Earnings Call Transcript
HDFC BANK LTD (HDB)
Earnings Call Transcript - HDB Q1 2024
Operator, Operator
Ladies and gentlemen, good evening, and welcome to the HDFC Bank Limited Q1 FY24 Earnings Conference Call on the financial results presented by the management of HDFC Bank. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after a brief commentary by the management. 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
Thank you, Bhavin. Good evening and welcome to all the participants. I want to provide a brief update on the merger. Effective July 1, HDFC Limited has merged into the bank, making all subsidiaries of HDFC Limited subsidiaries of the bank as well. Earlier today, with support from BSE, NSE, NSDL, and CDSL, all HDFC Limited shareholders on the record date received shares of HDFC Bank. This marks the conclusion of the 15-month journey for the bank and all involved regulators, and we thank them for their continuous support. The HDFC brand, built over 47 years, is now owned by the bank. We are privileged to engage with 6,000 institutional investors and 700,000 individual shareholders. HDFC Limited has successfully nurtured customer trust over four decades, and we aim to strengthen this bond with home loan customers by utilizing our extensive distribution and digital platforms to offer a complete range of bank and subsidiary products. These include savings accounts, personal accounts, credit cards, among others. Integration processes are underway to ensure seamless execution, focusing on product merging and enhancing customer engagement. We onboarded 4 million customers with a portfolio exceeding INR 6 trillion, along with 4,150 talented professionals to enrich our knowledge and culture. Now, let's discuss the key macro environment during the quarter before we delve into the earnings. Strong GDP growth in the March quarter has positively influenced sentiment, with economic activity remaining robust in the recent June quarter. GST collections in the first quarter reached INR 5 lakh crores, growing 12% year-on-year. Manufacturing and Services PMI numbers indicate strong activity at 57.8 and 58.5, respectively. Additionally, the narrowing current account deficit to a seven-quarter low bolsters this strength. Business activities remain vigorous, demonstrated by a 14% growth in RTGS/NEFT transactions and a 44% increase in UPI payments. On the consumption side, passenger vehicle and two-wheeler sales reflect strong consumer demand. In retail, card spending grew by 30% year-on-year and 10% sequentially. However, uneven monsoon patterns have affected sowing, causing challenges in certain regions. Overall, we see healthy domestic demand, resilient services exports, and government support through capital expenditure. These factors suggest a year-on-year GDP growth of 7.7% for Q1 and over 6% for the full year '24, following a robust GDP growth of 7.2% in FY23. Nonetheless, weather-related uncertainties and rising inflation present risks to rural recovery. Turning to our distribution activities, we added 39 branches in the quarter and expanded our branch network to 7,860 over the past year. The number of payment acceptance points has grown to 4.6 million, a 37% year-on-year increase. Our SME business now reaches 1.7 lakh villages, significantly surpassing our goal. Gold loan processing is being offered in 4,336 branches, doubling from the previous year. We added 2.4 million new liability relationships during the quarter, bringing our total customer base to over 85 million. To support this growth, we added 29,000 employees in the last year, with 8,500 added this quarter. We issued 1.5 million cards during the quarter, increasing our total to 18.4 million. Our website attracted approximately 109 million visits per month, with a substantial year-on-year growth in unique visitors. We have seen impressive growth in deposits, amounting to INR 19.1 lakh crores, with a year-on-year increase of 19.2%. In the June quarter, we added INR 30,000 crores in deposits, including INR 38,000 crores from retail deposits. Retail accounts for about 83.5% of our total deposits, up from 82% last year, growing at a rate of 21.5% year-on-year. Wholesale deposits represent 16.5% of total deposits, showing a modest 9% year-on-year growth but a 2.5% sequential decline. On a pro forma basis, considering the merger with HDFC Limited, retail deposits grew by 20.6% year-on-year. In terms of advances, we achieved a 20% year-on-year growth in IBPC advances, with net IBPC advances at INR 16.3 lakh crores growing 15.7% over the previous year. The credit-to-deposit ratio stood at 84% by the end of June. Our domestic retail advances grew 20% year-on-year, primarily driven by strong home and personal loan performance. Commercial and rural banking segments showed a year-on-year growth of 29%. The wholesale segment grew 11% year-on-year, but experienced a decline of 1.2% sequentially. Excluding HDFC Limited’s home loan book, the pro forma core loan growth for the merged entity is 18.7% year-on-year. We continue to prioritize our technology initiatives, with HDFC Bank One, our customer experience hub, having over 12.5 million unique customer interactions. PayZapp achieved 13 million transaction