ICICI Bank Limited
Q1 2018 Earnings Call Transcript

Published: 29 Jul 2017

[Executives:]

Chanda Kochhar - Managing Director and Chief Executive Officer N.S. Kannan - Executive Director Rakesh Jha - Executive Director and Chief Financial Officer

[Analysts:]

Mahrukh Adajania - IDFC Securities Kunal Shah - Edelweiss Securities Pavan Ahluwalia - Laburnum Capital Manish Ostwal - Nirmal Bang Securities Amit Premchandani - UTI Mutual Fund Suresh Ganapathy - Macquarie Capital Securities Vishal Goyal - UBS Securities Manish Karwa - Deutsche Bank Adarsh Parasrampuria - Nomura Nilanjan Karfa - Jefferies Pankaj Agarwal - Ambit Capital

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q1 2018 Earnings Conference Call of ICICI Bank. As a reminder, all participant lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Chanda Kochhar, Managing Director and CEO of ICICI Bank. Thank you, and over to you, ma'am.

[Chanda Kochhar:]

Thank you and good evening, everyone. Our Board has today approved the financial results of ICICI Bank for the quarter ended June 30, 2017. I happy to say that the Bank continues to make progress on the strategic priorities outlined in our 4 by 4 Agenda covering Portfolio Quality and Enhancing Franchise. I would specifically want to highlight six key areas. The first highlight is our focused approach to growth. So the Bank has been following a focused approach to growth, in line with the objectives of improving the portfolio mix, and reducing concentration risk. And in line with that approach, the domestic loan growth has been healthy at 10.9% year-on-year. Within that the retail loan growth was actually 18.6% year-on-year, with healthy growth across all the retail products and the retail loan portfolio has now become 53.3% of our total loan portfolio. The SME portfolio also grew at a healthy rate of 18.4% year-on-year. In the domestic corporate portfolio, we actually focused on lending to higher rated corporates and saw healthy growth in that area. But at the same time, we have also focused on reducing the net advances classified as restructured or non-performing, or included in our drilldown list. And the final part of our portfolio which is the overseas branch declined by 25.0% year-on-year, reflecting the same above approach of focused approach to corporate lending and also because of the repayment of FCNR linked loans. So the international loan portfolio has now reduced to 15% of our total loans, in line with our strategy of increasing the proportion of domestic loans in our portfolio. So overall, the areas that we wanted to grow and we were focused on growing have been growing well. The second highlight is our strong retail franchise. And the strength of our retail franchise is demonstrated by the growth retail loans, we held deposits and retail fee income. As I mentioned earlier, the retail loan portfolio actually grew 18.6% year-on-year. The CASA deposits also saw a healthy growth and grew by 24.4% year-on-year. The Bank's CASA ratio was 49%, and retail deposits were 76.1% of our total deposits on June 30. The retail fee also saw a healthy grew of 17.6% year-on-year. The third highlight is the improving core income and expense trends. Our net interest income grew by 8.4% year-on-year to INR 55.90 billion in the first quarter from INR 51.59 billion in the same quarter previous year. Fee income was again at double digit growth of 10.3%, driven mainly by the retail fee income as I mentioned earlier. The growth in operating expenses has reduced to 12.5% compared to a 16.3% in FY 2017. The standalone profit after tax was INR 20.49 billion for Q1 compared to INR 22.32 billion for Q4 of 2017. The PAT of Q1 of course we must remember had included exchange rate gain related to overseas operations of INR 2.06 billion, which is no longer permitted to be accounted as income following the RBI guideline in April 2017. And also the Q1 2017 profit included a INR 2.04 billion from ICICI Life, which is not there in Q1 2018 because the company has moved to half yearly dividend payments. On a sequential quarter basis, there was an increase in PAT. Similarly for consolidated profit after tax also there was in fact a growth of 25% sequentially from INR 20.83 billion in Q4 of 2017 to 26.05 INR billion Q1 of 2018. The fourth highlight is the improving asset quality trends. The gross additions to NPAs were INR 49.76 billion. This is the lowest in the last seven quarters. During the quarter, we also in fact completed the process of sale of cements business of a borrower, which was classified as NPA in the preceding quarter. As we had indicated in the preceding quarter, part of the cements accounts has now been upgraded due to the transfer of a part of the debt to a AAA rated company. As a result, we had record recoveries and upgrades during this quarter which was INR 27.75 billion. Therefore the net additions to gross NPAs that is net of recoveries and upgrade was INR 22.01 billion. In fact the net NPAs in absolute teams has actually declined during the quarter from INR 254.51 billion to INR 253.06 billion. And the net NPA ratio has also declined from 4.89% to 4.86%. The fifth highlight is our technology leadership. We continue to be at the forefront of offering technology-enabled services to our customers. Our online banking functionality received the highest overall score in the 2017 India Online Banking Functionality Benchmark which is a study conducted by Forrester. Our mobile banking application also received the highest overall score in the same study for mobile banking for the second year in a row. Debit and credit card transactions continued to grow at a healthy rate. The number and value of debit card transactions at POS terminals increased year-on-year by 81% and 83% respectively. And the credit card transactions increased year-on-year by 49% and 52% in terms of number and value respectively. Over 3.3 million UPI Virtual Payment Addresses have been created using the Bank's mobile platforms till June 30, 2017. The Bank had acquired over 130,000 merchants till June 30, 2017 on the ICICI Bank's 'Eazypay' mobile application for merchants. Digital channels like internet, mobile banking, POS and call center, all these channels put together now accounted for about 81% of the savings account transactions in Q1 2018. The last highlight that I would like to point to the sixth highlight is the strong value creation in our subsidiaries. So ICICI Life maintained its market leadership position among private players based on retail weighted received premium with a new business market share of 15.3% in Q1 2018 up from 12.0% in FY 2017. The new business margin has been continuously improving from 8% in FY 2016 to 10.1% in FY 2017 and now further to 10.7% in Q1 of 2018. ICICI General had a profit after tax of INR 2.14 billion in Q1 of 2018. ICICI General has filed a draft red herring prospectus with SEBI for a public offer of equity shares of ICICI General, representing approximately 19% of its equity share capital, through an offer for sale of up to 7% by the Bank and 12% by Fairfax. The profit after tax of ICICI AMC increased by 43.9% year-on-year to INR 1.41 billion in Q1 of 2018. Now with assets under management of about INR 2.6 trillion for the quarter, ICICI AMC continues to be the largest mutual fund in India. The profit after tax of ICICI Securities was at INR 1.15 billion in Q1 of 2018 compared to INR 0.69 billion in Q1 of 2017. ICICI Securities continues to be the largest online retail broking platform in India. We believe that we are well positioned to leverage the growth opportunities in the coming years given our strong deposit franchise, robust capital levels and significant value in our subsidiaries. We continue to make investments and to further strengthen our franchise and work towards resolution and reduction of stressed exposures. I will now hand the call over to Kannan.

