RBL Bank Limited (RBLBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the earnings call of RBL Bank to discuss the financial performance of Q3 and 9 months FY '20. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vishwavir Ahuja, Managing Director and CEO of RBL Bank. Thank you, and over to you, Mr. Ahuja.

Yes. Thank you, and good evening, ladies and gentlemen. Thank you for being on this earnings call for Q3 FY '20. I want to start by observing that the bank continues to show healthy growth across all aspects of the franchise, which includes our advances position, our deposits position, our income, our operating profits and so on and so forth, signifying the strength of our business model and strategy. For the quarter itself, the advances grew 20% year-on-year. Our wholesale business growth was muted at 3%, as might be expected. But the nonwholesale businesses continued to grow strongly at 42% year-on-year. Deposits grew at a healthy 21% year-on-year. CASA grew 31% during the same period. Our cost of deposits fell 19 basis points to a level of 6.71% for this quarter. CASA percentage is up slightly to 26.8% in Q3 as against 26.5% last quarter and 24.6% same time last year. We had significant surplus liquidity throughout the quarter, further enhanced by the capital raise of INR 2,700-odd crores in December 2019. Our daily average LCR was 164% for the quarter. Our branch expansion continues apace with 25 branches added in this quarter, largely in metro and urban centers. We remain on track to end the fiscal year with around 400 branches, as we previously indicated. In our Financial Inclusion business, we added 89 BC branches in this quarter, with 77 of these in RBL Finserve itself. In total, we now have 1,245 BC branches. Revenue growth momentum remains strong and has grown 37% year-on-year in Q3 FY '20. NIMs increased to 4.57%, an all-time high, from 4.35% last quarter and 4.12% year-on-year. Our NII growth, net interest income growth was 41% year-on-year and continues to be significantly higher than our loan growth. And as a result, our overall yield on advances improved 15 basis points Q-on-Q to 12.26%, largely because of the change that has happened in the business mix. Noninterest income grew 30% year-on-year, and our core fee income grew 37% year-on-year in Q3 FY '20. Our noninterest income was 35% of our total income for the quarter. Our cost to income ratio was 48.1% for the quarter. It was lower this quarter due to benefits accruing on certain cost-saving initiatives. However, we expect cost to income ratio to be slightly higher than 50% in the near term, as we previously indicated again, though perhaps a little better than we had previously anticipated. Our operating profit grew 47% year-on-year and 15% quarter-on-quarter. In Q3, our operating profit was INR 732 crores. This actually reflects that the fundamental operating strength of the bank and its franchise strength that before we sort of take into account the necessary provisioning that we've had to do on a small handful of names which we've talked about frequently, the fundamental operating performance of the bank in all aspects continues to be very strong and in fact, has shown a significant 47% growth this year over last year. Our PAT for the quarter was INR 70 crores, impacted, obviously, by the credit provision that we have taken. And obviously, we'll be discussing more of that. Lastly, the ratings for our Tier 2 bonds was reaffirmed at AA- by ICRA ratings. Now getting into, first, the wholesale business and the specific asset quality issues which we have highlighted previously and we'll talk about now also. The growth in the wholesale business was 3% year-on-year, and a marginal decline, in fact, on a Q-on-Q basis. This is because of the prevailing environment and rebalancing of the portfolio in line with the strategy to further granularize the portfolio of the bank. The external environment continues to be challenging given the stress levels in the economy, and we are keeping a close watch on the health of our portfolio. In this quarter, specific to the stressed asset pool of INR 1,800 crores, which we had previously outlined in the last call and to which there is no material change, we have recognized an additional NPA of approximately INR 710 crores, and we have made provisions of approximately INR 340 crores. This now implies that over 80% of the previously identified credit stressed exposure on certain corporate accounts has been marked as NPA, and we now have made a total provision of approximately [ INR 700 crores ] on that portfolio. We expect a tail of NPAs to flow through in Q4 when we will make the related provisions as planned. Previously, primarily as a result of all this, our gross NPA percentage for the quarter was 3.3% as against 2.6% at the end of last quarter. Net NPA was at 2.07% as against 1.56% in Q2 FY '20. Our PCR remains stable at 58.1% relative to the previous quarter. So that's on the asset quality front on our wholesale business. Now moving on to the nonwholesale book, which continued its growth momentum. This business, as I said earlier, grew 42% year-on-year, 8% Q-on-Q. Within this, the retail asset segment grew 49%, 9% quarter-on-quarter. And the DB&FI, the Development Banking & Financial Inclusion segment, grew 25% year-on-year, which is 8% quarter-on-quarter. Yields continue their uptrend and increased by 18 basis points quarter-on-quarter, 151 basis points year-on-year to 15.7% in the nonwholesale business driven by the product mix changes. Last time, we talked about the retail asset business environment in terms of the slowing economy and the possible threat of job losses, et cetera. I also mentioned that in all our portfolio reviews and bureau reports, one did not see any material stress buildup. The position is now more or less the same. Actually, the festival season saw demand come back strongly, and we saw our cards business spends grew more than 29% in the festive month over the previous month, which is October over September. However, we continue to remain cautious and our tightening of underwriting standards continues to be in force. The credit card users crossed an important milestone of 2.5 million cards, making us the sixth largest franchise in the country. Our new card acquisition was robust, and we issued 3.29 lakh cards this quarter. The aggregate retail card spends saw a growth of 18% quarter-on-quarter and continued its growth momentum. We are happy that despite growing at this fast pace, our retail spend card and other key metrics continue to hold and are in line with market leaders. During the festival quarter, we saw our retail spend cards move up to 11,265 versus 10,522, an increase of 7% in 1 quarter itself. A lot of these spends got converted into EMIs, taking the term contribution to the card portfolio to 44%. We booked around 9.26 lakh cards -- consumer loans, I'm sorry. We booked around 9.26 lakh consumer loans versus 8.5 lakh the previous quarter. The 9.26 lakh consumer loans is approximately 10,000 a day. In our LAP business, while we continue to show growth, the challenges in the NBFC segment has allowed us to up our quality of sourcing. In fact, reduced competition has allowed us to move to better risk segments at decent yields. In micro banking, the quarter saw some disturbances in the eastern part of the country. Assam was the first market to get affected, where we saw some trouble brewing in 5, 6 districts on a call given by some local organizations. As the industry was trying to solve this, the state also saw unprecedented disruption to normal livelihoods and business operations with widespread protest across the state. We did see some slowdown in protests towards the last 10 days of December, enabling our branches to be able to open and contact customers. This did push our collection efficiencies down to 85%. We expect this to improve this month given the early trends. However, we will continue to watch this state closely and make all efforts to be close to our customers. As of now, there are no new disbursements happening since mid-November in Assam. Our exposure to the state is around 3.97% of the micro banking book, which is actually down 15 basis point from the September levels, where the overall FI book is approximately 9.2% of the total bank book. So it is 3.97% of 9.2% of the total bank book and therefore, is unlikely to cause any problems which the business cannot absorb. Our ticket size of new loans is at INR 29,000, which is much below the industry average of INR 44,000 and the peer average of INR 57,000. We're also being cautious in our lending in all districts in adjoining states which are close to the border and may have had an influx of migrants. The last calendar year has seen a series of disruption in various states ranging from flood, cyclone, drought, political agitations, et cetera. Our geographical diversification model and deep understanding of the market has helped us tackle these with minimum impact to the business, which remains very profitable. In this quarter, the micro banking business grew by 31% year-on-year, 7% quarter-on-quarter, and the MSME business showed a 40% growth year-on-year, 6% quarter-on-quarter. We added a total of 89 BC branches in the quarter, taking our total BC branch count to 1,245, which -- yes, 1,245 across 24 states. We continue to open BC branches as we scale these businesses. Lastly, on capital. We completed our fundraise of INR 2,701 crore in December, which should provide us with adequate capital for our growth plans for approximately the next 3 years. We ended the quarter with a capital adequacy ratio of 16.08% with Tier 1 capital adequacy ratio of 15.02%. Before I finally conclude, I want to leave you with a few thoughts in summary. Amidst concerns of an uncertain business environment because of slow growth and other reasons, we are working to steer the bank out of its recent challenges. And as we've indicated before, this should be sort of done and dusted by the end of the next quarter. We are digesting this situation and should be, like I said, put behind us very soon. We continue to be in low-risk appetite mode in the wholesale business, as we in parallel also deal with our current stressed book on an active basis. We will focus on growth in wholesale as and when we see a definite turnaround in the economy. We have picked certain business segments where we said we'll become significant, and that is succeeding to a very large extent. And you already know, we've talked about on the nonwholesale side these business segments where we're achieving significant size, scale, significance and have started generating market acceptable returns from these businesses. Our branch footprint is underinvested, and we will continue to invest in our deposit franchise. Technology continues to also play a vital role. However, it is not just tech that drives liability generation. It is touch and tech, and we will continue to invest in both. Lastly, as I said earlier, we successfully completed our capital raise, and this addresses our capital needs for approximately the next 3 years. So I thank you. And with that, I will now open it up for question and answers.