volumes this quarter, showing a significant increase in customer spending. Express car loans now represent 30% of our total car loan volume. Our balance sheet remains solid, with an LCR of 126%, up from 116% in the previous quarter and 108% year-on-year. The capital adequacy ratio is 18.9% and CET1 stands at 16.2%. For the quarter, net revenues reached INR 32,829 crores, a 26.9% increase year-on-year driven by advances growth of 20% and deposit growth of 19%. Net interest income for the quarter was INR 23,599 crores, constituting 72% of net revenues and up 21% year-on-year. The core net interest margin was 4.1%, and 4.3% based on interest-earning assets. Other income totaled INR 9,230 crores, with fees and commissions making up two-thirds of this figure. Retail contributed about 93% of fees and commissions. Operating expenses grew to INR 14,057 crores, a 33.9% increase over last year, largely due to branch and ATM expansions. Our cost-to-income ratio stands at 42.8%, reflecting our investments made during a favorable credit environment. The pre-provision operating profit grew by 22% to INR 18,772 crores. Regarding asset quality, the GNPA ratio was at 1.17%, compared to 1.12% last quarter and 1.28% last year. The core GNPA ratio, excluding NPAs in agriculture, is at 0.94%, unchanged from last quarter. The net NPA ratio is at 0.30%. The current slippage ratio is at 35 basis points, with recoveries and upgrades at INR 2,650 crores. Write-offs for the quarter were INR 2,100 crores. The provisions reported were INR 2,850 crores, leading to a provision coverage ratio of 75%. Contingent and floating provisions amounted to approximately INR 11,150 crores, similar to the last quarter. Credit cost ratios indicate an annualized credit cost of 70 basis points, down from 91 basis points last year. With recoveries accounted in miscellaneous income, the net credit cost ratio was 51 basis points for this quarter. Profit before tax rose to INR 15,912 crores, a 30% increase year-on-year, while net profit after tax reached INR 11,952 crores, also growing by 30%. For HDB Financial Services, the loan book reached INR 73,568 crores, growing 5.1% sequentially and 19% year-on-year. The distribution network increased to 1,581 branches. Net interest income for the quarter was INR 1,501 crores, rising 5% quarter-on-quarter. Profit after tax increased to INR 567 crores for the quarter. Regarding HSL, our securities company, it added nearly 0.6 million clients, growing the total to 4.6 million. The reported revenue for the quarter was INR 497 crores. In summary, our results demonstrate a consistent delivery with continued momentum in deposit growth of 19%, retail deposit growth of 21.5%, and a gross advances growth of 20%. Profit after tax rose by 30%, with a return on assets above 2% and ROE of approximately 17.3%. The reported earnings per share were INR 21.4 at the standalone bank level and INR 22.2 at the consolidated level. Book value per share stands at INR 525.4 for the standalone bank and INR 542.7 for the consolidated bank. I would now like to open the floor for questions.
Operator, Operator
Thank you very much. We will now begin the question-and-answer session. The first question is from the line of Suresh Ganapathy from Macquarie. Please go ahead.
Suresh Ganapathy, Analyst
Yeah, hi. I have two questions, Srini. One is on credit growth and deposit growth. There is a merged company profitability. So let me first touch the deposit growth aspect. So I know quarterly, there can be fluctuations, but your Q-o-Q standalone deposit growth was about INR30,000 crores, right, 1.6%. But I'm looking at the system number, apparently, the system seems to have added INR9 trillion of deposits, 5% Q-o-Q. So, somehow, I feel on an incremental basis, for the quarter, you might have lost a lot amount of market share. Anything specific, which affected this quarter's deposit mobilization?
Srinivasan Vaidyanathan, CFO
No, Suresh, there's nothing specific to mention. Generally, the first quarter tends to be slow compared to other quarters. It is typically a slow period across various parameters, including branches, deposits, and loans. Historically, the contribution in the first quarter is usually single-digit. Occasionally, it may reach double-digit figures, but single-digit is the norm. Additionally, if we reflect on the past quarter or two, it's important to note that this isn't just about one quarter. We saw significant growth in March, and we managed to maintain that momentum. This growth was substantial, with over INR50,000 crores generated in the March quarter, surpassing expectations. We also expanded on this foundation, particularly in retail where we achieved INR38,000 crores. In the first quarter, it is common to see a decline in current accounts and a slight moderation in savings accounts due to spending trends. We experienced a 30% increase in spending, with cardholder spending rising by 30% overall and increasing 10% sequentially for retail cards. These factors typically play a role, but what is most crucial is that we are confident in the building blocks we have established for this remarkable growth, and we anticipate that it will come to fruition over the next few quarters.