[N.S. Kannan:]

Good evening to all of you. I will talk about our performance on growth and credit quality. I will then talk about the P&L details, subsidiaries as well the capital. First on growth, the overall domestic loan growth was 10.9% on a year-on-year basis. Loan growth for the Bank was driven by retail segment. Within the retail portfolio, the mortgage and auto loan portfolios grew by 17% and 14% year-on-year respectively. Growth in the business banking and rural lending segments was 19% and 22% year-on-year respectively. Commercial vehicle and equipment loans grew by 13% year-on-year. The unsecured credit card and personal loan portfolio grew by 39% year-on-year to INR 231.80 billion and was about 5.0% of our overall loan book as of June 30, 2017. We continue to grow the unsecured credit card and personal loan portfolio, primarily driven by a focus on cross sell to our existing customers. The domestic corporate portfolio decreased by 2.8% year-on-year. We continue to focus on lending to better rated clients and work towards reducing exposures in sectors impacted by the challenging operating environment. If we exclude NPAs, restructured loans and loans to companies included in drilldown exposures, there was a growth in the domestic corporate portfolio. The SME portfolio grew by 18.4% year-on-year and constituted 4.5% of total loans as of June 30, 2017. The net advances of the overseas branches decreased by 25.0% year-on-year in rupee terms and 22.0% year-on-year in U.S. dollar terms as of June 30, 2017. Coming to the funding side

[Operator:]

Thank you very much. [Operator Instructions] The first question is from the line of Mahrukh Adajania from IDFC Securities. Please go ahead.

[Mahrukh Adajania:]

Hi. I just wanted to know that the outside slippage of one engineering account that you highlighted, most banks are saying that only the domestic portion has slaved and the international has not for this account, so would that be the same in UK?

[N.S. Kannan:]

Yes.

[Mahrukh Adajania:]

Okay. And just in terms of outside the watches of course this time around there was one lumpy slippage, but since you also increased your size of your watch list in the earlier sectors, do you think that now there will be no lumpy slippage outside the watch list, are there any accounts on the border line other than in these sectors because otherwise outside the watch list slippage may continue to be a high number.

[N.S. Kannan:]

Yeah, last time modest as I remember to specific question we had responded saying that that with respect to the individual borrowers, some of them will be below investment grade outside watch list only outside of the done list also and a couple of them could be lumpy under names that kind of talked about in the market. That's what we have said. And we said that on an overall basis, as we said in the early calls also, there would be additions outside of this 200 billion watch list and a couple of them could be lumpy cases assets. So that is what we would like to repeat once again.

[Mahrukh Adajania:]

Okay. And in terms of domestic corporate loan growth, is that weak?

[N.S. Kannan:]

As I said that the domestic corporate loan we should really split it into two parts, one is the areas which we have identified specifically as a stress factors which is separately disclosed and also the restructured and other types of RBS schemes where those disposals have been made. In the full segment we didn't grow at all, we just wanted to make sure the focus is on collection and not further expanding our exposure. So if we leave out that the balance is where we're focusing on in terms of weather it is working capital lending or the any other requirements of the corporates including refinancing from other bank. So that is the segment a desirable segment we focused. So we slip - if we split in this manner, we believe that on the desirable segment, we have grown quite recently. And given the overall growth in the corporate segment, I think it is something we would be happy with. So that is a way we would like to internally look at in terms of sitting and seeing that what kind of exposures we are taking. So from that perspective we are quite happy with what we have done in the corporate banking.

[Mahrukh Adajania:]

Got it. And just one last question, have you reversed provision relating to the cement account for the parts we upgraded?

[N.S. Kannan:]

Yeah, to the extent which are service could be reversed we have done that in the quarter.

[Mahrukh Adajania:]

So it would be 15% of the upgrade?

[N.S. Kannan:]

It will be the provision that we held that could depend on that, it may not be 15%, it will depend on what the provision we hold.

[Mahrukh Adajania:]

Okay. Thank you.

[N.S. Kannan:]

Thank you.

[Operator:]

Thank you. The next question is from the line of Kunal Shah from Edelweiss Securities. Please go ahead.

[Kunal Shah:]

Yeah. So in terms of this exposure to the NCLT account, so everything is classified as GNPL of 6,900 crores or something is even sent out of it?

[N.S. Kannan:]

The bulk of it is classified as non-performing. So more than 95% actually on of the loans outstanding is classified as non-performing. There is one account where we have the exposure which is performing account with us where is at June 30th.

