. Q4 FY '22, our PAT increased to INR 343 crores. Now Q4 FY '23, our PAT has gone up to INR 474 crores. And privately I share with you, there is nothing in the income that you should worry about is it onetime and all that, nothing material. So that gives you a sign that gives you color about where the story is headed. Now that translates to return on assets. When you translate that, our ROA in Q2 FY '22 was 0.37%. Q3 was 0.64%. Q4 was 0.77% and Q1 FY '23 0.97% that we run it off 1% for convenience. So just please see where the ROA has moving so fast upwards. So it gives us confidence that there is no onetime sitting in this, it's just a confidence that this story can progress up for a while. So many of you who have been disappointed with us saying that you guys are not making profit and for those of you who feel like that, I must say that the way if you look at it, it's not the 1% is greatly impressive. I mean, a good number should probably 2%. But then the issue -- the [indiscernible] is not at 1%. It's a good land mark. But what is more important is the direction. The speed at which is getting fixed and it is getting addressed is something we should take note of. And therefore, for all of you who feel -- in fact, there's a couple of global research reports to all this look at us and say guys are making no ROE, why should we read a 1.2x book. I think they're fundamentally making a mistake because they're looking at today. These are the look will be 2 years forward. And let me tell you, you'll probably surprise of it. Now the other thing is return on equity. Return on equity, it is basically that our ROE in Q2 FY '22 was 2.97%, Q3 '22 -- by the way, I'm talking sequentially quarter, not like year-on-year and all that, the sequential quarter, 2.97% goes to 5.44%, and Q4 FY '22 moved to 6.67%. Q1 FY '22 moved to 9% touch and go. So I hope it should not be a surprise for you when we say we'll guide at the Q4 of this year, one of you asked this question what the ROE will be and I told you double digit. Our own sense is that we'll get there even before Q4. We like to probably advance the guidance if it's something like that. So the short point is that some of you have been disappointed with our profit number. But I must say that not that we are a choice because there are just so many lumpy assets to deal with. We can't push them under the carpet. We had to deal with them, whether the B1, Reliance Capital, some infrastructure loans, some South India-based companies, that are unfortunately [ 55 ]. All of these are legacy accounts, we had one retail -- large retail seeing on which we had exposure that's been in the news for the last few months in the large legal side. We had exposure there, that's also a legacy account. So one after one after the other, we have built every one of them. I can tell you confidently there's nothing left here. Now for those of you who don't feel confident about it, you can watch the results for a quarter or 2, you'll get the confidence. So with that, the legacy issues out of the way and the core operating profit opening up the way I described to you in terms of ROA, ROE. It shouldn't be surprising for you that our profitability is increasing. So I can, therefore, say that we are looking forward to a very, very good FY '23. We don't expect to give any surprises. And we -- if you were within the walls of this office, you'll probably get a feeling that we are internally feeling very, very confident. So I'm feeling very good about the upcoming year and maybe '24, '25 and so on because I don't think there's any surprise left here. So that's about it. Thank you very much for taking the call today, and I request Sudhanshu to maybe throw some more color into the discussion.