[Operator Instructions] The first question is from the line of Dhaval Gala from Birla Sun Life Mutual Fund.

Sir, 2 quick questions. First, outstanding number on watch list, and if you could also talk about the movement in the watch list for the current quarter versus what the slide which was there in the last quarter in our investor deck? Second question was, if you look at the movement of rating profile for our wholesale lending book, despite 2 quarters of very high slippages, the rating profile still seems -- I mean is there material downgrades or how -- why there is a 6% type of a BB and below book still looking at the same number mean in the last 2, 3 quarters despite such high slippages? So that was 2 questions around asset quality.

Yes. Good. Good questions. I think...

So Dhaval, on the second one, clearly, we have seen external ratings downgrade. Some of that in our internal ratings had already been downgraded, and we know the situation in those companies. We don't see anything materially different in terms of, let's say, those entities slipping into NPA or any other challenges right now. Some of these also happen to be technical where there could be a 1-day default and there is opportunity for these companies to claw back because of strong operating cash flows. So I think also the environment is fairly challenging and I'm strongly suspecting that the universal data will also show that there are more downgrades than upgrades if you look at the last 6, 9 months outcome from rating agencies. So yes, I think that number has increased in the sense that the slippages have come out from those numbers, but we don't expect anything material going forward other than what we have generally guided around the overall stressed asset number. In terms of movement, I think, broadly, I think we still continue to see stress coming from the 4 groups that we had mentioned in the past, in the last quarter. And there is no -- nothing unusual which we had not envisaged last quarter.

