Earnings Call Transcript - HDB Q3 2022

Operator, Operator

Ladies and gentlemen, good evening, and welcome to HDFC Bank Limited's Q3 FY'22 Earnings Conference Call on the financial results presented by the management of HDFC Bank. As a reminder, all participants' lines will be in a listen-only mode and there will be an opportunity for you to ask questions after the brief commentary by the management. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. Thank you, and over to you, sir.

Srinivasan Vaidyanathan, CFO

Good evening and a warm welcome to all the participants. First to start with the environment and the policies that we operated in the quarter were conducive for growth with good tailwinds from monetary and fiscal policy. You all know about the activity indicators getting better in Q3, like the PMI, GST collections, e-way bills, etc., but also up-to-date about the CPI or RBI policy rate stance and the liquidity conditions. Now in that backdrop, the equity capital market was robust in the quarter. Private issuance raising almost INR82,000 crores, we were mandated for eight IPOs. Indian bond market also saw total fund raises of approximately INR1.87 lakh crores in the quarter. The Bank maintained its ranking as one of the top three arrangers in the INR bond market. With that, let's go through five themes at a high level before we delve into the quarter financials. One, the Bank's balance sheet continues to get stronger; for instance, the capital adequacy ratio is at 19.5%, CET1 at 17.1%. Liquidity is strong as reflected in our average LCR for the quarter at 123%. The balance sheet remains resilient. The GNP ratio is at 1.26%, floating and contingent provisions aggregating to INR10,100 crores have been derisking the balance sheet and positioning for growth. Two, investments in key enablers are picking up in executing our strategy. We opened 93 branches in the quarter, 171 branches year-to-date, and throughout the nine-month period. To give additional context, we have added 525 branches over the past 21 months, that is during the COVID period, positioning us for capitalizing on the opportunity. We've onboarded a little more than 5,000 people in the quarter, 14,300-plus people during the nine-month period. We have onboarded about 17,400 people over the past 21 months during the COVID period to get the people ahead on the productivity curve as the economy accelerates further. There is a growing impetus on digital. We have taken the steps necessary to ensure our customers have great and consistent experiences in whatever channel they choose to bank with us. Key initiatives like a streamlined modern customer experience hub allowing access to content across channels and devices will be introduced soon. We are also committed to continuously enhancing the digital experience for our customers through a fully revamped payment offering. We've taken multiple steps to ensure a robust, scalable, and secured technology setup to strengthen even further. Some key initiatives include capacity for UPI has been tripled, net banking and mobile banking capacity has been doubled to manage 90,000 users concurrently, a significant step, as most of our customers rely on digital channels for their banking needs. The Bank has migrated four data centers in Bangalore and Mumbai to state-of-the-art facilities. The Bank is moving to the next level of disaster recovery with DR automation and implementation of HA/DR active-active setup for key applications, significant upgrades in network and security infrastructure to support our exponential growth in digital transactions. Our digital capability is coupled with rich data on customer behavior. For instance, in the traditional retail product, nearly 80% of new loans go through digital scorecards or automated underwriting. In Q3, we received a total of 245 million visits on our website, averaging 31 million unique customers per month. Our analysis shows we had 30% to 70% more visits on our website compared to public-private sector sales, with nearly 60% of the visits through mobile devices indicating the growing simplicity of mobile footfalls. Three, on customers, acquiring new liability relationships is setting new highs as we prepare for broad basing and deepening relationships in times to come. During the quarter, we opened about 2.4 million new liability relationships, bringing the total to 6.4 million new liabilities during the nine-month period of this financial year, exhibiting a growth of 29% over the same period last year. Four, our market leadership in digitizing the economy is at an all-time high. In Q3, we achieved the highest ever issuance with 9.5 lakh card issuances. Since late August, when we recommenced issuance of new cards, we have so far issued 13.7 lakh cards. The credit card print for the Bank has grown 22% year-on-year and the debit card print has grown 14% year-on-year. The spend growth reflects both increased customer engagement and improvement in the economy from a consumption perspective. Similarly, through our PSE partnerships and to scale our business further, we have signed MOUs with two large payment banks for distributing certain products. This opens up further opportunities for growth in semi-urban or rural areas leveraging partner distribution access points and feet on the street. We have further scaled emerging growth segments such as easy EMI and consumer durables targeting our preferred customers through segmented sales and marketing. The consumer finance business has over one lakh active distribution points and we have over 5 million customers with easy EMI options. The Bank's merchant offering is scaling to provide enhanced value-added services across various segments. The Bank has 2.85 million acceptance points as of December with a year-on-year growth of 35%. The Bank's acquiring market share stands at approximately 47% with a 19% share in terminals processing about 300 million transactions per month. The Bank has been focusing in SURU locations and investing in training and offering segment-specific solutions. Over 50% of new merchant sourcing is from SURU locations. Five, asset volumes are gaining momentum to reach new highs, driven through relationship