Thanks, Vaidya. Good evening, everyone, and welcome to the con call. I'm happy to share the financial results of Q1 FY '23 with all of you. The overall balance sheet price has crossed INR 2 lakh crores in this quarter and grew by 19% on a Y-o-Y basis to reach INR 2 lakh 565 crores. So overall funded assets, which includes loans and advances and credit investments, grew by 21% Y-o-Y and 6.7% sequentially to increase INR 1 lakh 37,663 crores. Within that, the retail and the commercial book together grew by 36.8% Y-o-Y and 9.9% sequentially to reach INR 1 lakh 1,309 crores. Home loans registered the high growth at 61% on a Y-o-Y basis. Mortgage book, which includes home loans and loan against property, now constitutes 33.5% of the overall retail and commercial book. The rural book, which includes funding to [indiscernible] group, Kisan credit cards and small enterprise loans, also grew strongly by 29% on a Y-o-Y basis. This segment is bouncing back from the [indiscernible] impact in base 2. Speaking of our debit card business, the bank has issued more than 1 million cards since we started this business in January '21. The credit card book worth INR 2,315 crores on June 30, up by 183% on a Y-o-Y basis. Even with credit cards, [ terms ] have increased by 20% on a sequential basis, we are clearly increasing market share here. With respect to wholesale assets, the non-intra corporate loans grew by 12% on a Y-o-Y basis and by 1% from on Q-on-Q to INR 23,970 crores. We will continue to grow this book in a risk-adjusted manner. The infrastructure book degrew further and reduced by about 35% Y-o-Y and by 2% Q-on-Q to INR 6,739 crores, and now forms nearly 4.9% of the total funded assets as compared to 22% at the time of merger. From a risk standpoint, borrower concentration has also improved significantly, the exposure to top 20 single borrowers reduced from 16% in March '19 to 9% in June '22. Moving on to the liability front. The CASA deposits of the brand has increased by 22% Y-o-Y to INR 56,720 crores. The CASA ratio is stable at 50.04% as on June 30, 2022. Average CASA deposits also grew by 10% on a Q-on-Q basis. Outstanding term deposits grew by 20% on a Y-o-Y basis. With that, the overall customer deposits grew by 21% to reach INR 1 lakh 268 crores. The bank had excess liquidity and maintained an average LCR of 128% during Q1 as compared to 136% in the previous quarter. This is still well above the regulatory requirement. The branch count now stands at 651 branches along with 807 ATMs. The bank opened 10 branches in the current quarter and have opened 50 branches in the last 1 year. The bank has substantially granularized the liability base since merger as Tata and TD less than INR 5 crores stands at 83% as on June 2022. The bank has also successfully repaid high-cost legacy borrowings of INR 5,530 crores in last 1 year, including INR 2,775 crores in the current quarter. The total outstanding of its high cost legacy borrowing stands at INR 22,406 crores at June 30, 2022. Moving on to asset quality. The gross and net NPA of the bank improved to 3.36% and 1.30% as of June 30, 2022, as compared to 3.7% and 1.53% as on March 31, 2022, reflecting an improvement of 33 basis and 21 basis, respectively. The decline in GNPA and NPA on a yearly basis was much sharper by 125 bps and 102 bps respectively. The provision coverage ratio, including technical write-offs, also improved to 73.13% at June 30 as compared to 70.29% at March 22 and 61.06% at June 30 last year. The gross slippages for the quarter were lower by 20% on a sequential basis. And in fact, slippages net of recovery as upgrades were lower by 25% sequentially. In the retail and the commercial segment, the GNPA and the NNPA came down significantly by 51 bps and 22 bps sequentially, to reach 2.12% and 0.93%. We are happy to share that we are already trending around the long-term sustainable target in the segment of GMP, as Vaidya mentioned. In the corporate book, ex infra, the GNPA at 3.67% and NNPA was only at 0.2% as compared to 2.75% and 0.31% as on March 22. This book also had a high provision cover of 97% as on June. The increase in profit NPA by 92 bps during the current quarter is primarily because of loans to one large legacy retail chain group, which slipped into NPA out of the existing restructuring pool. It may be noted that bank has made 100% provision against this retail change group on a prudent basis. Again, happy to report overall restructured book as a percentage of total funded assets has reduced to 1.3% now as compared to 1.8% last quarter. The S&A on the post-sale book is less than 0.5% of the book at June 30, even on the retail and the small business rules, as Vaidya mentioned, the SMA position has further improved as compared to the previous quarter. Coming to the profitability. We are happy to share profit after tax grew to INR 474 crores from a net loss of INR 630 crores reported in Q1 last year. Sequentially also, the increase was from INR 343 crores to INR 475 crores, which is a growth of 38%. This was largely driven by strong growth in operating income and lower credit costs. Within that, the NII grew by 26% Y-o-Y to INR 2,751 crores. The net interest margin was 5.89% for Q1 '23 as compared to 5.50% in Q1 last year. Fee and other income witnessed a strong increase by 100% Y-o-Y to INR 899 crores. Of course, Q1 '22 was COVID-impacted quarter and hence, this decrease looks a bit higher. However, even on a sequential basis, fee income has increased by 7%. The retail fees contributed 92% to the overall fee and other income, and it is quite granular. Fee income from toll and credit card was at 16% in Q1 FY '23 on the total fees within the overall fees. We have given more details around the fee breakup in the investor presentation. The plans had a trading loss of INR 44 crores in Q1 FY '23 on account of sharp increase in market yields as compared to a trading gain of INR 393 crores in Q1 FY '22 and a growth trading loss of INR 9 crores in Q4 FY '22. Recognizing the heightened market volatility, the bank proactively tightened limits and reduced the book. The modified duration of the ASF and ASHFC book was lower at 0.82 years on June 30, '22. Moving on to the core operating income, excluding trading loss increased by 39% Y-o-Y to INR 3,650 crores aided by strong NIM fee income growth mentioned below -- before sorry. Operating expense grew by 31% Y-o-Y to INR 263 crores in Q1 FY '23 from INR 2,032 crores in Q1 FY '22, and was marginally lower from INR 2,674 crores in Q4 FY '22. The increase in OpEx on Y-o-Y basis was relatively higher on account of low base effect in Q1 FY '22 due to the pandemic. The cost-to-income ratio excluding trading gains improved to 72.95% in Q1 FY '23 from 77.16% in Q1 FY '22 last year and by 323 bps as compared to Q4 FY '22. As a result of the above, the core operating profit, excluding trading gains, grew by 64% Y-o-Y and 18% Q-on-Q basis to reach INR 987 crores from INR 601 crores in Q1 FY '22 last year. Provisions were also lower by 84% and 17% on a Y-o-Y and Q-on-Q basis, respectively, and stood at INR 308 crores in Q1 of this -- Q1 FY '23. The credit cost on a quarterly annualized basis as a percentage of average funded assets for Q1 FY '23 was 0.9%, which is well within our guidance of FY '23. On a quarterly annualized basis, the ROE for Q1 has touched nearly 1% and ROE has reached 9%. ROE improved by 20 bps and ROE increased by 28 bps from the previous quarter. On the last segment, with respect to capital adequacy, the bank has maintained strong capital adequacy and its capital adequacy, including profits for Q1 FY '23 was at 15.77% as of June 30, 2022, with a CET ratio at 14.01%. The current quarter capital adequacy had an impact of 58 bps on account of recompetition of ops with RWA, which is taken in the first quarter everywhere and then it started for the rest of the year. Even at 15.77%, the bank is well above their regulated threshold and look forward to grow the book in a profitable manner. Yes. With that, we can move to the Q&A section.

[Operator Instructions] We have the first question from the line of Ishan Agarwal from Erevna Capital.