Suresh Ganapathy, Analyst
You reported in the pre-Q update that the merged gross number, excluding wholesale of HDFC Limited, was growing at 15%. However, you mentioned in the call that it actually grew at 18.5%. If I consider the retail HDFC and add the gross advances of the standalone entity, the figure is 18.5%. Which number should we refer to, since the pre-Q indicates 15.5% for the merged gross excluding wholesale?
Srinivasan Vaidyanathan, CFO
See, the gross bank, we put that up in page 23 of the earnings deck that we published earlier today to be helpful on that. The bank's gross of IBPC grew by 20%.
Suresh Ganapathy, Analyst
Correct.
Srinivasan Vaidyanathan, CFO
HDFC's individual mortgage loans grew by 14% year-on-year. When we combine the bank loans and individual loans, this category experienced a growth of 18.7%. On the other hand, HDFC's non-individual loans decreased by 18% year-on-year. We know that there have been management actions contributing to this decline, and we will assess the situation over the next two quarters to determine a stable level before we begin to grow again. Overall, this results in a total loan growth of 16% on a gross basis.
Suresh Ganapathy, Analyst
Okay. Oh, yeah, there's some confusion in the pre-Q. Okay, no problem. And finally, are you confident that, on a merged basis, when you deliver the September quarter results you can sustain the current levels of ROE reported? I mean, you exited, of course, this quarter with 2.1%. Last year also, full year, the number was 2.1%. How confident are you based on your initial assessments?
Srinivasan Vaidyanathan, CFO
Yeah. See, the level confidence is pretty high. Typically, I think, Sashi had alluded to in some other context that we're looking at 1.9% to 2.1%. That's the range at which we'll oscillate. Quarter-to-quarter, if there is a timing on certain things, particularly, if there is anything that we do will be timing, but otherwise, broadly, it is 1.9% to 2.1% that we alluded to before. That is where we are confident of driving to deliver.
Suresh Ganapathy, Analyst
Okay. Thank you so much, Srini.
Srinivasan Vaidyanathan, CFO
Thank you.
Operator, Operator
Thank you. We have the next question from the line of Mahrukh Adajania from Nuvama. Please go ahead.
Mahrukh Adajania, Analyst
My first question is about operating expenses. This is similar to what we saw in the first quarter of last year. The operating expense growth in the first two quarters sequentially is around 4% to 5%. As branch additions increase, the operating expense growth could rise to 7% or 8% quarter-over-quarter. Last year, this increase occurred as branch additions were significantly high in the second half, with around 600 to 700 branches added each quarter. How do you foresee the standalone operating expenses moving forward? HDFC's business operates with steady-state expenses, but as you continue to add branches, do you anticipate the sequential growth of 8% returning? I'm specifically referring to quarter-over-quarter growth, not in terms of cost to income.
Srinivasan Vaidyanathan, CFO
The 8% quarter-on-quarter growth is mainly due to the increase in branches. Our intention was to build up our distribution capabilities at the start of the quarter. We focused on creating the infrastructure needed for new branches. As we gained confidence in the stable credit environment, we looked for opportunities to invest during this time in order to maximize our growth potential. We anticipate that when credit levels normalize to historical averages, which fall between 90 to 110 basis points, we will see positive outcomes from our investments. However, we need to wait for the current maturity cycle to reach its conclusion before seeing these effects. As time progresses, the comparisons to previous performance will become more favorable. The growth we experienced has not yet reached a level where it can be effectively compared to the earlier periods, as we primarily began this expansion in the September and December quarters. Additionally, the credit costs have decreased; last year in the June quarter, they were 91 basis points, while this quarter, they stand at 60 basis points. As these costs improved, we took the opportunity to make further investments, although not all of the decreases in credit costs have been reinvested.
Mahrukh Adajania, Analyst
Got it. My next question is about loan growth and incremental deposit growth. Regarding loan growth, we had previously indicated a potential doubling of the book. Are we expecting to see that starting in FY24, given that the run rate appears to be a bit softer in the first quarter? The merged balance sheet has grown by 13% when everything is included, and if we exclude IBPC, it's grown by 16%. Can we expect to see growth of 17% to 18% by the end of the year? Would that be a reasonable estimate?