management, digital offerings, and breadth of products. In the wholesale segment, corporates continue to generate strong cash flows across sectors presenting a fair degree of prepayments. Trade continues to be an opportunity for credit growth. Factoring, invoice financing, export financing, and import financing are some of the products we participated in for growth. We are also making progress in the MNC segment with our ambition to be the largest player in that space. Corporate banking and other wholesale loans grew by 7.5% over the prior year and 4.4% over the prior quarter. On the retail assets front, the momentum pickup observed during Q2 continued its stride in Q3 as well, witnessing robust sequential asset growth of 4.7% and year-on-year growth of 13.3%. This has been on the back of strong incremental disbursals during the quarter. Commercial and rural banking businesses saw robust growth this quarter. This is seeing a sequential growth of 6.1% and year-on-year growth of 29.4%, reflecting underlying economic activity and continued market share gains. Now let's start with net revenues. Net revenues grew by 12.1% to INR26,624 crores driven by advances growth of 16.5% and deposit growth of 13.8%. The net interest income for the quarter, which is at 69% of net revenues, grew by 13% year-on-year and registered sequential growth of 4.3%. The core net interest margin for the quarter was at 4.1%. This is in the similar range of the previous quarter. Net interest income growth is reflective of an underlying shift from unsecured lending essentially gravitating towards higher-rated segments in the COVID period. This is also represented in our ratio of net interest income to RWA, which is consistent at around 6%. Moving on to details of other income, which is at INR8,184 crores, was up 9.9% versus prior year and up 10.6% versus prior quarter. Fees and commission income constituting about two-thirds of other income was at INR5,075 crores and grew by 2% compared to the prior year and 2.6% compared to the prior quarter. Retail constitutes approximately 93% and wholesale constitutes 7% of fees and commission income. Fees, excluding payment products, grew year-on-year by 17%, while fees on the payment products declined year-on-year due to lower fees on card loan products and cash advances reflecting a cautious approach to card-based lending as well as customer preferences. However, card sales, ANR, and interchange have come out robustly, which positions us for future growth and the customer propensity to use card products for loans and revolvers increases. In addition, during the festive period, we offered certain fee waivers to incentivize customer engagement. FX and derivatives income at INR949 crores was higher by 69% compared to the prior year, reflecting a pickup in activities and spreads. Trading income was INR1,046 crores for the quarter; the prior year was at INR1,109 crores and the prior quarter was at INR676 crores. Some of the gains from investments were monetized in line with our strategy. Other miscellaneous income of INR1,113 crores includes recoveries from written-off accounts and dividends from subsidiaries. Now moving on to expenses for the quarter at INR9,851 crores, an increase of 14.9% over the previous year. Year-on-year, we added 294 branches, bringing the total branches to 5,779. Since last year, we added 1,697 ATM cash deposit and withdrawal machines, taking the total to 17,238. We have 15,436 business correspondents managed by common service centers, which is higher by about 1,900 compared to the same time last year. The cost-income ratio for the quarter was at 37%, which is similar to the prior-year level. As previously mentioned, in technology, investments have been further stepped up and as retail segments pick up further, we anticipate the spend levels to increase driven by incremental volumes, sales and promotional activities, and other discretionary spend. Moving on to asset quality. The GNPA ratio was at 1.26% of gross advances as compared to 1.35% in the prior quarter and 1.38% on a pro forma basis in the prior year. It's pertinent to note that of the 1.26% GNPA ratio, about 18 basis points are standard. These are included by us in NPA as one of the other facilities of the borrowers in NPA. The net NPA ratio was at 0.37% of net advances. The preceding quarter was at 0.4%. The annual slippage ratio for the current quarter is at 1.6%, about INR4,600 crores as against 1.8% in the prior quarter. The agri seasonally has contributed approximately INR1,000 crores to slippages or about a 25 basis points annualized rate. During the quarter, recoveries and upgrades were about INR2,400 crores or approximately 25 basis points. Write-offs in the quarter were INR2,200 crores, approximately 23 basis points. Sale of NPA accounted for about INR260 crores, approximately 2 basis points in the quarter included in one of the categories above. Now looking at check bounce and restructuring and so on. The check bounce rate continues to improve in December across most of the retail products and is not only back to pre-pandemic levels but also marginally better. Further, the early January bounce rate shows continued improvement. Similarly, the demand resolution is at 97%, 98% for most of the products back to pre-COVID levels and in some cases, better than pre-COVID levels. The better improvement in bounce and non-resolution rates at aggregate level, among other things, illustrates the overall portfolio quality. The restructuring under the RBI resolution framework for COVID-19 as of December end stands at 137 basis points. This is at the borrower level and includes approximately 28 basis points of other facilities from the same borrowers, which are not restructured but included here. To give some color on restructured accounts, 30% are secured with good collateral and the predominant good CIBIL score, which we feel is comfortable. Of the unsecured portion, approximately two-thirds are salaried customers and about 40% have good CIBIL scores more than 700. The demand resolution is showing encouraging trends. COVID restructuring has been an enabler for our customers to tide over the uncertainty in the last few quarters. The