Good evening, everyone. Thanks for joining the call. We welcome you all to a discussion on Axis Bank's financial results for the Q1 of financial year 2020. I'm joined here by my colleagues, Jairam Sridharan, Group Executive and CFO, Rajiv Anand, Executive Director and Head of Wholesale Banking, Pralay Mondal, Group Executive and Head of Retail Banking, and Ganesh Sankaran, Group Executive, Wholesale Banking Coverage Group. Before we get into the discussion of financial performance, I would like to start by updating you all on the execution strategy that we had articulated at the beginning of the year. Our execution strategy 2022 is centered on the delivery of three vectors: growth, profitability, and sustainability. While all three are important, the starting point of our strategy has always been sustainability.
We intend to build sustainability in our business performance and operations with disciplined execution and conservatism at the core to sustainably deliver 18% ROE. This quarter saw us continue from the previous one in terms of our focus on sustainability. We continued to invest in our conservative stance on provisioning, compliance, and risk. Last quarter, you saw us voluntarily make some additional provisioning in certain select areas. We built on that in this quarter with more additional provisions towards special situations. With these efforts, the bank now holds additional provisions of around INR 2,358 crore for various contingencies, over and above what is counted in our provision coverage calculations and the 0.4% standard asset provisions. Jairam will take you through some of these facts in detail later in the call. The second element of GPS 2022 is growth.
Our philosophy on growth is to allow growth rates to be an outcome of deliberate, cautious, and conservative choices around sustainability rather than directly target specific growth rates themselves. If we consistently make such choices, there could be quarters in which our growth rates would be modest and others in which it would be brisk. We also believe that if we continue on this path, the growth will come. We are equally okay anyway with both, either a slow or a high growth. Domestic growth conditions remain soft, with weaknesses seen in multiple high-frequency indicators: auto sales are weak, and demand for capital goods remains slack. That said, there are enough high-quality market opportunities available for us to deliver domestic loan growth 5% to 7% over the industry growth rate for the next couple of years.
In line with that, our domestic loans grew 19% year-on-year this quarter. With elections uncertainty behind us, transmission of lower interest rates coupled with easier liquidity conditions, we believe will boost credit offtake and trigger a revival in private sector CapEx demand over the next couple of quarters. Continuing weakness in the NBFC sector is also helping increase bank share of domestic lending. On the profitability vector, the most important development during the quarter was a significant improvement in operating efficiencies. Operating profit was up 35%. We had also laid out a goal of reducing our cost-to-assets ratio to 2% through the course of GPS 2022, and this quarter was an important step forward. Our operating jaws were very favorable during the quarter and resulted in a fall in cost-to-asset down to 2.08%.
This quarter also saw some important moves in the bank from a talent perspective to drive greater focus on new customer acquisition on the CASA and RTD side. We created a new vertical structure in liability sales in April 2019. During the quarter, Naren Kumar Dixit has joined the bank to head this function as head liability sales. Establishing Axis as a digital bank is another important dimension of GPS 2022. During the quarter, Sameer Shetty, ex-McKinsey who will lead our digital banking initiatives, joined us. Finally, we had Neeraj Gambhir joining the Axis family during this quarter as head of treasury and markets. With this, we now have the full team in place to turn our aspirations into reality over the next few years. Two important product launches worth a mention. In the credit cards business, we have had strong growth and leadership position for some years now.
We added an important feather in that cap during this quarter as Axis Bank launched an exclusive co-branded Flipkart Axis Bank Credit Card, a card that offers best-in-class benefits for the digital customer. We aspire to build this card to be one of the largest card co-brands in the industry. The initial signs post-launching the card have been very, very positive. During the quarter, we also launched an INR 20 disruptive brokerage plan on Axis Direct, whereby our customers can avail unlimited trading at INR 20 per order, but is also expected to add to our liability franchise because our customers are expected to maintain a certain minimum balance. Axis Bank obviously remains committed to deliver consistent performance quarter after quarter, year after year. During quarter one financial 2020, our operating performance was strong. Our growth metrics were healthy.