Srinivasan Vaidyanathan, CFO
Yes, Mahrukh. If we consider any time frame, such as three or five years, typically we see growth rates around 2.3 to 2.4 times, which translates to approximately 17% to 18% growth. This reflects a longer-term perspective. However, in the short term, we've seen growth rates of 15%, 16%, and sometimes 18% to 19%. Overall, 17% to 18% is our target as we build our capacities and gain consistent traction at that level. While quarterly results may vary, this is our expectation for the full year. The non-wholesale, non-retail sector of HDFC Limited will undergo evaluation based on growth rates, and we'll determine when to begin implementation. We believe there is sufficient credit demand; it’s about deciding which opportunities to pursue and when, at appropriate pricing. During this quarter, there were various lending opportunities. Our wholesale loans saw 11% growth year-on-year, though they declined about 2% quarter-on-quarter. We are selective about participating in loans that do not meet our price expectations. We prioritize maintaining relationships, which supports other segments of our business. Overall, that's where we currently stand.
Mahrukh Adajania, Analyst
Okay, got it. Would you be able to quantify the CRR and SLR of HDFC Limited at the end of June? Would that be possible?
Srinivasan Vaidyanathan, CFO
No, it starts to kick in, I think, in the next fortnight. We provided the high-level overview of how we're managing liquidity to support growth and the necessary results. The standalone LCR of the bank is 126%. On a combined basis, it was 116% last quarter and is now 126%. On a pro forma combined basis, it's just over 120% after accounting for CRR requirements and so on. So, yes, we're quite comfortable with our position to meet regulatory requirements.
Mahrukh Adajania, Analyst
Okay. Thank you so much.
Operator, Operator
Thank you. The next question is from the line of Kunal Shah from Citi. Please go ahead.
Kunal Shah, Analyst
Thank you for taking the questions. To start, regarding retail deposits, last time we reported an encouraging figure of INR1 trillion and indicated we aim to achieve similar numbers quarterly. While Q1 does have some seasonality, considering the capacities we are developing and the investments in our franchise, what average retail deposit growth can we expect over the next six to eight quarters?
Srinivasan Vaidyanathan, CFO
Kunal, I want to clarify that while we don't provide a specific forward-looking statement, I can emphasize what we've said before. We have the capacity to reach the levels we discussed, though there was a quarter where our performance was lower. This is partly due to seasonality; the April to June quarter tends to be slow as people and customers are away and schools are closed. However, our goal is to reach the level we previously indicated, and we are committed to improving our performance moving forward.
Kunal Shah, Analyst
Okay. So INR1 trillion was the indication. So we should drive that back to INR1 trillion-odd level?
Srinivasan Vaidyanathan, CFO
Thereabouts, that's what we had indicated, that that's the level at which we'd like to operate.
Kunal Shah, Analyst
Sure. Regarding credit growth, the 17% to 18% range you mentioned may not account for IBPC. Is this a fair assessment, or are you suggesting that the 13% after IBPC is what could be considered a sustainable level of 17% to 18%?
Srinivasan Vaidyanathan, CFO
IBPC is usually a very temporary portfolio, which means it fluctuates – it comes in and goes out. It's not a permanent sale. We manage it on a quarterly basis. There are specific goals we aim to achieve regarding priority sector obligations and liquidity, among other factors. When considering the loans, the historical rate of 17% to 18% translates to a growth of 2.3 to 2.4 times, doubling every four to five years, based on a total perspective.
Kunal Shah, Analyst
So, when do we actually expect this number to moderate? Maybe, obviously, this will move out, it's a transient one. But what is the kind of number, which we can look at in terms of the IBPC, because that also exactly is the overall balance sheet number?
Srinivasan Vaidyanathan, CFO
We don't have a target for IBPC. It is opportunistic.
Kunal Shah, Analyst
Yeah.
Srinivasan Vaidyanathan, CFO
The purpose is not just opportunistic from a balance sheet perspective and market demand; there was significant demand in the market. Certain institutions want to invest their assets, and when we receive a good price, we pass that on. Additionally, when considering priority sector requirements and our responsibilities, if it's beneficial to collaborate with someone else, we will consider that as well. We do not have a specific target; it entirely depends on market conditions and pricing opportunities.