First of all, congratulations to the management for once again delivering a performance surpassing expectations in most plants. My first question relates to the NII growth quarter-on-quarter. So the NII growth quarter-on-quarter stands at around 3%. I think since the time of the merger, this is the lowest Q-on-Q growth in NII and maybe the first time decline in NIMs quarter-on-quarter. Is it because of lag in passing on the increase in cost of funds on the lending side during the quarter? Or is it structural in nature?

No, we have a lag in passing on. So this quarter, we'll be passing it on. So this will get fixed.

Okay. So again, we should be on an upward trajectory from Q2?

Yes.

Okay. Okay. And -- so going to the next question, provisions at INR 308 crores in the quarter looks extremely low. That's around like 1% of the average book...

0.9%.

Yes, sorry 0.9% of the average book. Are there any write-backs or one-offs in the provisions for this quarter?

No.

Okay. So again, from this question, your press release mentioned that the bank is well on track on its guidance of 1.5%. So should we assume that the provisions for Q2, Q3 and Q4 would be higher than 1.5% for the annualized credit cost to be at 1.5%? Or...

No, that's a good question. But we don't see in guidance just because we had a great quarter this time. So let's watch the rest quarter. But we don't see any reason why credit loss for the subsequent quarter should go up any materially. So probably will -- our own internal sense is that we'll do better than 1.5%.

So could it be 1% to 1.1% for the rest of the year?

It could be, it could be. That would be a fair guess, but we don't want to put it out because we don't want to lead up everybody down the road and just in case there is an odd blip on this side. But yes, I mean, right now, it's 91 basis points for the quarter, which I hope you'll agree is probably very good for the...

Very, very good, yes.

For the kind of yield we get on a book. So yes, we don't expect it to materially go up, but then we don't want to change guidance based on one quarter.

So barring any unforeseen circumstances, we could expect it to be 1% to 1.1%?

Yes, I think so, yes. That would be our internal guess.

Okay. So again, on the next question is actually on the OpEx front. So OpEx has seen a Q-on-Q decline in absolute terms. How do you see that taper on OpEx for the next 3 quarters?

Every quarter will go up a little bit. But this quarter, it didn't materially go up, but you should expect that normal quarter-on-quarter growth should happen.

Okay, okay. And in this quarter...

Disbursals and...

Okay. So it could go up marginally every quarter from here on sequentially?

This is the operator here. Can you hear us or the management? Can you hear me?

I can , yes.

Just give me one minute. We'll check with the management connection, one minute. [Technical Difficulty]

Yes. Yes. So you answered my question on the operating expense front?

Sorry, we cut out. So I don't know what said -- you cut out. But we won't say that normal quarter-on-quarter increase because there will be more disposals in the subsequent quarters and naturally more upfront payouts and normal collection expenses, that kind of stuff, but nothing material that should shake you or surprise you.

Okay. And on the savings account rate front, so we are offering 6% on savings account balances above INR 10 lakhs. How much has that impacted our blended cost of funds on savings accounts? So what would be the blended cost of funds right now on the savings account?

Yes, blended cost of funds, savings account would be 5%.

5%. Okay, okay. Just a suggestion, once you've shared the investor presentation, you do not need to read out the data points in the PPT during the call. That will maybe give us some more time for Q&A.

We'll be careful next time.

We have the next question from the line of Tushar Sarda from Athena Investment.

Congratulations for great performance over the past 2, 3 years. There's just one parameter of the bank, which I can't get my head around to is the total expense to assets ratio which is almost at 5%, 6%. And I think in terms of comparison, only equity, small finance is higher than that. Even AU Small Finance is at 3.5% and the larger private sector banks are below 2%. So can you just help me understand this?

Okay. If you don't mind, you have to answer one question of mine, then I'll answer your question.

Yes.

Okay. What is the vintage of most of the banks to compare it with?

No, vintage is there, obviously. So is it because of the vintage or is it -- that's what I want to understand. One factor I don't understand.

No, you answered the question. So you say you take all the big 4 banks. How long have they been operating? At least 25 years, 30 years.

Yes, yes.

So when you put up a branch or an ATM, they take time to leverage. So we are -- for all practical purposes, our 640 branches, you can call it had an average life or maybe 1.5, 2 or 3. They're not 20 years. So the same branches, you can imagine when you -- the one thing I think many people are not able to get their head around, if you -- or not get the perspective is that there is a new bank. So we put up infrastructure as we run an established bank because we are already at merger, we had a large loan book of INR 1 lakh crores with no retail deposits. So we went and put up their branches, but they've had a very short life yet. So when these branches really scale up from here over the next 10, 15 years, you'll find that naturally all the cost venture will measure with every other bank, it has to. That's on the liability side. On the asset side, again, I have asked you, I won't trouble you asking, but I expect you that if you think of any of the large banks have been around for 15, 20, 30 years, they probably have a very large mortgage book and the cost to assets on the mortgage book would be pretty low. So we just started. So -- and most of our products are not exactly those lower rate, long duration mortgages. So think of our products, for example, which are giving us, of course, better yield, which you can see in the NIMs, but they also have relatively high OpEx business on the asset side. Think of any product we have, let me say, durable financing or 2-wheelers or used car or new car or loan mortgage property, of course, is low or [indiscernible]. So therefore, the products would have a little higher OpEx on the asset side. Our branches and liables that are definitely new and not -- they're not lived the life of 20, 30 years of the other banks. So as this vintage of this bank plays out, they'll all normalized.