Asset quality metrics continue to improve, and we have further strengthened our balance sheet and improved provision coverage. With that, let me hand over to Jairam to take you through the bank's financial performance in detail.
Thank you very much, Amitabh. Ladies and gentlemen, good evening. It is my pleasure to take you through the detailed financial performance of the bank during the Q1 of financial year 2020. As always, do keep our investor presentation handy as we do expect to refer to various slides there. There are 5 key highlights of our performance during the quarter. First, asset quality. Asset quality metrics are progressing well and are in line with expectation. Two, we continue to strengthen our balance sheet and our provision coverage quarter after quarter. Three, our growth metrics in the quarter were healthy, led by retail. Number four, the deposit side where our franchise had a strong quarter once again. And finally, operating profits, which grew 35% year-on-year with a very strong trajectory on most revenue and cost line items. We'll go through all of these in detail.
Let me start with asset quality and balance sheet strength. Please refer to the asset quality section of the presentation starting slide 49. NPA ratios for the bank remained stable during the quarter. We ended the Q1 with a GNPA ratio of 5.25% and a net NPA ratio of 2.04%, both slightly lower than corresponding numbers at the end of March. GNPA at the bank level, in rupee crore terms, was INR 29,405 crores compared to INR 32,662 crores at the end of the Q1 of financial year 2019. The GNPA book has now reduced in absolute terms for five consecutive quarters. Net NPA of the bank was at INR 11,037 crores compared to INR 14,902 crores at the end of the Q1 FY 2019. Once again, net NPA book of the bank as well has reduced now for five consecutive quarters.
Gross slippages in the quarter were INR 4,798 crore compared to INR 4,337 crore in the Q1 of FY 2019 and INR 3,012 crore in the Q4 of FY 2019. Slippages in Q1 do tend to be seasonally higher at the bank compared to Q4. Gross slippage ratio during this quarter was broadly flat with the gross slippage ratio seen in the Q1 of last year. We were at 0.94% compared to 0.95% last year. Of the total gross slippages, corporate segment slippages were INR 2,128 crore.
On the net side, net slippages in the quarter were INR 2,621 crore compared to INR 1,420 crore in the Q1 last year and INR 636 crore in the Q4 of last year. We had two chunky accounts, one in the power sector and another in the shipping sector, together contributing INR 850 crore that we downgraded into NPA during this quarter.
Both these accounts were in the BB and below list previously. You will recall that in FY 2019, Q1 saw a fairly large IBC-driven recovery, which made our net slippage numbers extremely low in that quarter. We witnessed no such chunky recovery during the Q1 of this year. Of the net slippages of INR 2,621 crores, INR 1,318 crores came from corporate, INR 414 crores came from SME, and INR 889 crores came from retail and agri segments put together. 79% of the net slippages in the corporate book came from the BB and below portfolios, which gets us to a very quick look at the movements in the BB and below portfolios. This quarter, we took another hard look at the ratings on our corporate exposures to identify accounts that might merit rating downgrades in the newly weak economic environment.
Looking through our entire corporate book, with special focus on some groups that are showing some signs of stress in recent months and quarters, we identified and downgraded INR 2,242 crore into the BB and below book in this quarter. The downgrades came largely from groups that have displayed some signs of stress in recent months and quarters and that have been in the news. Importantly, we also witnessed INR 1,007 crore of reduction in balances with prior period BB accounts. Mid of all these movements, the bank's BB and below corporate lending book remained largely stable at INR 7,504 crore at the end of this quarter compared to INR 7,467 crore at the end of Q4 FY 2019. This book is down 28% year-on-year. Stress groups, t he credit environment in the corporate segment continues to be challenging.