Sir, could you tell -- I mean, explain with the numbers Jaideep means just to understand, the quantum was INR 1,800 crores last quarter...

Yes, yes. Correct.

Sir, how much has come from the watch list, the slippages, and how much is the new addition to the watch list in the current quarter?

No. So we have approximately INR 700 crores which have slipped further, taking the total approximately to INR 1,500 crores.

To clarify, I think last -- when we indicated that number, we took INR 800 crores of that into NPA last quarter.

Correct.

And we had suggested that approximately the same amount may happen in the next quarter. And this is what is -- how it's panned out. So INR 700 crores of that has slipped Q3. And so that's INR 1,500 crores out of INR 1,800 crores. The outlook on the INR 1,800 crores remains stable. Yes, it's not moving materially here. And that's how we look at it. And I think that's the way we're going to answer it.

So do I -- that means the understanding is that the INR 1,800 crore number which was from the 4 groups remains steady. And there are no addition to that number as such, means not many more groups or any new that you want to mention...

No, no, no. So if you go back to the last quarter's discussions and various commentaries and discussions, we had said that there was a 5%, 10% buffer in it, which could take into account any further, if I may say, deterioration one way or the other. My view is, we should still keep it at 4 to 5 names. Where that could come from, it's too early to say anything right now. And maybe it won't, maybe it will, we don't know. It's a very dynamic environment. But what I'm trying to say is that we are still sort of remaining broadly within that outlook of number that we put out earlier, and we have no reason to suspect that we want to change it.

Just to clarify, Dhaval, materially, the entire INR 700 crores materially, barring some small number here and there, is coming from those identified sources.

Yes.

Just to complete this conversation of asset quality, the last part, if you could guide us that how do you look at a scenario for slippages next year or next few quarters. Because you have recognized bulk of the problem until new -- any new issues come. So do we move back to our earlier slippage ratios which used to come when -- before, say, till March 2019? Means we never had any big hiccups when it came to wholesale banking then. And now that you've seen the book really well, tried to curtail the growth, et cetera, could you guide us in terms of how your slippage ratios could be in next fiscal?

So Dhaval, I think one change you must appreciate is that we have -- because of the general lack of risk appetite and opportunity in wholesale, I think our mix is moving quite rapidly towards some of our stronger retail businesses, which, by design, as per the program, will have high credit costs. Just mathematically, for example, if I simplify the credit card business, let's say, it is 20% and 4.5% or 5%, that itself will be 1% credit cost or 0.9% credit cost for next year. So to that extent, I think one should calibrate the credit cost because of the change in mix. On the wholesale, while I will make -- we should expect if things normalize, the economy to go back to a relatively normalized run rate. But at this stage, I don't think we have enough data points to say that the economy is back to a normalized run rate that soon. But sir, if you have to add.

No. Really appreciate your comments, Jaideep, well put. You see, even in this last 2, 3-month period, intervening period since our last conversations, there has been, at least on the corporate side, further stress buildup. I don't think the environment has improved, if anything. And we've seen 2, 3 names pop up in the environment. And without going into them, fortunately, we were not in them. So from our point of view, we are all -- we are still looking that we are safe and secure from the standpoint where we were 2, 3, 4 months ago. So -- and I think we have, in many ways, looked at our portfolio very carefully. I mean last quarter, and I'm maybe overextending my answer. Last quarter, there were a lot of concerns around a couple of NBFC names, which was sitting with many banks, including some parts with us. And honestly, we have moved that needle significantly in a positive direction. The exposures have been cut down 60%, 70%. They're down to a very minuscule number. And they have been, in terms of the security structures and whatever you want to call it, we've made them more or less risk-free. So the fact is, in that sense, we have strengthened our asset position on the wholesale side. In few other names, which are good names, still very highly rated, but we felt that our exposures were somewhat disproportionately high because that is one of the learning experiences from even these 4, 5 names that we have taken pain on. There again, we have brought them down. We have a very new target operating model in place with tighter filters, with lower and more conservative level of risk appetite even for highly rated names. So all those changes have been made in this quarter. And all one can say is that it should position us strongly for the future to revert to a high-quality BAU business in the future with decent growth, yes? Right now, for the next 2, 3, 4 months, we are still in the mind frame of being somewhat risk averse and just making sure that what we have on our books is safeguarded and protected and safe -- and in the right -- is of good asset quality. So I think that's what we are ensuring. And from that standpoint, I would say, we are still doing okay and hope to remain okay.

Just the last question, if I am allowed. On the business model, if one -- I mean, you can just -- I mean, a little longer term, now that the mix of loan book is becoming 50-50 and the wholesale book is now at 52-plus percent, and the way you articulated about the debulking of the loan book as well as reducing ticket sizes with each of your clientele, how one should envisage, say, next 1- to 3-year time horizon the book mix? Because that would derive higher margins if you keep tilting more towards retail, especially on the key segments which we've grown aggressively this year or more importantly, credit cards and in FI business, et cetera. So just, if at all, next 3 years how do you look at your mix between the wholesale and the retail?