[Kunal Shah:]

Okay. So that would be hardly like 5% of this 6,900 crores.

[N.S. Kannan:]

Yes, that's right.

[Kunal Shah:]

Okay. And particularly in terms of the telecom, so given that RBI is also highlighting this, so do we believe that there would be a need to get telecom as well into may they drill down list of say the stress factors and because maybe the pitch could also coming from some of those account. So what's you view in terms of your overall exposure to few of these corporates on the telecom side?

[N.S. Kannan:]

So our own exposure to telecom as I mentioned is quite low at 1.5% of our exposure. And also if you look at the way we have done that drilldown list would - are those cases in the specific sectors which are below investment grades you know rating. So even if I include telecom, it won't make any difference to the list. So for us it's not an issue.

[Kunal Shah:]

It is not anything below that?

[N.S. Kannan:]

Yeah, we have been focused on keep layers which we believe.

[Kunal Shah:]

Okay. And lastly for just to get the clarity in terms of what has been the addition to this drilldown, would it be fair to assume that it would be earlier either outside of 525 or say maybe the classified accounts because I think maybe when you look at it in terms of the flexible restructuring under 525 that component is also rising from 17 to 24. So should it be fair even that it is already from say the existing 525?

[Rakesh Jha:]

So as Kannan mentioned earlier, of the increase that we had in the drilldown exposure, INR 7.5 billion was already a part of the 525 refinancing and that was disclosed at March 31 as a part of 525 refinancing. So the increase that we had seen in terms of the INR 14 billion of down way to below investment grade, out of that INR 7.5 billion was the part of the loan which was where already 535 refinancing have been implemented.

[Kunal Shah:]

So it would be new.

[Rakesh Jha:]

Sorry.

[Kunal Shah:]

So another 7 odd billion would be something which is outside of maybe when we look at this year?

[Rakesh Jha:]

Yes, so that would be you know from the existing investment grade portfolio of these sectors.

[Kunal Shah:]

Okay, yeah, yeah. Thank you.

[Operator:]

Thank you. The next question is from the line of Pavan Ahluwalia from Laburnum Capital. Please go ahead.

[Pavan Ahluwalia:]

Yes, thank you very much. I just wanted to talk about the two exposures that were kind of and anticipated the INR 2,500 crore engineering account that was not part of watch list and the INR 1,400 crore addition to the watch list. Can you tell us a little about why when you are framing the watch list, we decided not to put these exposures in there? The both kind of widely talked about it you mean there once that I think you referring to quiet widely talk about widely analyze there have been all kind of question marks on that viability. So it would be interest on what I just hear in your thought process, what is that made you think these were not necessary to dimension upfront and what sort of turned out definitely?

[Rakesh Jha:]

So, a couple of things to start with I think from the beginning when we have disclosed this list of the drilldown loans actually have put out, we have said that this is the list of exposures that we have which are below investment grade in the identified sectors which is steel, power, cement, rigs and mining. So - and we have said from day one that there are exposures which are outside of these five sectors which could be below investment grade in our portfolio. The reason we took these five sectors and disclose that was because our exposure in these sector were under stress and we had larger, lumpy exposure below investment grade in these sectors. So outside of these sectors if we look at for example electronic and engineering that is not really a sector which is stressed. We of course had one exposure which was below investment grades but that is not the criteria that we had used and we have always clarified that there will be addition which will come outside of the list of drilldown loans that we have put out. And we have been careful not to use the word watch list around it because it is not an entire listing of all below investment grade loans of the bank. So that is something which is there. And of course the addition that you are talking about the total addition which happened during the quarter outside of the drilldown list and NPA evolvement and restructure slippages was about INR 21 billion. And out of that a substantial part was the electronic engineering in the company. So that is one. In terms of the drilldown list itself, again we have said that a listing of all are below investment grade loans which get reviewed internally every quarter and based on the rating upgrade or downgrade, the list actually can either expand or come down. During the quarter, we had a couple of accounts which went down from investment grade to below investment grade and that is an increase that we've seen of INR 14 billion. And out of that as I mentioned earlier about INR 7.5 billion was already part of INR 525 refinancing that we have done. Of course in this particular exposure also, we believe that we should be able to recover. It is just that as for our internal ratings once it goes below, below investment grades, we disclose that as a part of our drilldown list.

[Pavan Ahluwalia:]

But given that everyone seems to be calling this a watch list, right. And I agree that you've not been calling at a watch list but for better over the last year, this is become this suppose that watch list on every call. Would it make sense to maybe have a kind of expanded version of it that gives us a sense of all below investment grade exposure regardless of sectorial classification, so that we avoid the whole issue around why is that from outside the watch list or inside the watch list or whatever list?

[Rakesh Jha:]

Yeah, so I think the thinking which was there at that point of time, clearly was that which are the sectors from where you would end up seeing large amount of slippages potentially. And that is what was put out. If you put out an entire listing of all loans that may not be as helpful that was the thinking which was there. And of course from day one, we have been very clear to say that there are a few accounts outside of the drilldown list which are - so these are accounts which are internally closely monitored by us, of course it's something which has been there in the portfolio. So we take your feedback and we'll see what can we done about it. But we believe that the way we've been disclosing is quite a consistent way of and robust way of doing it.

[Pavan Ahluwalia:]

Thank you very much.

[Operator:]

Thank you. The next questions from the line of Manish Ostwal from Nirmal Bang Securities. Please go ahead.

[Manish Ostwal:]

My question on the net interest margin trend last two quarters and what is the overall outlook for the FY 2018 on the domestic margin side? And secondly on the loan book growth side, we have seen the detail book grew by 19% during this quarter and SME around at same levels. So do you belief that kind of growth rate we can maintain in FY 2018?

