Yes Bank Limited (YESBANK) Q1 FY23 Earnings Concall Transcript

Yes Bank Limited (NSE:YESBANK) Q1 FY23 Earnings Concall dated Jul. 23, 2022

Corporate Participants:

Prashant Kumar — Managing Director and Chief Executive Officer

Niranjan Banodkar — Group Chief Financial Officer

Analysts:

Mahrukh Adajania — Edelweiss — Analyst

Jai Mundhra — B&K Securities — Analyst

Somya Jain — Emkay Global — Analyst

Saurabh — JP Morgan — Analyst

Kunal Shah — ICICI Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Yes Bank Limited Q1 FY ’23 Analyst Conference Call. On the management panel, we have with us today, Mr. Prashant Kumar, Managing Director and Chief Executive Officer of Yes Bank; Mr. Niranjan Banodkar, Group Chief Financial Officer; Ms. Anita Pai, Chief Operating Officer; Mr. Rajan Pental, Global Head, Retail Banking; Mr. Akash Suri, Country Head, Stressed Asset Management; and Mr. Ravi Thota, Country Head, Large Corporates.

[Operator Instructions] And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]

I now hand the conference over to Mr. Prashant Kumar from Yes Bank Limited. Thank you, and over to you, sir.

Prashant Kumar — Managing Director and Chief Executive Officer

Thank you, and very good evening to all of you, and thanks for joining Yes Bank quarter one financial results call. With me, I have the top management of Yes bank, Rajan, Anita, Niranjan, Ravi and Akash.

Let me start with a key update available on Slide 3 of the investor presentation. The Bank has successfully come out of the reconstruction scheme after the shareholders approved formation of alternate board with effect from July 15. And presently, the Board consists of seven independent directors, two non-independent directors and MD and CEO.

During the quarter, Bank — or I will be saying on the 15th of July, the Bank has signed a binding term sheet with potential ARC partner towards sale stressed assets. Pursuant to an objective Board-run process, the binding term sheet was signed with partner JC Flowers to acquire an identified pool of INR48,000 crores of the stressed assets of the Bank. A Swiss challenge auction has been launched with JC Flowers base bid of INR11,183 crores, which is roughly 135% of carrying value on the balance sheet as of March 31. Pursuant to successful closure, this is set to be the largest sale of stressed asset in domestic markets.

Coming to quarter one financial results, we are pleased to report consistent improvements across all our core operating metrics as well as the strategic objectives. In the quarter gone by, the Bank has achieved the following: on the profit and loss front, during the quarter, the Bank has reported a net profit of INR311 crores, which is an increase of 50% Y-o-Y. The net interest income of the Bank at INR1,850 crores has increased by 32% Y-o-Y. The Bank’s NIM stands at 2.4%, which is again up by 30 basis points.

The non-interest income, excluding the treasury income is up by 35%. The core fee income driver continues to show significant traction with sustained momentum in retail banking fees, which is up 43%. Corporate trade and cash management business and increased digital transactions have also resulted in higher interchange income on Y-o-Y basis.

The operating profit for the quarter stands at INR590 crores. Excluding the treasury gains, operating profits are — have increased by 33% Y-o-Y. The total provision cost at INR175 crores is lower by 62%, and is the lowest quarterly provision cost since the reconstruction scheme. The Bank’s operating expenses are at INR2,042 crores, which is an increase of 6% quarter-on-quarter. The increase in operating expenses is due to increase in loan sourcing fees on account of its strong business momentum, a step-up in IT investment and employee increments and increased welfare expenses, including health insurance.

On the advances front, the advances have grown by 14%, of which retail have grown by 42%, medium enterprise at 33%, SME at 15%, while the corporate book has shown a decline of 9%. Retail, MSME and corporate mix has improved by another 200 basis points, now to 62% for retail and MSME and 38% for the large corporate.

New sanction disbursement aggregated to roughly INR23,000 crores during the quarter across segments. Despite decline in net advances for the corporate segment, our new business generation continues to be strong with wholesale disbursement of INR5,237 crores during quarter one. The Bank is confident of meeting the 15% loan growth guidance for FY ’23.

On the deposit front, as on June 30, our total deposits are INR1,93, 241 crores, which is showing the increase of 18% Y-o-Y. The CASA ratio stands at 30.8% with CASA and retail term deposits together constituting 62% of total deposits. The customer acquisition momentum continued with more than 3 lakh CASA accounts opened during the quarter. Growth in liabilities has come despite reduction in interest rates, which is a reflection of our superior customer service and stakeholder confidence. Our cost of deposits continued to reduce, and is now at 4.8%, which is down 60 basis points Y-o-Y.

Saving account balances have grown by 39% Y-o-Y, while current account balances have grown 25%. Every daily current accounts have actually grown at 50% Y-o-Y, mainly on account of our digital solutioning to the e-commerce and fintech players.