Yes. I mean, just looking ahead, some of it is circumstantially happening and some of it is obviously by design. So the fact that we are now more than 50% retail or nonwholesale this quarter itself has circumstantially happened. And like you very rightly said, the portfolio is doing well. There is -- extremely well, very well managed with huge growth potential out there. And also the good thing is that these are businesses which are now reaching significant size, scale and market significance and now reaching a point of escape velocity to give us perfectly market benchmarked profitability and returns. So there's no reason to, in any way, soften that momentum and trajectory. Now if that is the case, then the whole question is that, to what extent do we want to take this? So I think our first line of thinking is that if in the next 12, 18 months or so we will get closer to a 55-45 situation, then I mean that is something that we will first see how we get to that point and then probably take a pause and reflect what the other opportunities in the environment are because -- and this is a continuous process with a dynamic -- and within that portfolio also we have to make sure that we remain sensible and prudential. So that's the whole game going forward. But yes, I do see that the nonwholesale sort of picking up 1% a quarter for the next 3, 4 quarters.

The next question is from the line of Nitin Aggarwal from Motilal Oswal Securities.

So the first question is on the fee income. The fee income continues to surprise positively led by sustained momentum in card business. So if you can throw some light on the composition of card fees in terms of spend-based, subscription-based, et cetera? And secondly, the deposit growth this quarter has been flat. So are we not looking to strengthen our liability franchise and improve our credit to deposit ratio at a time when we are going slow on the wholesale business? So why this deposit growth is flat? And third is on the OpEx line. While you have said that this quarter OpEx was more benign than what we envisaged, but the OpEx number as such has been like the same for last 3 quarters. So why is this so because we have been adding branches every quarter and our retail business has been going well.

So the card fee breakup is still in the same. Roughly, if you see you are joining, so processing fee is 1/3, which is the fee which customers pay when they get the card, annual fee. And there is this loan fee which we get which is combined with that. And then you have the spend-based fee, which is about 37%. And the balance is the other fee, a large portion of that is the penal fee as well as the insurance income, et cetera, which we get. So broadly, this is what it is divided. And that if you look at it, they're all a function of the number of cards you have. And therefore, as the new card growth keeps happening, the fee proportionately will keep going up.

On the deposit, Nitin, see, we have a peculiar situation where, I think, the retail growth continues. We are quite happy to take those retail deposits. We've been adding branches and people. I think what has happened to us in the last few months is that because the loan growth is relatively slow and we had some very nice opportunities on refinance which are quite cheap given our asset portfolio, we've had some borrowings which have come in and of course, we have seen capital come in. So what has really been defocused upon is the bulk deposits, which always used to be the marginal 30%, 40% in our case, which clearly we are not really needing to take because we are sitting on INR 5,000 crores to INR 6,000 crores of excess liquidity and now with capital slightly higher. So that's really the reason why you will optically see CD ratio being a little higher or incremental CD ratio being higher. Within deposits, the growth in retail and CASA is quite satisfactory.

Okay. Lastly, on OpEx?

On OpEx, we've had some over-provisioning which we had done in the first couple of quarters on employee expenses like gratuity. Some of these are more provisions which we had overestimated. I think we corrected a little bit of that. And we had some cost saves as well which we have accrued over a period of time which got recognized in this quarter. So if -- maybe the number should be in the INR 20 crore, INR 30 crore range, so you can adjust for that. But we will have OpEx growth again coming back. And therefore, we've mentioned that we should probably be back in the 50%, 51% range on the CI ratio.

The next question is from the line of Henrik Milton from Coeli.

This is Henrik here. Just wondering here, when we listen to your quarterly call in the summer of 2019, you said it will take roughly 2 to 3 quarters before you'll get out of the woods regarding the NPLs. So is that a picture that you still can confirm that you're having a good progress regarding NPLs?

Yes. That's what we said.

Yes. Yes. That's what we said, and that's what we are saying even now that in the 2- to 3-quarter perspective, it's been 2 quarters and the third quarter would be the coming quarter. So -- and as we have said again and again that we expect to at least put behind these -- the need to recognize and provide for the stressed portfolio by then and get back to a normalized situation starting next fiscal year. Yes. So yes, we are staying with that.

Yes. And can you also just confirm that the slowing in loan growth is that you're more resilient taking on new loans in the wholesale business?

We are -- sorry?

Slowdown in the loan growth.

Yes. I think we should first of all see it in the context of the opportunity itself being -- can see a slowdown in the wholesale banking credit growth across the industry. We also are -- while we add gross loan book of reasonably good quality, we are also debulking some of our existing book because one of the learnings, as mentioned in the past and today, was that we need to be a little more granular on the wholesale book. So the net origination that we see, of course, is colored by the fact that there is a shedding of existing loan book as well from a rebalancing perspective.

Okay. And then my final question then. And then now that the loan growth is a little bit slowing down here, where are you actually going to make the money going forward? What will be the profit drivers in your case?

Well, I think from an income standpoint, I think the benefit continues to be from falling cost of funds and relatively less fall in overall yield on assets and yield on advances, so we should continue to see margin expansion. On the fee income side, we will see some pressure on wholesale fees because the growth is definitely coming down as in the past. But we expect some of that at least to be compensated by the retail, both liabilities and assets, and then from a distribution standpoint as well as from the asset businesses on retail to kind of continue to show strong growth. Our expectation would be that noninterest income growth should be not very different from what we have seen in the recent past unless there are some serious slowdowns that we see in other parts of the business, which we are right now not envisaging. So I guess top line should do well, and we will continue to be prudent on cost while continuing to invest in branches. Once we are -- by the end of this year, we should be 400 branches. And on that base, we probably will moderate the percentage growth of branches. So we'll probably add about 100 branches next year, which on a base of 400 is more like 25%. So I think we will start seeing some level of operational leverage on the distribution side of the business as well. So those would be the levers for us to kind of maintain/improve our profitability once we cross the provisioning hump.