We continue to witness sudden and sometimes dramatic rating downgrades in many companies across various sectors. We would like to share some color on the bank's exposure to a few old and some newly stressed groups. In particular, I'd like to discuss, without naming them, eight stressed corporate groups and diversified conglomerates. These groups are engaged in the areas of infrastructure finance, infrastructure, power, telecom, housing finance, travel and tourism, commodities, molded plastics, and media-related sectors. If you look at these eight groups, our exposure details are as follows. I will split this into three parts: loan outstanding, investment outstanding, and non-fund-based outstanding. Our loan outstanding to these eight groups is around INR 7,000 crore. Of this, INR 1,000 crore is already NPA. Another INR 2,900 crore is now in our BB and below book. Of the remaining INR 3,100 crore, about two-thirds is with one operating media account.
All the rest is made up of various small exposures to operating entities. So that was the INR 7,000 crore loan outstanding coming to investments. On the investment side, we have an outstanding of INR 2,200 crore towards these eight groups. Of that, INR 200 crore is already NPA. Of the remaining INR 2,000 crore, we have marked to market a provision of INR 400 crore. Finally, NBFC exposure. We have an NBFC exposure of INR 3,000 crore to these groups. One-third of that INR 3,000 crore exposure is already NPA or in the BB and below pool. The remaining two-thirds is to one account in the telecom space where we have a BG which has expired, but we do not have physical guarantees returned to us.
We do have a credit enhancement from a credible third party on this account, and initial judgments in the judicial process that are underway have been in our favor. We continue to track this position closely. So in summary, our NPA exposure to these eight groups is limited and mostly in the already disclosed BB and below pool. Investment exposures are adequately marked to market, and there are only two material exposures outside the above two categories: a disputed BG with a telecom client and a loan exposure to an operating media company. These two together form 0.75% of our customer assets. Moving now beyond corporate lending, I'd like to spend a minute to highlight some facts on retail asset quality. Gross NPA ratio in retail continues to be modest.
In the Q1, gross NPA ratio in retail was lower than in the Q1 last year, which in turn was lower than in the Q1 of the year before. Net NPA ratios in retail have largely remained around the 0.6% mark, similar to where they have been for most of the last two years. Net slippages in retail are higher than in the Q1 FY 2019. This is mostly driven by the exceptionally low net slippages number you saw in Q1 FY 2019. If you go back, you find that net slippages in Q1 FY 2020 are practically the same level in absolute rupee terms as in Q1 FY 2018 on a book that is 47% larger. Net slippages in agri were at around the same level as last year and the same level as the year before in absolute rupee growth terms.
I draw your attention now to slide 56 and the table in the lower half of this slide. You see on the bottom right that the total provisions and contingencies for the quarter were INR 3,815 crores compared to INR 3,338 crores in the Q1 of last year. You will also notice that in the last two quarters, the bank has been setting aside significantly higher levels of provisions to its categories other than loan loss provisions. This is towards the balance sheet strengthening that Amitabh has been speaking of consistently. More of this in a minute. You will also see on this slide that the bank has an accumulated prudential written off portfolio of INR 21,317 crores. Of this, 86% has been written off in the last nine quarters.
We want to point out that over the last 12 months, we have recovered 9% of the opening PWO pool, and this ratio has been broadly consistent quarter-on-quarter. If you move back one slide to slide 55, you can see the credit cost trajectory of the bank over the last few quarters. Credit cost for the quarter stood at 2.06% on a gross basis. This compares with 2.45% in the Q1 last year. SMA- 2 at the bank remains benign and around 0.4% of loans. In our earnings call last quarter, we enumerated several steps the bank has taken towards further strengthening our provisioning process. That push continued through this quarter. The bank's provisioning coverage on non-performing assets stands at 78% compared to 69% at the end of the Q1 last year and 77% at the end of Q4 FY 2019.
On NPA provisioning, the bank continues to adopt conservative norms, including daily stamping of NPA across the entire portfolio and 100% provisioning for unsecured credit in retail at the 90 DPD stage itself. The bank also increased provisioning on certain non-banking assets held on our books. The context regarding this provisioning was explained in detail during our Q4 earnings call in April. This was an additional provision of INR 535 crore during this quarter. You might recall that 100% provisioning on this asset has already been passed through reserves last quarter. Hence, this incremental provision of INR 535 crore that were done in this quarter are book value neutral in nature. This quarter, we also started making specific provisions for non-fund-based exposures we have towards borrowers that are either already NPA or are showing weakness and are in the BB and below pool.
