ICICI Bank Ltd (ICICIBANK) Q2 FY22 Earnings Concall Transcript

ICICI Bank Ltd (NSE:ICICIBANK) Q2 FY22 Earnings Concall dated Oct. 23, 2021.

Corporate Participants:

Sandeep Bakhshi — Managing Director and Chief Executive Officer

Rakesh Jha — Chief Financial Officer

Vishakha Mulye — Executive Director

Anup Bagchi — Executive Director

Analysts:

Prakash Kapadia — Anived Portfolio Managers Pvt Ltd — Analyst

Mahrukh Adajania — Elara Capital — Analyst

Abhishek Murarka — HSBC Securites & Capital Markets (India) — Analyst

Nitin Aggarwal — Motilal Oswal Securities Ltd. — Analyst

Anand Dama — Emkay Global Financial Services Ltd — Analyst

Rahul Jain — Goldman Sachs — Analyst

Adarsh Parasrampuria — CLSA (India) Pvt. Ltd. — Analyst

Gaurav Kochar — Mirae Asset Investment. Managers (India) Pvt. Ltd. — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the ICICI Bank’s Q2 FY ’22 Earnings Conference Call. As a reminder, all participant lines will be in a 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 Mr. Sandeep Bakhshi, Managing Director and CEO of ICICI Bank. Thank you, and over to you, sir.

Sandeep Bakhshi — Managing Director and Chief Executive Officer

Good evening to all of you, and welcome to the ICICI Bank earnings call to discuss the results for Q2 of financial year 2022. Joining us today on this call are Vishakha, Anup, Sandeep Batra, Rakesh and Anindya. We hope that you are safe and in good health.

India has witnessed a steady decline in COVID-19 cases and a massive pickup in the vaccination program since June. India has now crossed the milestone of administering 100 crore vaccination doses. We would like to extend our gratitude to the efforts and dedication of all the health workers and essential service providers for their untiring effort in the recovery from the pandemic. I would also like to take a moment to thank our employees for their service to customers in these challenging times. We are happy to share that now almost all our employees have received at least one dose of the vaccine.

Economic activity has continued to improve since June. The Ultra Frequency Index comprising several high-frequency indicators tracked by the Banks Economic Research Group has steadily increased from 99.6 in the first week of July ’21 to 105.5 in September 2021 and reached 110.3 in the week ending October 17th. The underlying economic activity continues to show an upward momentum owing to the higher peak power demand, e-way bill generation and rail freight revenues, improved vehicle registrations on the back of the festive season and rising labor force participation rate in the urban areas. Overall industrial activity is above pre COVID 19 levels. The progress in the vaccination program is supporting an improvement in mobility indicators. We expect the festive season to give further impetus to economic activity.

During the challenging period of the last 18 months, we at ICICI Bank have continued to strengthen our franchise and delivery and servicing capabilities with a range of digital initiatives. Our loan portfolio has performed well in the face of challenges posed by the two waves of the pandemic, behaving either in line with or better than our expectations. We aim to create holistic value propositions for our customers through our 360 degree customer-centric approach and focus on opportunities across client and segment ecosystems. Cross-functional teams have been created to tap into key customer market segments, enabling 360 degree coverage of customers and increase in wallet share. We will continue to steadily grow our business and franchise within our strategic framework.

Coming to the quarterly performance against this framework. Growth — Number 1, growth in the core operating profit in a risk calibrated manner through the focused pursuit of target market segments. The core operating profit increased by 23.3% year-on-year and 10.6% sequentially to INR95.18 billion in this quarter. The profit after tax grew by 29.6% year-on-year and 19.4% sequentially, to INR55.11 billion in this quarter.

Further strengthening our strong deposit franchise. Growth in deposits continued to be strong at 17.3% year-on-year at September 30, 2021. During the quarter, average current account deposits increased by 35.7% year-on-year, and average savings account deposits by 24.9% year-on-year. The liquidity coverage ratio for the quarter was 133%, reflecting continued surplus liquidity. Our cost of deposits continues to be amongst the lowest in the system.

Growing our loan portfolio in a granular manner with the focus on risk and reward. The retail portfolio grew by 20% year-on-year and 5% sequentially at September 30, 2021. With the increase in economic activity, disbursements across all retail products increased sequentially in this quarter. Mortgage disbursements were close to the levels seen in Q4 of 2021, reflecting the increase in demand coupled with a seamless customer on-boarding experience through pre-approved dockers and digitization.

Disbursements of personal loans and auto loans were also close to Q4 of 2021 levels. Credit cards in force increased by 6% sequentially and the value of credit card spends grew by 47% sequentially. Spends across most categories other than travel crossed March 2021 levels in September. We expect the momentum in spends to continue in the festive season. The business banking and SME portfolios grew by 43.1% year-on-year and 42% year-on-year respectively. Sequentially, the business banking portfolio grew by 12.3% and the SME portfolio grew by 11.3%.

We are observing a steady uptick in the number of credit inquiries, and with our digital offerings and platforms like InstaBIZ, Merchant Stack and Trade Online, we believe that there is significant potential for growth across these portfolios. Excluding the builder portfolio, the growth in the domestic corporate portfolio was about 14% year-on-year at September 30, 2021. Overall, the domestic loan portfolio grew by 19% year-on-year and 4% sequentially.

Leveraging digital across our business. Our digital platforms are continuously evolving to enable best-in-class end-to-end seamless digital journey, offer personalized solutions and value-added features to customers, and enabled more effective data-driven cross-sell and upsell. These platforms also enable us to acquire new customers. We have shared some details in Slides 18 to 30 of the investor presentation. We have seen significant increase in adoption of our mobile banking app, iMobile Pay. We have had about 1.5 million activations from non-ICICI Bank account holders in the current quarter, taking the total activations to 4 million as of end September.

The transactions by non-ICICI Bank account holders in terms of value and volume respectively, were three times and 13 times higher in September 2021 compared to June 2021. We are seeing a rapid rise in payment transactions through repeat use of features such as Pay to Contact and Scan to Pay. We continue to expand the suite of services offered through iMobile Pay to achieve high engagement levels with the users. Recently, we launched a facility which enables the saving account holders to manage use of credit cards of any bank through iMobile Pay. We also launched a contactless payment facility on iMobile Pay which enables users of Android-based smartphones to make credit and debit card payments on POS terminals in a safe and secure manner by tapping their phones.

The financial transactions on a digital platform for businesses, InstaBIZ and our supply chain platforms have grown steadily in the past few quarters. The value of financial transactions on InstaBIZ grew by about 80% year-on-year in Q2 of 2022. We have on-boarded about 200 corporate customers on our supply chain platforms. About 70% of the dealers of these — dealers of these customers are active on our supply chain platforms. The value of transactions through these platforms increased 4.7 times year-on-year in Q2 of 2022.

The proportion of end-to-end digital sanctions and disbursements across various products has been increasing steadily. About 32% of our mortgage sanctions and 40% of our personal loan disbursements by volume were end-to-end digital in H1 of 2022. About 95% of the overdraft facility setup of business banking current account customers were end-to-end digital in H1 of 2022. 40% of asset and liability accounts opened during the quarter were through digital channels.

