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

Ladies and gentlemen, good day, and welcome to the IDFC First Bank's Q2 FY '27 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Saptarshi Bapari, Head, Investor Relations and ESG. Thank you, and over to you, Mr. Bapari.

Thanks, Darin. Thanks, everyone, for joining the call. We'll have the presentation first from Sudanshu, our CFO, and then we'll have some brief comments from Vaidya, and then we can open the [indiscernible]. So I'll now hand over to Sudhanshu for his opening remarks.

Yes. Thank you, Saptarshi. First of all, good evening, everyone. It's a pleasure speaking to all of you. I will -- in terms of sequencing, I'll maybe first cover a few business numbers and then later on take on the profitability part. So business momentum continues to be quite strong. During the quarter, we saw a healthy growth in both advances and deposits. However, the key development during the quarter was the FCNR mobilization under the RBI team. So let me start with giving some numbers first on that front. During the quarter, the bank mobilized INR 3,390 crores, which is about USD 3.6 billion of FCNR deposit under this scheme. This constituted about 10% of the overall deposit that we have at September 30, 2026. Against this, we also extended leverage of USD 2.6 billion, which is in about INR 25,000 crores. to NRI customers. If we see on these -- on the basis of these loans, then this constituted about 7% of the overall loan book at September 30, 2026 at mobilization of USD 3.6 billion, the bank garnered about 2.7% of the overall mobilization, the country received under this scheme. This is about 1% higher than our NRI deposit share, which was this pre FCNR announcement. As part of the exercise, we also obtained our but international rating from S&P and KR, happy to report that we got an investment-grade rating for the banks on this front. On the back of the ratings, we were also did a bond issuance. We almost raised close to $1 billion of bonds. The actual number was USD 950 million. And this was raised from the offshore IB branch from Marci international investors. Since this was a specific opportunity during the current quarter, wherever relevant, I will try to give out numbers with and without FCNR to keep underlying trends comparable with the previous quarters. Moving on to loans. That registered a strong growth of 30.1% on a Y-o-Y basis and 13.6% on a Q-on-Q basis, including FCF. And that book has now reached about INR 3.47 lakh crores. If we exclude the FCNRB backed loans, the loan assets on a gross of IBPC basis grew by 22.2% on Y-o-Y basis and 5.7% on a Q-on-Q basis and was about INR 3.29 lakh crores. The incremental growth on the loan side during the quarter was primarily driven by mortgage, vehicle loans, consumer loans and a slightly faster growth in business banking and wholesale loans, which individually grew by more than 30% on a Y-o-Y basis. The MFI book saw a marginal increase during the quarter. That book now stands at INR 6,825 crores, and about 2% of the overall funded assets. 97% of the book is now covered under the CGF new scheme. With respect to credit cards, happy to report that the card in core crossed 5 million during the quarter the book on an outstanding basis stood at INR 9,875 crores. And the credit card spend grew at a healthy pace of about 15% on a Y-o-Y basis. We have given more details around the asset growth on Slide #31 in the investor presentation. Moving on to asset quality. There also, we saw an improving trajectory across NPA, net NPA, SMA across product classes. We give a fair degree of disclosure in the investor presentation around these numbers. On a headline basis, the gross NPA of the ratio of the bank improved by about 19 basis points from 1.51% reported in Q1 to 1.32% in Q2 and when 9 bps if we exclude Final leverage in the denominator. Similarly, our net NPA, we saw an improvement of 4 basis points to 0.40%, if we exclude the FCNR backed loans, the net NPA ratio would be 0.43% as against 0.4% reported in the previous quarter. further drill down, if we look for now the retail agri and the MSME book, the GMP ratio here improved from 1.4% to 1.2% and to 1.36% if we exclude again FCNR loans from the question. Moving on, the collection efficiency for the current bucket for retail continues to hold well. It has been now stable around the 99.5% for many quarters. The SMA-1 and the SMA-2 book for the details was at 0.72% in Q2 from 0.77%, which we saw in the previous quarter. SMA 1 and 2 for microfinance further normalized to 0.6% from 0.7 bps in the previous quarter. At an overall bank level, SME 12 reduced by 4 basis points to 0.5%. The net slippage ratio for the quarter was stable at about 1.6%. Moving on to deposits. Total deposits, which is customer deposits plus certificate of deposits that's reached at INR 3.8 crores. The growth was about 25.9% on a Y-o-Y basis and 11.8% on a Q-on-Q basis. If I just talk of customer deposits, that has crossed INR 3.4 lakh crores. It grew by 26.9% on a Y-o-Y basis and 14% on a Q-on-Q basis. This also included FC. And if we exclude [indiscernible] deposits, customer deposits grew by 14.1% on a Y-o-Y basis. But here is where we slightly calibrated the growth because we got strong FCNR inflows during the current quarter. This was more a conscious strategy which we followed during the course of the quarter. As a result, we did reduce the bulk deposit ratio from 17.1% to 13.9% in the current quarter and also repaid certain certificate of deposits as it came up for maturity. If I talk of CASA deposits that grew to now INR 1.6 lakh crores. The growth on a Y-o-Y basis was 19.8% while the CASA ratio for the quarter came down -- came to 47.6%. This was lower because of the FCNR deposit mobilization in the denominator. The average CASA ratio still, I would say, was healthy at about 4.4%. If I move on to profitability, I'm happy to report that the profit has remained above INR 1,000 crores for the second consecutive quarter, and the profit for the quarter stands at INR 1,045 crores which is an improvement of about 196.5% on a Y-o-Y basis, while it was marginally down as we had reported higher treasury income in the previous quarter. We have also given in the presentation our numbers on a core tax basis when I mean cold that excludes trading gains for all the periods and also certain one-off items, which we have called out in the previous quarters, like the impact of the fraud incident, some income tax refunds and interest we had come in the previous quarter. The core profit and these details are given in Slide 5 of the presentation, Again, happy to report that on a core basis, the profit has crossed INR 1,000 crores, and this was about INR 