The next question is from the line of Saurabh Das from Franklin Templeton Capital.

I would again dwell upon a little bit on the asset quality side. On Slide 22, you have the detailed breakup of the rating profile, and there was a question asked around the 6% BB and below. If you can give me the total number to which I should multiply that 6% number. What would be that absolute rupees crore number?

That should be approximately somewhere around INR 4,000 crore number.

No. No. It's [indiscernible].

No. What I mean by that, is it like INR 50,000 crores?

INR 4,000 crores divided by 6%.

INR 4,000 crores divided by 6%, approximately INR 60,000 crores because it includes fund and nonfund-based rated profile.

Along with the corporate investment book or the total investment book?

No, it will be corporate investment book. We don't take G-Secs and other investment book here.

In this number, right?

This predominantly will be loan book, plus nonfund-based, plus corporate investment book.

So if I just look at the movement of this, how much of that pending INR 700 crores or pending INR 1,000 crores, which you had as standard, but a part of your INR 1,800 crore watch list of the last quarter would be overlapping with this INR 4,000 crore last quarter?

Almost 100%.

100%. So which means that there is a net increase of somewhere around INR 700 crores to this number?

Correct. Correct.

Correct. Correct. Absolutely right.

So how -- I mean, if you can just talk about a little bit around the movement in absolute numbers that would give us a sense of how much has been downgraded into this book.

No, so Saurabh, what you just now said is correct. Approximately INR 700 crore went out in Q3 versus Q2. And so the numbers are roughly the same. Therefore, approximately INR 700 crores got added because of external downgrades, which is a little over 1%...

Assuming 0 upgrades?

I'm talking about a net number. There will be some upgrades and therefore, the downgrades could be a little higher. But substantially, yes, I mean, it may not be precise, 10, 20 basis points upgrade if at all. And I think some of this is -- at least the 2, 3 names that I remember are a little technical in nature and don't necessarily indicate an immediate possibility of a slippage in the near future, so -- which is why our, let's say, thought process around the overall stressed book not materially changing.

Got it. So roughly, let's say, 1% to 1.5% on a quarterly basis or around 5.5%, 6% of the corporate book is right now the run rate of addition to this BB and below. So that kind of brings into this question that for the next fiscal year, assuming a large part of Q4 slippages would come out of the pending, whatever, INR 300 crores, INR 400 crores of the stressed book, it does give us a sense that it could be an elevated level of corporate slippages. Is that right now a safer conclusion to make or you have different views?

Saurabh, I think one of the things that we did mention, it is a dynamic environment. This particular last 2 quarter slippages have substantially been influenced by some of the stressed portfolio that we had already spoken about starting June, July. And obviously then, some of that has translated. I think it will be an extreme extrapolation that you're talking about, unlikely to be in that quantum. Having said that, the economy is where it is and therefore, my guarded comments around these. Yes, but I think I'll be very surprised if we start seeing this as a trend for the next 4 quarters. I don't think that's the intention at all.

Right, right. And in terms of SMA-2, how large will that book be? And is there a substantial overlap with your BB and below or those have slightly different context?

Yes, yes, yes. SMA-2 will have a very high to full overlap with AA. I think our SMA-2 should be in the range of about INR 200 crores.

Net of the stressed.

Yes. It's about INR 200 crores net of the stressed book that we are talking about. So that should be about 30, 35 basis points.

39.

39 basis points.

Got it. And in terms of...

SMA -- Saurabh, SMA-2 is 39 basis points.

Yes.

39 bps. And that has been in that vicinity for the last 2 quarters or...

Marginal increase. Last time, I think net of our stressed book it was about 17, 18 basis points, 20 basis points. So yes.

Very little, right, right. And just in terms of the retail asset quality, you did mention that it's been tracking well. But we do hear from other players that on the unsecured portfolio, there are some pockets of stress which are coming through. So if you can give us some sense of write-off rates on the credit card portfolio, trends and what do you think would be a fair expectation for next year. We do hear about large white-collar job companies which are under stress, so there could be layoffs. A lot of companies in their calls also indicated employee rationalization, et cetera. So do you see any challenges coming out of that? And in terms of salaried/nonsalaried complexion on the credit card book, if you can you give some sense on incremental flow.

Yes. Okay. So on the card side, while on the -- if you look at the market and the bureau, the latest read which has come, the 90-plus has gone up by only about 10 basis points. So there's not a significant increase which one is seeing there. I think for us, specifically, you can expect the credit costs to be somewhere in the 4.6% to 4.7% range next year and the GNPAs in the region of about 1.6% to 1.7%. If there is a massive job loss situation, then yes, portfolios which are salaried will get affected. I think so far we've been a little -- we've not been impacted for the simple reason that our salaried book is extremely granular. So when you go open market, I'm not bunched towards a particular company because I don't have very high quantum of salary accounts of that company and therefore, a high quantum of cards in a particular company. So when there are job losses which happen which are company-specific, we kind of get insulated. But if it becomes a bigger trend, then it gets kind of impacted. Our mix between salaried, self-employed, roughly about 35% of the book is self-employed and the balance is salaried.