[Rakesh Jha:]

On the margin, I think we had - we said in the last call in May that there would be some reduction in the margin in FY 2018, mainly driven by the fact that there is fair bit of repricing of loans which is happening with the sharp reduction in the lending rates that we have seen and the sharp reduction in NCLI itself that we have seen. Plus upwards if you look at the year as a whole FY 2017 and compare that with Q1, the margins are kind of at a similar low level. In Q4, we had highlighted that there was higher amount of collection that we were able to do on a couple of non-performing loans, so that came in as an additional benefit to the margin and the margin in Q4 had shown a sharp increase over Q3. Going forward from where we are currently in the June quarter, the June quarter of course also had benefit of close to 10 basis points coming in from the interest on income tax refund which is difficult to predict us to in which quarter, in what quantum it will come. But other than that the key impact would continue to be from the incremental lending and the repricing of existing loans which one is happening in the mortgage portfolio in the better rated corporate that something which clearly there. So we are also reducing our deposit rates but incrementally given the overall systemic loan growth being quite low, the lending spread indeed are under pressure and we would see some impact of that going forward in the next couple of quarters as well. And as we had said in call in May, we are confident of maintaining the margins above 3% for the year.

[N.S. Kannan:]

And to answer your second question on the growth, yes given the retail growth momentum we have seen so far and our distribution capabilities, we do believe that we can continue to do growth anything like 18% to 20%. So we are quite confident of that. On the SME, we have as we have mentioned in the earlier calls, we have sort of recalibrated in terms of making the lending more granular and more focus on collateral. On this basis, we do believe that we can maintain the growth rate which we have been able to put out the coin in the quarter.

[Manish Ostwal:]

Second question on the fee income sides, last three quarters, we have been growing fee income around 10% plus Y-o-Y and we've seen this quarters some of the larger private banks shown a very strong fee income growth, so do you believe this is further scope of improvement of growth rate in fee income side?

[N.S. Kannan:]

Within the overall fee income, now the retail fee income is more than 70% and that has been growing at 18% or so. So we believe that we should be able to sustain the growth in fee income. On the corporate side, till last year actually we were seeing a decline in the overall fees, overall corporate fees and that's why the overall fee growth for us was in single-digits. We believe this year we should be able to maintain the corporate fee at the same level. So with both of these, we should be grow our fee revenues in double-digits for the year. Of course with the corporate fees not growing at that 15%, 20%, the overall growth in fee income will still be around the current level.

[Manish Ostwal:]

And lastly, this 160 crores of additional provisional select sectors, this is a quarterly rented for next four quarter or this is done?

[N.S. Kannan:]

So this is the provision that they have made on the portfolio outstanding at June 30 in these sectors. So if there is an increase in the portfolio of these identified sectors, to that extent, the incremental provision will be there or if we were to add other sectors to this list of sectors then the provision would go up, but on the ethics sort, we are taken the entire incremental provision as for our policy.

[Manish Ostwal:]

Okay, sir. Thank you very much. All the best.

[N.S. Kannan:]

Thank you

[Operator:]

Thank you. The next question from the line of Amit Premchandani from UTI Mutual Fund. Please go ahead.

[Amit Premchandani:]

Good evening and thank you, sir. Can you help us with the sector in which you have enforced or try to enforce a change in management outside SDR of 55 billion? And when is it likely to be effective and does it also lead to an upgrade of this exposure? Or maybe we can consider possibility of that rate reduces because of this?

[N.S. Kannan:]

To answer you first question it is the mining sector which we have talked about in the past as well. And as I said in general our approach to the drilldown list is my opening remarks, I mention that we will employee all the tools and all the available options so that we maximize our recovery. That is the way we will proceed, not just in this exposure but across the exposure in the drilldown basis.

[Amit Premchandani:]

But as this change in management reduces the probability of default of this exposure?

[N.S. Kannan:]

Yeah. We will have to see how the sector itself develop. From our perspective, we always thought that this is the best option for that asset that's why we are moving in that path.

[Amit Premchandani:]

And sir, there is still almost INR 40 billion of steel under the watch list given the improvement in the underline dynamics of the steel sector. When do you see upgrades starting to come in the steel sector?

[Rakesh Jha:]

Also in terms of it our performance and the cash accruals of these companies clearly when I see an improvement in over the last 12 or 18 months. But given their debt levels and the other issue which are there, it would be sometime before we see upgrades of these companies happening into the investment grade. So I think it is sometime away though are we are relatively confident about the current set of loans which are there.

[Amit Premchandani:]

So you mean that the INR 40 billion which has not get slipped, you are relatively confident about that?

[Rakesh Jha:]

Of course some of that could slip but overall performance of these companies has been consistently being improving over the last 12 months to 18 months. So in the overall portfolio again to say you know both in terms of steel and power. There would be exposure for example that we have in the investment grade which could going forward slip into below investment grade and the existing below grade investment grade could slip in to NPLs. That is a potential risk which is definitely there because the overall stress in these sectors and the environment still continues.

[Amit Premchandani:]

Thanks. And sir what could be the impact of PSLC on the overall margin and OpEx given that the track of private sector buyouts PSLC will be eliminated in margins and rejected in OpEx?

[Rakesh Jha:]

We these are not done that large amounts of PSLC to really have an impact. In current quarter, actually there is nothing which is there, so as we see where we are in terms of our achievement on the overall for IT sector and the sub-targets depending on whether we investment in PSLC or not over the next two or three quarter, the impact could be there but as of now in the first quarter there was nothing.

[Amit Premchandani:]

And what could be the rate at which normally this trading would have happened?