initial indicators suggest that most of these customers are now pushing to resume their payments with minimal impact on the overall quality of the advances of the Bank. As mentioned previously, the impact of restructuring on our GNPA ratio can be 10 basis points to 20 basis points at any given quarter. We talked about it last quarter and mentioned that. The core specific loan loss provisions for the quarter were INR1,821 crores as against INR2,286 crores during the prior quarter. Total provisions reported were INR2,994 crores against INR3,924 crores during the prior quarter. Total provisions in the current quarter included additional contingent provisions of approximately INR900 crores. The specific provision coverage ratio was at 71%. There are no technical write-offs; our head office and bank books are fully integrated. At the end of the current quarter, contingent provisions towards loans were approximately INR8,600 crores, the Bank's floating provisions remained at INR1,400 crores, and general provisions were at INR6,000 crores. Total provisions, comprising specific floating contingents and general provisions, were 172% of gross non-performing loans. This is in addition to security held as collateral in several of the cases. Looking through another lens, floating, contingent, and general provisions were 1.27% of gross advances as of December quarter end. Now coming to credit cost ratios. The core credit cost ratio, that is the specific loan loss ratio, is at 57 basis points for the quarter against 76 basis points for the prior quarter and 116 basis points on a pro forma basis for the prior year. Recoveries, which are recorded as miscellaneous income, amount to 25 basis points of gross advances for the quarter against 23 basis points in the prior quarter. Total annualized credit cost for the quarter was at 94 basis points, which includes the impact of contingent provision of approximately 30 basis points. Prior year was at 125 basis points, and the prior quarter was at 130 basis points. Net profit for the quarter at INR10,342 crores grew by 18.1% over the prior year. We'll give you some color on some balance sheet items. Total deposits amounting to INR14,45,918 crores is up 13.8% over the prior year. This is an addition of approximately INR40,000 crores in the quarter and INR175,000 crores since the prior year. Retail constituted about 83% of total deposits and contributed to the entire deposit growth since last year. CASA deposits registered a robust growth of 24.6% year-on-year, ending the quarter at INR6,81,225 crores, with savings account deposits at INR4,71,000 crores and current account deposits of INR2,10,000 crores. Time deposits at INR7,64,693 crores grew by 5.6% over the previous year. Time deposits in the retail segment grew by 8.3%. Time deposits in the wholesale segment decreased by 2.8% year-on-year. CASA deposits comprised 47% of total deposits as of December end. Total advances were INR12,60,863 crores, growing by 5.2% sequentially and 16.5% over the prior year. This is an addition of approximately INR62,000 crores during the quarter and INR1,79,000 crores since the prior year. Moving on to CAPAD, which I covered at the beginning, total, according to Basel III guidelines, the total capital adequacy is at 19.5%; Tier 1 18.4%, CET at 17.1%, which I covered previously. Now getting on to some highlights on HCBFSL, this will be on IndAS basis. The total loan book as of December 31 stood at INR50,478 crores with a secured loan book comprising 74% of the total loans. Conservative underwriting policies on new customer acquisition which were implemented during COVID continue to be in place and will be reviewed in due course based on external environment. The investments have picked up in Q3, growing 9% quarter-on-quarter and 11% year-on-year. For the quarter, HDBFSL's net revenues were INR1,982 crores, a growth of 15%. Provisions and contingencies for the quarter were at INR540 crores, including INR97 crores of management overlays against INR1,024 crores for the prior year. Profit after tax for the quarter was INR304 crores compared to a loss of INR146 crores for the prior-year quarter and a profit after tax of INR192 crores for the sequential quarter. As of December end, gross Stage 3 stood at 6.05%, flat sequentially. 80% of the Stage 3 book is secured, carrying provision coverage of about 41% as of December end and is fully collateralized. 20% of the Stage 3 book, which is unsecured, had a provision coverage of 84%. Liquidity coverage ratio was strong at 222%, and HDB is funded with a cost of funds of 5.9%. The total capital adequacy ratio is at 20.3% with a Tier 1 at 14.9%. With markets opening up and customer accessibility improved to near pre-COVID levels, we believe the Company is well poised for healthy growth from here, subject to any impact from further waves of COVID. Now a few words on HSL again on IndAS basis. HSL, HDFC Securities Limited, with its wide network presence of 213 branches in 147 cities and towns in the country has shown an increase of 58% year-on-year in total revenue to INR536 crores. The net profit after tax of INR258 crores in Q3 shows an increase of 58% year-on-year. HSL's digital account opening journeys are running successfully. There has been a significant increase in the overall client base to 3.4 million customers as of end December, an increase of 30% over the prior year. In summary, we have reasonably overcome the effects of the pandemic over the past 21 months across broad counters of balance sheet, P&L and human capital. While the effect of the latest COVID wave is not clear, which we'll have to watch out over the next few weeks to see where it turns, we are confident of navigating this and applying our learnings from past waves. Our growth is accelerating leveraging our people, product, distribution, and technology. The quarter results reflect deposit growth of 14%, advances growth of 16%, profit after tax increased by 18%, delivering a return on assets over 2%, earnings per share in the quarter of INR18.7, book value per share increased in the quarter by INR19.4 to INR414.3. With that, thank you very much. May I request the operator to open up for questions, please.