An important element of our strategy to grow our risk calibrated core operating profit is to serve the complete financial requirements of customers and their ecosystems. The ICICI stack for Corporates is being continuously enhanced. We have created 19 industry-specific stacks, which provide bespoke and purpose-based digital solutions to Corporate clients and their ecosystems. The volume of transactions through these solutions grew 2.4 times year-on-year in Q2 of 2022. This — these solutions along with the depth of our coverage have supported the strong growth in our average current account deposits. Further, the Bank is well position to capture the — the opportunities arising from the growing FDI and capital market flows. We are focusing holistically on the merchant ecosystem both directly and through partnerships.

Our super merchant current account, which offers various benefits such as digital account opening and instant overdraft facilities, based on point of sale transactions has been receiving a good response from customers. We have partnered with Amazon India to offer instant overdraft to sellers including non-ICICI Bank customers on its portal. We have also launched an instant overdraft facility for MSMEs registered on the GEM Sahay application through API integration with the OCEN network.

Protecting the balance sheet from potential risks. Net NPAs declined by 12.3% sequentially to INR81.61 billion at September 30, 2021 from INR93.06 billion at June 30, 2021. The net NPA ratio declined to 0.99% at September 30, 2021 from 1.16% at June 30, 2021. The net additions to gross NPAs during the quarter were INR0.96 billion. The total provisions during the quarter were INR27.14 billion or 28.5% of core operating profit and 1.44% of average advances.

The provision coverage ratio on NPAs was 80.1% at September 30, 2021. The total fund-based outstanding to all standard borrowers under resolution as per various guidelines was INR96.84 billion or about 1.3% of the total loan portfolio at September 30, 2021. The Bank holds provisions of INR19.50 billion against these borrowers, which is higher than the requirement as per RBI guidelines. In addition, the Bank continues to hold COVID-19 provisions of INR64.25 billion or about 0.8% of total loans as of September 30, 2021.

Maintaining a strong capital base. The capital position of the Bank continued to be strong with a CET1 ratio of 17.33% at September 30, 2021, including profits for H1 of 2022. Further, the market value of Banks investments in listed entities of the Group is about INR1 trillion.

Looking ahead, we see many opportunities to grow our core operating profit in a risk-calibrated manner. Using ICICI STACK, we will create digital journeys and offer personalized and customized solutions to the customers to suit their life stage and business needs. We’ll continue to build flexibility and agility in the Bank to tap into opportunities across ecosystems. We believe that our ongoing investments in technology, people and distribution network, our prudent risk management practices and our strong balance sheet will enable us to drive growth in our core operating profit in a risk-calibrated manner. We continue to be guided by our philosophy of Fair to Customer Fair to Bank, emphasizing the need to deliver fair value to customers, while creating value for shareholders. We continue to focus on delivering consistent and predictable returns to our shareholders.

I now hand the call over to Rakesh.

Rakesh Jha — Chief Financial Officer

Thank you, Sandeep. I will talk about the balance sheet growth, credit quality, P&L details, capital adequacy, portfolio trends and performance of the subsidiaries.

Starting with the balance sheet growth. The overall loan portfolio grew by 17.2% year-on-year and 3.6% sequentially at September 30th. The domestic loan portfolio grew by 19% year-on-year and 4% sequentially at September 30th. The retail portfolio grew by 20% year-on-year and 5% sequentially. Within the retail portfolio, the mortgage loan portfolio grew by 25% year-on-year and rural loans and auto loans by 16.1% each. The commercial vehicle and equipment portfolio declined by 5% year-on-year. Growth in the personal loan and credit card portfolio was 20.7% year-on-year. This portfolio was IND724.16 billion or about 9.5% of the overall loan book at September 30th.

The business banking portfolio grew by 43.1% year-on-year and 12.3% sequentially. The SME business comprising borrowers with a turnover of less than IND2.5 billion grew by 42% year-on-year and increased by 11.3% sequentially. The growth of the domestic corporate portfolio was 11.5% year-on-year. Excluding the builder portfolio, the growth was about 14% year-on-year. This was driven by disbursements to higher rated corporates and PSUs across various sectors to meet their working capital and capital expenditure requirements. We are focusing on providing the full suite of banking products to Corporate clients and their ecosystems.

The overseas loan portfolio declined by 8.6% year-on-year and 3.5% sequentially at September 30th. The overseas loan portfolio was 5.1% of the overall loan book at September 30th. The non-India linked Corporate portfolio reduced by 56.9% or about $1.1 billion year-on-year and 15.9% or about $154 million sequentially at September 30th. We have provided the breakup of our overseas Corporate portfolio on Slide 16 of the presentation.

Coming to the funding side, average savings account deposits increased by 24.9% year-on-year and 4.3% sequentially. Daily average current account deposits increased by 35.7% year-on-year and 4.6% sequentially. Total term deposits grew by 12.5% year-on-year to INR5.3 trillion at September 30th.

Coming to credit quality. Net NPAs declined by about 12.3% sequentially to INR81.61 billion at September 30th, from INR93.06 billion at June 30th. The net NPA ratio decreased to 0.99% at September 30th, from 1.16% at June 30th. The net addition to gross NPAs was INR0.96 billion in the current quarter compared to INR36.04 billion in the previous quarter. There were net dilutions of INR5.54 billion from gross NPAs in the retail and business banking portfolios and net additions of about INR6.5 billion to gross NPAs in the Corporate and SME portfolios. The gross NPA additions declined to INR55.78 billion in the current quarter from INR72.31 billion in the previous quarter.

The gross NPA additions from the retail and business banking portfolio were INR46.24 billion and from the Corporate and SME portfolio were INR9.54 billion. The gross NPA additions from the Corporate and SME portfolio was almost entirely from borrowers rated BB and below as of June 30th and evolvement of non-fund based outstanding to NPAs. The recoveries and upgrades from NPAs excluding write-offs and sales increased to INR54.82 billion this quarter from INR36.27 billion in the previous quarter. There were recoveries and upgrades of INR51.78 billion from the retail and business banking portfolio and INR3.04 billion from the Corporate and SME portfolio.

The recoveries and upgrades in the current quarter include upgrades of INR11.67 billion where resolution was implemented as per the RBIs framework. The gross NPAs written-off during the quarter were INR17.17 billion. The Bank sold gross NPAs amounting to INR0.9 billion in Q2 on a cash basis. The non-fund based outstanding to borrowers classified as nonperforming was INR37.14 billion at September 30th, compared to about INR41 billion at June 30th. The Bank holds provisions amounting to INR17.71 billion at September 30th on this non-fund based outstanding.

The outstanding to all borrowers where resolution was implemented as per COVID-19 framework 2.0 was INR41.58 billion. The outstanding to borrowers where resolution was implemented as per COVID-19 framework 1.0 and later modified as per framework 2.0 was INR1.18 billion. The total fund-based outstanding to all standard borrowers under resolution as per various guidelines was INR96.84 billion or about 1.3% of the loan portfolio at September 30th, compared to INR48.64 billion at 30th June. Of the total fund-based outstanding under resolution at September 30th, INR69.92 billion was from the retail and business banking portfolio and INR26.92 billion was from the Corporate and SME portfolio.