As we transitioned towards this new regime in this quarter, we made an additional provision of INR 459 crores in the quarter. Overall, through various measures over the last few quarters, the bank now holds additional provisions of INR 2,358 crores towards various contingencies. This is over and above the NPA provisioning which is included in our PCR calculations and the 0.4% standard asset provisioning requirement on regular assets. This INR 2,358 crores of additional provision for contingencies includes INR 510 crores for BB and below or SMA- 2 accounts, INR 459 crores for non-fund-based exposures, INR 1,389 crores for various stress sectors and other situational provisions.
Please note that the INR 1,138 crores of extra provisions made towards LRD in the last two quarters is not included as part of the INR 2,358 crores. So that was a detailed discussion on asset quality. Let's move now to a discussion of deposits.
You have observed that the bank has been disclosing deposits on a quarterly average balance basis for the last few quarters. The rationale behind publishing the QAB numbers is to highlight our focus on maintaining and tracking stable, non-volatile deposits and minimizing the amount of hot deposits during quarter ends. This is another step in our journey towards building a sustainable franchise at the bank. Please refer to slide six in the presentation. On a quarterly average balance basis, CA, SA, and retail term deposits together grew 24% year-on-year. Within this, SA grew 10%, CA grew 12%, and retail term deposits grew by 43% year-on-year on a quarterly average balance basis. CA, SA, and retail term deposits continue to form a strong, stable base of funding and stood at 80% of total deposits.
Slide 23, a little ways ahead, highlights the strong growth of our wealth management business, Burgundy. We manage one of the largest wealth management businesses in India with assets under management of INR 136,789 crore as of the end of June 2019. We continue to open branches steadily. We expanded our total network to 4,094 domestic branches during the quarter by opening 44 new branches. Let me now discuss loan growth and the trends we are seeing across key business segments. Domestic loan growth for the quarter stood at 19% year-on-year. The international loan book degrew by 34%. Retail continued to be the key growth driver, growing at 22% year-on-year. The bank's strategy on retail assets continues to be centered around existing customers of the bank. 83% of retail asset originations in Q1 was from existing customers.
98% of our credit cards and 93% of personal loan originations in the quarter were also from existing customers of the bank. A couple of quick comments on the bank's auto loans business. Our auto loans portfolio has grown by 36% year-on-year and now stands at INR 30,900 crore. The growth is fairly evenly spread across the country. Auto loan disbursements have grown by 19% year-on-year in the Q1. We continue to leverage our branch coverage and digital capabilities to grow our auto business without compromising on pricing or credit filters. Roughly 45% of incremental car loans are originated from our branches. 90-day delinquency ratios in our car loan business remain near two-year lows at levels well south of 0.5%. SME lending growth was tepid at 8% year-on-year. Term loans and working capital loans grew by 3% and 9% respectively.
79% of our SME loan book is working capital, and 85% of our non-NPA outstanding is to clients rated SME- 3 or better. In the corporate banks, domestic loan growth stood at 16%, and the international book degrew 39% year on year. Moving now to the bank's profitability metrics, I request you to refer to a section starting slide 10 in the earnings presentation. Operating profits grew 35% year on year with contribution from all revenue and cost line items. NII for the quarter was INR 5,844 crores, a growth of 13% YOY.
It's important to note that in the NII number of Q1 FY 2019, there was a one-time impact of INR 249 crores due to the recovery of a large IBC case during that quarter. In this quarter, we have not seen any large recovery fructify. Non-interest income for the Q1 grew 32% year- on- year to INR 3,869 crores.
This was driven by fee income which grew 26% year-on-year to INR 2,663 crore. Fee income growth was led by a healthy 28% growth in retail fee income and some contribution from Treasury. I will note that some part of the fee income increase is seasonal, particularly in Treasury. We are seeing favorable impact of some fee repricing measures as well that we undertook in certain pockets of our business, particularly in retail liabilities. That part is structural. Within retail, fees from our cards business grew strongly by 28% year-on-year. The cards business now constitutes 27% of the total bank level fees in the Q1 of FY 2020. Investment products and other distribution grew by 5% during the quarter. Transaction banking fee growth was at 7%, and corporate credit-related fees were down 1% year-on-year.