Kunal Shah, Analyst
Sure. And one last question. In terms of any integration costs that would be incurred once there is a merger or there is no integration cost?
Srinivasan Vaidyanathan, CFO
No, there will be integration costs in the form of stamp duties and in the form of another cost that we will have, but they are, as we said, within reason, nothing substantial, but within reason it will be. We will call that out separately after we complete it.
Kunal Shah, Analyst
Okay. But that's not a meaningful one, which will temporarily earning.
Srinivasan Vaidyanathan, CFO
It's not a big mover of the overall financials. Thank you.
Operator, Operator
Thank you. We have the next question from the line of Saurabh Kumar from JPMorgan. Please go ahead.
Saurabh Kumar, Analyst
Hi, good evening, Srini. I have two questions. First, regarding deposit repricing. This quarter, your interest cost has increased significantly by 15% compared to the previous quarter. Can you explain where you stand with your term deposit rates on the balance sheet versus new increments? Second, about the HDFC mortgage book, can we assume that most of this book will transition to EBLR within the next six months? Thank you.
Srinivasan Vaidyanathan, CFO
The second question, I didn't understand, mortgage book, what is it?
Saurabh Kumar, Analyst
Basically this will all be repo-linked now. This was all PLR-linked at HDFC Limited.
Srinivasan Vaidyanathan, CFO
I understand your question now. Regarding deposit pricing, if you look at it over time, SAR deposits have remained stable, not just for us but across the entire market. This is primarily due to time deposits. The deposit cost you're noticing is simply a result of the mix we've achieved, which aims for a comprehensive customer relationship and deeper engagement. This is evident as time deposits grew by 29% last year and 26.5% this quarter. The next inquiry would be about the growth rate of these time deposits, which relates to our market share. Our deposit pricing is generally at or slightly below some competitive levels, so we are not aggressively pricing to attract deposits. Our goal is to maintain engagement. We acknowledge that this comes at a cost, but it offers better engagement and a longer duration on deposits, and we are comfortable with that. We do not aim to lead the market on pricing just for deposits. Comparing various channels, this is the trend you'll observe. We may be slightly above State Bank for most tenors, except for some shorter terms where State Bank might be priced higher. Overall, our pricing is aligned with the top private sector banks. Regarding mortgages related to EBLR, it will transition to repo-based pricing. Initially, this will not change anything for the customer, as they always had the option to finance wherever they chose. Pricing will continue to be competitively set, similar to the time deposits, with a focus on engagement and maintaining good relationships with our customers. So, yes, we will move to EBLR for repo-based loans.
Saurabh Kumar, Analyst
Sir, why I ask this is, basically, in future, will HDFC's NIMs will have slightly higher volatility than what it had in past, because now you have a large potentially external benchmark in book or will just try to manage those two cycles, yeah?
Srinivasan Vaidyanathan, CFO
If you look at how HDFC Limited was managed, you'll see that we are taking over the same operations with the same team and a similar risk approach. The margins were stable because they effectively hedged against interest rate risk. Consequently, when the repo rates increased, you didn't observe a significant rise in HDFC Limited's net interest margin, as their risk management kept it within a narrow range. Whether in an upcycle or downcycle, the changes will be modest but will remain controlled. This is part of their duration management strategy, which will continue moving forward.
Saurabh Kumar, Analyst
Got it. Thank you, Srini.
Srinivasan Vaidyanathan, CFO
Thank you.
Operator, Operator
Thank you. We have the next question from the line of Rahul Jain from Goldman Sachs. Please go ahead.
Rahul Jain, Analyst
Yeah, hi. Good evening, Srini.
Srinivasan Vaidyanathan, CFO
Good evening.
Rahul Jain, Analyst
So just, first question, going back to one of your statements that you are sort of making use of decline in credit costs in investing in capacity buildup. So, how long can this trend continue? We've seen structural decline in credit cost so far along. Is there any more legroom available out there to bring the credit cost down from here or how do you see that play out?
Srinivasan Vaidyanathan, CFO
Thank you for the question. There is no definitive timeline for when credit will revert to the mean, but a reversion will occur. Our risk management team will provide insights a few quarters in advance, as they did when we began building those branches around November and December 2021. We analyzed cycle trends and adjusted our strategy accordingly. Our risk management will continue to evolve and indicate how the cycle might shift. This process is related to the maturity of the product rather than the quality of our credit portfolio, which remains strong now, was strong in the past, and will continue to be strong in the future. The timing of the reversion will guide our actions, but we are confident that when it begins, we will be able to handle the base effect comparison cycle effectively. This means that as the base effect kicks in, we expect contributions to our topline in about 18 to 24 months. Ultimately, we hope that the reversion to the mean will stabilize before then. This should give you a clearer perspective on the timing of these developments.