[Rakesh Jha:]

I have not really tracked for the current quarter.

[Amit Premchandani:]

Thank you, sir. That's it from myself.

[Operator:]

Thank you. The next question is from the line of [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Hi, sir. Just few questions. One on the loan growth, since lift in reduction in the share of overseas loan book in the past years, where do you expect the share to stabilize in the next year or so?

[N.S. Kannan:]

See look at the next couple of years, I think given the growth that we have seen on the domestic side, we expect the retail growth to sustain and at some stage the corporate growth will also pickup from the current level that we are seeing. So the proportion of the overseas book would continue to decline for us over the next couple of years. We don't have any specific target in mind in terms of where it would end up, but directionally it would still reduce from the current level of 15%, 16% rate.

[Unidentified Analyst:]

Okay. And in terms of what proportion for domestic loan book on MCLR today?

[N.S. Kannan:]

Of the floating rate - so floating rate loans which are there in the domestic portfolio about slightly more than 50% are linked to MCLR, what 55% of the floating rate loans are linked to MCLR, so that number has indeed been going up quite a bit in the last couple of quarters.

[Unidentified Analyst:]

And the fixed book if I understand correctly its 25% on domestic book?

[N.S. Kannan:]

It's about 30%.

[Unidentified Analyst:]

Okay. And just lastly on tax rate, where do you see the full year effective tax rate to be?

[N.S. Kannan:]

For the current quarters, effective tax rate is what we would expect for the full year because of either accounting standard requirement is that we have to estimate the effective tax rate for the full year and apply that to the current quarter's profit. So that slightly more than 20% is what the current expectation would be based on the income composition. If there is any change in the actual income composition versus what we are assuming then there could be a change in that rate.

[Unidentified Analyst:]

Sure. Thanks.

[Operator:]

Thank you. Next question from the line of Suresh Ganapathy from Macquarie Capital Securities. Please go ahead.

[Suresh Ganapathy:]

Yeah, hi. I just wanted to get a qualitative comment on the cases being referred to IDC and in general the approach of the bank. I mean considering that the RBI saying 50% should be the minimum position and secured and 100% on unsecured and it looks like RBI is going with the very high nod given default assumption in cases that toward to IDC. Now what is going to be your assessment of the eventual loss given default A and secondly if IDC is going to eventually result in something have the 60% loss given default, does is necessarily make sense for bank to refer cases to IDC? So just wanted your views on that.

[N.S. Kannan:]

So Suresh, as regards the provisioning itself I guess the asset we are talking is that it is the only of matter of time because they would have gone in to 50% provisioning. So it is just a bit of bringing it forward the provisioning by probably half a year or one year. So I don't think that 50% itself is a much higher number compared to the existing level of provisioning. We believe that the discipline of having to decide in a time bound manner will definitely come, thanks to the IDC process because once it is admitted then thereafter the insolvency professional takes over and whenever there is a proposal within that 180 plus grace period 75% of the lenders will have to come together and approve the proposal, otherwise it will go into liquidation. So obviously all of us banks will understand that the best solution would be especially in operating companies to find a solution without allowing the case to go for liquidation. So I think there will be compensate of urgency across the banks to put the proposal together and then under the agency of NCLT go ahead and get the approval for the resolution package. That we believe is the best option rather than not approving any proposal and allowing the company to go for liquidation. So that would be the larger approach of the bankers, so it puts in a discipline, it helps us to resolve it in a time bound manner. So that is the way we are looking at it. But having said that these are the early days we have does seen this cases being just being admitted or just a insolvency professional we are taking over, so will have seen how this phase develops. But time bound action plan is the essence of this one whole thing.

[Suresh Ganapathy:]

There is one more question I mean apart from these 12 accounts, RBI has asked in fact banks to look at another 50 odd systematically stressed accounts. Some banks have actually given their exposure. Is it possible for ICICI to share that number apart from these 12, what are the other 50 accounts total exposure and impact and stuff?

[N.S. Kannan:]

I'm not aware of RBI asking us anything on this, they've not asked us at all. So I'm not sure what….

[Suresh Ganapathy:]

No, they said beyond these 12 accounts, there are some other cases also which needs to be taken up by banks within six months and then get resolved, that's not been communicated to you?

[Rakesh Jha:]

That is the part of circular where they said that the other non-performing loans also banks should look at resolving over next six months and taking steps in that direction. And if that doesn't move then the banks will be required to take them to NCFD. That was more a generic statement not specific to identified account.

[Suresh Ganapathy:]

Okay.

[N.S. Kannan:]

And Suresh, just before the circular came, RBI itself modified the ground rules for the JLF conduct and there they reduced the threshold for decision making to 50% by value it used to sorry 60% by value from 75%.

[Suresh Ganapathy:]

Correct.

[N.S. Kannan:]

So it would have started of some better discipline in terms of people attending and they also subsequently clarified that this voting will be by some people present their voting at the JLF. I think that itself will help what Rakesh mentioned in terms of resolution going forward even outside of NCLT.

[Suresh Ganapathy:]

Okay. Thanks.

[N.S. Kannan:]

Thank you.

[Operator:]

Thank you. The next question from the line of [indiscernible] from Anand Rathi. Please go ahead.

[Unidentified Analyst:]

Yeah, hi, good evening. Could I understand the impact of INDAS on the P&L in terms of your expected credit cost or some credit cost guidance?