We had trading profits of INR 832 crore during the quarter, driven primarily by G-Sec gain. Miscellaneous income for the quarter stood at INR 373 crore, primarily coming from dividends from subsidiaries and recoveries from return off accounts. Let's take a look for a moment at slide 15. You see here that the net interest margin for the quarter stood at 3.4%. This compares to a core net interest margin of 3.29% in the Q1 FY 2019 after adjusting for the 17 basis points of one-off during that quarter. Domestic NIM during this quarter was 3.56%. For FY 2020, we continue to expect margins to remain broadly flat year-over-year with an upward bias. If you flip back to slide 13, this is the story on operating expense. Operating expense growth has been a major positive during this quarter. OpEx growth stood at 3% year-over-year.
Cost to assets came down significantly in the quarter to 2.08% as compared to 2.13% at the end of the Q4. Some key sources of the improvement during the quarter included rationalization of outsourced manpower, rationalization of security expenses through expanded use of command center and other such technologies, digital initiatives in sourcing resulting in lower mid-office and back-office expenses, and some seasonal elements like lower expenses on business promotion and advertising during the Q1. As stated in our previous earnings call, we intend to continue improving our cost efficiency and build cost consciousness across the bank. Much of the cost efficiency gains are likely to be front-loaded, and that is why what we are witnessing currently. We expect to consolidate around the current levels of cost to assets before restarting our downward trajectory towards our goal of 2% in the medium term.
We would also reiterate that while improvement in our cost metrics is welcome, we expect to continue investing heavily in areas that require material capital investments, in particular, our digital strategy. Profit after taxes stood at INR 1,370 crore during the quarter, up 95% year-on-year. I would like to draw your attention to the overall impact of this profitability on the book value per share of the bank at the end of the Q1. Book value per share as of March 31st 2019 stood at INR 259, which increased to INR 272 as of 30th June. Two factors primarily contributed to the increase. First, INR 2,563 crore got added due to the full conversion of warrants issued during the preferential allotment in December 2017.
And second, INR 535 crore of provisions relating to land parcels got released as we provided for the same through the P&L during the course of this quarter. And hence, your BVPS went up from INR 259 to INR 272 per share. Let's move now to digital and payments where our strengths and leadership position continue. A quick look at slide 33 on credit cards. The bank had nearly 6.2 million credit cards in force at the end of Q1, making us the fourth largest credit card issuer in the country with a market share of 12.6%. In the Q1, inr 56,500 crore of card spends went through Axis Bank network across our issuing and acquiring businesses. Slide 36 highlights the rising contribution of digital channels to business growth. 59% of all savings accounts opened are through Tab Banking.
46% of personal loan disbursements in the Q1 were through digital channels compared to 31% a year ago. The next slide, slide 37, highlights our strong position in the UPI space. During the quarter, we saw 256 million UPI transactions with total transaction value growing over 4x YOY to INR 40,427 crores. We have a registered VPA base of over 40.6 million and a market share of 11% in terms of transaction volumes for the quarter. In mobile banking, we witnessed the YOY growth of 73% in transaction value. Axis Mobile app continues to feature among the highest ranked banking apps with a rating of 4.6 on both Apple Store and Google Play Store. Last quarter, the bank's customers undertook transactions worth INR 123,547 crores on the Axis Mobile app. Let's talk now about the bank's capital position. CET1 ratio increased by 41 basis points during the quarter.
45 basis points of capital was infused during the quarter through conversion of warrants exercised by investors. There were also two risk-weighted assets-related regulatory changes in this quarter: unrated exposures to clients greater than INR 200 crore in borrowing from banks and undrawn CCOD exposures for borrowers greater than INR 150 crore from the banking system. Both of these drove a one-time use of 31 basis points of CET1. There was also a 9 basis points consumption during the quarter due to seasonal increase in operational risk RWA, which happens in the Q1 of every year. The two regulatory changes also contributed to two percentage point increase in RWA to total assets, and ops risk contributed to another 0.6 percentage points. The bank's CET1 ratio at the end of the Q1 was 11.68% with a Tier 1 capital adequacy ratio of 12.9%.