On the asset quality front, the gross NPA number has improved to 13.4% against 13.9% as of March ’22. Similarly, net NPA ratio has also improved to 4.2% from 4.5% as of March ’22. The slippage at INR1,072 crores of which corporate slippages stand at INR619 crores, retail at INR368 crores and the rest is for SME and medium enterprise. Slippage out of the restructured pool at roughly INR126 crores, which majorly consists of one large exposure. The increase in the overdue loan of more than 30 days by INR1,700 crores quarter-on-quarter predominantly on account of one large infrastructure group backed — fully backed by strong and highly valued collateral. The resolution momentum continues to be strong with total recoveries and upgrades of INR1,532 crores, and we remain on track to achieve our annual guidance of recovery and upgrade of more than INR5,000 crores.

On the capital front, the Bank continued to accrete capital organically, with CET ratio at 11.9% and total capital adequacy at 17.7%. The risk weighted asset to total asset has improved to 73%.

Bank has seen a net addition of 802 employees during the quarter. During the quarter, we have launched multiple — on the multiple front, we have taken initiative for welfare of employees and also for upgrading the skills of our employees along with taking some special measures for our women employees, including the training for both top leadership as well as for the middle and the junior management.

We continue to focus on new customer products and propositions, and we have launched a first of its kind floating rate fixed deposits linked to the RBI repo rate. This is an intelligent fixed deposit with dynamic returns and we already have more than 14,000 customers on this product.

All the above points demonstrate a strong momentum in the buildup of a good quality franchise. Our slides from 20 to 41 in the investor presentation provides a detailed update on the entire franchise of the Bank. As we complete the first quarter of FY ’23, we are confident of achieving our strategic guidance provided to you earlier, which I would like to reiterate. 35% CASA ratio, further improve the retail corporate mix advances mix by 400 basis points, to keep more than 15% advances growth where the growth in retail, SME and medium enterprise would be more than 25% and 10% loan growth in corporate segment. We would sustain the CD ratio below 100%. The recoveries and upgrades to be more than INR5,000 crores. ROA target of 0.75% and 1% to 1.5% over the medium term.

With this, I want to thank you all once again for taking the time out for joining this call and wish all of you and your family a good health and prosperity.

We can now open the floor for your questions. Thank you.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] First question is from the line of Mahrukh Adajania from Edelweiss. Please go ahead.

Mahrukh Adajania — Edelweiss — Analyst

Hello, sir. Sir, I had a few questions on earnings. But before that, I just had a question on the ARC. So basically, you did mention about the transfer, which is the gross value of assets, but newspaper reports talk about this same gross value and they say that the net value of assets is around INR83 billion or something like that, INR8,300 crores or INR8,500 crores. So what I wanted to check is that basically 85% of that INR8,300 crores, in the worst-case scenario, if there is no recovery, will come as provision. Is that the correct understanding? And what will be the aging profile means over what period, if at all there are no recoveries, of course, there will be, will these have to be provided for?

Prashant Kumar — Managing Director and Chief Executive Officer

So Mahrukh, I think the first point that 15% or 85% is not out of that INR8,300 crores. The assignment value which is INR11,100 crores, okay. We would be getting 15% cash out of it, okay? And since the net carrying value is lower than the assignment value, this cash would further bring down the value of the SR, which we are going to carry in our books, okay?

As per the current regulation, the provisioning on the SR would be in accordance with the provisioning on the NPA, okay? So it means the SR would also continue to attract the provisioning as per the aging of the NPA. But today, we are carrying a net value of INR8,300 crores. We would be getting a 15% of the INR11,100 crores which would further bring down our SR net carrying value, okay? So it means, fundamentally, the impact for us would be only the aging provision for the net carrying value for the SR, which we would be carrying in our balance sheet.

Mahrukh Adajania — Edelweiss — Analyst

Got it, sir. So the net carrying value will be INR8,300 crores [Phonetic] minus cash that way?

Prashant Kumar — Managing Director and Chief Executive Officer

Right.

Mahrukh Adajania — Edelweiss — Analyst

Got it, sir. INR8,300 crores [Phonetic] minus full 15% cash?

Prashant Kumar — Managing Director and Chief Executive Officer

Yes.

Mahrukh Adajania — Edelweiss — Analyst

Got it, sir. Got it. And sir, how — given the profile of these assets, they’ll age over how many years? Over one year, two years according to RBI guidelines?

Prashant Kumar — Managing Director and Chief Executive Officer

So this is a mix. This is a mix between one to three years kind of thing.

Mahrukh Adajania — Edelweiss — Analyst

Got it, sir. Got it. Sir, my next question is that you did give growth guidance, which looks strong, retail, corporate. So what are the risk to this growth given that, in general, investors remain concerned about a global slowdown? Any risk to the growth? Or do you think the base is low enough to generate this kind?

Prashant Kumar — Managing Director and Chief Executive Officer

I think as of now, we are not seeing any impact on the demand side, okay, either on the corporate side or also on the retail and SME. But we need to be absolutely cautious in terms of how things should move, because things are very uncertain, how the interest rate would move not only in India but globally and how it would impact the Indian economy. So I think everybody is very cautious about this, but currently, we are not seeing any impact on the demand side.

Mahrukh Adajania — Edelweiss — Analyst

Got it. And sir, you think deposit gathering will not be an issue not only because of rising rates, but also possibly because of HDFC Bank?

Prashant Kumar — Managing Director and Chief Executive Officer

No, I think the issue is more in terms of, yes, liquidity has come down as compared to past, but it’s still getting deposits to support the loan growth currently is not a challenge. The only thing is the pricing for all the banks would go up in line with the movement in the rate of interest.

