Earnings Call Transcript - HDB Q1 2021

Operator, Operator

Ladies and gentlemen, good evening, and welcome to HDFC Bank Q1 FY '21 earnings conference call on the financial results presented by management of HDFC Bank. Please note that this conference is being recorded. I now hand the conference over to Mr. Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. Thank you, and over to you, sir.

Srinivasan Vaidyanathan, CFO

Okay, thank you, Aman. Appreciate the participants calling in today. Mr. Aditya Puri is with us today. May I request Mr. Puri to give opening remarks, please?

Aditya Puri, CEO

Thanks, Srini. Good evening, all of you, and thanks for taking the time off to listen to us. I will cover the opening remarks in three portions. First, I want to get these Twitter messages out of the way. Then I will give you an idea as to what kind of work we've put in to get the results that we got during the COVID quarter. And last but not the least, I would like to clear all the uncertainty regarding our future in terms of succession, management planning, and our business plan. Our team, which is actually what has performed to give you the results, will cover individual aspects, whether it is about NPA, unsecured loans, credit risk, or if we will have a sudden jump with the moratorium going off or if we've taken proactive measures to see what is happening, the fact that we have a clearly defined succession plan coupled with the team in place. So let me start first. We've been receiving messages suggesting that there is some turmoil among employees based on the transition. So let me cover that one by one. As far as Mr. Munish Mittal, our Chief Technology Officer, was concerned, he spoke to me about a year back. He expressed his desire to pursue more detailed and advanced studies in technology at Oxford. I told him, 'No problem. You've been loyal and we know you love the bank.' He was set milestones that he had to achieve before he moved on. He achieved those milestones, and now he's preparing to become an even better expert on technology. The second was Mr. Abhay Aima. Abhay was one of the founding members of the bank. He has been with us for 25 years and loves the bank with his life. He played a stellar role in private banking and product management. He expressed interest in pursuing another opportunity, which I am aware of but I don't want to specify. I told him that once he trained his successors and I was satisfied with their ability to cope, I would be happy if he pursued his interest since you only live once. He did that, and he moved on. Now, let's clarify the situation regarding the auto loan business. The bank has a robust policy to deal with complaints and allegations and take appropriate actions. We have always upheld the highest standards of governance and propriety at all times and will continue to do so. We received some whistleblowing complaints, and internal inquiries carried out have not uncovered any conflict-of-interest issues, nor did they have any bearing on our loan portfolio. Appropriate disciplinary actions have been taken against a set of employees related to personal misconduct. Mr. Ashok Khanna, being head of that business segment, participated in the inquiry process. He superannuated on March 31, 2020, upon expiry of his tenure. Based on the further developments, appropriate actions will be taken in the highest form of corporate governance. Now, regarding the other matter, I won’t name the company, but we were asked by RBI to refund some money. We had appropriated that money based on sound legal advice. However, as the regulator advised us, we will return the money as we become pari passu with other creditors, and as per the amount provided for. We have exhibited exemplary standards across 25 years, and I don't see any reason why the culture and the base of 200,000 people would change. I want to share how we achieved our results during the COVID period. It has required a superhuman effort, and I thank all our employees for that. The economy has sharply recovered since April, reflected by a range of high-frequency indicators including oil and electricity consumption, e-way bills, toll collections, and improvements in the purchase managers' index in May, which sustained in June. Anecdotal evidence on capacity utilization in sectors like auto, steel, and FMCG corroborate this conclusion. The uptick in tractor, two-wheeler, and small car sales, as well as robust FMCG growth, suggests a rural recovery. While this points toward a good recovery, we expect some moderation. Some demand reflects pent-up demand from the lockdown that could begin to lose momentum. The rising infection rates across the country mean containment continues to be a challenge, and partial lockdowns imposed could hinder a full recovery. Our MSME credit disposal has been recovering strongly in the range of 5% to 6% year-on-year recently. This could sustain as credit disposal to MSMEs, backed by government guarantees, gains momentum. The 150 basis point rate cuts in February and a large liquidity surplus of INR 6,50,000 crores have contributed to a decline in yields and borrowing costs. It also augurs well that the market will absorb additional government borrowing. However, risks remain concerning duration and supply. We expect further policy rate cuts in the near term and yield management operations to pick up later in '21. Our employee base has done exceptionally well, and I appreciate their efforts. We are proud to say that our bank continues to provide increments, bonuses, and promotions, as we have always done. The employees delivered, and since they have delivered, they are entitled to their share of the bank's profits. Our bank is well-positioned to play a meaningful role in this changing work landscape. Two-thirds of our employees outside of branches are working from home, and certain branch staff come in on a rotational basis. We have seen improved productivity across the board, prioritizing employee safety through transport arrangements, working from home, and disinfecting measures. Our highlight in Q1 was the rollout of our 'anywhere working' initiative, which enabled our retail branch personnel to engage with customers through phone or video conferencing. During the quarter, we averaged approximately 225,000 daily customer interactions, a total of almost 68 lakh customer interactions in the month, nearly double March figures, focusing more on phone and video engagement. We have acquired 1.2 million liability customers, approximately 13,000 accounts daily, which represents about 80% of prior-year Q1 levels. Despite the challenges posed by COVID-19, this was driven through various strategies including enhanced digital journeys. We are aiming to scale up digital onboarding processes like video KYC and supplement our existing digital offerings. By and large, 95% of our branches remain operational, and around 13,000 ATMs across the country function with an average uptime of 92%. Our virtual relationship team continues to be active, and we’ve seen good traction in liabilities through this channel. Efforts such as the launch of video KYC on a limited pilot basis have enabled us to offer 100% digital full KYC accounts for customers, and we are scaling this in Q2. Additionally, we launched various marketing initiatives involving prominent personalities to boost consumer engagement and sales, alongside merchant-funded offers. Our payment business volumes are rebounding back to around 70% of January levels, driven by higher spending in categories such as daily essentials, medical expenses, and food delivery. Our corporate banking is focused on AAA-rated corporates, and we’ve been actively involved in raising funds through debt markets. We have restricted certain consumer loans and are monitoring recovery closely for issuance. Retail asset originations fell by 70% due to tightened credit standards and an overall pessimistic environment. Personal loan origination saw an 86% drop, reflecting the demand and our prudent management approach. However, we are seeing recovery trends starting, especially in segments like small cars and two-wheelers. Our experiences indicate the strength of our training and operational abilities, and we remain committed to our customers even during these challenges. We also contributed to various societal needs, further displaying our commitment as a responsible bank. To summarize, the best of HDFC Bank is yet to come. Srini, can you take over on the financials? And then Rahul can elaborate on corporate performance, and Jimmy can speak on asset quality.