So I'll have a follow-up on this. So that's why compared to AU Small Finance also, which is a similar kind of businesses, which is 3.5% and capital cost as a history, IDFC may not have but you obviously had the infrastructure and the history, right? And your size is also big. It's not that the size is INR 20,000 crores, and therefore, the expenses will be high at INR 2 lakh crores. So you're one of the larger banks in that sense. So that's why I wanted to understand because all other parameters, it ticks the box fantastically. It's just this one parameter, which slow down. if you can explain a little more...

No, no, it's my job, and I'll explain properly. I didn't mean to throw your balance. So let me answer the question. So on the assets, on the liability side, my answer is pretty much what I told you that the branches have not yet scaled up. So if you think of a branch, for example, per branch, let me say, if you give us a longer vintage, see, integrate, let's not forget, we are living operating the same country. We are hiring people of similar cost structures, branches, what we pay for premise is similar. So there's no reason our bank cost structure should be different than any other bank. They're all the same. At least all the leading private sector banks, all give or take in the same ballpark. So it only and only on the liability side is only about scaling up, which will happen. So I'm not troubled at all on that front. I hope you'll agree with me. Now let's talk...

Just one clarification there. I'm assuming INR 3 crore cost per branch to operate. Is that fair? Or is it more?

Let's call it, INR 2 crore, INR 2.5 crore depending on...

650 branches means around INR 2,000 crores you spend on branches, right? Out of INR 10,500 crores, that's the annual loan rate.

So we can do the math there. But I'm just saying that the -- you get the drift. Let's talk -- just get the concept out of the way. So on the liability side, they will scale up like any other good bank. And because we offer slightly better rates, probably the scale a little better than any other good bank, okay? Like any other banks. So let me just say that. asset-liability side is easy to understand because same markets, same -- cost structure is similar. Now on the asset side, the cost structures are definitely -- the product suite we have are definitely have a higher cost structure than -- let me take one of the large banks in the country. They probably have a INR 5 lakh crore home loan book, which some of us, myself, maybe my colleagues have started like 20, 25 years, maybe 20 years ago. So by now it must have really scaled up to a really big piece. So obviously, if you look at our home loan book today, our cost-to-income ratio on home loan book is probably like 90% or something. So I'm sure. So basically, because it's -- I mean, particularly the prime home loans that we started maybe about a year ago. Because yields are just about 7, 7.5 or something and then the NIMs are pretty low there. And then -- but OpEx -- today's OpEx, of course, we leverage it over the next 8, 10, 15 years. Obviously, next generation [indiscernible] on the bank will get to see very low cost-income ratio on that front. But today, people who are building it will incur the expense and we'll have to live with the higher cost structures on that product, say, in home loan, for example. So to start with I mean a year goes by is even out. Now let's talk about other products. So because we've started. So as far as other businesses are concerned, let me say, a JLG business. They have about INR 8,000 crore business there, is fundamentally a higher cost structure. So if you take a car financing business, it's at least a used car one, a relatively higher cost structure. So it is true that our asset structures have a relatively higher cost and a liability of course, as currently we just started. Then the third business we started is the credit card business. As we see credit cards is loss-making. So we incur -- in other words, the cost information credit card is in excess of maybe 130%, 150%. So therefore, all of these things tend to put a load on the cost income ratio. But honestly, I am personally not troubled about this because that's how business are built. If I run away from doing these things under investor pressure, then the bank level is built then you...

No, that's not my -- I guess, to understand for us to understand from management what is their take.

I know, I know, that's not idea, but I'm trying to explain to you that it's -- so coming back to the point, therefore, some of the business we built are built for the future. They -- so our job as leaders of the organization is to get the payback. So on the liability side, I have no confusion in my mind. It -- payback will happen and scale happens and as we start doing cross-sell. So as a bank, we just started this process of cross-sell. We were just a liability gathering machine until maybe a year ago. So we now put up the structure. We enable the people to cross-sell other products and services. We have tiered the customers. We are under Tier 1, 2, 3, 4. We've done some -- we are throwing up the necessary customer offers on the RM screen so that they can discuss the next suitable product to the customer, et cetera. So our processes have just begun to gather steam. We are probably underperforming, not probably, certainly underperforming on the extent of cross-sell, we are doing to our customers on the liability side, that machine is gathering up. So that will solve some of the issues. Credit card is all the issue. And I mean, it's all the issue as it turns into property, it will happen. So as part of management, our job is to turn these -- once we set up the businesses and incur the expenses, our job is to now bring them to profitability. It's a phase where it will happen. And you can see it quarter-on-quarter, we will share numbers with you.

So over 3 to 5 years, what one should expect in terms of cost to assets, not cost to income, but cost to total balance sheet size?

No, you should come back to cost to income because if cost to assets in the treating depends on the line of business you do. I mean, I could do a lot of growth...

Cost to income, what do you think? You are at 75% today, right? So...

Yes, somewhere there. So you can see every quarter now, if you take Y-o-Y, it is coming down, it will still come down. You see, we have done the math. In our kind of line of business, if we bring on cost income by 10%, our return on equity increase will jump by 5%.

It will be phenomenal. That's the reason I asked this question.

No, it will come down. You watch the game. Users watch this game. It will come down. It has to come down because income will go up. I told you, just to summarize so that...

I don't have any issues with all that. I am completely agree with you on that. Wondering this -- part was troubling me. That's why wanted to know. So the 75%, one should expect it will come to 50% or 60% ballpark increase to 5 years?