The Bank holds provisions of about INR19.5 billion against these borrowers, which is higher than the requirement as per RBI guidelines. Over 95% of the loans under resolution in the retail and business banking portfolio are secured loans. Till the last quarter, we disclosed the rating-wise breakup of the total loan book, where in the retail loan portfolios were grouped under various categories at the product level. Based on feedback received, from this quarter, we have disclosed the rating-wise details of the non-retail portfolio comprising domestic, Corporate, SME, business banking and overseas advances in order to provide a more transparent presentation of the rated portfolio. The details are given on Slide 38 of the presentation.

The proportion of overdues across most products in the performing retail, SME and business banking portfolios as of 30th September has reduced compared to 30th June and has reached the March 2021 level. Less than 1% of the performing corporate portfolio is overdue as of September 30th.

Coming to the P&L details now. Net interest income increased by 24.8% year-on-year to INR116.9 billion. Interest on income tax refund was INR0.3 billion this quarter compared to INR0.14 billion in the previous quarter and INR0.26 billion in Q2 of last year. The net interest margin was at 4% in this quarter compared to 3.89% in the previous quarter and 3.57% in Q2 of last year. The domestic NIM was 4.09% this quarter compared to 3.99% in Q1 and 3.72% in Q2 last year. International margins were at 0.26%. The cost of deposits was 3.53% in Q2 compared to 3.65% in Q1. The sequential increase in NIM in this quarter was primarily due to decline in cost of funds and lower interest reversal on NPAs.

Non-interest income, excluding treasury income grew by 26.2% year-on-year to INR44 billion in Q2. The fee income increased by 21.4% year-on-year to INR38.11 billion in Q2. Fees from retail, business banking and SME customers grew by 24.6% year-on-year and now constitutes about 77.9% of the total fees during the quarter.

Dividend income from subsidiaries and listed entities was INR5.83 billion in this quarter compared to INR3.34 billion in Q2 of last year. The dividend income this quarter includes final dividend of ICICI General and higher final dividend from ICICI Securities compared to Q2 last year.

The Bank’s operating expenses increased by 28% year-on-year in Q2 reflecting the lower base of Q2 last year. The employee expenses increased by 21.2% year-on-year. The Bank had slightly over 100,000 employees at September 30th. The employee count has increased by about 8,000 in the last 12 months. Employee expenses in Q2 include an impact of about IND1.25 billion due to fair valuation of ESOPs granted to all employees post April 1, 2021 for the current and previous quarter as required by the RBI guidelines.

Nonemployee expenses increased by 32.3% year-on-year in this quarter, primarily due to retail business and technology-related expenses. We will continue to invest in technology, people, distribution and building our brand. The core operating profit as a result of the above, increased by 23.3% year-on-year and 10.6% sequentially to IND95.18 billion in this quarter. The treasury gain was INR3.97 billion in Q2 compared to INR2.9 billion in Q1 and INR5.42 billion in Q2 of the previous year.

The total provisions during the quarter were INR27.14 billion or 28.5% of core operating profit and 1.44% of average advances. There was no write-back of COVID-19-related provisions during the quarter. The provisioning coverage on NPAs continues to be robust at 80.1% at September 30th. In addition, we hold INR19.5 billion of provisions on borrowers under resolution and COVID-19-related provisions of INR64.25 billion. The COVID-19 provisions are about 0.8% of loans. At September 30th, the total provisions other than specific provisions on NPAs was INR149.51 billion or about 2% of loans. Given the performance of the portfolio, we are confident that these provisions will completely cushion the balance sheet from the potential credit losses which may arise due to the pandemic.

The profit before tax grew by 36.7% year-on-year to INR72.01 billion in this quarter compared to INR52.66 billion in Q2 of last year. The tax expense was INR16.9 billion in this quarter compared to INR10.15 billion in the corresponding quarter last year. The profit after tax grew by 29.6% year-on-year to INR55.11 billion in this quarter compared to INR42.51 billion in Q2 of last year.

In accordance with the scheme of arrangement between ICICI General and Bharti AXA General Insurance, assets and liabilities of Bharti AXA General Insurance business vested with ICICI General on the appointed date of April 1, 2020. The Bank’s consolidated financial statements for Q1 of this year have been restated to reflect the scheme. And there was no material impact on the consolidated profit after tax for Q1 due to this. The consolidated profit after tax was INR60.92 billion this quarter, compared to INR48.82 billion in Q2 of last year. On capital, the CET1 ratio including profits for H1 was 17.33% compared to 17.01% at 30th June. The Tier 1 ratio was 18.53% and total capital adequacy ratio was 19.52% at September 30th.

Coming to some portfolio detail. We have been growing our loan portfolio in a granular manner with a focus on risk and reward. Our retail portfolio has been built based on proprietary data and analytics in addition to bureau checks, utilizing the existing customer database or sourcing in key retail asset products through cross-sell and upsell and pricing in relation to the risk.

In the business banking and SME business, our focus is on parameterize and program-based lending, granularity, collateral and robust monitoring. Credit submissions in the overdraft accounts of business banking and SME customers have continued to grow consistently in this quarter, and reached March 2021 levels in the September. We have given, further information on our retail and business banking portfolios in Slides 37 to 47 of the presentation.

The loan and non-fund based outstanding to performing Corporate and SME borrowers rated BB and below was INR127.14 billion at 30th September compared to INR139.75 billion at 30th June and INR119.29 billion at 30th September 2020. The details are given on Slide 39 and 40 of the investor presentation.

Similar to the last quarter, other than three accounts, which are, one each in construction, power and telecom sectors, the maximum single borrower outstanding in the BB and below portfolio was the less than INR6 billion at 30th September. At 30th September, we held provisions of about INR9.6 billion on the BB and below portfolio compared to about INR9.76 billion of provision at 30th June. The builder portfolio including construction finance, lease rental discounting, term loans and working capital loans was INR228.14 billion at September 30th or about 3% of our total loan portfolio. Our portfolio is granular in nature with the larger exposures being to well-established builders. About 13% of our builder portfolio at 30th September, was either rated BB and below internally or was classified as nonperforming.

Coming to the subsidiaries and key associates. The details of the financial performance of subsidiaries and key associates are covered in Slides 51, 52 and 71 to 76 in the presentation. The new business premium of ICICI Life grew by 45% year-on-year to INR64.61 billion in H1. The VNB margin increased from 25.1% in FY 2021 to 27.3% in H1. The profit after tax of ICICI Life was INR2.59 billion in H1, compared to INR5.91 billion in H1 of last year. ICICI Life had a net loss of INR1.86 billion in Q1, primarily on account of COVID-19 claims and provisions made for incurred, but not reported claims. The profit after tax increased by 46.6% year-on-year to INR4.45 billion this quarter.

The gross direct premium income of ICICI General was INR86.13 billion in H1 this year, compared to INR64.91 billion in H1 last year. The combined ratio was 114.3% in H1, compared to 99.8% in H1 last year. The profit after tax was INR4.46 billion this quarter compared to INR4.16 billion in Q2 last year. The prior period numbers are not comparable due to the reflection of the scheme of arrangement in the current period numbers.

The profit after tax of ICICI Asset Management Company was INR3.83 billion in this quarter compared to INR2.82 billion in Q2 of last year, reflecting the growth in AUM. The profit after tax of ICICI Securities on a consolidated basis increased by 26.3% year-on-year to INR3.51 billion this quarter from INR2.78 billion in Q2 last year.