Mahrukh Adajania — Edelweiss — Analyst

Got it, sir. Got it. And sir, any outlook on margin?

Prashant Kumar — Managing Director and Chief Executive Officer

So currently our NIMs are at 2.4%, and we are expecting NIMs for around 2.75% for the full year.

Mahrukh Adajania — Edelweiss — Analyst

Got it, sir. Sir, was there any mark-to-market loss in the quarter?

Niranjan Banodkar — Group Chief Financial Officer

Mahrukh, that’s about INR37 crores.

Prashant Kumar — Managing Director and Chief Executive Officer

Yes, just INR37 crores.

Mahrukh Adajania — Edelweiss — Analyst

Got it. Okay, sir. Thank you so much. Thanks a lot.

Prashant Kumar — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Jai Mundhra from B&K Securities. Please go ahead.

Jai Mundhra — B&K Securities — Analyst

Yeah. Hi, sir. Good evening, and thanks for the opportunity, and thanks for the detailed presentation also. Sir, firstly, on this alternate board, so the proposal was there would be two SBI Directors and two RBI Directors. So as of now, there are two SBI nominated Director, which are these two non-independent Director, and there is no RBI Director. Is the understanding right?

Prashant Kumar — Managing Director and Chief Executive Officer

Absolutely.

Jai Mundhra — B&K Securities — Analyst

Right. And sir, now that you have an alternate board, I mean what is the significance of this? Does this change? I mean, of course, it’s a good milestone that you have achieved and you have completely have come out of this restructuring scheme, but does this sort of changes anything in terms of business or in terms of your ability to do business?

Prashant Kumar — Managing Director and Chief Executive Officer

No. I think the formation of alternate board would not be impacting any of these kinds which you are mentioning. I think it was more like a large financial institution was put up under a reconstruction scheme, okay, which was brought in by Government of India under consultation with RBI. I think, at least we are not aware and we have not seen any parallel that a large financial institution is successfully able to come out from the reconstruction scheme. So I think that is something which is very important, and that is our performance, the delivery in the last two years where the Bank has been successfully come out of the reconstruction scheme, new Board has been formed, and now it’s a growth path for the Bank.

Jai Mundhra — B&K Securities — Analyst

Understood, sir. And second thing, sir, on this ARC deal, I mean, I just want to understand the mechanism. So let us say the base value, let us say it is finalized hypothetically at INR12,000 crores just to keep the numbers, calculation easy. You get 15% of that as cash which is INR1,800 crores. The rest you get all in security receipts, right? So you have a carrying value of let’s say INR8,000 crore, which reduces by INR1,800 crore. The rest — so the net NPA only declines by INR1,800 crore in the first tranche, in the first leg. The second leg would only be as and when you redeem the security receipts. Is that understanding correct?

Prashant Kumar — Managing Director and Chief Executive Officer

So I think just one clarification which I thought. Then we would be carrying the SR to the extent of INR15,500 crores [Phonetic].

Jai Mundhra — B&K Securities — Analyst

Sorry. What is that? INR15,500 crores [Phonetic]?

Niranjan Banodkar — Group Chief Financial Officer

Hi. This is Niranjan. So I think in your example, you took a INR8,000 crores carrying value. Is that correct? And you said INR1,800 crores is the cash. So INR6,200 crores is the post-transaction net carrying value. The only minor, I would say, from a classification standpoint, the change would be the NNPA will actually move into — from the INR8,000 crores, it would move into a security receipt of INR6,200 crores, investment in securities.

Jai Mundhra — B&K Securities — Analyst

Got it. And sir, if you have — so let us say your security receipts in not an aggregate basis, but for a particular exposure is zero, right, let us say, and you have got security receipts of INR10. Hypothetically, you are in the money on security receipts, right? But you cannot book that notional profit anywhere, right?

Prashant Kumar — Managing Director and Chief Executive Officer

Yeah.

Jai Mundhra — B&K Securities — Analyst

And the third thing is, sir, just on this recovery of INR5,000 crore, the target that we have, and I think we have done fairly well in this quarter also. You have already included this ARC transaction, right, which will, let us say, give you roughly around INR2,000-odd crores as cash, right? So this INR5,000 crore includes that already, right?

Prashant Kumar — Managing Director and Chief Executive Officer

No. Jay, this INR5,000 crore is separate from ARC Transaction.

Jai Mundhra — B&K Securities — Analyst

Okay, understood. And sir, there was a media mention of one film exhibitor having gone into NPA has that been — that was some sizeable amount. Has that been already NPA in first quarter or that could come in second quarter?

Prashant Kumar — Managing Director and Chief Executive Officer

It was a NPA in the last financial year.

Jai Mundhra — B&K Securities — Analyst

Okay, that was already an NPA in the last financial year.

Prashant Kumar — Managing Director and Chief Executive Officer

Yes.

Jai Mundhra — B&K Securities — Analyst

And the last question is, sir, you have given a detailed guidance and of course, you have given milestone and we are on track on most of them or maybe almost all of them. On the cost to income, right, so this looks clearly bloated at 71% or 75%-plus. So in your guidance of over 75 basis point ROA, how should one look at the cost to income for the full year?