[Rakesh Jha:]

We are currently in the process of working on that. We are waiting in some drop guidelines or fund guidelines from RBI on the expected credit loss. Broadly in terms of directionally if you look at it under INDAS we will have three category of loans which will be the stage 1, stage 2 and stage 3 loans. The stage 3 loans will include all are existing NPAs, all the restructured loans and almost all the loans where we have initiated any of the RBI schemes the SDR, S4A or the change in management. And then also some of the loans which are a part of our drilldown list. So that would become a part of the stage 3 loans. So within that, clearly there will be an increase in provisions which will happen because the provision has to be taken based on the expected losses. And there is no facing of provision which is there in the current RBI guideline which has allowed under INDAS. Sothat is one which will have an impact. And then the stage 2 loans which are the loans were there has been significant increase in credit risk from the time of underwriting the loan. Those loans will essentially include the SME 2 loans which are not already a part of stage 3 loans and part of the SME 1 loans. So the 30 days less and the 60 days plus loans and there again one has to take the lifetime expected losses which will be the lifetime default multiply by the loss given default. So we are currently in the process of working out all the credit models for working out these numbers. And in addition though all the expected losses will be on the exposure and default and not just on the loan portfolio.

[,:]

The other thing is that under INDAS, most likely in terms what Basel allows because the IRFS 9 migration is happening globally also. So for that what they have said is that when you are migrating to IRFS 9 then the impact at the time of transition which if the current timeline of RBI is what it is then it will be the April 1, 2017, which will be the transition date, then the day 1 impact of that while it has to be considered in the balance sheet. For the capital purposes it would be amortized over 5 years. That is the general expectation. So we are awaiting all these final or rough guideline from RBI to kind of conclude on this.

[Unidentified Analyst:]

Okay. Thanks. And could I understand the show of outside the watch list to the overall, I think I missed this.

[Rakesh Jha:]

So of the corporate and SME slippages which was there during the quarter about 52% was outside of the drilldown list and the restructured loans which are there.

[Unidentified Analyst:]

52%?

[Rakesh Jha:]

52% and that was largely contributed by one account in the electronics and engineering.

[Unidentified Analyst:]

Okay. And one last qualitative question. So I think you said focus in on making SME more granular as spreads in a SME and retail are under pressure. Could I understand what kind of risk profile migration if any is taking place in both your SME and retail portfolios?

[N.S. Kannan:]

So in the retail portfolio, it is pretty consistent we really as not looking at any change in the risk profile. So we have seen growth both on the secured retail loans and the unsecured retail loans as well. Of course the growth on the unsecured retail loans has been higher because of the lower base of such loans that we have. But incrementally, we continue to focus on the existing customers of banks to originate the personal loans and the credit card business. But overall, we are not really looking at any kind of change in the risk profile other than the fact that the unsecured portfolio will grow at a faster phase given that it is still at a lower base and we have a lot of opportunity to cross sell to existing customers. On the SME, what we have done over the last two years of slightly more than that is that we are looking at more granular lending and with improved collateral. So that is something which we have implemented over the last couple of years. And that's already there reflecting in the incremental portfolio that we are underwriting. And based on that we are looking at growth of about 15% to 20% on the SME portfolio.

[Unidentified Analyst:]

Okay, but is it fair to say that if you are looking at more granular low ticket size in SME, incomes or turnover of SME clients would be lower and therefore mix your plans so maybe higher yielding but mix your plans?

[N.S. Kannan:]

The experience has been actually been mixed because some of the lumpier accounts on the SME segment more closer to the midsized enterprises. I think banks have had a mixed experience. So I don't think it's just the smaller size that we are looking at. It is more granular portfolio with all the other risk parameters also in place and the collateral also there. So it's not just going into smaller SME. That is separate segment of the market that we address to the business banking look that we have which is the part of our retail portfolio. There we look at granting loans which are of typically of size less than INR 10 million and very well collateralized in our loans. The experience there has been pretty good in terms of the returns and the great experience which is there. And that's a portfolio which looks like the smallest the very smaller business entity.

[Unidentified Analyst:]

Right, but even on the larger ticket size that is more collateral commensurate with lower yields, is that correct?

[N.S. Kannan:]

Sorry.

[Unidentified Analyst:]

I am saying for more collateral, if you take on loan else typically commensurate it with a lower yields, right?

[N.S. Kannan:]

Yes. Yeah.

[Unidentified Analyst:]

Okay. Fair enough. Thank you. All the best.

[Operator:]

Thank you. The next question from the line of Vishal Goyal from UBS Securities. Please go ahead.

[Vishal Goyal:]

Hi Rakesh. Hi Kannan. So onequestion actually on the outside of drilldown list actually so and we definitely would have had some below investment grade when we initiated this list of INR 440 billion and the proportion was 30% or 40% which was outside of drilldown list which was below investment grade. Now that proportion because our drilldown list also has come down to 200, should we expect the proportion also to go down or the proportion would have gone up?

[Rakesh Jha:]

Vishal, we've not really separately disclosed that number. So very difficult to talk about it in proportions. What we are saying is that outside of drilldown sectors which are there, there are a fair number of sectors which are there. There are few loans that we have which are lumpy and outside these five sectors and below investment grade. One of them did slip in the current quarter and that's why the outside drilldown list editions were higher and it is possible that there could be of these other two or three accounts that could in shift in the coming quarters so. That's what we've kind of say beyond that anyways it's very difficult tool.

[Vishal Goyal:]

No, the reason I asked Rakesh is, two of those kind of those accounts are already factored in like one is added to the drilldown and one is become NPA. So - I am just like saying like if there were three, then two have gone down.