And the flow will be similar?

Yes. There is obviously a large potential on self-employed. It's not as if the self-employed segment is also doing great in this economy because the MSME sector is also stressed. So as of now, we still find the salaried segment much superior in performance than the self-employed, so we're a little guarded there.

Got it. Got it. And what's your write-off policy, if you can remind me?

We write off at 180.

180. Okay. And you don't see any reason right now to change that given the recovery trends in the harder buckets?

No. We basically like to write off early because you don't want to carry a book hoping that the recovery trends will improve. Our recovery trends are stable. Currently, since our written-off book is not very large as a proportion, therefore, recovery rates are a little higher. But as that recovery pool becomes longer and more vintaged, the recovery rates start coming down. And therefore, we will continue with the aggressive write-off policy.

Got it. And just in terms of behavior patterns between the Bajaj Finance tie-up customer source versus the non-Bajaj sourcing, is that broadly -- there is a difference, I understand, but is that differential remaining constant or you're seeing any difference in the delinquency patterns in those?

So we expect the Bajaj Finance book to always have a lower delinquency and credit cost by the simple virtue that it is a tested book.

True. But I'm talking about the differential between the 2.

So as the Bajaj portfolio also starts getting vintaged, this difference narrows down. But you can safely assume about 40 to 50 basis points difference to remain between the 2.

The next question is from the line of Rohan Mandora from Equirus Securities.

Just want to -- I missed the initial comments wherein you talked about the provision on the INR 700 crores of slippage that happened on the stressed pool. Would you repeat that?

INR 340 crores.

Yes, approximately INR 340 crores.

INR 340 crores. Okay. And sir, in terms of on the credit card business, the Slide 42, where we are showing the portfolio breakup for term and nonterm, interest earning and noninterest earning. Is it possible to share this number in terms of the number of accounts and the value of this. But in case, if you can share the split on number of accounts?

I don't have the number of accounts, sir. You also understand that the same customer will have a term and will also have a nonterm balance. So therefore, it's easier to put it as a balance than put it as a customer.

Got it. But just for confirmation, what percentage of the customers would carry a interest-earning balances that are part of the total?

So I think what I can safely tell you is that if you were to look at what customers revolve, that number is about 27%. Okay. And term loans, typically about 75-odd percent would be to customers who don't revolve.

Okay. And what was share of inactive customers, say, who are 6 months inactive?

Our inactive 6 months would be in the region of about 15-odd percent.

The next question is from the line of Manish Ostwal from Nirmal Bang.

Most of my question already answered, only one question on the corporate book side. Compared to the last quarter to this quarter, we have recognized INR 700 crores of additional NPA from the watch list. So based on the current macro assessment and some downgrades happening in the BB book, what are the upside just to the INR 1,800 crores earlier watch list book? So INR 1,800 crores can increase materially or it remain where it is?

I think we had commented in our previous commentary today that we don't expect any negative material movement in the short term to this number. But at the same time admitting that I don't see upside risk considering INR 1,500 crores of the INR 1,800 crores is already taken. And so there's not much room to have, except that on the provisioning side we have aggressively provided. As you can see, it's much above the regulatory provisions. And so as the recovery and resolution efforts are ongoing, let's hope that there we will do a better job and effect some savings and which will sort of be an add-back to P&L as and when that happens. So I think the upside potential, if anything, is on that side rather than on the gross number itself.

The next question is from the line of Aditya Jain from Citigroup.

On the slippages, so the INR 1,050 crores, you've mentioned about INR 710 crores from the stressed asset pool. So that leaves the remaining INR 340-odd-so crores. So this is a bit higher than the INR 250 crores sort of that you've talked about as a normal slippage. So how do you look at that INR 350 crores? Is this a normal number going forward or are there any aspects in this which will not recur?

No, I think this is -- really, it's the slippage. Much of the increase has come from your cards only.

Yes. You can explain that.

Yes, exactly.

So this time, we did see about -- if you look at versus last quarter and I could talk to the whole retail asset segment as such. You did see a INR 50-odd crore increase in slippage. Bulk of this was because we changed our NPA methodology, went a little more conservative. So we used to follow a month-end NPA policy and in fact, last time in the call, somebody had asked, have you moved? And we said, yes, we have part moved and part moving. So all the big products, cards and LAP, et cetera, moved into the daily NPA. So there's a little bump up which happened which is a onetime. And this will, therefore, normalize over the next 1 or 2 quarters.

Okay. So as of now, all of the products have moved to the daily NPA tagging and the effect of that is there?

Yes. That's right.

Yes, yes. All have moved now.

So as of 1st October, everything moved.

Got it. And on credit cards, the credit cost in the last quarter was about 4.5%, I believe, was mentioned on the call. Where would that be now?

So this quarter because of the daily NPA, we went up to about 5%. This would, as I said, stabilize again at about 4.6%, 4.65% going forward.

Got it. And in terms of the portfolio, cards portfolio maturity and the average vintage, so how do you see that affecting the credit cost going forward? So given the aggressive growth, we would have seen a higher -- I assume the portfolio vintage of the -- that the share of customers who are, let's say, in the 1.5 -- 1 to 1.5 years sort of bucket would be becoming higher. Does that play into the credit cost outlook for the cards business or credit management?