Prashant Kumar — Managing Director and Chief Executive Officer

No, even for the full year, our guidance on the cost to income is around 70%, 71%, okay? And the reason for this is also since we have started on the growth phase and since there is a higher focus on the retail and MSME, I think at this point of time, it is important to help those kind of investment, which would start giving you the revenues over a period of time. Similarly, I think not only for us, for any Bank, it is important to keep on investing in the IT infrastructure, okay? And since we are very strong, we also have a responsibility of supporting the digital transaction of the country. So I think we would continue to make investment into our IT infrastructure. We would continue to expand our business and in the initial year, the cost to income would be definitely higher, but as the revenues would increase, it would start coming down.

Jai Mundhra — B&K Securities — Analyst

Understood, sir. Thank you so much for your time, sir.

Prashant Kumar — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Somya Jain from Emkay Global. Please go ahead.

Somya Jain — Emkay Global — Analyst

Hello. Am I audible?

Prashant Kumar — Managing Director and Chief Executive Officer

Yeah, please go ahead.

Somya Jain — Emkay Global — Analyst

Congratulations, sir, on the results. Sir, I was going through the presentations. I wanted to know what is the breakup of SMA-1 and SMA-2 that if you could give the numbers for the same?

Prashant Kumar — Managing Director and Chief Executive Officer

I think in the presentation we have given the numbers.

Niranjan Banodkar — Group Chief Financial Officer

Yes. We have shared the number. Page 17. If you can go to Page 17 of the presentation that we have the breakup between 31 to 60 days and 61 to 90 days overdue. Okay, sir. And one last question, sir. Initially, you had mentioned the guidance that you have given as 35% CASA, 15% advance book. So I missed on the breakup in the segments advances. What is the target for advances growth in the retail and corporate? If you could just repeat that, that would be very helpful.

Prashant Kumar — Managing Director and Chief Executive Officer

So on the retail and MSME, we are targeting it more than 25% growth and on the large corporate 10%.

Somya Jain — Emkay Global — Analyst

Thank you, sir.

Operator

Thank you. [Operator Instructions] The next question is from the line of Saurabh from JP Morgan. Please proceed.

Saurabh — JP Morgan — Analyst

Hi, sir. Good evening. Sir, two questions. One is essentially on this NIM that’s critical for meeting your ROA expectation. So the rise that you would be forecasting is that mix led? Or would you be modeling some kind of cost of funds improvement once you raise capital?

Prashant Kumar — Managing Director and Chief Executive Officer

Saurabh, can you please repeat this? We are not able to hear.

Operator

I would request Mr. Saurabh to increase the volume of your headset, please.

Saurabh — JP Morgan — Analyst

Is it better, sir?

Prashant Kumar — Managing Director and Chief Executive Officer

Yeah.

Saurabh — JP Morgan — Analyst

Hello. Is this better?

Operator

You’re audible. Please proceed.

Saurabh — JP Morgan — Analyst

So just on the drivers for NIM at its margin, sir, are you just forecasting an increase basis the improvement in mix or would you also be looking at some kind of funding cost reduction once you raise capital?

Prashant Kumar — Managing Director and Chief Executive Officer

So Saurabh, on the NIMs, a, to begin with, when you look at this quarter, I mean, we should have basically already seen some increase in the loan yields. We have not seen the commensurate increase because a lot of the repricing which was linked to either the EBLR or the MCLR is actually yet to kind of fully play out. So assuming on an as is basis, I mean, there is already a 7 basis points to 8 basis points of margins, which will come through in the next quarter or two. So I think that’s one element.

The second is in terms of how we look at deploying our excess liquidity, I think CD ratio is already at about 96%. So I think we will continue to improve on our loan spreads. I think that’s really the focus and that is a function of how we get our cost of funding lower. So we are using every event to kind of continue to compress the spreads that we offer on our deposits to competition and that’s been a very historical Journey for us post March 2020. So whenever we are seeing interest rates or let’s say cost of deposits actually go up in the industry today, we have also increased, but we’ve not increased with the same intensity as the market. So I think we will use that opportunity to also expand.

The third clearly is the mix in our cost of funding which is on the CASA. Within CASA, you know the proportion of how that kind of also plays out. So it’s a combination of these which will play into the net interest margins. The last element is also on the recoveries and resolutions because that also plays in terms of a drag that I have on the net interest margin. So it’s a combination of these four broad events.

Saurabh — JP Morgan — Analyst

Understand. But in the 0.75% ROA guidance, the NIM assumption will be around 2.9-odd-percent. Will that be fair?

Prashant Kumar — Managing Director and Chief Executive Officer

Say that again, please?

Saurabh — JP Morgan — Analyst

So for the ROA guidance of 0.75%, the NIM on that, I mean, to achieve that should be around 2.9-odd-percent.

Niranjan Banodkar — Group Chief Financial Officer

So we should be exiting at about 2.9%. For the full year, we should be at about 2.7% to 2.75%.

Saurabh — JP Morgan — Analyst

But the Q4 exit should be around 2.9%.

Niranjan Banodkar — Group Chief Financial Officer

That’s right. Upwards of that.