[Rakesh Jha:]

The addition to drilldown is coming from the sectors which are - the five sectors which have - so that is from the power sector or the steel or mining or rigs, where there is a downgrade which happens. As you would appreciate in the banking business, we review internally that trade rating of all are borrowers on a periodic basis. And if there is a downgrade and the classification becomes in our system as below investment grade which is below BBB minus then we disclose it as a part of the drilldown list. So that is - that is to the power sector exposure which got downgraded during the quarter, separately the electronic and building that one company which slipped during the quarter. That was in a sector which was not covered as a part of the drilldown list. And as in response to by an earlier query as Kannan had mentioned that particular group has present to two separate companies and one of them is what has slipped in the current quarter and the other company also would be outside the sectors that we have covered in the drilldown list. So I think as we've said earlier also that for the year FY 2018, we do expect the NPA additions to be significantly lower than last year. Of course a part of the decline will come from the fact that last year that slippages from the drilldown list were much higher because we were starting off with the very high number of the drilldown exposure. But overall, in aggregate also the NPL additions will be significantly lower in FY 2018. The outside of drilldown list because of the couple of lumpy exposures that number would not of course come down from where it was in the last financial year.

[Vishal Goyal:]

Okay. And our international name actually gone down to 73 basis point. Did I miss any comment, I'm sorry the initial, did you mention anything about it?

[Rakesh Jha:]

I think we've mentioned, in the last quarter, we had fair bit of collections from the non-accrual loans which was mainly NPAs both in domestic and foreign currency in the March quarter. So that was not there in the current quarter. So the margin has come down. I think going forward because also the book is really not growing. And when the book is not growing some of the non-accruals do impact the margin more than when the book is growing. So to that extent going forward for the current year also the margins would be around the current level on the overseas. But as we mentioned earlier, the overall proportion of loans in the overseas business will continue to decline. So to that extent the impact on the overall margin should have that offset as well.

[Vishal Goyal:]

Okay. And if I ask one lastquestion on this promoter entities which we have, any update on that one, anything?

[Rakesh Jha:]

So that's the transaction under process. Of course you know last year we had seen some reduction on this exposure which happened. Currently it's a transaction under progress and we have hopeful it should conclude soon.

[Vishal Goyal:]

Thank you. All the best.

[Rakesh Jha:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] The next question is from the line of Manish Karwa from Deutsche Bank. Please go ahead.

[Manish Karwa:]

Yeah, hi. My question is on the NCLT related accounts, while it is time bound, it seems that we may not see much of a resolution recovery happening in this financial year and a large part of the resolutions now probably happen only in FY 2019, would it be fair to assume that it will be in FY 2019 only? And second if these accounts were to go - some of these accounts were to go under liquidation, it seems that the recovery rates would be very low and you may need some more provisions overtime, just want your comments on that?

[N.S. Kannan:]

Yeah, so I think the process been - the process been start very shortly. So I think it will be FY 2018 as well as FY 2019. I don't think it will come, hopefully we draw blank in FY 2018 on the resolution. Especially I feel that in those cases where there is operating plant generating some EBITDA, I'm sure that there will be some coordinated attempt to ensure that they get the result to preserve the asset value and to maximize the recovery for the lenders. So we are quiet hopeful in those kind of accounts. To your question on a liquidation, yes of course when it goes to the liquidation what will be the ultimate loss given default, we don't know at this stage. But we do hope that wherever it possible to be resolved, the banking system will come together and resolve it before it goes into liquidation.

[Manish Karwa:]

Okay. And on NPLs, we didn't have much of an agri related issues of like some of the other banks have seen. Is that fair to assume that we didn't have or probably there is likely would that something may come up in next few quarters?

[Rakesh Jha:]

So we didn't really have, we had the no impact of the fact that last quarter there was a differentiation that RBI had given because of demonetization. So slightly more than INR 2 billion of loans which were in overdue more than 90 days. They were not classified as NPL as of March 31 under that the sensation. And this quarter a part of that would have slipped into the NPL bucket. So that's the reason why the overall editions is somewhat higher than the usual trend that we would have. On the rural portfolio, as of now, it is we've not really seen any increase in the NPL so much higher than the normal trend, but of course it's a portfolio that we are closely monitoring. We have seen some increase in the over dues to happen. But as I said overall we've not seen any increase in the NPLs and we will be closely monitoring it over the next couple of quarters.

[Manish Karwa:]

And lastly a small question, would there be any one off fee income as in MRD related fees which came in this quarter which some other banks have also seen?

[Rakesh Jha:]

No, no.

[Manish Karwa:]

Okay. Okay, thank you.

[Operator:]

Thank you. The next question from the line of Adarsh Parasrampuria from Nomura. Please go ahead. Adarsh, your line - it seems we lost this his line, so we'll move to our next question which is from the line of Nilanjan Karfa from Jefferies. Please go ahead.

[Nilanjan Karfa:]

Hi, Rakesh. Hi Kannan. When we talk of margin guidance, does that factor in any one-offs coming from part NPL accounts or interest reversal or is that some part of it?

[Rakesh Jha:]

It does factored in that there will be some NPA addition that will happen non-accrual result and we'll collect from some of your account. There is you know it does factor some of those things.

[Nilanjan Karfa:]

Right. But if I look at progression for example from where we are today to reaching three, is it a fair assumption that in some quarter, there will be fairly large slippages and margin will go down to like 280 or something?

[N.S. Kannan:]

No. I think the way of to look at it is that current quarter as I said there is about 10 basis point of interest for income tax refund which that can happen may not happen in a particular quarter can be a lower number. So typically it is kind of is very volatile. So that one should exclude. And then the key impact that we are still factoring is more because of the repricing of existing loans. The more and more loans are getting shifted from base rate to MCLR on the mortgage side plus on the higher rated corporates as well and the incremental lending spreads are also quiet tight. So that is the impact that we are kind of taking in. In terms of the NPAs and all of that what you're factoring in is that the additions in the current year will be significantly lower than last year. And some of the NPL interest collections we are factoring in that again there could be, it could happen in quarter and not in other. But overall the margin progression, it would not be a sudden drop that you see which kind of happens. I think the pressure is more because of the incremental lending spreads and the repricing of the existing loans.