ICICI Bank Canada had a profit after tax of CAD8.4 million in this quarter compared to CAD5.1 million in Q2 last year and CAD5 million in the previous quarter. The sequential increase in profit after tax of ICICI Bank Canada is mainly due to lower loan loss provisions. The loan book of ICICI Bank Canada at September 30th declined by 8.8% year-on-year.

ICICI Bank UK had a profit after tax of $2 million this quarter compared to $4.9 million in Q2 of last year and $2.9 million in Q1. The loan book of ICICI Bank UK at September 30th declined by 28.9% year-on-year and 8.8% sequentially. During the quarter, ICICI Bank UK repatriated capital of $200 million to the parent Bank.

As per IndAS, ICICI Home Finance had a profit after tax of INR0.46 billion in the current quarter compared to INR0.02 billion in Q2 of last year and INR0.17 billion in the previous quarter. The sequential increase in profit of after tax is mainly due to lower provisions.

With this, we conclude our opening remarks and we will now be happy to take your questions.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. (Operator Instructions). The first question is from the line of Mahrukh Adajania from Elara Capital. Please go ahead.

Mahrukh Adajania — Elara Capital — Analyst

Yes, hi. Congratulations. My first question is on provisioning policy, so was there any tightening of provisioning policy this quarter too?

Rakesh Jha — Chief Financial Officer

No, there is no change in provisioning policy that we have done during this quarter.

Mahrukh Adajania — Elara Capital — Analyst

Okay. And just in terms of restructuring, what would be the turnover of moratorium? How much moratorium on an average on retail loan?

Rakesh Jha — Chief Financial Officer

It would vary across the products, but maybe typically you can say about a year or so.

Mahrukh Adajania — Elara Capital — Analyst

Got it. And just within restructuring, you said that 95% is secured assets, but if you follow the loan composition, right, there will be a higher proportion of mortgages, would that be fair or?

Rakesh Jha — Chief Financial Officer

So the restructuring, it is Mahrukh, spread across the portfolio. So indeed, there will be, you know the mortgage portfolio. Commercial vehicles as you know, that will be there, some amount of car loans, smaller amount of business banking, so it’s spread across. There is nothing specific to highlight on that.

Mahrukh Adajania — Elara Capital — Analyst

Got it. Got it. And my last question is on loan growth, so of course you achieved very good loan growth and from third quarter these are very high, the Bank will hit a very high base as well. But given the loan demand that you see and given the under-penetration in your own liability accounts, would a 6% to 7% sequential growth be possible over the next few quarters?

Rakesh Jha — Chief Financial Officer

Mahrukh, as we have said, our focus is on growing the risk calibrated core operating profit. I think the loan growth is one of the drivers which is there, and depending on the overall demand which is there, the risk that we perceive, the pricing which is there, we will look at the growth numbers. So clearly there is momentum that is there, and you are seeing that in the sequential growth, if you look at the business banking, SME, retail, a lot of initiatives taken also in terms of, on the digital side, on easing the customer on-boarding process, the underwriting process, all of that is helping in this.

On the corporate side again, we get to look at all the deals which are there in the market. But you know the market is pricing loans in a certain way, given the surplus liquidity, so our focus there for example, is a lot more on the entire corporate ecosystem and looking at the core operating profit that we can generate and not just the loan growth. So we would not want to comment on any specific sequential growth numbers. Based on the opportunities which are there, for us to increase our operating profit, we will grow.

Mahrukh Adajania — Elara Capital — Analyst

Sure. And any comment on corporate CapEx visibility?

Rakesh Jha — Chief Financial Officer

I will ask Vishakha to just.

Vishakha Mulye — Executive Director

Yes. So not really Mahrukh. I will look at the CapEx and two, of course the private corporates and the PSUs and the government. So on the private corporate side, certain segment yes, but not really on — in a big way. People are spending money on the capital expenditure more to balance the capacities and so on and so forth. But we see a good traction on the PSU and the government side.

Mahrukh Adajania — Elara Capital — Analyst

Got it. Thanks a lot.

Operator

Thank you. The next question is from the line of Prakash Kapadia from Anived Portfolio Managers. Please go ahead.

Prakash Kapadia — Anived Portfolio Managers Pvt Ltd — Analyst

Yes. Congrats on a good set of numbers. I had two questions. Over the last few years (technical difficulty).

Operator

Mr. Kapadia, sorry to interrupt, but your voice is breaking up. May we request you to move to a better reception area please.

Prakash Kapadia — Anived Portfolio Managers Pvt Ltd — Analyst

Yes. Is it better now?

Operator

Yes sir.

Prakash Kapadia — Anived Portfolio Managers Pvt Ltd — Analyst

Yes. I was asking you, over the last few years, we’ve been focusing on cross-selling to our existing customers, getting feedback on every transaction on the Internet, so if you could give us some sense, where are we in the cross-sell journey as on date? And something on assets and liabilities, where is more headroom for growth?

And secondly on mortgages, it’s been doing pretty well as a sector. So what are the trends we are seeing? Is it restricted to top 10 Cities, is it across India and do we expect the momentum to continue?

Rakesh Jha — Chief Financial Officer

Anup, you want to take that?

Anup Bagchi — Executive Director

So I think it’s a very interesting question, Prakash. So the way we look at it and way we do things is that, if you look at the sheer number of customers on the asset side will always be lower, because mortgage the ticket sizes are very large, auto the ticket sizes are very large, etc. However, there is another set of customers who are coming on to us, who are not deposit customers, but who are also not asset customers, they are essentially payment and service customers. In this, FASTag is one, iMobile Pay is another big source. Our Credit Card Pay is another big source.

So now what is happening is that there is a steady inflow of customers we are getting who are non-asset and non-liability customer. They are essentially coming for services. So that then becomes a big source of liabilities for us. So you can cross-sell liability accounts to them and then of course customers who are not our customers who have taken assets, we then cross-sell liability to them. But I must say that the reverse is a lesser number, that is asset to liabilities.

Services to liabilities is a very large number. Services to asset is a smaller number. Liabilities to asset is a very large number. Asset to liability is a relatively smaller number ticket sizes. But all of them, as you would appreciate, is interlinked. Because, if one is not there and then if you don’t do 360 degree of each of the customers who come in through the door, then it’s a opportunity that we would not have captured fully. So that’s how we think about cross-sell.

Prakash Kapadia — Anived Portfolio Managers Pvt Ltd — Analyst

And some of these — Anup you mentioned about being more on service oriented or transaction oriented. So what is the journey for them to cross-sell? Get them into the Bank, then get to other products in terms of cross-sell, start with smaller product?

Anup Bagchi — Executive Director

So for example, let me take an example of FASTag for example. FASTag as you know, we have a dominant market share there, but all customers of FASTag are not ICC Bank deposit customers. Many of them are, but many of them are also not ICICI Bank deposit customers, it’s to — it is easier to sell deposit — deposit accounts to them, and once they become deposit account holders, and we have more digital footprint, then we do PF route to them and then we sell asset products. So I’m just giving you another dimension, so generally typically traditionally Banks think of fully asset to liabilities, liability to asset, I’m just adding a dimension of services also, because that flow is a much larger flow than just liabilities or just assets.