Srinivasan Vaidyanathan, CFO

Thank you, Mr. Puri. First, a few comments to provide the backdrop on the strength of the franchise across a few dimensions: liquidity, capital, provisions, and credit quality. The bank's average liquidity coverage ratio for the quarter was 140%. Capital adequacy is at 18.9%. We have 7.8 percentage points more capital than the regulatory minimum. Our CET1 at 16.7% is also well above the minimum requirement. We have taken several steps to tighten lending credit standards, and the provision coverage ratio now stands at 149%. The net interest margin has been stable over the past ten years, currently standing at 4.3%. Our net revenues grew to INR 19,741 crore, driven by advances growth. The net interest income for the quarter was also up 17.8%. We expect some impacts from COVID, but the fundamentals remain strong across our balance sheet.

Sashidhar Jagdishan, Executive Director

Thank you, Srini. The main driver of growth in the quarter has been the corporate banking unit. Corporate banking had a satisfactory performance during the quarter, supported by the migration of corporates to our bank. Customer assets increased year-on-year by approximately 1 lakh and 25,000 crores. We saw broad-based growth in sectors such as power, transportation, and financing arms of the government. In terms of disbursements, we focused on large, highly rated Indian corporates. Our portfolio has maintained a high quality, with approximately 86% of it rated either AAA or AA. Our internal rating system remains effective in ensuring robust asset performance.

Rahul Shukla, Corporate Banking Head

Thank you, Sashi. Corporate banking saw growth amid economic activities that weren't as impacted as feared. We observed strong trends in collections, with June collections at 94% of the levels seen in June 2019. Key sectors like telecom and pharma showed significant resilience. I'm pleased to report that our corporate customer base remains strong, demonstrating a positive outlook despite ongoing economic shifts.

Jimmy Tata, Asset Quality Head

Sure, Sashi. Reflecting on asset quality, we’ve been closely monitoring credit flows. Despite the challenges, we recognize that maintaining strong customer relationships and ensuring timely payments has been critical. We've implemented early warning systems, and our analysis shows that while we had to tighten credit standards early on due to the pandemic, current performance remains encouraging.

Srinivasan Vaidyanathan, CFO

As we look toward the future, our focus remains on maintaining a robust capital structure. We have adequate internal capital generation capabilities to support business growth. We will continue to monitor business conditions and calibrate our strategy accordingly. With strong fundamentals and a proactive approach, we believe we are well-positioned for the coming quarters.

Aditya Puri, CEO

We have not laid off anybody during this period. All our employees have been gainfully employed, ensuring we can recover when markets improve. As we navigate these uncertain times, we remain committed to our employees and customers. Our management depth and succession planning underscore our readiness to face the future. I am confident in our team's ability to lead HDFC Bank forward.