Saurabh — JP Morgan — Analyst

Okay. And what will be the average cost of savings right now?

Niranjan Banodkar — Group Chief Financial Officer

We should be in the 5% handle, Saurabh.

Saurabh — JP Morgan — Analyst

And just one last question, sir. On this large infrastructure account, which is in your SMA-2 book, what’s your expectation that this could potentially slip in forward quarters? And where are you exposed? Are you at the group company or in the SPVs?

Prashant Kumar — Managing Director and Chief Executive Officer

No, I think, we don’t see any possibility of this account slipping into NPA category, and this account remains under SMA-1 or SMA-2 for a very, very long time, and the issue was more in terms of mismatch between the revenues and the obligations for this. But it’s a strong company backed by strong security, and we don’t see any possibility of slippage at all.

Saurabh — JP Morgan — Analyst

Okay, sir. Okay. Thank you for your time, sir.

Operator

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

Kunal Shah — ICICI Securities — Analyst

Yeah. Hi, sir. So first question in terms of this impact of ARC sale on GNPA and net NPA. So the way to look at it is in terms of the carrying value which is there that will directly go out of the GNPAs, corporate GNPAs of INR25,000-odd crores [Phonetic] which are there. So maybe minus INR8,800 crores and at the net NPA level, how would be the impact?

Prashant Kumar — Managing Director and Chief Executive Officer

No. So Kunal, I think if we try to see in a slightly different way, the INR48,000 crores of stressful asset, which we propose to transfer to ARC is excluding of the slippage happens in the Bank after 1st October, right. And similarly, some of the category of loans like foreign currency loans, which are regulatory, cannot be transferred to ARC, would remain within the Bank, okay. So it means when we would be exiting the FY23, we would be having the slippage after 30th September 2021 in some of those category of loans. But we would also be seeing a recovery and upgradation from that pool also. And since our slippage guidance for the Current financial year is 2%, so we would be expecting a GNPA number of between 1.5% to 2% by the end of the FY ’23 and the net NPA of something around 0.5 to 0.6 [Phonetic].

Kunal Shah — ICICI Securities — Analyst

So GNPA would be 1.5% to 2% and net NPA of 0.5-odd-percent.

Prashant Kumar — Managing Director and Chief Executive Officer

Yes.

Kunal Shah — ICICI Securities — Analyst

Okay. Of the overall. So this is broadly in terms of we are talking at the Bank levels.

Prashant Kumar — Managing Director and Chief Executive Officer

Correct.

Kunal Shah — ICICI Securities — Analyst

Okay. So this entire corporate banking piece which is there that would move out. So I just wanted to understand from the corporate banking GNPAs which are there, okay, 25,000 [Phonetic], so how would that behave post the sale and towards the end of the fiscal year?

Prashant Kumar — Managing Director and Chief Executive Officer

So most of the corporates would be out, okay.

Kunal Shah — ICICI Securities — Analyst

So it has nothing to do with the carrying value on the balance sheet, so it will directly be the larger part of this pie.

Prashant Kumar — Managing Director and Chief Executive Officer

Entire pool will be out.

Kunal Shah — ICICI Securities — Analyst

Okay. So that would be out in the same way you are talking about the net NPA. And in terms of this restructure, so, again, when we look at the COVID-related restructuring, I think decline was almost INR210-odd crores and I think that’s the number you highlighted in terms of slipping into NPA as well. So to direction try to assume that maybe there has been no recoveries which are coming in from the restructured pool, and if we really look at it, when do we expect this pool to move out? And maybe what would be our estimate of the further slippage going forward on this INR3,700 crores of COVID-related restructuring?

Prashant Kumar — Managing Director and Chief Executive Officer

I think the behavior of the COVID restructured pool has given us a positive surprise. The retail and SME COVID restructuring pool is behaving very well. The customers are repaying as per the restructured plan and the collections have been good. We have seen only one reduction on the corporate side from this COVID restructuring. Otherwise, the pool is behaving very well. But definitely, we can’t expect the similar asset quality trends in the restructured pool also as compared to the remaining part of the loan book. There will be definitely some incremental delinquencies out of the restructured pools, but that would not be meaningful or significant.

Kunal Shah — ICICI Securities — Analyst

Okay. And when does this actually move out? So when should we see it is reflecting? Maybe it will be September or it will be till March?

Prashant Kumar — Managing Director and Chief Executive Officer

No, actually, because as per the COVID restructuring, they have been given a timeline. Ravi, any idea? Two years or what? So I think it would take some time, because as per the restructuring, they need to continue to serve and completely repay the FITL, right. Once they would make the FITL zero, then they would be considered out of the COVID restructuring.

Kunal Shah — ICICI Securities — Analyst

Okay. Got it. And in terms of the overall expenses, so I think maybe when the Bank was under this entire restructuring scheme, I think that was the place wherein there would have been the cost cuts and some ROI management through the operating efficiency but, in fact, that’s growing. It seems to be pretty much into the investment phase and given the growth guidance which is there, how should we really look at this number? In fact, when we look at it maybe 30% still seems to be low and we will be investing it much higher getting forward into the next 18 to 24 months or it should stabilize?