897 crores in the previous quarter some more drill down, all operating metrics continue to demonstrate a healthy growth trajectory. For example, NI grew by 21% on a Y-o-Y basis and 3.5% on a Q-on-Q basis. NI growth was, in fact, 4.5% sequentially, if we adjust for interest on income tax refund, which we had called out for Q2. The NI growth in the current quarter was also broadly in line with 21.1% Y-o-Y increase reported in the previous quarter. The net interest margin for the quarter was 5.8% as compared to 5.90% in the previous quarter, excluding the income tax refund, which we have reported. Now I will talk about why was the moderation in the current quarter. The NIM is moderated because of, I would say, 3 or 4 factors. One was the FCR, which I would say was the primary reason. Since this came into the denominator, we had an impact of about 16 basis points on this FCNR backed lending. Second, because we are mobilized strong, I would say, FCNR deposit flows. We, in the interim also passed such liquidity in low-ending treasury instruments and [indiscernible]. That had an impact on NIM of 7 basis points. Then there were also impacts because of change in asset mix because we have grown wholesale banking and business banking at a faster pace. That had an impact of 5 basis points. And last is the day count convention impact because this quarter had 92 days vis-a-vis 91 days in the previous quarter. So to summarize, 16 bps is because of CNR lending is because of excess liquidity, 4 bps is because of decount convention and 5 bps is because of other assets is. The 1 point which I want to sort of also put across is that the margin impact on FCNR should not be viewed in isolation as because FCNR also considered denominator, is correspondingly also reduces operating expenses and credit costs related to assets. And hence, we have estimated the overall impact on the ROE could be very minimal as low as 2 basis points. Pursuant to the FCNR scheme, we have also have estimated an additional benefit of 1%, including statutory benefits, which could accrue to us, if we compare this with a normal deposit, which we would have raised in the otherwise if the FCN flows were not there. This FCNR deposit also would not consume capital. Since whatever we earn and which I mentioned of 1% that increases by NI that increases my profitability, that increases my ROE, EPS and all of these numbers. Just in terms of how do we see NIMs going forward, we see this recovering to approximately 5.8% by as some of the excess liquidity would have been definitely put to use by them and also the expected repo rate increase, which we also are factoring for the course of the year. Moving on to fee and other income. We saw a healthy growth that increased by about 24.5% on [indiscernible] basis compared to 22.9% in Q1. We have given details of the fee composition in the investor -- as a result of the increase in the NII in the fee, the total income, excluding trading gains for Q2 on a Y-o-Y basis was a growth of 21.9% versus 21.5% reported in Q1. During the quarter, the treasury gains were modest at about INR 11 crores as compared to INR 181 crores reported for Q1. This was largely due to the hardening of the GSEs during the quarter. Moving on, the OpEx for the quarter was at INR 5,942 crores. This grew by 16% on a Y-o-Y basis and by 3% on a sequential basis. The increase of 3% corresponds to an increase in core income growth of about 4.6% on a sequential basis, as a result, the cost-income ratio excluding trading gains improved by 7 basis points on a sequential basis to 70.2% and was, in fact, 350 bps lower on a Y-o-Y basis. Operating job, which is the growth between the total income and the OpEx, that continues to improve. In fact, for the quarter, it stood at 92 basis points. And for H1, it stands at 53 basis points. If you remember, we had guided for an upwards of 500 basis points, which we would endeavor to maintain and we are broadly on track on that front. As a result, the incremental cost-to-income ratio was about 55% for H1 and hence that has also resulted in some of the opening of the jaws, which I sort of spoke of slightly. If I talk of operating profit of the quarter that saw a healthy increase of 38.5% on a Y-o-Y basis and 6.6% on a sequential basis. So for 3 quarters in a row now we are getting an operating profit increase of upwards of 30%. Moving on to provisions reduced by 21.7% from INR 1,452 crores to INR 1,137 crores on a Y-o-Y basis. On a Q-on-Q basis, if we see this has broadly remained at the same level as we reported about INR 1,144 crores in the last quarter. However, point to note here is that the provision for the current quarter also includes standard asset provision of about INR 100 crores on the SNRbedans. Exclude this, then the provisions for the quarter declined by 9.3% on a Q-on-Q basis. The bank continues to hold contingency provision of INR 515 crores last quarter. This is on a prudent basis considering the evolving macroeconomic and the geopolitical uncertainties. In terms of credit cost translation, the credit cost for the quarter further improved to 1.38% as compared to 1.53% for the previous quarter. If we exclude the FCNR loans and the corresponding provision since these are backed by FD, the credit cost for the quarter would have been further lower to 1.30% on average funded assets. On an average total assets, the credit costs, which we have reported translates to a credit cost of 1.1%. Moving on to last few parts of my opening remarks. We all know that there has been a consultation paper, which has been issued by while this is still, as I said, in the consultation stage, there could be a draft circle which could come in followed by final declinations. And this is largely expected to come in from next year. But we have estimated the impact in as is in the current form that this has to come, this will definitely reduce our fee income. But we feel that, to a large extent, the impact can be offset by the expected repo increase and the FCNR benefit which has talked earlier. We will also continue to work on product mix changes and closely monitor the developments in this regard. Moving on to capital and liquidity. The capital adequacy ratio stood at 1.6% at September with CET1 ratio of 13.1%. On the LCR, the ratio was at 125% on an average for the quarter and with September being at higher at 139% because of the FCNR money which came in towards the fag end of August. Normally, as you would have noted that normally, we have been maintaining LCR around the 15% mark we would continue to deploy some of this excess liquidity. We also broadly feel that this will get largely consumed in a month or so. With this, I will hand over to Vaidya for his opening remarks.