Prakash Kapadia — Anived Portfolio Managers Pvt Ltd — Analyst

Understood. This is helpful. Thanks. And on the mortgage fees, you could give us some color?

Rakesh Jha — Chief Financial Officer

On mortgage fees, what would you want to do? Mortgage, I think there is enough demand, I think it is coming back quite strongly. The other thing that is active on the corporate real estate developer side is that after RERA and whatever has happened volatility in the last few years, I think it is strengthening and it is consolidation — consolidating quite well. And if you look at market shares on large developers, they have been increasing and that has been our view now since last one year or so and it is consolidating well and we are also consolidating our position there, I think its a right time to really focus on that ecosystem.

And as you know, that ecosystem which is a physical asset, real estate asset class is a very, very large asset class. It’s the asset class which will perhaps be larger than the full financial asset class. So there is a lot of opportunity and lot of scope there as well. So there, we have our 360 strategy firmly in place. And there is demand and of course there is competitive pricing there, as you know, because it’s a low loss given default product, and so there is a lot of credit flow in that. But there the decongested processes and our ability to cross-sell to our old customers, and our ability to do 360 gives us an advantage over many other (inaudible).

Prakash Kapadia — Anived Portfolio Managers Pvt Ltd — Analyst

Understood. Thank you. All the best.

Operator

Thank you. The next question is from the line of Abhishek Murarka from HSBC. Please go ahead.

Abhishek Murarka — HSBC Securites & Capital Markets (India) — Analyst

Yes. Hello, good evening, and congratulations for the quarter. So couple of questions. Just going back to slippages in retail, that’s still about 4% – 4.5% on an annualized basis. So just want to know where particularly is it coming from? Of course all sectors are not recovering at the same rate. So is it the contribution from commercial vehicles is higher, or where particularly it’s coming from?

Rakesh Jha — Chief Financial Officer

Yes. Abhishek, I think like we have said earlier also, on the retail business, I think one has to look at the — the net additions also, because a lot of the gross additions that you see, they get recovered or upgraded in the same quarter also. So, of course this quarter the recoveries and upgrades are much higher than usual, partly reflecting the fact that Q1 we had very high additions. But to say on an overall basis, the numbers that we have seen in the current quarter on retail, rural, business banking, SME, they have pretty much been in line with our expectation.

And across portfolios if you look at it, I think we have pointed out in the past that commercial vehicles is one segment where the stress has been there even prior to the COVID period and over the last 18 months that has kind of continued. Otherwise I think across portfolios, if you look at the additions and deletions, it has been a reasonably stable trend. And the good thing is that the overdues on the portfolio also which I mentioned earlier, they have now come back to the March ’21 level. In June they had got again elevated because of the second wave. So the overdues have also come down across in retail and the business banking portfolio.

Abhishek Murarka — HSBC Securites & Capital Markets (India) — Analyst

Sure. And just continuing that, so I know you said on restructured that it’s again sort of proportionate to the loan book, but last quarter for instance, you had highlighted that housing, LAP, gold, those sectors had seen relatively higher restructuring. Would we — would it be fair to say that it’s the same kind of concentration this quarter in your restructured also?

Rakesh Jha — Chief Financial Officer

So last quarter actually, the gold loans was — or the loan against gold, really that was — we had seen higher amount of NPA additions in Q1, because of the challenges on the collection side and this quarter actually we have seen a fair bit of recoveries coming in from that portfolio. Again on the restructuring, if you look at it, where we have implemented the COVID 2.0, the aggregate number itself is — is only INR40 billion. So that is spread across, there is some in-home loans, within that, yes LAP will be there, commercial vehicle, auto and a little bit in SME and business banking. So nothing really concentrated there Abhishek to kind of point out.

Abhishek Murarka — HSBC Securites & Capital Markets (India) — Analyst

Okay. And just from looking forward perspective, this overall slippage rate of 3% – 3.5%, how long before it, let’s say, hits a 2% kind of run rate? Are you seeing that kind of recovery in the economy, where you can think that maybe two quarters down the line or three quarters down the line, you would be trending towards a normalized slippage rate?

Rakesh Jha — Chief Financial Officer

So, again if we, for a moment keep aside the pandemic and third wave and all of that, I think we are heading in a direction where it should get to a normalized level. I think the indicator for that is always, if you look at the overdue book, if it is higher than normal, you would expect slippages to be also higher. And I think, the overdues have come down to us — for us and down to you know the March ’21 levels, which was pretty close to a normal level as well. So I think, we should start seeing that. Again, I would request you to look at on the retail side, there is a fair bit of addition, deletions and all that happen, so from that perspective, I think we should get to a normal level pretty soon.

Abhishek Murarka — HSBC Securites & Capital Markets (India) — Analyst

Sure. And just second question on NIM, just anything in terms of what should be the read through going forward? Because your composition of relatively higher yielding products would continue to increase, looking at the growth rates. So do you see further uptake from 4% – 4.1% levels?

Rakesh Jha — Chief Financial Officer

I think, last quarter I said that we would try and protect our NIM at the level at which it was in Q1, which had seen a sequential increase. This quarter definitely the fact that the net NPL additions are pretty much negligible, has helped because, interest reversal all of that is not there, plus, because of the NPL deletions, you kind of collect interest which was not booked earlier. So that has helped in the current quarter. So I think, if you look at more the H1 NIM, which was at about 3.94%, I think our endeavor will be to protect the margin at those levels. I think the moving parts are definitely the competitive intensity, which is there across all the segments of lending.

As you would have seen, we have really not been price leaders across any of the products or segments. But yes we would kind of bring down our prices if required, based on what we are seeing in the market. The cost of deposits has really been something which has helped us in improving our margins. Even in this quarter, we saw a 12 basis point decline in the cost of deposits, driven by the 35% growth in daily average current account deposits, 25% growth in savings account balances. So these are the variables which are there.

Overall, of course, the interest rates will inch up as RBI kind of normalizes the liquidity in the system. So how the Repo rate moves and the funding cost moves and all of those will be variables which will come into play, maybe towards the end of the year or in the first half of second year. We will be focused on pricing our loans appropriately to get the required returns.

Abhishek Murarka — HSBC Securites & Capital Markets (India) — Analyst

Sure, sure. Thanks so much, Rakesh for the explanations. And all the best to the team. Thank you.

Rakesh Jha — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Nitin Aggarwal from Motilal Oswal Securities. Please go ahead.

Nitin Aggarwal — Motilal Oswal Securities Ltd. — Analyst

Yes, hi. Good evening, and congratulations on good results. So firstly like while our mortgage growth has been quite strong, but just to understand if you are seeing any impact on growth in the metro and the Tier-1 cities as other banks are now competing less heavily on rates?

Rakesh Jha — Chief Financial Officer

Okay. So on rates, as I said, where we believe that from an overall perspective and we look at and we have talked about the fact that we look at Customer 360. So we don’t look at just a single product. In most of the instances now when we give out the home loan, we also have the customer opening their savings deposit with us and this is true across all the products, so the Customer 360 is a very key thing for us.