Prashant Kumar — Managing Director and Chief Executive Officer

Kunal, can you — I am not able to get you very clearly on this question. Can you please repeat?

Kunal Shah — ICICI Securities — Analyst

No, sir. I’m just saying that, see, one, two years have been the year of consolidation, okay, and maybe not too much of an investment. So definitely we have been building up the retail and the SME and disbursements are going up, but to what extent we are done? If we have to look at it in terms of our objectives, targets, how much of that Investments is already done in the franchise? And we should now see more of a stabilization of the opex or maybe we have just started off maybe Q4 whatever numbers we are seeing, 33% rise, 6% quarter-on-quarter rise, okay, that’s just the start and we should see the buildup over here in terms of the overall operating expense other than the employees?

Prashant Kumar — Managing Director and Chief Executive Officer

So, Kunal, I think most of the investments would happen during the current financial year, okay. And that’s why we would be seeing a expense ratio of around 70%, 71% for the year FY ’23, and next year onward, this expense ratio would start improving. Though there would be a continuous investment, which we will require, but I think the kind of investment which we are doing would also give us the proportionate increase in the revenues, and we are also bringing the overall efficiency into the entire system which would also bring a lot of improvement on the expenses ratio.

Niranjan Banodkar — Group Chief Financial Officer

So Kunal, I think just one more point I also wanted to add is if you look at the cost to income thought process for the retail business is clearly higher than corporate, right, just a cost income, and over the last two years what you have also seen very substantially is that the mix on the balance sheet or the assets is actually also moved in favor of the retail. So while in isolation if you look at retail, you would have seen them on an improving trajectory from a cost efficiency standpoint, but just the sheer mix moving into retail has also meant that some of the cost to income ratios have been at 77%, 78% for this quarter, but largely, we should — 71%, right?

But I think just coming to the point, this year, if you look at our cost to assets, we were at about 2.4%. I think that we have allowed to expand to 2.6% in June and possibly for this particular financial year, and that is coming on the back of multiple things, right, that Prashant just mentioned for this year. But we will see that offset coming in from the revenue to assets as compared to fiscal ’22. We will see margins which expanded from 2.1% to 2.5% in fiscal ’21. We should see the 2.4% that we are right now to expanding to exiting to 2.9%. So you will see NII to assets actually offset that cost. One.

Number two, there will also be because June was in some ways coming off the back of a very good March quarter, also, it was not a very comparable one from some of the retail business standpoint. I think we should see a good momentum sequentially also pick up. So the fees to assets should also do better. And if this coincides with also the contribution from corporate growth because on a Y-o-Y basis, corporate growth has been lower. So that also will start supporting the cost to income quite constructively.

Kunal Shah — ICICI Securities — Analyst

So I understand it from the income perspective, but purely on the cost side, would we allow this 2.6% to further expand or it should stabilize? Maybe income, I think, yes, there would be levers, but broadly, in terms of the cost, is there the investment mode which is still on and we’ll further allow it to expand beyond that as well?

Niranjan Banodkar — Group Chief Financial Officer

So Kunal, as I said, we will not allow the cost to assets now to go beyond 2.6%.

Kunal Shah — ICICI Securities — Analyst

Okay. Yeah. Thanks a lot.

Operator

The next question is from the line of Sri Karthik from Investec. Please go ahead. Mr. Karthik, I’ve unmuted you. Please proceed with your question. Yeah. Thanks. What would be the capital implication for the ARC transaction?

Prashant Kumar — Managing Director and Chief Executive Officer

What is the possible? Sorry?

Operator

What will be the impact on our capital ratios because of the ARC transaction?

Prashant Kumar — Managing Director and Chief Executive Officer

Kunal, the transaction would be capital neutral, but due to some accounting entry, it would be having an impact on the capital ratios. Otherwise, it’s capital neutral for us.

Operator

Understood. Okay, I’ll come back in the queue again. Thank you. The next question is from the line of Anand Dama from Emkay Global. Please proceed. Yeah. Thank you, sir, for the opportunity. Sir, if I’m correct, basically, what you said in the earlier one of the query, is that all of these INR48,000 crores of NPA which will move out to ARC is part of the current GNPA pool, right? Nothing is already written off.

Prashant Kumar — Managing Director and Chief Executive Officer

No, it also includes almost INR15,000 crores which has been written off.

Operator

Okay. So INR48,000 crores minus INR15,000 crores is the gross value which will move out of the GNPA and how much will move out of the NNPA in that case?

Prashant Kumar — Managing Director and Chief Executive Officer

How much of the…

Operator

So what is the net carrying value which is sitting into the NNPA pool at this point of time?

Prashant Kumar — Managing Director and Chief Executive Officer

INR8,300 crores.

Operator

INR10,300 crores.

Prashant Kumar — Managing Director and Chief Executive Officer

INR8,300 crores.

Operator

INR8,300 crores. And, sir, secondly, the cash which you will receive from the ARC certainly after the switch auction happened, now will that not really even partially flow into the P&L?

Niranjan Banodkar — Group Chief Financial Officer

Sorry. Is the question that will the cash flow into P&L? Was that the question?

Operator

Yes.

Niranjan Banodkar — Group Chief Financial Officer

No, the cash will not flow into the P&L. The cash will actually go down to reduce the carrying value of the security receipts.

