EARNINGS CALL NOTES
Part 2
ROHAN MANDORA – EQUIRUS SECURITIES
Q: Just on that guidance for FY29 what would be the normalized credit cost that we assuming there? that’s first and secondly what would be the losses that we are incurring currently on the credit card portfolio and on the branch liability space right now?
- All everything all products are mixed up when we announce a bank level or a credit cost - we guide for 1.5-1.6
- So what current numbers include everything
- Let me just say that the for the upcoming five years we have assumed a little higher credit cost than what we are currently incurring - because there’s one benefit we have been getting in our credit cost thus far - one is that I mentioned earlier you know in Covid there were charge-offs and those obviously recovery is happening, because you may charge off a loan but so that kind of a recovery has been coming to us last two years. And we believe that all those benefits will go away
- And also you know we should be we should be we should be prepared for you know just for the sake of it be prepared for slightly higher credit cost generally in ecosystem 9 nothing to do about us so we assume slightly higher numbers than what we currently incurring
Q: Sir so this essentially means the RoA expansion is predominantly driven by Improvement in the OPEX is flattish and credit cost would marginally go from current and on the question on credit card portfolio losses that we entering right now…and the branch expenses…
- I told you now we not calling out how much we lost in Loan Against Properties or this or used car - we’re not giving product by product - but broadly we at a bank level we are in very, very good control - it’s super low
Q: I was trying to understand operating losses in the credit card portfolio
- I told you when we put out our numbers we put a credit cost numbers at an entire rate level and the overall Bank level because some products you have a good quarter, some more slippage - something has less slippage, but you should look at a composite manner from quarter to quarter and year to year- and that number is trending very well
- You know last year the credit cost was 116 basis points
- Even in the worst period of covid our credit cost average book was frankly among the best among the peers
- You would imagine for a book that is yielding a NIM of you know 6.306.5% You can imagine 2.5% or maybe 2% even in normal conditions - in covid we had only 2.51 right
- So and then moment Covid vanished that is FY22-23 it came down to 1.17% - this is super low so we are very confident that they’re underwriting good credit
- But we believe it cannot stay this way all the time so we have now factored for higher number
- With respect to your question on a credit card -definitely economics have been improving there as we are building in more book right, cost income if you we had given out numbers that that was 164 % as of the previous year and we expect that to come down meaningfully to around 110% for this year
- And so we have we have been guiding that we expect credit card to sort of Break Even into next year and be profitable in the year to follow
- so we feel that it takes some time right - it has been just 3 years before when we had launched this product so we feel that we are well on course
- We have never let you down in credit cost and asset quality for like 14 years now - anybody who’s been with us since Capital first years will testify that we never have credit problem. It’s been five years we haven’t put one foot wrong on credit - not one foot wrong.
- Obviously you know such a long period of time comes from a disciplined underwriting processes, continuous tightening of the norms and revising the Norms, continuously staying in The Cutting Edge of Technology, good governance in terms of the number of people who inspect a portfolio - so all these things we have no intention to relax
- And we at least while we have mentally factored for a slightly higher credit cost because we believe we should be pessimistic about these things but
ANAND BAVNANI – WHITE OAK CAPITAL
Q: From our business model perspective, I just wish to understand how much of the collections we do is outsourced?
- It is increasingly becoming more and more digital and online you know
- There’s a massive shift underway there so
- let me say a few years ago it was largely you the whole thing is changing to give you one very simple idea for you to understand - earlier if a customer bounces a check we have a call to the customer and request a customer to pay and some agent would go and collect the money from the customer
- Now it’s not like that - now you there’s lot of analytics and technologies that happen calling itself is not necessarily done by a human being - the call will probably be done by a bot and the bot will take some promise and then the bot will send a link to the customer saying that you know you promised to pay me here’s the link for you to pay and customer just pays from the link and the bank gets the money
- So the bank is very digitized bank and we are able to do such massive progress
Q: I specifically want to understand the outsourced collection cost… so if I were to look at the 9 month total other operating expenses it’s around 8,200 crores -approximately how much would be the cost we pay out of the 8,200 CR to Outsource collection agencies?
- I don’t think we know the number off hand nor have we put it out but broadly speaking the directionally we’re trying to become a more direct to Consumer bank - but of course we do have agents
- By the way lot of our collections in in rural areas happens directly by our own employees not even the agents
- Just for information many locations we don’t use agents in rural India
- There are many products in which early bucket collection done by employees themselves
JAY MUNDRA – ICICI SECURITIES
Q: I have just one question that earlier we had a guidance of you know 65% cost to income by exit FY25 and 1.4 - 1.6% RoA by F525. Does that still hold - both these things or you know or how should one look at it?