No, no, definitely. I mean, we won't -- we can't be at this number. It's all set up cost income, so to say. We think that definitely in the long run, we want to be certainly in the mid-40s, but certainly, we don't want to wait that long, long run even if it take, say, a 2-year window. We do think that by -- within 2 years, it should materially come down. And you see our ROE has already touched 9%. So -- and this is core and genuine thought onetime and all that. So even if we bring this -- we touched no other lever and just increase the -- just pay off the high-cost legacy liabilities, that should give us about INR 750 crores. And then you reduced cost income by other means we talked about, you should expect the bank to get to the mid-50s in the long run, but certainly, maybe mid-60s in the next couple of years.

Okay. And I have just one more feedback for you. I'm IDFC Bank customer. The new app is phenomenal, but the downtime is very high. So maybe you would want to look at it.

No, thank you. We are very aware of that.

If you are aware, then that's fine.

No, no, but thanks, we will fix it. No, so that's one. So since you said that, so we are -- frankly, we are very proud that we put up a really good app. But on this issue...

Phenomenal app. I like it. But when you want to actually do the transaction, sometimes on time, it doesn't...

That's why I talked to you. Just to tell you that was an issue you must have faced until a week ago for maybe -- it was there because it is a starting...

I think, yesterday, I faced an issue.

Yes. Yes. Just on the launch. But now over the last -- now it is fully stabilized. I'll be surprised if you say that if you try it today. It's unlikely. It's already addressed.

We have the next question from the line of Pritesh Bumb from DAM Capital.

Just a medium-term question on -- so how do you look at deposit rates for us as you know that we have in the up-cycle. So do we feel that we'll have to be a little ahead to raise the right rates versus the industry and the hypothetically, yes, is there any room in the mix to keep the NIMs intact? So that was the first question.

No, no plans really right now, whatever it is, it is. I mean, as we speak, there is no such discussion going on within the bank.

So what will be ahead on the market or will we like we'll be working out basically? How do we see that? Because the CD ratio is still lower than -- I mean higher than the loan side. So do you feel like we may have to raise something ahead of the markets?

No. No.

Yes, Pritesh, even on the -- Sudhanshu here. On the CD ratio, yes, it's relatively higher than other banks. But you need to note that we are carrying high-cost legacy borrowings, right, in the form of long-term bonds, refinance, right? These were taken which came to the bank at merger, right? And we have reduced these borrowings. But to that extent, the funding requirement was lower, right? So if we include these long-term stable borrowings in the denominator, then the CD ratio gets adjusted to about 80s, right? So once these sort of liabilities gets paid off over the next 2 to 3 years, and we sort of get deposits in BF replacement, then automatically, this ratio should correct in due course.

Sure. And second part of the question was that do we still have room in our mix to increase NIMs from a yield perspective, if you also don't pass on some of the NIMs are coming hypothetically, again, do we see the mix -- any mix changes we can do or keep the NIMs impact on NIMs moving up a little bit?

So is, as you see, our NIMs are quite healthy, right? It's at 5.9% in this quarter, right? We are seeing sort of rate increase, which has happened, some of it may more happen, right? But as Vaidya mentioned, we have not passed on the increase in reported to customers that -- most of that benefit would start taking in from Q2. So we will be fairly comfortable in terms of maintaining NIM around the 6% mark. And we feel that should happen.

Sure. Second question was if you are disclosing what will your technology cost as a percentage of OpEx because some of the banks are disclosing this. Can we also have that number?

So we have not specifically called out that number, but we are -- we continue to invest in technology, but we have specifically not called out that number.

No. Any sense on if it will be a higher number as a percentage of -- is it material? Or is it not to worry about? Because just trying to understand, we have built the bank on the technology side for some time now. So do we see that the technology cost will slightly move down or in terms of plateau, so that's what I was getting.

Probably plateau from here, but you see, I'll tell you, yes, first of all our technology cost is probably a bit higher than I'll tell you the reason also. Again, we should not forget the fact that let's think of any large bank who've been there for say 25 years, they already have a cash management system. If they launched cash management, we build it today. They already have a savings bank probably -- they already have probably an app. We have to build an app from starting today because we can't tell our customers that look at because -- so then similarly, if somebody has already built a solution for current account management for the customers, we have to build today. So the point is that there is a certain set of expenses that -- sorry, capabilities that an organization need to have, it is simply stable stakes. The one thing we should not forget is that we became a bank overnight is INR 1 lakh crores of assets, right, with no banking life and with no -- like NBFC converting to a bank. So -- because both parties were just lending institutions. So therefore, some portion of expenses that simply just catch-up expenses that as a system for building basic capabilities that others already have for 15, 20 years. Now second part of the capabilities are to build digital capabilities for being contemporary and staying ahead and all that stuff. So we are probably incurring both, which is why you're probably seeing this, but you should also see -- so I don't deny that. But it's just for to understand this origin of this organization is very, very different than any other organization, which is a small NBFC, who's got a bank license, which in this case, it can scale up everything along with -- as the businesses grow, but this is already different. But let me also point out to you that the expense are no expense, you see how quickly our story is building up from here in terms of operating profit. I read out the numbers to you. Now the way our ROA, ROE getting fixed at a bank level, it should now set you thinking that if this bank starts normalizing it expenses like everybody else, where this game might head. I think it will look really, very healthy. I mean for us, the 2% ROA is something that, frankly, is a bit in undergo for our kind of bank.

Understood. Last question was, if you look at the recent numbers of large banks, we have seen a solid unsecured growth in all the banks. Do you feel the marketplace? Or do you feel that you will get -- you will take a step back just to see how the market is shaping up because it seems to be getting more detail on the unsecured side? Or do you feel like it's not a problem yet?