Operator

Of the security receipts. Okay. So there will be no P&L impact because of this ARC transaction at all. All that it will do is basically optically reduce the NPA ratio. It will move out of the balance sheet. It will go to the ARC. And secondly, there will be no capital impact as well. I mean, there is no capital release as well, right?

Niranjan Banodkar — Group Chief Financial Officer

Right.

Operator

Okay. So in that case, the CET ratio being slightly lower than the piers, what is our capital raising plan?

Prashant Kumar — Managing Director and Chief Executive Officer

So, currently, we are sitting with a CET of 11.9%. We would definitely like to increase it to at least 14% kind of thing. So during the current financial year, we would see when this kind of opportunity would come, but we would like to raise capital in the current financial year.

Operator

Okay. Sir, any quantum?

Prashant Kumar — Managing Director and Chief Executive Officer

Around $1 billion.

Operator

Thanks a lot, sir. Thank you. The next question is from the line of Ankit Bihani from JM Financial. Please go ahead. Yeah. Hi, sir. So I just had one question. I wanted to know what proportion of your loan book is floating rate and of the floating rate, how much would be linked to repo?

Niranjan Banodkar — Group Chief Financial Officer

So we have approximately 36%, which will be at the MCLR and we’ll have about 25% which will be EbLR.

Operator

Okay. Thank you. Thank you. The next question is from the line of Sagar Rungta from Anand Rathi. Please proceed. Hello. Hi sir. Just one data keeping question. What were the restructured slippages you mentioned? Thank you.

Niranjan Banodkar — Group Chief Financial Officer

We had about INR130 crore that has slipped from the restructured book into NPA.

Operator

Okay. Thank you, sir. Thank you. The next question is from the line of Rakesh Kumar from Systematix Shares. Please go ahead. Yeah. Thank you for the opportunity. So just coming back to this stress asset sell to ARC transaction. So please correct me if I am wrong of the total transaction of INR48,000 crore, we have got the bid of INR11,100 crores. So basically, there is a write down of around 77%, right? And we approximately have provision coverage of 83%. So we are going to get write-back of the provisions of around INR2,900 crores which you said just now that it will go towards reduction in the SR value instead of provision write back in the P&L. Correct?

Prashant Kumar — Managing Director and Chief Executive Officer

Absolutely.

Operator

And this INR1,600 crores — INR1,700 crores number which is part of the cash, this will come into the P&L or like what is that like against the sale of the stressed asset?

Prashant Kumar — Managing Director and Chief Executive Officer

Yes, this would reduce the carrying value of the SR in our…

Operator

But this INR2,900 crores [Phonetic], which is the difference between the PCR what we carry and what is the write down that JC Flowers is giving, so this INR2,900 crores should be rooted into the provision line, right?

Niranjan Banodkar — Group Chief Financial Officer

Sorry, Rakesh. Can we just very quickly start with the numbers, again? INR2,900 crores reflects what?

Operator

So according to the bid of INR11,100 crore, so there is a write down of 77%. We are carrying the provision of 83%.

Niranjan Banodkar — Group Chief Financial Officer

Understood. Let me just very quickly explain. So the first rule in an ARC transaction is that you have to record the security receipts at the lower of the security receipt consideration or the current book value whichever is lower. So as a thumb rule, if I am selling these at INR11,000 crores, let’s say, INR11,100 crores ballpark, the carrying value is INR8,300 crores. I cannot have a balance sheet carrying value which is more than INR8,300 crores. That’s the first step. Number 1.

The second is that I can recognize anything into P&L only if I receive cash. However, because I have a principal outstanding, the P&L will be used to further create or reduce the value of that security receipt which means on the INR11,000 crores, when I get the 15% cash, the INR8,300 crores will be further reduced to get the carrying value to about, let’s say, INR6,700 crores.

Operator

Okay. And secondly on this slippage ratio number guidance, which we have provided at around 2%, so the INR3,700 crores slippage we are expecting on a gross basis from the remaining nine months and we have a slippage of INR1,000 crores in the first quarter and INR1,500 crore of recovery upgrade. So we have actually net slippage a negative number. So what is the credit cost that we are estimating our expectation that we have?

Niranjan Banodkar — Group Chief Financial Officer

So Rakesh, our actually slippage is the way we are looking at the full year slippage is from a gross slippage standpoint. We’ve always said that this year our provisioning write back or the recovery that will have some bad debts should be quite sufficient to offset any provisioning requirement that we will have on our existing book either through slippages that we will have or the aging related provision that we have. So that, let’s say last year the provisioning to assets was about a 55 basis points. We should actually see a lower trending in fiscal ’23 as a consequence of the recoveries that we will have, possibly in the 25 basis points to 30 basis points.

Operator

And just coming back to because of this ARC transaction because this net NPA number would fall, so we would have positive impact on the margin. Correct?

Niranjan Banodkar — Group Chief Financial Officer

I mean look, from an NII to assets, we should see I would say marginal improvement. That’s because to the extent of cash that we receive will go to improve the NII to assets, but from a NIM perspective, it’s actually cosmetic. So I would say just from an NII standpoint, the cash that we receive is the real contributor to the NII of the bank.