Good evening, everybody. Really, really pleasure to talk to all of you. First of all, I'm really happy to say with everyone who've been observing us and talking us for a while. The second quarter in a row bank post a profit of a tax of INR 1,000 crores. It's a landmark even for us, consider we started. It feels good. It encourages us to keep going. It appears to us that a reasonable look is that this should continue in the months to come as well. Now if you see the core profitability, the core profitability, meaning that if you take off what can be considered a onetime income like a treasury trading income, et cetera, last quarter, the bank has posted a part of INR 89 crores if you are on a rather 900 crores. We called it out last time when we post 1,700-odd. We have said that a portion of that is treasury income, like INR 4 crore is 900. In the quarter before that, the core was the quarter before that was 430, quarter before that is 300 million. You can see the trajectory. So I can safely say that the territory is fairly established by now. This quarter, on the core, recording adjustments it is INR 1,036 crores. So we feel good about that. I said increasing distance of 1% ROA. It looks like we will get there. In fact, this quarter also we had ROE of about 0.93%. Susan mentioned, the most in our -- in the denominate reset, but for that project a bit higher than that. So broadly in other words, the trajectory of profitability is looking good. I also want to say that the project profit maybe is today, but actually to the case many investment the bank has been making for many years. If you recall, many may not recall, it's been a while back. But in the year, that was the merger here, we were posting something over INR 700 or INR 800 crores, INR 750 crores as the core top. Now PPOP is now touching something like INR 1,000 crores so -- or annualized. So I think the trajectory is looking good, and now you can get a take sense where it might look next 2 to 4 years from there. And in today's numbers, I'll try to give you a picture of that. So the key thing to note is what is happening to the underlying economics. This is very important to understand because if you see the H1 actuals, the interest income is 10.7%. The interest expense is 5.0%. The NII is 5.7%, as you know. Now fee income is 2.1%. This are all actual. So the total income for H1 27 is 7.8%. Now the cost-to-income ratio is currently 70.4% on stock. Now if you subtract from that the credit costs, the ROE comes to over 0.99 for the half year. But for a minute on a spread sheet go and plug the cost-income ratio at 5% 55 expense in a moment. So put at 55%. And you see what does the OpEx. OpEx come up to 4.3%. [indiscernible] become 3.5%. The provision is still 1.1%, which is actual the PBT becomes 2.4% and RO becomes 18,148 184%. The point is that on an incremental basis, the bank is now making a return on assets of about 1.8% plus. On a stock basis .93 that I mentioned to you. So what is the point. Why do we assume that 54, 55 why you should assume so? Now if you look at the incremental cost income ratio, what you do is that you go to -- our operating expenses was INR 1,40,000 crores, and our operating expenses in nofINR27100. So incremental between H1 27, 126 is INR 1,627 crores. And the incremental income is INR 2,900 crores. So on an incremental basis, the bank is posting 55% cost income ratio. So eventually, the incremental becomes the base as long as we keep repeating more of the same. Now you might ask how confident do you feel about repeating this -- now look, for 3 quarters in a row, we have been pointing out that the our OpEx growth is 500 basis points lesser than the income growth is 3 quarters in a row. So it has some predictability now. And we feel we can reasonably give or take, stay in the zone for the next few quarters as well. So we feel all of this year i.e., in '27, we can operate the bank at 50% cost into ratio. So that explains to you why it was to plug that into the stack. The moment you plug it [indiscernible] stack. You don't need to do any adjustment and you don't need to do. You don't have to go buy projections about cost income ratio will be in the future. You don't need to go there. You just need to take it what it is and putting there, you'll get a sense of where it might get to. So we are actually happy to share with you that eventually our bank is not going to stop at one. This will increase because of incremental risk or disrupt. The second thing is that the loan growth, now on the bank front is that the loan growth continues strong at is clearly in visibility. We've reported 30% this quarter, of course, Y-o-Y. That's because SK about INR 25,000 crores of C&I-backed loans are also showing up here. So the correct though the FCNR was actually INR 3,500 cores, INR 34,000 crores, this INR 24. I'm adding back because that is the amount the bank had raised in IBU and had lent to customers, which customers got back as the positive one. So if you look at it like that, it shows 30, but actually think of it -- now on the deposit front, again, it's showing as 25.9 but really read it more like capacity rates to 20. On net of S&R, be it probably lesser than that, but that's because we consciously reduced it because there is liquidity. But think of the core capacity of the deposit side to keep growing at 21%, 22%, Think of the loan growth growing at 20%. So 20, 20, both sides. So you know that the income will start -- will keep growing in strongly. Now