So until the time we are growing at this rate, you're right, our portfolio is skewed towards the 1- to 2-year vintage bracket, which is where the credit cost peaks. So that's the reason why we are running at almost peak credit costs. In about 1 or 2 years from now when the proportion of the portfolio which is greater than 2 years starts growing, that's when the credit cost starts coming down because that portfolio has already seen its losses, and there the credit costs are fairly low.

The next question is from the line of Deepak Gupta from Reliance Nippon Life Insurance.

I just wanted a clarification on a data point on Slide #18 where you mention net stressed assets which have increased from 1.6% as on September 30, 2019 to 2.14%. So if you could just take us through what is this increase on account of.

This is the net NPA number which is already at 2.07%.

Okay. So isn't this a part of the INR 1,800 crores or out of those INR 1,800 crores, INR 800 crores was made a provision on Q2.

No, no, no. Deepak, sorry to clarify, this net stressed assets is actually what is there in the balance sheet as of December 31, which is nothing but net NPA plus a very, very small old book of stressed that we are carrying.

The next question is from the line of Parag Jariwala from White Oak Capital.

Sir, my question is on the asset quality. See, if you look at your slide on the ratings, in December 2018, BB and below was also slightly higher than 6%. So how do you read this? I mean, is this the time it surged to 6% earlier when the environment was not as bad as what is it right now, you were at 6%. So are this 6% is something which we should be worried about or even it will be like a normal course of business where, obviously, we are not here to lend everything to AAA, right? So how do you read this?

So Parag, I think December '18 did carry the situation around the fact that the slippages which happened later probably, I don't have the data point of that old, to be honest, because we were more focused on looking at the sequential numbers. But maybe there was a large part of the INR 800 crores book also sitting there, which one would have come down. And I think from -- yes, I mean, I don't see any other -- to be honest, any other answer here. As I told you in the earlier question, whether we will continue to add INR 500 crores, INR 600 crores, INR 700 crores to the BB book, highly unlikely. But yes, given where the economy is and where the near-term outlook is, should it increase in terms of absolute, answer is yes. Hopefully, as a percentage, I think it should come down because as and when these things materialize into NPAs, I think the incremental slippage should come down.

Got it. And the INR 1,800 crores number, by the next quarter, I think almost everything will go under. But in your experience of this BB and below, what is the percentage? Again very difficult to guess or very difficult to calculate, but in your assessment, what should be the ratio of slippages out of this pool?

Fact of the matter is that out of what we have had to classify as stressed this year, 1 year ago or little more was a AA- credit, more than 70% of this portfolio. So it has not slipped from BB, it has slipped from AA. And unfortunately, there's not much to say about that. So it didn't come from that book. In many ways, the slippages coming from the BB book have not been that stark. Jaideep, am I right, look...

Yes, absolutely.

And in fact, either has just remained there or a small percentage may have slipped. So right now I think maybe we can do some more work to arrive at a correlation factor, if any. But if you look at the stressed book that came post July 2019, almost all of it came from a A or better category.

The next question is from the line of Hiten Jain from Invesco AMC.

I had one question. So if you can throw some light on this downgrade of INR 700 crores to BB and below. I'm assuming this would be mostly from the wholesale book. Any color of this, whether it's lumpy, granular or which industry has this come from? Any specific trend that you are seeing that would be useful?

No. So I think I don't think we have seen any industry correlation here, and I don't think there are too many industries which are doing well in the economy any case. So there is a widespread of industries which are doing poorly. So I guess it's pretty diversified in that sense. Not to my knowledge that we have seen anything bulky here.

The next question is from the line of Darpin Shah from HDFC Securities.

Just wanted to check how much is our interest reversals for the quarter?

Interest reversal?

Yes.

Should be about INR 20 crores.

Okay. And how much this will be in the previous quarter? Because we have seen similar slippages for the last 2 quarters, almost similar.

INR 25 crores.

Yes. About INR 25 crores to INR 30 crores.

Okay. And the last thing is, what explains the dip in employee expenses? Sorry if I've missed that.

Yes. Yes. So I mentioned that we had -- there are certain provisioning items in employee costs like gratuity and bonus provisioning, et cetera, which we had taken estimating a higher number. Some of that was recalibrated to what it is today, so some claw back in this quarter on that. We will go back to some increase which will be more reflective of the people additions...

Additional employees.

Absolutely, yes.

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

Just one question. Have you made any progress on this INR 1,500 crores to INR 1,800 crores of slippages which has happened and which is likely to happen? What has been the progress on expected recovery on that front?

Frankly, it's been a little slower than what we thought when we started. Bunch of things in different fora. The other challenge, of course, in a couple of cases is, I don't think all the lenders are on the same platform yet. So it's still work in progress. Different stages for different entities, but nothing close to what we thought will be in the initial period.

Mahesh, if I may just extend that comment. I mean last comment -- last quarter in my commentary itself I mentioned that the experience has been not good. We have to be very frank. And for one reason or the other, either the deterioration has been rapid or the banking groups involved in each case, I mean, these were large exposures. There are several banks involved. And just the process of coordination between banks and alignment has been very poor. And even in some cases, frankly, it's frustrating because there is significant asset value sitting there in recovery potential, but we are not able to come together. And relative to our size, even though some of our exposures are high, but in the context of the consortium of the banking group it's still relatively low, which means we don't have leverage. The bigger bank is -- bank or banks are some of the others. It's either a SBI or a Yes Bank or this or that or the other. Fact is that when they are taking certain positions, our leverage position is not that great. So we have to agree on some of these cases, which is why -- although, I would say, fundamentally, barring one name, in all the other 3, 4 names, the fundamental recovery potential is quite much there.