Rahul Jain, Analyst
Yeah. So, just to paraphrase, I think you have got sufficient degree of visibility at least for this year that credit costs can keep compensating for enhanced investment in capacity buildup. That's a fair understanding, right?
Srinivasan Vaidyanathan, CFO
Yeah. That's a fair understanding and, normally, 18 months, 24 months, a breakeven to payback. So if you really started this in December '21, January '22, that's where we started, 18 months' time that you see, and by that time, the base effect is also in.
Rahul Jain, Analyst
Makes sense. That's very helpful, Srini. The second question is about the segmental growth. We noticed that personal loans grew quarter-on-quarter, but it seems that home loans had a slower sequential quarter. Is this slowdown in personal loans due to your cautious risk approach while focusing on growing the secured portfolio, or is it simply a quarterly trend?
Srinivasan Vaidyanathan, CFO
It is simply a quarterly trend, Rahul. In previous discussions, I mentioned that the first quarter is typically quite slow. Looking at an aggregate level over three to five years for loans, the first quarter usually contributes a little above mid-single digits, somewhere in the mid-to-low double digits for the full year. Therefore, it’s normally slow. However, we still observe a strong underlying demand. As we speak now, regarding the mortgages post-merger, we are getting anecdotal reports from different sources within our bank. As we track the logins, the mortgage logins are 20% higher on a combined basis than what we have seen before. We are witnessing significant traction building there. The timing of when this translates into the balance sheet remains to be seen, but there is solid demand emerging.
Rahul Jain, Analyst
I was quite interested in personal loans specifically, as the year-over-year growth for the last few quarters has been lagging compared to the overall system's personal loan growth. Is this a deliberate strategy to limit growth in this portfolio or market share?
Srinivasan Vaidyanathan, CFO
Good. Thanks for asking that, right? People sometimes have asked us the market grows personal loan at 30% or 35% or whatever high-20s and so on, and why we are not growing, we are at 18%, 20% or 22% kind of rate. What's going on, right? See, that's the level at which our risk management looks at how to calibrate and get that growth across. There are opportunities to do 2x that from a growth rate point of view, but I'll leave that respectfully to our credit to determine at what pace, because every growth gets monitored, evaluated post the disbursals into the bureau to see. Learnings are incorporated. There are several processes they follow to calibrate it and go. And I wouldn't second guess them in terms of demanding for higher growth than what they allow.
Rahul Jain, Analyst
That's helpful. Just one last question on the PSL and RIDF. Any incremental color? Did you have to buy more RIDF this quarter or were you self-sufficient for the full year? Can you just throw some color on that, please?
Srinivasan Vaidyanathan, CFO
I wish I could specify how much we will purchase, but I need to be cautious about market prices to avoid causing fluctuations. At the same time, we are aware of our requirements, and overall, we exceed what is needed. We constantly explore sub-categories we want to develop. Our goal is to achieve self-sufficiency over time, which is why we are expanding geographically into remote villages. This is a long-term objective. In the short term, we are actively engaging in activities like purchasing PSLC, RIDF as a compensatory measure when we believe market prices are not suitable, and utilizing IBPC, which provides a PSL, as well as securitization through pass-through certificates that offer qualifying assets. Alongside our organic growth efforts, we are consistently active in the market for these options.
Rahul Jain, Analyst
Got it. Srini, just one last question if I can squeeze in, on the merger related costs. I mean, is there going to be any one-off that we should expect? Any qualitative color that you can give around as you move to consolidate the numbers between you and HDFC Limited for the second quarter during the year? Anything that we need to be aware of?
Srinivasan Vaidyanathan, CFO
There will be some costs associated with the merger. In a previous question, Kunal asked about these costs. They will be manageable and within a reasonable range, including stamp duty and other expenses needed to complete the merger. We have already spent or will be spending on these costs, but they are all reasonable and not excessively high.
Rahul Jain, Analyst
And apart from costs, there is nothing much that can arise.
Srinivasan Vaidyanathan, CFO
No, not. No, apart from costs, there could be some capital assets that we will put in from an infrastructure point of view. And then over a period of time, it will depreciate certain assets for capacity building. But other than that, some costs will be incurred, but they are within reason and range.