for a 20% growth, if our OpEx growth is 15%, then you know 500 basis points, I totally, and I told you how the cost ratio incremental comes and then you put the story I told you -- now the next thing is that when you see this payoff then straight away, then we see the 500 basis points increase -- sorry, difference between the OpEx growth and income growth you find that the nationally operating profit didn't grow not in proportion of the book, but it's higher. So operating profit now growing at 3.5%. So that's how the stack is playing out. The good news is that after operating profit comes to cost. So on the credit cost, we have now come down to about 1.3% or so of the loans or about 1% of assets. Now of course, it's all-time low for us. We're very happy about that. And we are very cautious about it because Q3, Q4, LD knows it effective to show we will watch this very, very carefully. But as I can see, it looks like this is reasonably achievable in the next 2 quarters as well. So therefore, if you take this at one, then the rest of the stack plays itself out how the 3 will play out. Now next, I'd like to talk about [indiscernible] now the really good news that all of us should take note is that for a bank, which is just about 7 years ago, we started in full earnest setting up a deposit brand side. If you remember the deposit process was retail INR 10,000 crores. So it is just at the start. And for maybe -- and let me say from the date we got a license 10 year, let's take the date. But for a bank is 10 years from a deposit license just think that we could raise INR 4,400 crores that $3.6 billion of FCNRB money. We have no overseas brands. We have no subsidiary. We have no retrofits. Just customer trust industry capabilities, it should give you a clue about how strong the bank is to cap become. It is the kind of money the bank can raise in that window. Now the other big benefit of SNRP is that we have 3- to 5-year deposits that has given the bank a lot of structural liquidity. And particularly now that interest rates suddenly risen in the last 10 days, we are now almost willing to be overjoyed that we raised this kind of money for such long tenure at the low cost. The other thing is that there is some understanding on the mark, let me say, understanding or this understanding that we say about what this FCNRB of to nil. So I've seen people attend to bump the conclusions that the we have -- whenever people have raised user through leverage that is full leverage as having raised money to IBU and giving it to customers that come back to us at deposits. particularly, there is a double counting on the -- I mean, the -- not double company, let me say, the balance sheet expense by that amount. In our case, that amount is INR 2,885 crores. Let me -- since I spoke to us, let me just slow down and explain that to you. In the IP that we have, we have raised some of the money as borrowing which we have further given ahead loans to customers, which came close to post. Now because of this, the asset side expense by that amount. Now when the assets are experienced, then the NIM drops to that extent. So in our case, that impact is 16 basis points. Now oftentimes, many are looking at the 60 basis points of isolation and then wondering that [indiscernible] has dropped so if your profit mono reduce. But that's not true. I want to clarify. While the NIM percentage this by the 16 basis points because of this impact, when you go back to ROA because eventually it's ROI, when you go back to return on assets 3, the OpEx also is also now going to be divided by the expanded assets, which the new number, which is at INR 35,000 crores to it. So there, you get the benefit in operating expenses. Similarly, when it takes to credit cost. Again, that will get divided by a larger expanded base. So when you come down and praises down to the ROE increase, in our case, it's estimated that only 2 basis points. So I request analysts do not immediately reach the 16 basis points after log because please go down and see what it does to the OpEx and order it does to the credit cost also, you'll see ROA level is not much impact. So this is one important clarification I wanted to bring to you. So this is the bit on -- now the last thing I'd say, I like to talk about is what this SMR has done to our cost of funds. Now actually, before I come there, let me just talk about the [indiscernible] I'll bring that back in context. So if all of you know the come out with the insurance paper and commissions to be paid, et cetera. Now the paper is what it is, let us assume it comes in its current form. So we have to be prepared for it, and we have to know what the impact will be. Our own sense is that our bank is that there are 3 countervailing factors which -- there are three contributing factors which will -- sorry, once again for tissue. And it will also compensate for that. One is that the FCR, the deposits that we have raised is giving us about 1% benefit to the overall cost of funds, what we would have cost deposits, what it costs have been raised domestically. Let me read out the broad map to you. So basically, the impact One is we have raised it at a rate -- the rate differential between the rate we borrowed it in the IDU and what we lend to customers, there is a small margin out there, let me call it 40, 50 basis points. Now when you add that back to the events of price we pay to customers, with a 6.75% and the 6.75 become 6.85, I think, because of the quarterly impact.