And similarly, looking at the entire ecosystem, be it a corporate ecosystem or any other ecosystem that we focus on. So we look at it on an aggregate basis and the contribution to operating profit, again on an aggregate basis. So you would have — you have seen the volumes that we have been able to do on the mortgages in this quarter, the Y-o-Y growth, the sequential growth, both reflect that.

So there are opportunities for growth, which is there. We will of course not go completely bottom fishing in terms of the rates which are there. But yes, the headline rates for us also, we have brought down with some of the competition bringing it down. But overall, with the cost of funding being where it is and the fact that mortgage customers are sticky customers, give us the opportunity to service them across a wide range of products and services over a long period of time. With that, we are comfortable with the — the profitability levels and would continue to look at growth in this segment.

Nitin Aggarwal — Motilal Oswal Securities Ltd. — Analyst

Secondly on the — Rakesh, on the card side, like we have been reporting a very strong market share gains and card spending has come back, but how in general has the asset quality been trending? How is the customer behavior in that space? And if you have to benchmark yourself on profitability in the segment, because this is like one of the high yielding segments and we are doing very well here, so if you have to benchmark ICICI Bank in the industry, where will we be in this space, on a scale of say 1 to 10, anything that you can indicate, any qualitative flavor?

Rakesh Jha — Chief Financial Officer

So credit cards is again an important product, like mortgage is a long-term product, credit card is a product which is used frequently by the customers. So you kind of end up getting an opportunity to service a customer on an ongoing basis. So it’s a clear focus area for us and Anup has talked about it in the past as well. The tie up that we have with Amazon has really worked well for us. In terms of growth, again, you have seen the growth that we have seen in the cards in-force book or the credit card spends and the market shares have also improved for us.

In terms of profitability, again, it’s not that we have the numbers of all the players in the market, so difficult to comment in terms of on a comparative basis. But credit card is — is always a portfolio where the returns has been pretty good and if you look at the experience in the last 18 months through the COVID period, you know the numbers in terms of NPA additions or credit losses, given the pandemic have actually been — clearly been better than what we would have expected.

So those are the trends which are there. Anup you want to add something?

Anup Bagchi — Executive Director

No, I think.

Nitin Aggarwal — Motilal Oswal Securities Ltd. — Analyst

Sure. And lastly, like if you can also comment on the performance of ECLGS portfolio, how has been the collection efficiency trends in this portfolio and for loans which are out of moratorium?

Rakesh Jha — Chief Financial Officer

So I would say something similar to what we said in the last quarter’s call. So overall, our focus on — while implementing the scheme was to restrict ourselves to customers who we thought, where the business models are not broken and we would have the ability to recover on these loans. So overall, that means that it’s not a portfolio where we are overly worried, but indeed some of the customers under ECLGS would have been customers who would have had stress. Relatively, it would be higher than on the rest of the portfolio. So there could be NPL additions, which could be somewhat higher than the rest of the portfolio. But we don’t think that it is going to be anything which is material. We have about close to INR140 billion of loans under the ECLGS 1 scheme, about INR20 billion on the ECLGS 2 scheme. And we are quite comfortable with what we are seeing in terms of the trend there.

Nitin Aggarwal — Motilal Oswal Securities Ltd. — Analyst

Sure. Thank you and wish all the best.

Operator

Thank you. (Operator Instructions). The next question is from the line of Anand Dama from Emkay Global. Please go ahead.

Anand Dama — Emkay Global Financial Services Ltd — Analyst

Yes, thanks for the opportunity. My question is on restructured portfolio. So one, is there any residual pipeline in terms of restructuring that we will have?

And secondly, you have made somewhere about 20% odd provision on restructured portfolio. So any guidance that you can give in terms of what could be the reduction rate in the restructured portfolio? And because of which you need to make some additional provision on the restructured portfolio beyond the 20% that you already have?

Rakesh Jha — Chief Financial Officer

Yes. Anand, I didn’t get your second part of the question well. But I’ll answer. If I miss something, then just let me know. On the pipeline, as per the RBI guidelines, the — the request had to be received by 30th of September. So, which has happened. There would be some cases which would still be under implementation at 30th of September. As you know, these are retail loans and it does take some time for all of that to get implemented. So there would be some amount of restructuring increase one will see in Q3. But in the overall context, it is not going to be any material number I would say. It will be definitely, for example, less than INR10 billion. So that is what is there in terms of the pipeline.

On the provision, the — there is an RBI requirement was to take about 10% provision on the COVID restructured loan, against that, we have taken 15% provision. Some of the loans which have got restructured were NPA and have got upgraded due to restructuring. In those loans, we have carried forward the provision which was made when they became NPA. So that’s the reason we have overall about 20% provision on the restructured portfolio.

As I mentioned earlier, it’s predominantly secured portfolio which has got restructured. So we would expect to recover and collect on these. Something that we will assess on a quarter-on-quarter basis, at any point of time we believe there is higher provision requirement, we would be happy to make that. One should also consider that we any case have INR64.25 billion of COVID-related provisions as well.

If you look at the numbers that we have put in our release, where is that the RBI requirement for disclosure. So the slippages from the restructuring done last year, they have not been material in the first half of the year. Of course, some of those loans or actually many of those loans would still be under moratorium. Like I said earlier, moratorium is anywhere between 6 months to 12 months. So we’ll continue to assess this portfolio. If required, we will make some more provision. But overall, the provisions are quite comfortable at the Bank level, and this quarter, in any case, we have not even utilized or written back any of the COVID provisions.

Anand Dama — Emkay Global Financial Services Ltd — Analyst

That’s very comforting. Second question is about the ICICI pay later, because there is a lot of buzz about the NPL. We are also a dominant player in that space. Is it possible for you to give some trends in terms of how that book is playing up? ICICI Amazon card has done very well. So if you can provide some numbers in terms of your ICICI pay later book, that will be great.

Rakesh Jha — Chief Financial Officer

Pay later. The numbers I don’t think we have provided. But see the whole spectrum of credit in this business becoming very, very interesting. So you have normally, if the credit card which is a fantastic instrument, a very flexible instrument, then of course you have the EMI, you can have EMI on debit card, you can have EMI on credit card, you can have a normal. Now BNPL which is coming in essentially results in affordability products, but the difference between BNPL and other products is that it is essentially driven by merchants and so there is a implicit promise to the merchants, that if you give BNPL, the average order value will increase. And so the cost of the merchandize is higher than sometimes the credit card NBR that we give out.

And then there is economics in between. Our pay later, so we have a full spectrum of affordability products. Obviously pay later also is one of the products, a credit card being other products, our EMI on debit card being another product, EMI on credit card being another product. So from our perspective as a Bank, because we have got flexibility of instruments and a full spectrum, we would want to certainly be there in all spectrum depending on what customers want and how merchants want. We should be able to provide them all the options that they have.

The good thing that has happened in the last I would say three years particularly, is that the whole merchant ecosystem has become very, very digital. Right from the onboarding to there now UPI has come in, which is virtually zero MDR. So you can have EMI based on — so credit product based on that as well. So what has happened is that it has become very digital. And so the cost of onboarding has come down, the cost of reconciliation has come down, the cost of credit delivery has come down.