Operator, Operator

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. The first question is from the line of Mahrukh Adajania from Elara Capital. Please go ahead.

Mahrukh Adajania, Analyst

Hello, congratulations. My first question is on credit cost. So if the total credit cost, including contingencies, has come below 100 after many quarters, around three years. Now assuming that there is no further COVID wave, is that the new normal we are likely to see over the next few quarters?

Srinivasan Vaidyanathan, CFO

Mahrukh, thank you. That's a valid question and appropriate; thanks for asking that. See, we are coming from a COVID cycle where our bookings have been benign from a retail point of view. Second, from a wholesale point of view, which we have shown a very highly rated context, right? So, we come through the cycle and now starting to begin to get the retail account. The recent vintages, when you look at the recent vintage performance, they are far superior, both in terms of the entry-level scores and the customer profile in how we opened up and started. They are superior, right? And whether this is a new norm? I would not say that this is a new norm, right? You have to look at credit costs normally over a cycle, over a period of a few years, you have to look through a cycle. And that's how you need to analyze it. But if you look at our NPA, 1.26%, can bounce around at any time 10 to 20 basis points up and down, two quarters ago 1.47%, now 1.26%. So it can go up and down within a small range, that's where it can come. From a credit cost point of view, we have not given a particular outlook as such. But we have averaged in the past, call it, 1.2, 1.3 thereabout, that's the kind of range at which the total cost of credit, total provisions come up with. Current quarter is at about 95. So we would consider it a little lower than that. So in a broad range, if you think about 100 to 150 kind of a basis points, that's the range at which we have operated in the past. And if the credit costs are lower, then the way we look at it is it calls for experimenting a few things. It calls for opening up policy. So, there is a policy reaction that comes in. There is always that pull and pressure between the business and the credits that happen. So I wouldn't take that 50 or 60 basis points total credit cost of the specific losses or the total cost of 95 basis points as a good standard for a long time to come. But this is the current corporate that we are.

Mahrukh Adajania, Analyst

My next question is about fees. You mentioned that payment and credit card-related fees have decreased, but could you provide more details? Were there any one-time expenses or significant promotional costs for a big client that won't happen again? This information would help us understand the outlook for the next few quarters.

Srinivasan Vaidyanathan, CFO

Thank you for the question. The fees we reported, around INR 5,000 crores, are at 2%. Previously, before COVID, we consistently achieved about 20%, and we generally expect fees to be in the mid- to high-teens range. This quarter, excluding payment products, it stands at approximately 17%. The payment products have seen an unusually low performance due to several factors. For instance, we provided certain fee waivers to encourage customer engagement, which won't necessarily occur every quarter but may happen in alternate quarters based on our programs. Additionally, regarding credit cards, customer behavior indicates that payments are being made as expected, affecting our late payment revenue. There was a time when customers utilized cash advances, but that has decreased and needs improvement. We were also restrictive with credit limits, which contributed to lower fees from over-limit charges. However, we’ve recently reviewed our policies and are returning to regular operations, although we must remain cautious. Overall, concerning payment products, credit line utilization is currently below pre-pandemic levels. There's potential for growth as spending levels have increased by 24%, and the interchange yield is strong. Thus, credit line utilization can improve to match pre-pandemic figures, which highlights our approach to managing the overall customer proposition.