Annualized.

Because if we pay customer 65 actually 65 because of the annual of the interest. So let me take that number of -- so the annual cost of deposit is 6.6%. We had some hedging cost to it. And then I told you that there is some positive spread in the IB because between the rate that we borrowed and the rate we gave to customers, there's about 40 basis points margin there. And that gives us about 29 to 30 basis points spread there. And then there's also the fact that there is no PSL require on the deployment of funds. So all in all, our own estimate of that cost of funds money is basically it's about 6.8% or so, 6.85%. Similarly, when we have to go -- had this money had to be raised in India, at this point of time and the rates currently, our own census will cost us including the CRR, SLR cost, maybe the annualized cost would be -- if the customer rate is 7.25 you add some annualization to 75 to 750 and then you add SLR cost to it, that's more like about 7.8% or so. So blend between the 60 to 70, there is about 100 basis points benefit in having raised this money at the right juncture. And that on the INR 35,000 crores, it's a material amount that is going to come to us, which is not in our plan at all. The second thing is about it just happens that 25 basis points repo rate went up. So that will increase the yield on the books on the floating rate book. Deposit doesn't rise immediately as you know, it takes a year to -- for the fixed deposits to get repriced as and when they mature. So there is a gap in between and there is arbitrage between call it arbitrage, but there's a time period in between where the benefit comes to us. And then we are also assuming that for the rest of this year, i.e., between now to March of this year, we are expecting another at least 25 basis points increase -- and then we expect something to come up next year as well, maybe 25%. So that's at as a house yet this one of time. May numbers are different than output outcome will be different. So these are our current house is about 50 basis points. That is already done, 25 years to come and maybe 25 more next year. So that also is giving us a certain amount of income. Finally, this money, if we have raised the INR 35,000 crores in India in the domestic market, that also have a cost of raising which is all not there now. So when you add these things up, we broadly feel give or take, we should be in the zone that we should be able to manage. And it will be some give or take, the impact should be broadly managed. It should be in the zone. So we therefore feel that give or take, that should be managed. And other than that, let me just share with you that the book is building very well. And we expect this trajectory to be stable at least or grow -- we are, of course, very watchful of this loan the impact will cost to us. There are a couple of states and decline do, et cetera. We have to see how much portfolio we have to manage that. And -- but as I can see right now, it doesn't look like there's an immediate impact in Q3 or Q4, and then we'll take it as it comes. So that's all I have to share with you. Thanks for staying with us this call.

We can open the floor for Q&A.

[Operator Instructions]. Our first question comes from the line of Akshay Jain with Autonomous.

Thank you for the detailed margin bridge as well as the ROA trajectory. So just one clarification on this. I don't see an impact of funding cost moderation in both the margin bridge as well as the ROA expansion which we discussed. So since we have raised strong FCNR funds, should it not improve our ability to reduce funding cost differences vis-a-vis larger peers? So that's my question number one. Second question is more of a clarification on the NIM bridge. So how is the INR 30-odd crores which you raised in FCR being deployed in loans liquidity as well as repayment of bulk li -- and what is the spread you are assuming between liquidity as well as loans to get this 7 basis points of liquidity drag, which you have been quantifying?