Perfect. And would you say that you are in a position to at least crystallize what could be the potential loss in these exposures because we have INR 700 crores of provisions today. How do you look at that number?

So Mahesh, based on current estimates, it will not be very different from where we have provided on a pool basis, somewhere in the 45%, 50% range.

45%, 50% range. Yes.

Okay. So you can technically, you can say that you can go slow on provisions because you've made significant provisions today?

On these names, probably yes.

Okay. And just one clarification, when you say groups, you include everything in that group, is it? You have one common promoter and you include all possible companies of that particular group?

Yes, exactly.

Unless there is good reason to exclude anything.

Yes.

Sorry, sorry, I didn't get the answer.

I said unless there's good reason to exclude anything, yes, that's the way.

Okay. So I'll just give an example. If I say there's a company which is in entertainment and they have got in infra, would you include everything in that particular group or do you say that I have only included...

No, no, no. We have included infra.

Okay. Perfect. And last question is, there's been a decline in the corporate banking exposure sequentially. Anything to read into it?

No, just that the earlier broader commentary that one is a question of assessment of risk and the other is a question of pruning down exposures even when they were good large exposures. It's something that we were doing, yes? So you take even the -- I mean, this was a question asked even in this forum that what is your largest exposure and what is the amount of that quantum. And the fact is even that largest exposure, we have pruned back even though it's a AAA company, yes, because we have just decided on a completely different target operating model with very, very tight caps compared to what we used to have earlier. So we are pruning back even from the best.

The next question is from the line of Yash Agarwal from JM Financial.

Just one question. This write-off number, INR 440 crores, what loan does it comprise of?

Fairly routine retail write-off which happen, including cards, and then there'll be certain corporates which we would have taken a technical write-off. Though while we will try and continue recovery efforts, but we've technically written-off a few corporate assets.

It's been trending higher every quarter by about 30%, 35%. So...

Yes. I mean, so I think if you take heavy provisioning, it allows us to do that, right, because the P&L has already taken the hit.

The next question is from the line of Jai Mundhra from B&K Securities.

Sir, just a clarification first on the asset quality. So we had this INR 1,800 crores stressed pool, of which INR 8 billion slipped last quarter and around INR 7 billion slipped in this quarter. So that pool is now only INR 300 crores to INR 400 crores, right?

Yes.

And we have not added in this pool, we have added in our external rating benchmark. But the watch list nomenclature has sort of gone or the watch list still remains INR 1,800 crore?

So the balance is about INR 300 crores of the INR 1,800 crores.

Yes, yes. So balance of INR 300 crores, what you said is right.

No, no. But we were never calling it watch list. We have been always calling it stressed assets -- identified stressed asset pool. Yes, because these came from large exposures on the corporate side. But we have small stuff on a BAU base sitting in SME, mid-corporate, agri, retail, all of that. So that number is not in this INR 1,800 crores. So that's the BAU number which somebody mentioned earlier has been averaging around INR 250 crores, INR 300 crores for us. And in this quarter, it was INR 350 crores because of the bump on the -- INR 50 crores bump on the retail side because of the daily NPA marking. So that's how you should look at it.

Sure. And sir, in that conjunction, when you say SMA-2 is 39 bps outside of the stressed book, then there is a bit of a disjoint here because you have already recognized that stressed pool as NPA. So why do you exclude when you qualify your SMA-2?

So there will always be situations where we'll be -- first of all, it could be a part of our BAU situation where we will have slippages in mid-market, smaller companies, as just mentioned. And there will be situations where SMA-2 continues for a long period of time and some of them come back to SMA-1 status as well or even lower. So that's a part of -- I mean, you can -- you'll never -- I mean if it as simple that my SMA-2 book is watch list, then that's one way to look at it. That's not the way we have looked.

Yes. So that's INR 230 crores.

If I remember correctly, you said this INR 230 crores is, this is the portion which is not overlapping with the stressed book, right?

Yes. Yes. I'm saying it is not overlapping.

Correct. Correct. Correct.

So I'm saying outside of the INR 1,800 crores, the number is another INR 300 crores, INR 350 crores. Overall, across the rest of the entire portfolio of the bank, wholesale, nonwholesale and of which 39 basis points is SMA-2, which is INR 230 crores.

Yes. Sir, again, so the question is, if INR 1,800 crores -- out of INR 1,800 crores, INR 1,500 crores has already gone to slippages or NPA, then you can even say that SMA-2 including all is INR 230 crores plus, let's say, INR 300 crores. Is that correct understanding?

Yes.

Yes, yes, yes, no problem, can say. And that number -- okay, yes.

Yes. Correct. That's the right understanding.

Yes, yes, that's right. That's another approximately 30 basis points. That's fine.

Thank you. Ladies and gentlemen, we will now conclude the Q&A session. If you have any further questions, please contact RBL Bank Limited via email at [email protected]. On behalf of RBL Bank Limited, we thank you for joining us this evening. You may now disconnect your lines. Thank you.