So net debt, which is why you will see that this area of merchant ecosystem is really really exploding in a very big way and Banks like us — large Banks like us, we have a natural advantage to play that game, because we already have a large sort of vast footprint, we have a large merchant footprint from a current account perspective, we see a lot of flow happening through us and so digital underwriting is what we can do, digital onboarding is what we can do quite easily.

So actually, it’s an interesting space, which is — which is unfolding. But BNPL is a form factor of credit delivery and we look at it that way. It’s not a completely new product in the market. It has been there in various shapes and forms. But BNPL of course has its own advantages in the sense that it also caters to our need of a customer, they may not be having credit card or they may not be having lot of (inaudible) and these underwriting are on the fly.

So it’s a good form factor and it’s a good product for many, many customers. Our pay later also is positioned well and the other thing about many of these affordability productive, it is at the place of purchase, and it is not — you don’t have to go outside to take the loan, unlike personal loans, etc. It is at the time of purchase. So this embedded finance is a new thing which is — it’s not a new thing exactly, I mean, credit card was always there, but in a new way it is coming. So I think the space is interesting.

Anand Dama — Emkay Global Financial Services Ltd — Analyst

Yes, certainly. So basically, I think the acceptability among the customer certainly has gone up. So is it to some extent cannibalizing on a low value credit card expense which was?

Rakesh Jha — Chief Financial Officer

No, we haven’t seen that as yet. We haven’t seen that as yet. So from an affordability perspective, so there are two things. One is that, first you have to ascertain the underwriting of the customers. So once that threshold is reached, where is there is return on capital is — I will not be assured, but you have a high confidence on return of capital, then the next immediate thing is a very, very decongested and easy process. Because if you have a very difficult process, customers will not take credit, they will take some other out to take credit.

So if one can have a very, very good onboarding process, a credit delivery — on the fly credit delivery process and you take care of the headache of the merchant, that is they get the money, they get the settlement and then you take over the settlement later, by way of postponing cash flows from the consumer, and you make that process completely seamless, you can give it any name, you can give it revolver, you can call it BNPL, everything is BNPL actually, credit card is also BNPL, buy now, pay later.

Now there is a new word BNPL. So, but one has to make that a very, very good customer experience. Also from a bureau scores, new to credit customers if they are your own customers which banks have, because they are salaried accounts, so they are new to credit customers, you can underwrite them well. So there is also an added advantage that banks have, provided one has a very, very decongested on the fly underwriting process and the ability to integrate with the merchant in a very, very seamless way. So that’s really the value to the ecosystem that the product and service should give. If one had that, demand for credit we have seen is always there, so it gets picked up there.

Anand Dama — Emkay Global Financial Services Ltd — Analyst

That’s very helpful. Thanks a lot.

Rakesh Jha — Chief Financial Officer

Thanks.

Operator

Thank you. The next question is from the line of Shagun Verma from Goldman Sachs. Please go ahead.

Rahul Jain — Goldman Sachs — Analyst

Yes, hi. This is Rahul here. Just two, three questions. One is on the non-employee cost, it’s been pretty sharp spike this quarter, so just wanted to understand how do you see what’s kind of driving this? I understand business momentum has picked up, so that cost may have started coming through. But apart from that, is there anything else that we should know like on the digital side, technology side, how is the spend trending there and also this partnership-based spends on the big billion day, etc. So, can you just throw some color on that?

Rakesh Jha — Chief Financial Officer

Yes, Rahul. So, if you look at the — employee expenses were up about 21% on a Y-o-Y basis. We have seen about 78% increase in the number of employees on an average last Q2 to this Q2 and some increase in the salaries, all of that together along with the ESOP cost, that came in this quarter, would account for that increase.

On the non-employee expenses, clearly two sets of categories. The category which is growing is virtually all which is linked to business. So that would be of course the technology-related cost, the retail, business sourcing related cost. You know we have been buying a fair bit of priority sector lending certificates as well, that cost has gone up, like you mentioned sales, and activities may be in a promotion, those costs have gone up. So all of these are cost which are, you know, we believe productive good cost to improve and increase our core operating profit.

The other cost more of administrative and infra kind of cost, those have grown in single digits actually this period. One thing to keep in mind is that if you look at last year Q2, we had about a 5% decline in our operating expenses. So the base for us was indeed much lower last Q2. So some bit of that impact is as well there. Having said that, clearly in terms of the expenses that is there, we are at 20% or there about kind of a run rate on expenses, where we are currently running. And that’s the trend in absolute near term which one is seeing.

Rahul Jain — Goldman Sachs — Analyst

Okay and then Rakesh, just to put simply, I mean if you were to look at this cost from lets say growth-oriented cost or maintenance-oriented cost, how do you all kind of view this? I mean this cost is necessary from a go-forward basis?

Rakesh Jha — Chief Financial Officer

The way Rahul, in the Bank we run it, is that each of the businesses look — have a risk-calibrated core operating profit as their key metric. As part of that, expenses is one of the variables and each of the business teams then looks at it and there is always a trade-off, one can always end up with lower cost in the near term, if you kind of sacrifice a bit on the long-term growth opportunity. So that is something that we don’t do. So, some of these expenses are indeed which are building franchise, maybe they will show results in 12 month, 18 month kind of timeframe.

But overall, we are committed to growing the risk calibrated core operating profit. So the increase in expenses that we have, we will continue to work on improving our revenues also in line with that. Given the pandemic actually, some of the numbers have been a bit up and down, like I said. So last year some of the expenses were lower, and this year you will see the growth in expenses to be higher. I think from next year one will see a slightly more normalized number, but it would still be a growth which is high on the expenses side.

Rahul Jain — Goldman Sachs — Analyst

So the cost to income ratio should then be in a narrow corridor, is what I’m taking away. Is that a fair understanding?

Rakesh Jha — Chief Financial Officer

That is something Rahul for you to take away. We don’t focus on that ratio per se. I think for us, the entire focus is on the core operating profit. If we are growing that well, and that means our cost-income ratio goes down 2%, goes up 2%, it’s actually fine. In the longer term, definitely we believe that we should be able to grow our revenues at a faster pace than expenses. But in the near term, there are some of the expense which we will be incurring.

Rahul Jain — Goldman Sachs — Analyst

Got it. Thank you so much, Rakesh and good luck.

Rakesh Jha — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Prakhar Agarwal from Edelweiss. Please go ahead. Mr. Agarwal, your line is in talk mode, kindly go ahead with your question, please. As there is no response from the current participant, we move to the next question from the line of Adarsh Parasrampuria from CLSA. Please go ahead.

Adarsh Parasrampuria — CLSA (India) Pvt. Ltd. — Analyst

Hi. Yes, just a question on the ROE expectation now, right, the last 12, 18 months was quite volatile. We are getting comfortable with credit cost and the operating profit trajectory has been quite strong, any targets on ROE for the Bank over the next two to three years?

Rakesh Jha — Chief Financial Officer

Adarsh, as you know, we don’t have been any specific target communicated on the ROE. I think we’ll repeat that our focus is to grow our risk calibrated core operating profit and if that happens, the ROE should improve. We have seen some improvement over the last 12 months, 24 months and that would be the objective going forward as well. But there is no specific target that we have for ROE in our mind.