Yes. Maybe Akshay, I'll answer that Yes. Akshay, maybe I'll answer that question. So as I said, most of this money came towards end, while we have been able -- we were able to reduce some bulk deposits of about INR 5,000 crores in September. And also, we didn't roll over certain certificate of deposits, again, are about INR 5,000 crores in September. But there was still an excess liquidity, which was passed in, I would say, low-yielding investments and Nostrobalances. As a result, the September LCR was about 19%. As we speak in October, the further usage of this excess liquidity has happened. And as I said, we should come to the normalized levels of LCR of about 15%, 16% in a month or so. So which means that the drag, which we had in September because of parking it in treasury instruments, that is largely sort of taken care. And hence, we have said that because this certainly gets solved in Q3, the 7 bps drag sort of benches from the 5.58% number, which we have reported for at Q2 because that includes that track. Similarly, on the deposit side, where they mentioned that there's an overall benefit of 1-odd percent including PSL benefits. That will come over a period of time. But since these were deposits which were raised for 3 to 5 years, definitely, this will flow into the P&L equation, certainly starting from next year, we could see the full impact.

My question is more on the structural cost of funding side since you're becoming big your liability franchise is improving as well as given your strong performance on FCR side. So did not improve your ability to reduce the funding cost incrementally?

Well, we keep a very close eye on that. We've been doing that if you notice that were early paying 7% of its [indiscernible] and, now we made at 6%, about 25 lakhs, we're only thing 6 now. For us, it's a material change for somebody who is you raising, so it's a continuous process. So not only for a small lab in between, we're giving 7. So after that, it's now comes straight down to 6%. The continuous process, we've got to constantly moderate that and titrate that.

The funding cost could also inch up because reps are also increasing. So you may have some corresponding increase in the liability side, right?

But what we've done, at least the cost of funds continues coming down, when we draw up our next year's plan for cost of funds also, we are, by the time, assuming that right now interest is on the rise. So this -- whatever fixed deposit duty is next year, we assume it will come at a higher cost. So -- but overall, I think our own blended cost of funds of don't take it to the guidance, but I'm just giving you a bit of on the estimate that next year should be maybe 3 or 4 or 5 basis points more maybe over this overall cost of funds basis, over FY '20 I mean, '28 over '27, give or take, if you should be cable to manage about maybe 5 basis points.

5 to 10 basis points in this range.

What's the reported high you're building in this?

We are assuming 25 more -- 25 done, 25 more in the rest of the year, probably in December itself. And then April of next year.

Okay. So even for a 75 basis points or say 50 basis incremental rate hike? The cost of an impact would be only 5 to 10 basis points is what.

May not even be 10, but let's just say some [indiscernible] so because the good thing is the bank has -- because if you remember, the bank is running high CASA percentage, it's a super important point to note. Isn't it? Because buying current a high CASA percentage percent is only 50%. So when interest rate goes up, it doesn't affect it that much.

Understood. Got it, sir. And secondly, on asset...

Unfortunately, on the savings front, on the savings on current conference, there we are already doing well. I told you actually reducing it. And money is growing tick for us because it all good tech capabilities, good mobile app and good customer service and all that. So all put together, we feel like next year, we'll be able to manage comfortably.

Understood, sir. And secondly, on the asset quality front, Well, you have managed this quarter pretty well, though there was a minor interop in the slippage ratio, but I guess that can be lower for this quarter. But how should we think about it incrementally? Because a large number of your NBFC as well as bank peers have been guiding a bit cautiously on the El Nino as well as the macro impact and the oil prices. So anything that you are seeing over there? And how should we think about it? And the paid cost guidance of 150 to 160 basis points as correct?

Yes. So let's take this. Now in our case, we put out in our presentation very clearly what is our 0 to 30 DPD, we disclose the full funnel 0 to 30. We then talk about 31 to 90 . And then we talk from the 90-plus gross, when we talk 90 plus net ratio everything. As for now, our data numbers don't seem to suggest that there is a problem coming. The numbers, numbers per se. But numbers per se, oftentimes backward-looking doesn't tell the fuse story. So when you look ahead, so to say, we don't expect that in the next 1 or 2 quarters, immediately, things are going to change dramatically because it doesn't seem so quickly because after the large book, but this impact of the [indiscernible] and the drought in Maharashtra, Kanata, et cetera, we want to watch it much more carefully and cautiously before we make new comments.

Understood, sir. And just one more point on mortgage GLP. I can see that it has been really increasing and it is up by almost 27 basis points in the last 1 year. as well as the credit card SME has inched up by 40 basis on this time on? Like is it like anything to read in this? Or I'm getting too much into the numbers?

Getting too much numbers because see, mortgage, what happens that we are practically not growing the mortgage book for the last -- I think Y-o-Y growth is particularly nothing. So there's normal aging happening because we set up any business initially started and then it increases and then it stabilizes at some point of time when the book has a natural stable growth rate. As of now, because of the mortgage book hardly is any yield. So we are not pushing it very much. I mean it's just it comes as it comes, it's about it. So it's more because of the normal aging of the book. Nothing to read out there. I think mortgage only gone up from -- if not taken has grown from -- are you referring to the gross NPA [indiscernible]?