- The first of all we’ll keep the slides out there so that we don’t want to escape from our guidance of you know 1.0 so just to share with you that we will be true to that guidance
- God knows how we’ll perform again
- We’ll retain the guidance for sure we’ll keep it publicly out for you till the till the last day that’s our commitment
- Now second part your question about how we’re going to perform - you know the cost to income ratio - I think we are a little behind what we what we set out to do
- The good news is let me tell you, one countering factor for being behind schedule supposing we are at 65 and we turn out to be 68 I’m just making up a number - how does this play out? What plays out is the income line turns out to be higher than what we guided
- Remember we guided for 5.5 now we’re delivering 6.3 - so you’re already delivering about 1.3% more on income
- So even if your cost income is higher your RoA may still get there
- But we are going to be in zone of meeting our you know deposit numbers, we are in the zone of meeting our loan numbers ,let me say our asset quality number, Capital liquidity numbers we’re hitting all the buttons, all marks
- We don’t expect to meet exactly the cost to income numbers but because of the equation I told you right now we may still meet the RoA and the lower end of the RoE Mark by that time
Q: Is this RoE is a more normalized kind of an Roe?
- You’ll be a little surprised about how that game will change because what’s happening is that the we believe that from 2025-26, we do expect a positive movement on cost income ratio definitely and Improvement in RoA and RoE
- Okay just take that as our as a sense as of now when you move forward into 26 now remember we are talking of a loan book of only 20% we’re talking about deposit growth only 25%
- So our need for investing OPEX is going to be much lesser than before
- The first five years we were in complete buildout stage
- It’s not going to be that tough now
- So our expense requirement will be lesser - so FY26 over FY25 that will be our expense requirements growth will not be very much, and also by the time bonds should be paid back, needs will be much lesser - so we feel that things will get easier
MANISH SHUKLA - AXIS CAPITAL
Q: If I look at your sequential growth in assets or loans it is one of the slowest in the last 8 or 10 quarters. Anything particular to read into this?
- No we want to keep for asset growth you know within a Zone where our capital adequacy and our credit deposit ratio are all good
- Sometimes we do IPC - sometimes we do assignments meaning direct assignments with other Banks - basically we are clear that we don’t want to grow the loan book too much even now
- So we have taken out some of these loans and done IBPC - Interbank Participation where other bank purchase these loans off from us
Q: Specifically on personal loans and credit cards - any change of strategies since RBI regulations changed?
- No change of strategy
- Good phenomenal products in what the customer needs, cash flow is analysed, and they make good returns.
- We have increased interest rates on these products as cost of equity has gone up.
Q: The 20% loan growth CAGR over the next 5 years will be a step-function now? Compared to 25% right now…
- 5 years ahead you can’t make judgements on step functions
- What we have done is extrapolated 20% for each year
- We have not done step-up, step-down
- Even large banks having 10 lakh crore – 20 lakh crore – all are going 20% - 20 is nothing, it will just happen
- At 25 we have such good asset quality, then we can further cut out the edge customers and further improve the asset quality
- We have no doubt about achieving this 20%
JAY MUNDRA – ICICI SECURITIES
Q: Just a small clarification – it looks a bit confusing – can you clarify is what we have done is that we have been growing at a faster pace and now we have unveiled a new guidance with 20% - so is it going to be the new normal? Or because of conservatism, forecasting 5 years out, you have given this range…
- It’s our job to clarify this
- This thing about 25 to current growth
- It’s not like it’ll come to 20 in the next quarter itself
- But if you wake up in FY25, and see the book growth – you might see the growth at 20 – it is possible
- We are planning to slow down
- 20-22% is the zone
- There’s a reason for this – it eases a lot of requirements on the deposit side – we need to put branches, etc
- Two is that, everything looking so fantastic on credit cost front, but we want to remind ourselves, trim out the edges, we might tighten credit
- The intention is to slow it down in a way that on a sustainable basis this can compound for a long period
- You may be disappointed with 20% but trust me, even at 20 compounded for a long period of time – as operating leverage will unfold – we will realize it is a good strategy, a sustainable strategy
- For now we have assumed this strategy – we could do slightly higher, slightly lower – but this is the intention
Closing Comments
- Are you disappointed with the 20%? Or are you okay with it? What is the feel of the house
Jay Mundra – ICICI Securities
- You are clearly right, this helps in maybe more better filtering of the marginal customers and will ease off some pressure on deposits
- On a system level, this could be the narrative build-up, that growth needs to be a bit calibrated
V Vaidyanathan
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There is a message from the regulator also to curb exuberance
- It is time to trim the marginal customers to give a more stable story
- Hopefully even if you are disappointed right now, hopefully you will become a convert to our line of thinking in the coming quarters.
X.
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