No. We monitor indicators very, very closely. We look at 2 things. One is the perspective we get out of our experience and by watching the market, and second data, what data speaks to us. So -- and we watch it very carefully. We want to be very, very careful on this front. Our sense is that our general assessment is that unsecured is one dimension. It is not the dimension. It's not God. So basically, it is just one way of looking at it. For example, we find that when we lend a personal loan to Infosys or a Wipro or Unilever or a good CAT-A company, frankly, even through COVID, there was no default on them. Many of them didn't take moratorium. So that's unsecured, but it did very well. So the point is that vis-a-vis let me see a 2-wheeler business, which is secured but had trouble during COVID. So therefore, our job is not just to get -- evaluate these things bluntly by one dimension, it is to see the underlying profile of the customer that we are lending to. It's a very material point. The second material point is the -- in terms of our own indicators. So -- I'm sorry, one more thing about cash flow. How do you evaluate them? So if we evaluate them for the cash flow, it behaves a particular way end of the day, cash is paying you back, security is not paying you back. So I'm not saying it's a remittable point that I think, but you should also -- I just want to put in perspective.

We have the next question from the line of Sagar Shah from Phillip Capital.

First of all, congratulations for excellent numbers actually. My first question, sir, has already been -- had been asked. I think a couple of regarding your operating expenses actually as you have already spent in technology and as you are guiding that actually, as the income grows actually automatically, you said that our OpEx -- on the OpEx front, automatically, our income growth will be higher than your OpEx growth, and that would be a driver of the ROE, right? Am I right, sir, for the -- at least for the next year -- into next month, sir?

Sudhanshu, you want to answer. I can't hear the question fully.

So you're saying whether the income growth would surpass the OpEx growth. Is that the question?

Yes. My -- basically, as you have guided for the next year for a double-digit ROE, if I'm not -- only in the last quarter, so for double-digit ROE as my understanding is the key -- 2 key growth drivers are, first of all, your income growth, and secondly, your lateral OpEx growth. So I just wanted to understand on that part. My first question is on this.

So we think both will play out. It's not one for the other. Our costs should operate from here. And secondly, income will grow. It's a very simple model. If the retail book grows by maybe 25% year-on-year, which is what we have guided. And frankly, we feel we'll meet it comfortably. We don't have to do anything. We don't have to put pressure on ourselves. We don't have to run extra hard. Nothing there to do. It will just happen by itself in a way -- a smooth manner. So when that happens, automatically income grows by 25% and straightforward to operating leverage. I mean, we are not set about this double-digit ROE. Let me just tell you, we'll surprise you a little maybe ahead of time. But certainly, fourth quarter ROEs, you can take it as a assure thing -- assure many what you make of it, but we're feeling good about it.

Okay. Okay. Sure. And second -- my second question was on your cost of funds actually. I wanted a color on your -- now by 20th July, you have changed the interest of -- you have reduced the interest rates on the [indiscernible] accounts and the term deposit accounts. So your incremental cost of funds on -- landed on borrowings and deposits and roughly can say how much will it be, sir, going forward?

The exact number, Sudhanshu can answer, but let's talk into the delta. In the delta sense, frankly, our business model is baked for these kind of cost of funds. We don't have to be like the big 4 that they're kind of rate of 3% of up to INR 50 lakhs and greater than INR 350 lakhs, 5 -- 3.5%. We don't have to do this at least. We -- fundamentally, our yield is slightly better. Our origin is different. And therefore, for us, we are comfortable with what we're paying right now. And even at that, we're getting an interest margin of 6%, they are more than happy. We don't -- we are not under stress to increase it also. We are happy with 6%. So now it's a very simple game of just paying -- just scaling of the book, nothing more. Just pay more than the others in terms of savings, which we will do. And frankly, you don't worry about it, if someone had -- if interest rates went up in the market by another 50 basis points. I mean we won't back on high level smoothly increase in 50 basis points, we won't think twice. For us, the model is very happy and comfortable. Not that we have any plans, as I said earlier. But you don't stress about these things because we're sitting on a margin level that is so strong, we still are yet to take out. We still have not, like I told to leverage the assets or the cost so a lot of income meeting is to be there, a lot of new businesses to be built, that has to scale up, wealth management to scale up, cash management to scale up, past time will scale up. They will all give income. So when you have enough income setting out there yet to be taken a few basis points, is that said makes no difference to us.

Okay. Okay. Okay. Got your point. My -- sir, next question was regarding your commercial finance portfolio. I think on the net debt, I think it has degrown by around 8% quarter-on-quarter. So can you show some color on the commercial finance portfolio, how you intend to grow in that space, basically, how do you look at that portfolio going forward?

We like that -- we like the business authority sector. And Sudhanshu as you spoke to me just points out to me, it's already grown from INR 2,000 crores to INR 2,300 crores in the last quarter. So that's commercial?

So commercial finance book that has increased from INR 10,144 crores to INR 10,675 crores on...

You didn't mean commercial vehicles. You meant commercial finance, is that what you said?

Yes. Yes.

So it's a marginal increase on a sequential basis. Of course, on a Y-o-Y we feel that growth would be a bit faster in this segment in future quarters.

So just to correct myself, my apology. I thought you said commercial vehicle. That's why I read out some of them.

And coming back to my previous question, sir, you had thrown the color on your liabilities, but can you show us a number? And what is the blended cost now on borrowings and deposit, sir, loan powers?

You got the number?