Yes, 1.27 to crores.

[indiscernible] .5 is INR 1.5 crore only. [indiscernible]. Critical time credit card can come down from 1.99 to 1.49% here, [indiscernible] let me see what you have okay, fair point. So there it's gone up from 135 to 149, but nothing to read there. Nothing to call on machine. These are like normal variations of quarter-to-quarter.

And we have seen credit cost actually coming down is on the credit card.

We see credit cost coming down at [indiscernible].

Our next question comes from the line of Param Subramanian with Investec.

Firstly, the question, the slide that you have given on Slide 4, which you discussed also, where you're talking about your incremental cost income of 55%? Sir, is this something that you want to be held to going forward, that incremental cost will be at -- cost to income will be 55% for the next a year or so? Is that something that we should look forward to? And secondly, in that slide, I said we are saying 30 basis point drag from liabilities business, but there will always be some drag. So what should that number be on a [indiscernible]. That's my first question,.

Okay. I think it's a good question. I'd like to be afraid would you like to be held to. Okay. [indiscernible] that we are currently it is cost-income ratio is coming in to fair. We've done the math also where we've actually shown you how exactly the compute certify. So indeed, for the last 1 year, to, in other words, to get an income of INR 2,947 crores, we have spent only INR 1,627 crores. So in other words, cost income in. Question is that we will stay this way, as RF can see for this financial year, i.e., for '27, this number looks firmly in the bag. So in other words, for H2, also we expect a similar number. And that's our planned business model. See, basically, it all depends upon the 500 basis point differential between how much the income growth and the OpEx growth. So we feel that that's what we want to achieve we are in at now for 3 quarters, let me leave it at that. And you can also brought it broadly in your scheme of things. Now with regard to your second yes, what is your second question? [indiscernible] Yes, that I'm happy you asked the question. See, basically, you know that we've been always calling out that the liability side business is a drag on [indiscernible] of the new banks setting up cobrands, stones and all that and setting up so many things, technology and all that. So the thing is that the think of it as the liability side. If the bank, for example, is making let is for net assume that the analyst estimates of this financial year for the bank, is about INR 500 crores -- sorry, INR 450 crores. That is assumed for a minute are the numbers I think INR 4,400 crores estimate for this year. And for a minute, you assume the bank will meet it, okay, because so that do a quick simulation out here. So now if indeed, the -- those are the numbers, let's call it, 400 for the year. Now it is well known. If you go to a slide in the liability slide, you already called out the bank is current losses 7% on the average deposits. So if you do the math and take it net of tax, you'll find that the loss terms at about INR 1,500 crores on the liability side, maybe a little less than that. By definition, the assets should be making something like about INR 50 crores. Now assuming the bank is oversimplified and said there's only 2 parts 1 is assets on liabilities. So think of a bank make INR 6,000 crores on the lending side, as lose a loss of INR 500 crores on the liability side. And net debt, I suppose bank was about 44 corporators. Think of this equation. Now in this equation, if you divide this by the average assets of the year, you will find that assets is making 23%. [indiscernible] 0.3% by the same numbers I just described to you, and net-net will. But obviously, if the time line we do the trend line also in the presentation, if you in the trend line, it is not -- we are not planning to lose 0.7% forever. It's coming down. It's coming down from 3% or 2% to 1% to 0.7%. It has to come down to 0. So in other words, you press forward for maybe 3 years from now, you'll find that this number of [indiscernible]. So which means the drag from liabilities have become 0. And that 1.3% is 1.3%, which you can see even today, now on that 1.3, which is the asset side ROA the bank is making. Now we assume 2 more, 3 more years go by and some more operating leverage comes. So therefore, you must expect this with this 1.3 should go to 1.4 or 0.5, 1.6. It should happen. That's good to read that.

Got it, very detailed explanation. Thank you.

It seems that even today, if this was a new -- it was not a new bank, we had no drag on liabilities. Had it been like any other bank, which has been 30, 40 years to 25, 30 years in business, and there's no liabilities at loss, Imagine the banks are anyway making 1.3 today some it's seen from the books and the opportunity the next 3 years, it should -- it should take you to something beyond that for sure.

Yes. Yes. Got it, sir. Sir, next question is on the margin. I think this was asked earlier also, but see, this waterfall that you are showing, where you're saying that the Report hike will help our margin by about 7 basis points that assumes I understood, I think, 50 basis point of rate hike and because there are other moving parts also, there is tight liquidity in the system. So we are pretty confident that despite all of that, the 7 basis point on a 50 basis point rate hike is what we are talking about on NIM, right? Those assumptions -- the assumption is up 50 basis points and some repricing on term deposits as this is 8 basis points, so.