Rahul Jain, Analyst
Fair enough. Very helpful. Thank you so much for answering the questions.
Srinivasan Vaidyanathan, CFO
Thank you.
Operator, Operator
Thank you. We have the next question from the line of Abhishek from HSBC. Please go ahead.
Abhishek Murarka, Analyst
Yeah. Hello. Good evening and thanks for taking my question. So, Srini, the first question is on this wholesale book of INR1.1 lakh crores, which you are running down, the HDFC non-individual loan book. What part of that book remains to be run down still or now is it at a steady state and you're probably looking to build from here?
Srinivasan Vaidyanathan, CFO
It has decreased by about 18% over the past year. As we moved into the merger, we initiated a lot of rationalization, resulting in that decline. I don't have a specific figure for where we expect to stabilize before we begin to grow again, but this is part of how we assess our businesses and their relationships. Our wholesale portfolio, which is approximately INR4 trillion, is not merely based on lending. It emphasizes a comprehensive relationship that includes lending, cash management, trade and FX services, salary accounts, and supply chain distribution accounts. These functions are closely interconnected across all our business segments. Currently, we are reviewing these factors and aim to grow this portfolio eventually, but right now, we are determining the necessary positioning across various segments.
Abhishek Murarka, Analyst
Srini, the reason I'm asking this is, this obviously affects your headline growth, right, and there would be part of this, which you may have earmarked that this is not the kind of business we want to do. So if we can get a sense of that, then we know, except that, how much we can grow. That's just the idea behind it.
Srinivasan Vaidyanathan, CFO
We definitely want to be involved in these businesses. Construction financing is tightly linked to mortgage lending, and we will actively participate and develop in this area. It's a matter of assessing the right relationships for a diversified approach across various segments, and then we need to expand. Some evaluation is necessary, but we are committed to this segment. Our involvement is similar to our established role in auto dealer financing, and we must engage in the construction business to gain insights into development, allowing us to finance mortgages through that process. We are also expanding our LRD book, which the bank is already growing, and we will continue to build on that. The only areas we will avoid are land financing and certain project financing that doesn’t comply with regulatory requirements. Beyond that, we are fully committed to growth, so please don’t think this is a declining book; it is a key component for expanding our retail mortgage loans.
Abhishek Murarka, Analyst
Right. And the part that you don't want to do, the land financing and the project financing, does that run into, let's say, north of INR10,000 crores or it's within that?
Srinivasan Vaidyanathan, CFO
We are assessing the amount, which could be INR5,000 crores or INR10,000 crores, to determine which aspects we should avoid.
Abhishek Murarka, Analyst
The second question, Srini, is about deposits. The point I’m trying to get to is that your requirement for incremental deposit market share is approximately 25%. Looking at a longer-term acquisition rate, you’re achieving around 20% in incremental market share, leaving a 5% gap. Would you need to raise rates to address this? You've generally kept your rates at or below the competition, but with this new requirement, it seems unlikely to be met solely through branch investments. How do you view your rates on the TD side going forward, and will this lead to more stable rates on your funding costs, potentially putting additional pressure on NIM? What are your thoughts on this?
Srinivasan Vaidyanathan, CFO
We don't focus on market share as a goal for our business. Instead, our priority is on our funding needs and how to achieve them. I want to clarify that we do not have a specific market share target in mind. Regarding time deposits, we have a history of maintaining discipline in pricing based on relationships rather than leading with price to drive volumes. Our brand has been built over time, and we aim to connect with customers more closely. This strategy has been in place for years as evidenced by the growth in our branches, increasing from 2,500 in 2013 to 7,800 now. Building a strong distribution network and reaching customers are essential parts of our approach. We've successfully acquired 85 million customers, including over 2.5 million from HDFC Limited with whom we can establish liability relationships. Recently, we added 2.4 million new liability relationships. It’s crucial to engage with these customers to increase their balances, including time deposits. Our current penetration for time deposits is low at 14.5%, but we've made progress. Although we've seen growth last year and in the recent quarter, the overall penetration increase has been modest. When it comes to pricing, our time deposit rates are closely aligned with peer benchmarks. We avoid leading with price, and that’s a central theme in our discussions about how we engage with customers and acquire deposits.