[Nilanjan Karfa:]

Okay. Second question is on obviously the asset quality question. When do you believe that the outside watch list exposure will become zero? Is there a fair assumption from your side?

[Rakesh Jha:]

Outside the drilldown list, so you mean that we'll have no loans below investment grade in that.

[Nilanjan Karfa:]

No you might have been below investment guide rule but because you know what the status of those companies or exposures are and you think that those some of those will probably never slipped? Do you have - do you still want to quantify that part of because that's obviously that leaves an open question, every quarter we will keep on expecting something going out which is not part of watch list, so there is no end to it?

[Rakesh Jha:]

Yeah. Actually so - in this - as we have disclosed the drilldown list. Otherwise you're right, it is difficult to provide an estimate on that. So unless - either we could give an entire listing of loans otherwise difficult to give. So I think we have trying our best kind of communicate in terms of how you're seeing thinks. So one is - and again that overall NPL additions for the year will be significantly lower than last year. We will see additions coming in from outside the drilldown list and these are the two or three accounts which we've said a lumpy in outside these four or five sectors. And over the next couple of quarters that will still be there. But even with all of that incremental NPL additions, we expect to be significantly lower than last year.

[Nilanjan Karfa:]

Then can I reach other questions. What you able to quantify at least in terms of number of assets which are let's say for example INR 5000 crore plus for the system, which we have and which is below investing grade and is not part of drilldown?

[Rakesh Jha:]

Kannan also said these are the few accounts, so I would not exactly have in my head what is the exposure of the INR 50 billion in across banks. But overall where our exposure is lumpy and high, those are the few accounts which are there. They are not large in number of accounts but as you know on the corporate side like in this quarter essentially the non-drilldown list has been this number because of one account slipping that. That contributes to significant majority the overall slippage. So that is something which will be there for a couple of quarters.

[Nilanjan Karfa:]

I appreciate that. So it's a small questions, when will you be comfortable guiding on the credit cost? Will you be comfortable guiding it for FY 2019?

[Rakesh Jha:]

We have to be, if we shift to - as of now, the plan would be to shift over to INDAS from April 1, 2018. So I think we'll have to assess that to on how you could guide on that basis. But otherwise in terms of the overall clearly be NPL additions and all of that would be substantially lower in FY 2019. And so in terms of being able to provide a range for the credit cards, it's something that we could definitely do. I think giving up a precise number has its own challenges from both side. So I think we are looking at that.

[Nilanjan Karfa:]

Okay, okay. Appreciate the answers. Thank you so much, Rakesh.

[Rakesh Jha:]

Thank you.

[Operator:]

Thank you. The next question from the line of [indiscernible] fromPrincipal Mutual Fund. Please go ahead.

[Unidentified Analyst:]

Hi, good evening. My question in on cases being referred to NCLT, so could you share what could be the number of cases outside of these 12 initiated by RBI, that is either underway to being referred to NCLT or already been done? And a related question to that, is the 50% provisioning requirement applicable for these account as well?

[Rakesh Jha:]

As for the instruction with the RBI, advice that RBI had given, it is applicable on the 12 accounts which they had banks to take to NCLT. So we have - only spread the media report that you've read in on that. We have not separately disclosed. So there would be some cases that would have got, we would have taken to NCLT or maybe some of the banks have taken to NCLT and we have exposure. We have not disclosed that separately as of June 30.

[Unidentified Analyst:]

No, sir. I'm not referring to your exposure. What's I'm referring to is, could you share I mean what could be the number of accounts outside of these 12 that are being referred and has already been referred to NCLT, is can that be disclosed?

[Rakesh Jha:]

I can check on that but I don't have the number.

[Unidentified Analyst:]

Sure. Thank you.

[Operator:]

Thank you. The next questions from the line of Pankaj Agarwal from Ambit Capital. Please go ahead.

[Pankaj Agarwal:]

Yeah. Sir, the reason behind your opinion to not top rated corporate income comes of your new lending, is it because the use you getting on lower rated corporate is not in line with the risk in this corporate?

[Rakesh Jha:]

So, that the overall approach on the corporate side is linked to what we have talked about over the last couple of years that we want to one reduce concentration risk. So we are taking significantly relatively qualifies the exposure especially to the lower rated clients compare to what we had in the past. And secondly, overall portfolio we would want to within the corporate portfolio increase the exposure that we have to the higher rated clients. And that again is in part of our overall strategy. So that's the reason why we are incrementally growing in the higher rated corporate. So that is how we are looking at it currently.

[Pankaj Agarwal:]

And any reason behind fall in profitability and encourage in NPAs in home finance as well? In that home finance subsidiary?

[Rakesh Jha:]

There was some increase in NPA that we had with a couple of loan accounts slipping into NPAs, so that's reason. These were a couple of corporate builder loans which would have slipped and that's the reason for the quarter their profitability was low.

[Pankaj Agarwal:]

Okay. Thanks.

[Rakesh Jha:]

Thanks.

[Operator:]

Ladies and gentlemen, that was the last question. And I'll hand the conference over to the management for closing comments.

[Chanda Kochhar:]

Thank you. As we've stated initially that we see, we've been focused on our strategic priorities on the 4 by 4 agenda and we highlighted what we saw as improving trends for the quarter. And thank you for all your questions.

[Operator:]

Thank you. Ladies and gentlemen, on behalf of ICICI Bank that concludes this conference. Thank you for joining us. And you may now disconnect your lines.