Adarsh Parasrampuria — CLSA (India) Pvt. Ltd. — Analyst

Perfect. Rakesh, one question on the leveraging up of the balance sheet, right, that when the growth has been strong, our ROEs will kind of get there so — and we did raise capital into the pandemic anticipating some issues, but the outcomes have been a lot better. So what’s the — where do leverage go in the balance sheet in the next two to three years, because that — given that the ROEs will go up, it doesn’t look like we will have a lot of leveraging up of the balance sheet.

Rakesh Jha — Chief Financial Officer

So that we will see Adarsh in terms of what the opportunities are. I think it’s going to just be a function of what is the market opportunity and within that, what fits into our risk and return criteria. I think we are at a very healthy level of capital. So that gives us confidence that we can capitalize on all the opportunities which would come up and we are pretty optimistic about the economy, about the opportunity for the banking system in the — the two to three year timeframe that you are referring to. Based on the opportunities, we will see how the leverage goes up from the current levels.

Adarsh Parasrampuria — CLSA (India) Pvt. Ltd. — Analyst

Perfect. Thanks and congrats Sandeep and team, being splendid last two, three years. Thank you.

Sandeep Bakhshi — Managing Director and Chief Executive Officer

Thank you.

Rakesh Jha — Chief Financial Officer

Thanks, Adarsh.

Operator

The next question is from the line of Kochar Gaurav from Mirae Asset. Please go ahead.

Gaurav Kochar — Mirae Asset Investment. Managers (India) Pvt. Ltd. — Analyst

Yes, hi. Good evening, everyone. I have a few questions. Firstly on margins, I mean quarter-on-quarter, there was a 11 bps improvement in margins, if I look at the CD ratio, it has moderated further to 78. So taking maybe a four to six quarter view or a medium term view, if maybe you know credit picks up and now the CD ratio move towards 85% sort of mark, what is the outlook on margins?

Also in that context, the share of unsecured credit right now is 10%, if I add the personal loans and credit cards, any sort of target internally or any sort of cap that you would have built there? And maybe next two years and what would this be as a percentage of overall portfolio? And as a result, you know what kind of margins can we look at from a 12 to 18 months or two year perspective? That’s my first question.

Rakesh Jha — Chief Financial Officer

No, it’s a very dynamic market, very difficult to have a target on margins. I think, at any point of time, we are always, looking at at least first protecting the margin and then seeing the opportunities to improve it. I think into the next year, something which all banks will face including us, is that a lot of our loans are linked to external benchmark. So we’ll have to see how the Repo rate moves, how the T-bills move, and with respect to that, how the cost of deposits move for Bank. So that’s an additional factor which has come in, with all the loans being linked to external benchmark.

Otherwise, definitely, I think we are still sitting on surplus liquidity in the balance sheet. So as that gets deployed over time, we would see some benefit on the margins from that side. On business mix, the unsecured portfolio had been growing at a faster pace than overall portfolio for us prior to COVID and some bit of a slowdown happened there in the pandemic period and we believe we should get back to more normal levels of growth on that side, but we don’t have any specific target of NIM in a two years period.

Gaurav Kochar — Mirae Asset Investment. Managers (India) Pvt. Ltd. — Analyst

Sure. But directionally, do you believe this can go up further from here, the margin, given the levers?

Rakesh Jha — Chief Financial Officer

In the medium term, we would always work towards that. It’s going to be a functional lot of things, and some of those are not under our control as well.

Gaurav Kochar — Mirae Asset Investment. Managers (India) Pvt. Ltd. — Analyst

Sure. Understood. And the next question is on the provisions. If I look at the on-book provisions of 80%, net NPA in corporate book is I mean almost INR2000 crore, PCR on retail book is 65% and apart from that, we are also carrying provision buffers. I mean, for FY ’23, I mean it’s very hard to estimate a credit cost of more than 100 bps unless, of course, we see a third wave. What are your thoughts on this? And I mean in this year or maybe next year, do we see some write-backs of this COVID buffer that you made — that you have made in the last 18 months or so?

Rakesh Jha — Chief Financial Officer

Yes. So, in two parts if I take it on the — on first one, we have said that through the cycle numbers that we look at on credit cost is for it not to exceed 25% of our core operating profit, which would be like 120 or 125 basis points of our loans. So we should get back to that level once the pandemic is behind us for sure, because that is what we aim for while we build our portfolio.

Regarding the COVID provisions, I think it’s an assessment that we will keep on doing on a quarter-on-quarter basis. The portfolio of course has stood up better than what we anticipated and the performance there has been better than what we would have taken into consideration while creating the COVID-related provision. But we are not going to be in a hurry to unwind all of those provisions. I think we will assess it quarter by quarter, maybe at the year end, we’ll take a call as to how we should do that. It’s something that gives strength to the balance sheet, so we don’t over think around — around that.

Gaurav Kochar — Mirae Asset Investment. Managers (India) Pvt. Ltd. — Analyst

Sure, sure. But the intent is to unwind it maybe at a later date, if not today, not to hurry up, but the intent is not to keep that buffer forever. If my understanding is right.

Rakesh Jha — Chief Financial Officer

Yes. I mean, once the pandemic is over, then the COVID provision will not be there, whether we maintain some of the provision contingency provision, we will assess all of that and (inaudible).

Gaurav Kochar — Mirae Asset Investment. Managers (India) Pvt. Ltd. — Analyst

Sure. Got it, got it. And just, I mean on that ICICI Bank UK, I mean I didn’t heard it properly, but is the dividend payout $20 million or $200 million?

Rakesh Jha — Chief Financial Officer

No, that was the capital repatriation of $200 million that we — so it was surplus capital in the UK subsidiary. As I said, the loan book there has declined and their capital ratio was like 25%. The $200 million of capital was repatriated back to the parent Bank during the quarter.

Gaurav Kochar — Mirae Asset Investment. Managers (India) Pvt. Ltd. — Analyst

Okay. So this will not be part of the P&L, it will only be added back to results, is it?

Rakesh Jha — Chief Financial Officer

It will not be added back to the result, it will come in the capital adequacy. Investment in subsidiary is reduced from the capital while computing capital adequacy. So that a number of deduction has come down and in the balance sheet, it would have resulted in the reduction in the investment in UK.

Gaurav Kochar — Mirae Asset Investment. Managers (India) Pvt. Ltd. — Analyst

Okay, understood. And just last question, if I can squeeze in. The liquidity — the closing liquidity on the balance sheet was around INR1.5 trillion, is the average also around the same number or it’s a quarter end phenomenon when the liquidity is high typically?

Rakesh Jha — Chief Financial Officer

For the average number, you should look at the NCR number that we also disclosed, that’s a daily average number, so 130% or so. So it’s clearly higher than where we would ideally want it to be.

Gaurav Kochar — Mirae Asset Investment. Managers (India) Pvt. Ltd. — Analyst

Great. Okay. Sure, sure. Got it. Thanks. Thanks a lot and all the very best.

Rakesh Jha — Chief Financial Officer

Thank you, Gaurav.

Operator

Thank you. Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to the management for their closing comments. Over to you.

Rakesh Jha — Chief Financial Officer

Thank you everyone for spending the Saturday evening with us and we can take remaining questions separately. Thank you.

Operator

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