Mahrukh Adajania, Analyst

But in your assessment, how many quarters would it take to reach that long-term?

Srinivasan Vaidyanathan, CFO

It depends on a combination of the environment, economic activity, and customer behavior. It could take two, three, or four quarters; that's what I would expect. I don't want to predict the exact timing because there's no precise way to determine it. Typically, that is the timeframe for a maturity model to function. The same applies to PPOP; it should closely follow loan growth as it rebounds. Historically, we have shown that PPOP mirrors loan growth, and that is how we have performed. Loan growth is the key indicator, and most lines tend to behave similarly as we move forward.

Operator, Operator

The next question is from the line of Alpesh Mehta from IIFL Securities. Please go ahead.

Alpesh Mehta, Analyst

The first question is about reconciling the figures on the restructured loans. According to the notes to accounts, it appears to be around 23,000, which equates to approximately 17,000. How do you reconcile these two numbers?

Srinivasan Vaidyanathan, CFO

Okay. I understand your question. It's based on the template we use. Someone signed it, and we completed it and shared it. That's a different aspect. You raised a good point regarding the 25,000; we consider the grant as a restructuring in R1 and R2. When those are combined, it totals to about 22,000. If you remove the double count, it comes to roughly 22,000. Initially, there were several significant impacts when grants were made at those specific times. Last September, we reported INR 18,000 crores, and currently we report INR 1.37 crores, which amounts to about INR 17,500 crores. The decrease from INR 18,400 crores to INR 17,500 crores signifies a movement of about INR 900 crores, with half transitioning to NPA and the other half being net recoveries and adjustments. This illustrates the changes from September to December. The difference between the INR 22,000 crores and the INR 18,000 crores reported in September reflects everything that occurred before September, including movements to NPA and various recoveries and adjustments during that period. As of September, the outstanding amount was INR 18,000 crores, which is now INR 17,500 crores.

Alpesh Mehta, Analyst

Okay. So Srini, just correct me if I'm wrong. If I look at the September disclosure, right, the R1 plus R2 minus the double counting, as per the notes to accounts was around INR22,500 crores, of which there were NPLs and the amount repaid of the R1 amount that you mentioned in the notes to accounts. So that number was around INR20,400 crores. Whereas as per our disclosure in September was INR18,200 crores. So the INR2,000 crores, what's the difference between the amount which was reported as of September and between your result date, is that my understanding correct?

Srinivasan Vaidyanathan, CFO

Correct, various other recoveries and other things that came until the reporting date.

Alpesh Mehta, Analyst

Okay. Currently, the situation is similar in that you have not disclosed the non-performing loans and the amount repaid from R1 and R2. According to the notes to accounts, this could be approximately INR23,200 crores, but after accounting for recoveries, non-performing loans, repayments, and other factors, it stands at around INR17,500 crores.

Srinivasan Vaidyanathan, CFO

This quarter, the notes to account require reporting only R2 as originally granted, which reflects approximately INR18,000 crores in the notes. However, INR18,000 crores is not the outstanding amount; INR17,500 crores is the outstanding figure. So, we have reported as mandated in the note. When I referenced the 1.37, that corresponds to INR17,500 crores.

Alpesh Mehta, Analyst

Okay. The second question on the - can you just give some qualitative comments related to the tenure of this book? You mentioned in one of your comments that 10, 20 basis points would be shifting to gross NPL at any given point in time. But that will be a situation that almost 25%, 30% of this group can slip over a period of next one year. So when we are talking about 10, 20 basis points of that particular quarter or over the tenure of the book – so for example, it was around 1.37, then out of this 1.37, only 20 basis points can slip into NPL category. I just wanted to clarify that number.

Srinivasan Vaidyanathan, CFO

By the way, there is no particular sign for 10, 20 or something. This is based on what our analytics come up to say based on what experience we have seen based on customer profiles, which I alluded to say, for example, in the 40% secured, right, fully collateralized and with a good CIBIL score, which we feel very comfortable with, right? Then on the unsecured portion where we keep watch, about 40% or so have good CIBIL scores, CIBIL scores more than 700 or so, right? Based on various types of analyses, that's where we said we feel comfortable that 20 basis points at any point in time can be within our tolerable range.