So maybe Param, I'll answer that question. our 25 bps reincrease has already happened. We resumed one more EPO increase happens in -- maybe in the next quarter. So and this is a NIM position for Q4. So cumulatively, we should get some benefit on these increases, which are two increases in this year. However, there could be a corresponding increase in funding costs what we have put out there, 7 bps is a net impact, which could be an increase because the repo goes up. Offset by some bit of a funding cost increase. For us, about 32% of the book is rented to REPO. So on a increase 33 bps should broadly translate to about 16, 17 basis points, but we have assumed broadly half of it to sort of translate in terms of NIM. So that's the broad calculation here.

And the other thing is that these 7 bps, factors 50 bps basically. Basically, it assumes [indiscernible] talking you're talking about Q4 only here context.

Q2 to Q3, there might be a slight dip before this. And Q3 to Q4 is when most of the expansion happened because Q2 to Q3, the FCNR drag will be higher, just so that we are clear because you're putting out a margin expansion there. SP-2

Yes. Q3 should be flattish probably...

We feel a little bit quite range bound from the current levels.

May not dip that much. But then Q4, you'll claw back a lot of it because the [indiscernible] give you back 8 basis points excess liquidity trial will be gone. The repo hike would give you to 7 basis points. And just to tell you, the repo assumes that is 25 more, which I hope you agree probably will be a fair guess. Would you agree with that comment?

Yes, fair enough. Yes. So then that -- so therefore, we are to put out this slide as to where is the drag and how will it come back is that we didn't want people to certainly start worrying [indiscernible] down so much, very good headed. We want to give a 2-quarter picture that within 2 quarters, we see will normalize. And then for -- and then by our own intel estimates and use our internal estimates, that for '28, when we do a spreadsheet in production, we assume some cost of funds increase. We assume some repo increase all that. We expect this next year as far as I can see today, to be like around 5.8% into '28 also.

You can track it when do your work on us.

Yes. And sir, will there not be an asset mix impact? Because I think we are still on excess liquidity. September, LCR is pretty high. So the asset mix impact will not hurt us in Q3, Q4 because we still have to deploy that liquidity. Will there be a higher wholesale proportion of that deployment? Just so we are clear on the NIM.

We are reasonably factored it in. That's why I say we give 2 quarters in the next quarter's view. All that is factored. We've done the math. It looks like we are comfortable, and we wanted the market also to be comfortable that things will come back because of this detailed explanation. That is the purpose [indiscernible] if you -- when you read this report, does this give you adequate clarity. It doesn't need -- or you feel [indiscernible] some more explanation from us? What do you think, just to be honest with us.

No, I think, sir, you are sitting on excess liquidity. So which is what we're trying to understand that you're clearly calling out, you will benefit from rate hikes and logically, that should play out. So we're just trying to understand, sir, the extent of the benefit, which you're calling out, and I think it's very helpful.

No, no, I'm asking is a bit clear I'm asking you. I'm using a sample of one [indiscernible] question. It's a bit clear to you.

Yes, it is. So it is very clear what you're guiding for, sir Yes, that's right. Okay. Sir, lastly, on the slippages, so or from an asset quality perspective, I think I heard you mention on Q3, Q4, LBO is something to watch out for. So any early signs of any pressure or anything in your rural portfolios, especially because some of the lenders are calling out pressures in some of the drought affected districts. So any pressure we are beginning to see in your portfolio earlier.

No, no, nothing yet. But you should expect a reasonably good numbers, some next couple of quarters also. I always put the caveat because unknowns are unknowns in life. But as -- from whatever we can see right now, you will be comfortable for the couple of quarters as [indiscernible].

Okay. So we are very comfortable with that 1.5% to 1.6% credit cost guidance.

Yes, yes. Yes, definitely.

Our next question comes from the line of Piran Engineer with CITIC Securities International.

This once, again, I don't want to talk too much on this. But since you put it out here, wouldn't the September month NIM is meaningfully lower than. The 2Q average NIM. And if so, wouldn't we be starting off a much lower base. [indiscernible] full waterfall chart.

No, it should be okay for Q2.

So definitely September, as I said, we ran higher LCR because the FCRN money had just come in [indiscernible] 139% which means September NIM would have been slightly lower. But as I said, this liquidity is getting fast deployed in October as we see LCR issues a further normalized. And I expect this liquidity to be put to use in next maybe 1 month or so. We have taken this into account also some bit of a REPO increased benefit which would come in Q3 for the one which has happened. Taken all of this together, we expect that NIM could be very range down in Q3 from the current levels and before it sort of again picks up in Q4. And that's the number which we have put out in the presentation.

And just to be clear -- okay. Fair. No, that's good to know. Also, just to be clear, this does not factor in our capital rates, right? We have 5.8% mix.