Yes, blended cost is about 5.2%.

5.2%. And you are -- you refer, sir, that it will remain the same for the entire year and for -- even for going further?

I told you not to bother about that too much. I'm not -- first of all, I'm not ducking the question. As of now, we feel that the rates are what they are, we are comfortable. But like I said earlier, it feels in the market price for any reason, we have no problem touching it by 20, 25 basis points here or there. No problem at all. I told you the kind of margins sitting on the kind of buttons we're not even pressed in the bank in terms of the fee income, the operating leverage that yet to play out. Let me just say, for example, the loan book for the bank, retail side grew from INR 1 lakh crores to INR 130 lakh crores, INR 130 lakh crores to INR 160 lakh crores. We are not going to close the OpEx to 30%, 30%. So there's operating leverage sitting there. So there are so many pools of buffer are sitting on that this is a round of item. It won't be the material thing. For us, we were very clear. We want the deposits, what we want to have. We don't want to price in the sense we don't -- we will just need as much as we need. I mean, we'll take -- we'll touch the price in such a way that we just take what we want to take. But at this point of time, we have -- as we speak, there's no plan to touch it. And just to add, even in the asset side, we may sort of increase the pricing rate as markets have also increased pricing on certain products, we have also done so in Q1. So to some extent, asset repricing will also happen, which will take care of the cost of fund increase.

Okay. And my, sir, a follow-up question was, have you utilized the INR 168 crores provisions that you had in your balance sheet, sir, for COVID-19?

Yes, we have utilized...

Next quarter.

Yes, we have utilized about INR 75 crores of COVID provision, and this will largely utilized for the corporate case, which I mentioned has slipped into NPA during the current quarter out of the restructuring pool. And so we have utilized to that extent. We still carry a provision of about INR 90 crores as on 30 June, '22.

And that INR 165 million, largely, we told you there was one retail chain -- in my opening remarks, I mentioned to you the retail chain we had an exposure. So we drew down on the COVID provision and settled the retail sale, we made it 0 outstanding. And frankly, we don't see a need to use that COVID provision at all. So some time or the other, we have to release it. As of now, it's just there. I mean we're expecting next quarter credit provision to be very much. We don't expect Q3, Q4, any of them to be -- I mean we're not -- we see we will be quite safe and low so at some stage, we'll take it out and release it to the P&L.

Okay. Okay. Sure, sir. Then what is the exposure towards our -- that retail exposure -- that corporate account?

0, 0 now.

But what the exposure we had before?

INR 575 crores or INR 500-odd crores, maybe. I think, may be INR 555 crores, INR 560 crores, but it's all -- it is a legacy account. It's not that we could do much about it. So the last 3 quarters or so, a couple of quarters, you've taken it out and net 0.

Okay. Okay, sure, sir. Yes. And then my last question, sir, was regarding to your infrastructure portfolio. That infrastructure portfolio, I think it is still at around INR 6,700 crores also. So now are you confident of them in the existing portfolio? Or there are certain watch list accounts also in these -- in this entire portfolio?

No. So if you see the numbers out of the book which we have, about 21% is currently a GNPA book, right, where we have a net -- this also includes one large -- store to load, which had slipped into in Q1 last quarter, while we are getting revenues here in terms of the improved tools right? And we expect a resolution which could happen in the balance year. But in terms of incremental sense, we don't see sort of any further stress build up on the infrastructure portfolio.

We have the next question from the line of Ashutosh Mishra.

And first question is just to understand from the benchmark on how much of our loan are linked to the BN and RLLR and how much things and how the transmission is going to take place?

Yes. Thank you for the question. So we have the loans and advances book of about INR 1 lakh 30,000 crores. Correctly, about 37% of the book is linked to external benchmark in the form of EBLR, RLLR and MCLR and the rest is a fixed book. As we mentioned earlier, while we have passed on the REPO increase to the new loans, which were sourced after the rate increases on RBI, the existing book, largely the pricing benefit will come in from this quarter, and the loans which sort of came for reset through the MCLR route, right, because we also increased MCLR during this period. that increase was passed on to the customers. But as far as REPO is concerned, largely the benefit will kick in starting Q2.

So how much is REPO and how much is MCLR amount in this 37%?

Yes. So out of the 37%, about 60% is REPO and balance is MCLR, where the repricing would happen over 3 months to 1 year, depends on the MCLR, which has been agreed with the client.

Okay. The second question is that I think rate book composition is relatively higher in our overall loan book. So what is the tenor for this and how the repricing will move on this plan because we are in a rising rate environment and to understand the manager will be very important to know that part.

Yes. Again, if you see ours is a very diversified retail book, right? Like we do rural finance loans that is in essentially the fixed rate book, right? But there, the pricing is quite healthy. The segment is quite profitable, right? So -- and there are certain shortage. These are, again, not very long tenor loans, right? Similarly, we do consumer durables, which also runs off quite fast, right? This is also a fixed rate book. So while we are not able to pass on the rate increase to on already originated rate loans. But we have -- as I said earlier, we have made some increases in the incremental book which is getting sourced. So that's -- but we feel still we will be able to sort of hold on to the NIM. So the NIM are quite healthy, right, as we mentioned earlier, and we expect it to be around 6% even going forward.

Any number on the tenor of this loan book, average amount of the fee loan book?

Yes. As I said, it depends on product to product like CD average tenor will be about 8 months or so. For a PL, it would be about 2 years and so on. So that is from loan to loan, right? So it would be difficult to sell out a blended tenor in terms of the fixed rate book.