Alpesh Mehta, Analyst

Okay. So again, just clarifying over here is almost 15% to 20% of the book can slip as per your analytics. Is that number correct now? That 10, 20 basis points of 1.37%. So it's around whatever that 7% to 15% of the book can keep based on your analytics or the customer data that you have?

Srinivasan Vaidyanathan, CFO

No, I don't want to venture into extrapolating for the 10, 20 basis points into various time periods.

Alpesh Mehta, Analyst

Yes, got it. Got it. Okay. The second question is related to the credit growth. Historically, we had x multiple of the system credit growth that we always used to guide about as just an indicative number. But now when I see at the system level because of the consolidation of the larger segment within the PSU band, the system may be growing at x percent, but the private sector banks are growing much faster than that. And some of our larger peers are also growing at a significantly higher rate than that of the system. How do we see our credit growth? Do you still maintain that x percentage that we used to talk about in the past, or can we have better opportunities to grow much faster and gain market share? Secondly, your comments on the three specific products, one is payment products, second is the commercial and rural banking, which is growing very fast at around almost 30% Y-o-Y. Lastly, corporate and wholesale banking, since we have developed quite a bit of capabilities over the last two years and grown this book aggressively as a share of the overall loan book. So these are my questions.

Srinivasan Vaidyanathan, CFO

I have a lengthy question, but I'll keep it brief. When considering our loan growth and market share, it's important to note that our growth has been consistent, even throughout the COVID period. We need to evaluate our performance over a longer time frame rather than just focusing on a single quarter or two. For example, over the last two years, we’ve experienced a growth rate of about 35%, which could be categorized as high teens in growth. Likewise, if you look at the five-year period from 2016 to 2021, we've achieved around two times that growth. It’s essential to assess our current situation and the incremental improvements we've made, which we estimate at over 25% based on recent developments. Over the past year, we've seen loan disbursements of INR 1,79,000 crores and INR 3,25,000 crores in 24 months. We are concentrating on the right products, particularly in commercial and rural banking, which represents a significant part of the economy and is growing rapidly. We aim to engage more actively in this segment. While we were cautious with retail lending, we have resumed growth, currently seeing sequential growth at about 4.5%. In summary, evaluating growth shouldn't be limited to one or two quarters; it’s about the sustained growth over time. We will keep focusing on gaining market share with a balanced portfolio across secured and unsecured retail lending, as well as commercial, rural, and wholesale segments.

Operator, Operator

The next question is from the line of Akriti Kakkar from Goldman Sachs.

Unidentified Analyst, Analyst

Yes, thanks. Hi, Srini. Good evening, Rahul here. A couple of questions. First one, on the asset quality bit. Just wanted to confirm, was there any new restructuring that we did in this quarter?

Srinivasan Vaidyanathan, CFO

No, no new restructuring, but part of that net change that I gave you is INR500 crores is a plus and a minus mix of INR500 crores. This is whatever was in the pipeline that came through, that was about INR500 crores or so the new payment, but not a new application granted. Whatever was in the pipeline that came. But then the pay downs and other things that happened. So net-net, it is at INR17,500 crores, 1.37%.

Unidentified Analyst, Analyst

Understood. The second question is on the slippages and credit costs. I think Mahrukh also asked this question. On the credit cost also 95 basis points and slippages also are one of the lowest at least in the last three quarters, assuming no pandemic impact, do you think this could be a new normal over the next few quarters? And then in that context, how do you plan to build up the PCR buffer from here? Shall we continue to see more and more floating provisions coming through?

Srinivasan Vaidyanathan, CFO

That's a great question. You brought up another point similar to what Mahrukh mentioned, but as a bank, we don’t provide a specific outlook or forecast. However, I can refer to historical data. During the recent COVID period, we were operating around 1.2% to 1.3%. Just before COVID, we were in the range of 100 to 120 basis points. Currently, including the COVID period, our contingent provisions stand at about 95 basis points. Over time, we should expect a return to the pre-COVID average. The current quarter reflects our recent bookings, with vintages from the last 15 to 21 months showing good quality across various segments. Our retail book averages two years and is of high quality. Our innovation lab is also working on initiatives, including targeting new customers. Previously, we had about 80% existing customers for personal loans, and two-thirds to 70% for card loans. Now, we’re making strides in using alternative data for scoring new customers more effectively. I don't suggest you base projections solely on the current quarter, but when comparing pre-COVID to now, that's the context. Regarding your second question about building provisions, our increase in contingent provisions started several quarters ago, well before the COVID outbreak. For instance, in June 2019, we began building our contingent provisions, which were under INR 1,000 crores at the time. Today, that figure exceeds INR 8,500 crores, representing about 70 basis points of gross advances and 18 basis points including floating provisions. This buildup enhances our balance sheet’s resilience against any short-term uncertainties that may arise. Such resiliency supports our growth and allows us to conduct various experiments in our innovation lab. We evaluate these matters quarterly and do not have a predetermined approach; we respond as conditions evolve each quarter.