Abhishek Murarka, Analyst
Got it. Got it. Thanks. And just squeezing in one quick question on your calculation, actually. So the ROA that you show in your PPT, that's 2.1%, is that calculated on quarterly average balances? Because when I calculated, it comes to 1.9%. So just trying to reconcile that difference?
Srinivasan Vaidyanathan, CFO
No, I don't know how we calculate daily averages. But whatever the daily averages are, you cannot arrive at 1.9%. You provide your numerator and denominator, and we will identify where the issue lies.
Abhishek Murarka, Analyst
Okay, okay. I'll take it offline.
Srinivasan Vaidyanathan, CFO
Yeah, please.
Operator, Operator
Thank you. The next question is from the line of Manish Shukla from Axis Capital. Please go ahead.
Manish Shukla, Analyst
Good evening and thank you for the opportunity. Firstly, Srini, can you quantify the crystallized liabilities of HDFC Limited at the time of the merger?
Srinivasan Vaidyanathan, CFO
The liabilities that have crystallized amount to about INR6,36,000 crores, which has been transferred to the bank. This figure includes the deposits, as indicated on page 23 of the earnings presentation. The INR6,36,000 has moved along with the assets.
Manish Shukla, Analyst
Sure. That's helpful. Secondly, on the merger basis, the loan to deposit ratio is at about 109%. When do you think you can reduce it to below 100%? In terms of your additional funding needs, how do you see the balance between deposits?
Operator, Operator
Sir, sorry to interrupt, but the line for you is not very clear. I request you to please use the handset while you're speaking.
Manish Shukla, Analyst
Is it better?
Srinivasan Vaidyanathan, CFO
Okay. I'll get to Manish. You asked about the deposits and credit to deposit. Yes, due to the merger, it has increased. Last year, the incremental credit to deposit was 72%, while this quarter it’s in the 50s for incremental deposits. Our approach has been that before the merger, the average was around 84% to 85% credit to deposit. Currently, we're operating at about 80%. This reflects our thought process regarding the credit to deposit ratio. Even if we wanted to, it cannot be reduced instantly because of the maturity profile of our borrowings. It will take three to four years for that to decrease to the levels at which the bank has historically operated. We need to wait for the maturity profile to change and be replaced with deposits.
Manish Shukla, Analyst
So this gap would essentially be funded via affordable housing bonds or other kind of borrowings, right?
Srinivasan Vaidyanathan, CFO
No, because the maturity profile, it will both run down. On an incremental basis, is what you need to look at. And then it will play out where it comes back in three years, four years down to normal.
Manish Shukla, Analyst
Got it. Understood. Thank you.
Operator, Operator
Thank you. The next question is from the line of Pranav from Bernstein. Please go ahead.
Pranav Gundlapalle, Analyst
Hey, good evening, Srini. Thanks for the session. I wanted to revisit the issue with the IBPC. If you hadn't pursued the IBPC route and had instead retained the loans on the balance sheet, what kind of loss would you have faced numerically? Would it have affected your ROA, your LCR, or your PSL management? Essentially, what would you have had to give up to achieve a stronger headline number?
Srinivasan Vaidyanathan, CFO
When you execute an IBPC sell, you've removed the loans from the balance sheet, which lowers the baseline for priority sector lending. This means you are decreasing the obligations you need to meet for directed lending in the future. That's an important point. Additionally, if there's improved pricing and demand, it can enhance the spread. Liquidity is another factor; having cash allows you to deploy it effectively, and you can leverage that for additional loans. This is the thought process we use in this situation.
Pranav Gundlapalle, Analyst
Perfect. Thanks a lot, Srini. That's very helpful.
Srinivasan Vaidyanathan, CFO
Thank you. Thank you.
Operator, Operator
Thank you. Ladies and gentlemen, we have come to an end of the time allotted for the call. I would now like to hand the conference over to Mr. Vaidyanathan for closing comments. Over to you, sir.
Srinivasan Vaidyanathan, CFO
Okay. Thank you, Bhavin. Thank you, all the participants, for participating. It was good and quite a dialogue that happened. Further questions and those of you who could not complete questions or haven't had that opportunity to get on the line due to time constraints, we'll be open to having a conversation at some point in time. Please get in touch with our Investor Relations at Bhavin or anybody else with whom you are previously connected. We'll be happy to have any dialogue. Thank you. Bye-bye.
Operator, Operator
Thank you. On behalf of HDFC Bank Limited that concludes this conference. Thank you for joining us. You may now disconnect your lines.