Okay. My second question is that we are spending aggressively on advertisement across the channel. So what is our customer acquisition if you see on the retail advertisement, if you can put some light on that?

You see the -- as you know, we are -- last year, we did not grow the liabilities base very much. And the reason we were sitting on too much of LCR and -- so we had to slow down deposit growth. So from this year onwards, since we are expecting the loan book to grow by 20-odd percent, you know that we need deposits. So therefore, we might have seen some more activity out in the marketplace in terms of advertisements, et cetera.

So just in that direction, only want to know whether you have seen new customer or new account acquisition to go substantially put the substantial increase in our advertising.

It's not necessarily how many customers we get with a INR 1 lakh or INR 80,000 or INR 1 lakh or INR 1.2 lakhs fees. That's not a material point. The thing to note is actually the quality of customers we get. So we are very particular about the customer quality we get. We don't have 0 balanced products. And so therefore, customers coming in at a minimum brings requirement is INR 25,000 or INR 10,000, but customers usually bring in maybe even INR 80,000, INR 1 lakh, INR 1.5 lakh in that zone. So therefore, for us, quality of customers is very, very, very important, and we focus on that because then we can use -- make good use of the infrastructure we're setting up. And then also a more meaningful relationship.

Another I want to know on the high-cost bond book, which we are carrying it, what is your guidance on that? How much time is in business being interested we will get from repricing of that if you can buy back on that?

Yes. So as we have mentioned in the presentation that these loans fall off within next 3 to 4 years, right. On a blended basis, the average residual tenor is about 2 years. And these loans are currently having a blended cost of about 8.75%, right? Of course, as I said, our cost of funds is about 5.2%, right? And so we feel that money is money, right? So we will be able to sort of replace the bonds, right, as we follow for maturity, right? Asset cost, which would be in the range of 5% to 5.5%, right? And so you can compute that, that much of sort of relief will then flow through the P&L as and when it comes...

So you can do the math, supposing, let's say INR 22,000 crores. And then you say 8.8 minus, don't even take 5.2%, even if you take it at 6% because like one of the earlier speakers said that we've got a factor for a little bit more increase. And let's back to for it, let's call it, maybe even 5.5% or even 5.7% just literally speaking. And that difference multiple, so that 3.2 or so and multiply that by INR 2 crores and INR 20 crores, that's about 630 -- INR 640 crores. Post taxes, let's call it, about INR 450 crores, INR 500 crores. So if you add, you get the drift. So that is the amount of order of money in the P&L. And then we didn't discuss ROE in a detailed way, surprising nobody asked it, maybe you assume it's improving. But if you add that kind of -- earlier if you recollect, we used to call out 3 items. Okay. We used to call out credit card business launch, and we told you that it's losing money per quarter and all that. Second number we used to say was liability branches. And third, this time, we're not even doing that. We're at 1% ROA, we don't need to twist and turn and make any -- we don't have to do that. So you predict these 2 items. Let's focus on only one item, which is replacing high-cost legacy liabilities because the first 2, you might argue that your business would -- as an investor, what are going to do with that. But on this item of cost of funds, this is easy one, easy for you to understand. So you simply take our ROE today just add back is maybe INR 500-odd crores because of this reason. And then you see the ROE. This will surely go away. There's -- I have -- there's no discussion on this one. That's how we are looking at -- a lot of people are -- if you see one large brokerage report, which is always bearish on us, they're just not able to believe that we can fix the ROE thing. They just go back to mathematical grade and call us, they believe it should be priced as to know what name us. But I think they'll all -- I think when people get a little under the hood and see not the ROA and ROE, but the trajectory of where it is headed. And if somebody saw the underlying component that is driving this ROE. And if somebody saw the quality of the book that has been built, if somebody saw the quality of customer franchise they're building, and one thing we didn't talk about, about our obsession for customer first, it's showing, reflecting in a product, if you talk about that later. So if someone saw all the quality and character that is being put in the organization, then they will see what we're building. And unfortunately, it will show up only a few years from now, but it will show.

That was the last question due to time constraint. I would now hand it over back to the management for closing comments.

Well, frankly, first of all, thanks, you asked very detailed and very interesting conversations. So thank you for that. On the behalf of Sudhanshu and myself and anybody else from a bank hearing the conversation, thanks for that. I must say that all of us in the bank are a senior management team, many more were not on this call are all like working hard to build the bank and along the way, building is very profitable to the bank. My second thing is that we are building, of course, ROA, ROE, we'll talk. But on a -- in a real sense, they're building a really high-quality bank in terms of customer franchise. So there are many, many things we don't build customers for because they believe that either they won't bear to see it or we take -- if people complain about something or the other, we take it obviously seriously. We go back and fix the route. So there are -- in terms of features that genuinely customer friendly, as a shareholder, you may or even may not be impressed about the bank yet. But I must say that anybody and everybody should be a customer because we genuinely give high-quality products. We don't -- there are lots of fees and charges, et cetera, left right and right hand. We don't charge any of them. So we have a good customer bank. Third thing is that if you if you look, say, 1 year or 1 year ahead, let me say, 1 year ahead, my feel is that you won't be disappointed.

Thanks to the entire senior management team of IDFC First Bank for patiently answering all the calls. And thanks all the participants for being there. Have a nice weekend. Thank you.

Yes. Thank you, Kunal. Thank you, everyone. Have a good evening again.

On behalf of ICC Securities, that concludes the conference. Thank you for joining us, and you may now disconnect your lines.