Unidentified Analyst, Analyst

Got it. Srini, just two more questions. The other question was on the credit card or the payment product profitability. You laid out a few points why it was muted this quarter. When you think about the structural profitability of the product and also what regulators are thinking, any thoughts on how we should think about what are the components that would still remain remunerative while the component which could witness some pressure. You pointed out the fee waiver, the late payment fee, etc., coming down. So how should we think about it more in a one- to two-year perspective?

Srinivasan Vaidyanathan, CFO

Good question. We will address that, including regulatory matters and other factors. From a general perspective, the primary focus of a card is spending, which has increased significantly, showing a year-on-year growth of around 24%. As spending rises, credit line utilization also tends to increase, although credit line utilization had declined during the COVID period. Currently, it stands at about 80% of pre-pandemic levels, and we expect it to rise. In terms of fees, various types such as penalties, incentives, and loan origination fees are standard and will occur as volumes increase. Additionally, certain fees may be subject to regulatory constraints, meaning there are costs associated with them. It's essential to find a balance between the income generated from fees and the expenses related to rewards, cashback, sales promotions, and marketing, as these elements are interconnected across the profit and loss statement. It's not feasible to consider one aspect in isolation; no structural change is occurring. However, if a structural change were to arise, it would be necessary to evaluate it across all profit and loss lines to determine what is discretionary and what provides support. Overall, the cost profitability model should remain stable regardless of the scenario.

Unidentified Analyst, Analyst

Last question, the digital strategy. You've announced a partnership with the two entities. So can you just talk about this partnership with the entities that you're looking about? How does this sort of feed your digital tool strategy to acquire and retain customers and also from an operating leverage point of view? That is the last question.

Srinivasan Vaidyanathan, CFO

I understand this is a crucial question that has been widely discussed regarding partnerships and our approach to cost-income factors. I'd like to take a few minutes to outline our perspective, so you understand if it aligns with your thoughts. In banking, we consider three main activities: customer acquisition, customer servicing, and relationship management. These represent the continuum of customer engagement. The various fintechs and partnerships we discuss primarily focus on the customer acquisition aspect. We utilize multiple channels for acquiring customers, including branches, a virtual relationship model, a feet-on-street model, and a physical DSA model. Additionally, we have developed a digital marketing model over the past three years based on analytics, along with a partnership model that involves fintech collaborations. Previously, I mentioned the significant 2.4 million liability relationships we have, which plays a crucial role in driving other products. This results in faster customer acquisition. Ultimately, we evaluate the effectiveness of these efforts through the cost of acquisition metrics, aiming for an optimal cost that is typically more favorable with branches compared to fintechs or partnerships. For customer servicing, we can implement features such as fintech services or mobile banking that allow customers to self-serve or receive support through relationship management in a seamless, paperless way. We assess this through cost-to-income ratios to ensure we support customer engagement effectively. When it comes to relationship management—which holds substantial value—last year we noted that less than 30% of our customers contribute over two-thirds of the bank's value, and that subset is where we apply relationship management. Therefore, whether we attract customers through any channel at an ideal acquisition cost, the real value emerges from effective relationship management. This perspective is something we have shared before. Overall, I hope this provides clarity on our approach.

Unidentified Analyst, Analyst

Thank you so much, Srini. We'll definitely take it offline as well.

Operator, Operator

The next question is from the line of Saurabh from JP Morgan. Please go ahead.

Unidentified Analyst, Analyst

Hi, good evening Srini. Just one question. This is on your net interest margin. So how should we think about the progression from here? The book mix clearly seems to be getting better, and if rates rise, you clearly seem to be better positioned. So would you expect that the NIM should go up from here? And in that context, your earlier comment that the PPOP will grow in line with loan growth, shouldn't ideally this growth be better?