Operator

Got it. Thanks, sir. Thanks a lot. Thank you. The next question is from the line of Anusha Raheja from Dalal and Broacha. Please proceed. With respect to again this ARC deal, you said that reduction in the gross NPAs would be to the tune of INR15,000 odd crore, right? Am I right there?

Prashant Kumar — Managing Director and Chief Executive Officer

Sorry. Again, come up.

Operator

With respect to this ARC deal, out of this INR48,000 crores, reduction of the gross NPAs would be to the tune of INR15,000 odd crore.

Prashant Kumar — Managing Director and Chief Executive Officer

No, we were saying like INR48,000 crores includes INR15,000 crore which has been technically written off and sitting outside the balance sheet.

Operator

So INR15,000 crores, that is sitting outside the balance sheet. This 33 [Phonetic] is the current carrying NPAs because if I just look at it as on Q1, the current carrying NPA, gross NPA is INR27,000 crores. So INR15,000 crores is technical written off assets.

Niranjan Banodkar — Group Chief Financial Officer

That just also includes a non-performing investment.

Operator

So can you just give up the breakup, like what will be the current carrying value of NPAs and technical written off? And what could be the restructured assets in this 48 [Phonetic]?

Niranjan Banodkar — Group Chief Financial Officer

Ma’am, the carrying value in the balance sheet as of 31st March which we’ve explained is INR8,300 crores across the NPA, NPI pool which is going to be transferred.

Operator

So that is the net NPA.

Prashant Kumar — Managing Director and Chief Executive Officer

Which is going to be transferred to this and the gross is the INR48,000 crores, including INR15,000 crore of technical write-offs. Okay. Again on this, so what could be the reduction in the gross NPAs? INR8,300 crores was the reduction in the net NPAs. What could be the reduction in the gross NPA?

Niranjan Banodkar — Group Chief Financial Officer

Gross NPA would be lower by about INR26,500 crores.

Operator

Sorry. Come again.

Niranjan Banodkar — Group Chief Financial Officer

About INR26,500 crores. INR26,000 crores to INR26,500 crores.

Operator

And when is the deal likely to go through? When it’s expected to complete?

Prashant Kumar — Managing Director and Chief Executive Officer

We have already launched a Swiss Challenge process. It would take like around 75 days kind of thing. So I think the whole assignment would happen in the third quarter.

Operator

Okay. And what are the estimates of flows expected post sale of these assets to ARC? It will have a pool of INR48,000 crore. Usually, you will be having a 20% stake. So it is pari passu or how is it?

Prashant Kumar — Managing Director and Chief Executive Officer

So on this structure, the security which is that the banks will hold will be on a say pari passu basis. Like we said that gross value would be INR11,183 crores, so that is in some sense say reflection of the prognosis that a third party has made and said recovery on the same will happen over due course of time.

Operator

So the estimate that you have given of the NPA of 1.5% to 2%, anything that is built into these numbers? The flows of ARC, anything is built into these numbers.

Prashant Kumar — Managing Director and Chief Executive Officer

No, I think whatever like what I was sharing that…

Operator

That will get reduced from SRs I guess.

Prashant Kumar — Managing Director and Chief Executive Officer

Yes.

Operator

But I did not actually understood why it will not have a P&L impact because whether it will be received in cash or how the transaction is likely to happen? Because usually, if you get in cash, that’s usually pari passu, right?

Prashant Kumar — Managing Director and Chief Executive Officer

So the P&L impact will not be there because of the regulatory guidelines. The regulatory guidelines only allow say write back if in case say cash for that specific asset will be more than the net carrying value. So because of that say P&L impact will not be there and this will largely have a impact on the net book value of the security receipts. But the important point is that from a economic perspective, you will see that say a book which has net carrying value of INR8,300 crore that has been submitted at INR11,000 crores plus. So whatever is the delta, that delta would come back to bank as and when recoveries would happen.

Operator

Okay. So anything recovered beyond the selling price would add to the P&L. Is that correct?

Prashant Kumar — Managing Director and Chief Executive Officer

Sorry.

Operator

Anything that you receive from the ARC beyond the selling price, that could add to the P&L?

Niranjan Banodkar — Group Chief Financial Officer

So as and when the recovery, not beyond the selling price, the point that Akash mentioned. So let’s say, we keep getting the recoveries would mean that we basically keep writing or rather reducing the carrying value in our balance sheet. When the carrying value is effectively, let’s say, zero, any recoveries over and above that becomes into P&L. So it’s like in this particular structure, the P&L benefit of effectively INR3,000 — let’s say INR3,000 crores or INR2,800 crores that we are talking about is kind of rear-ended from a P&L benefit standpoint, but it is there and it has been basically validated through the bidding process that has come through.

Operator

Okay, sir. Thank you. Ladies and gentlemen, due to time constrain, that was the last question for today. I would now like to hand the conference over to Mr. Prashant Kumar for closing comments.

Prashant Kumar — Managing Director and Chief Executive Officer

So thank you so much for attending this call. We hope like we have been able to clarify your queries, but still if there is anything where you require more clarification, you are most welcome to reach out to us. Thank you so much.

Operator

[Operator Closing Remarks]

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