Srinivasan Vaidyanathan, CFO

Thank you for the question. It's important to consider the dynamics of our profit and loss statement. Historically, over the past 3, 5, and 10 years, we have observed a range for the bank operating between approximately 3.94% and 4.45%. Currently, we find ourselves at the lower end of this range, primarily due to the retail products which are expected to yield more and provide a wider spread, albeit with higher risks associated. We have seen some improvement in this area, with the retail portfolio growing sequentially by around 4.5% and 18% recently. As we move forward, the focus will be on solidifying this growth, which the retail segment has shown promising signs of. We categorize our corporate salary segment into five categories, A through E, with categories A, B, and C being particularly successful for us. As we expand, we anticipate better yields and increasing rates. Additionally, our government segment tends to carry lower risks in our analytics, which may lead to lower yields overall, but we are continuously working on growth strategies here as well. In terms of net interest margin (NIM), we should also consider the rate environment. Currently, approximately one-third of our loan book is tied to the repo rate, with another small percentage linked to T-bills. Compared to two to three years ago, when our NIM was at its higher end and the composition of these loans was minimal, the increase we're seeing now should have a positive impact on our margins as rates continue to rise, keeping in mind that the cost of funds can lag behind these changes. Overall, both the rate environment and the retail mix are factors that could contribute to improving our NIM in the future.

Unidentified Analyst, Analyst

Got it, Srini. So ideally, it should move up, so that's what I was coming to. If your NIMs tend to move up, shouldn't your operating profit be better than loan growth is the limited point I was trying about that?

Srinivasan Vaidyanathan, CFO

You raise a valid point. From my perspective, it's essential to keep making continuous investments. These ongoing investments lead to long-term success. In a static scenario, your observations hold true. If we only focus on short-term changes, such as adjusting the mix of loans and shifting to higher-yield segments in retail, it may seem beneficial. However, it's important to understand that this is not a simple model. We should approach it dynamically, investing for the future, which is why I mentioned branch investments, investment in personnel, and technology in my opening remarks. Though we might not see immediate returns, we can expect to see them in a few years. The branch maturity process usually takes two to three years to reach a reasonable state and about five to ten years to become robust. We need to continually invest in these areas. That's why I've talked about pre-provision operating profit and its influence on the growth rate of lending. Historically, we have been expanding, having added 2,600 branches over the past five to ten years, and 1,100 branches in just the last one to three years. These consistent investments are crucial for maintaining a dynamic model for long-term success.

Operator, Operator

The next question is from the line of Suresh Ganapathy from Macquarie. Please go ahead.

Suresh Ganapathy, Analyst

Srini, I have a question on the fees for the payments products in the sense that, are you seeing pressure on interchange fees? Are the MDR levels coming down? The reason why I'm asking this question is that, of course, you can just tell us what has been the experience? Secondly, to the new digital payments paper, I know it's always difficult to second guess, but do you really think there can be further reduction with respect to MDRs and debit cards? Can there be something on credit cards? Can UPI be monetizable? I'm just asking all these questions because everything has got to do with the payment-related fees. So if the regulator is thinking only in one direction as to bring down the transaction cost, then this is not going to be a one-quarter phenomenon. You're going to be prepared for subsequent several quarters. How is the management thinking about addressing some of the regulatory challenges here?

Srinivasan Vaidyanathan, CFO

It's important to discuss our views on this matter. There are two points to consider. First, regarding our experience with interchange and MDR, there has been stability with no pressure on rates, which has positively impacted our fee structure. The rates are in a good place. Concerning MDRs, we don't generate significant revenue from them, whether dealing with internal customer cards or third-party issuers. Thus, our MDR operations are quite neutral; however, we actively maintain and grow our merchant relationships, currently numbering 2.85 million, driven by our strategic approach. This also involves managing associated liabilities and values, which we're already addressing. Although we have more work to do, it's part of our overall strategy and MDR remains unaffected as there's nothing detracting from it. Now, regarding interchange rates, they have remained steady. If there are pressures, it's essential to look at interchange in the broader context of card rewards, including the costs associated with reward programs and marketing. When analyzing our profitability, we must focus solely on our transactors and set aside other customer behaviors that impact the financial picture. The MDR strategy helps keep customers engaged, which allows us to manage both liabilities and assets effectively. Should there be fluctuations in interchange, we will utilize various levers within our financial structure to ensure profitability by managing rewards, cashback, and marketing expenditures.

Operator, Operator

Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Vaidyanathan for closing comments.

Srinivasan Vaidyanathan, CFO

Okay. Thank you, Jennifer. Thanks for all the participants for dialing in today. We appreciate your engagement. If you do have nothing more that we could help you with, Ajit Shetty in our Investor Relations will be available to talk at some point in the future. Please use and stay in touch with us. Thank you.

Operator, Operator

Thank you. On behalf of HDFC Bank Limited, that concludes this conference. Thank you all for joining. You may now disconnect your lines.