The bank's board has recently approved an enabling resolution to raise equity capital of up to INR 18,000 crore. This enabling resolution, if approved by shareholders, would be valid for one year. Key shareholder return metrics for stability: ROA and ROE for the Q1 were at 0.69% and 9.19% respectively. We continue to remain focused on our GPS 2022 strategy with a goal of reaching a sustainable 18% ROE over that period. A quick look now at our subsidiaries. Axis Finance, or NBFC, had a growth of 17% YOY and now has a loan book of INR 7,962 crore. The business continues to deliver great returns with an ROE of 18.5% and net interest margin of 4.8% for the Q1. The gross NPA ratio of the business stands at 0.36%.
Axis Securities is one of the fastest-growing stock brokerage firms in India, currently ranking third in terms of total client base. The cumulative client base rose 12% year-on-year during FY 2019 to 2.13 million. Axis Capital, our institutional equities and investment banking franchise, has been the leader in equity and equity-linked deals over the last decade. During the quarter, Axis Capital executed 10 transactions across investment banking. Axis AMC, our mutual fund business, continues to perform well with a 29% YOY growth in average AUM to INR 102,221 crore for the Q1, led by 45% YOY rise in the number of client folios. The equity and hybrid businesses comprise 57% of this AUM. Invoicemart, the bank's digital invoice discounting platform, continues to do exceptionally well and enjoys a market share of 41% among all TReDS platforms.
We currently have more than 2,700 participants on the platform and have clocked more than INR 3,750 crores in finance throughput by e-discounting over 250,000 invoices. FreeCharge, our fintech company, is being positioned by the bank as an engine that generates a large base of new-to-bank customers that are young and digitally native. The quarterly active user base of FreeCharge was approximately 13 million at the end of the Q1 FY 2020. Finally, a couple of comments on our outlook for the future. The bank is committed to our three-year execution strategy based on the pillars of growth, profitability, and sustainability with an aspiration of delivering 18% ROE sustainably. In alignment with that aspiration, we'd like to reiterate the following. We expect domestic loan book of the bank to grow 5% to 7% faster than industry.
We expect credit costs to stabilize below the long-term average over this period. Cost to assets should continue to trend down towards our stated goal of 2% by financial year 2022. We expect NIMS to settle in the range of 3.5% to 3.8% over the medium term. For FY 2020, we expect margins to remain broadly flat YOY with an upward bias. As we close, allow me to re-summarize the key themes of the quarter. Overall, this was a steady, strong quarter for the bank. Growth parameters, both on deposits and loans, were steady. Operating profitability was strong. Asset quality trends progressed as per expectations, and provisioning was further strengthened. That about sums up our quarter. With that, I come to the end of our comments. We'd be glad to take your questions at this point.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. If you wish to remove yourself from the question queue, you may please press star and two. An operator will take your name and announce your turn in the question queue. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Thank you. The first question is from the line of Mahrukh Adajania from IDFC. Please go ahead.
Yeah, hi.
Hi, Mahrukh .
Thank you for the disclosure on the eight TReDS groups. That's really helpful. I just had a question that there are other companies that get downgraded practically every day. So is the risk from BB only from these eight groups because that's hardly any downside risk? Have you had a tough look at the portfolio? And now, therefore, can we expect the BB portfolio to stabilize at these levels?
So we have looked at our entire corporate books. It's not definitely from the eight groups that Jairam talked about. Obviously, it goes beyond that. But as you pointed out, the economy is going through a bit of a stress. And to kind of we do want to confirm that nothing else will go down into a BB from here. We're watching it closely. Our risk group is assessing on a daily basis what other changes might be happening in the marketplace. And on that basis, we are looking at our ratings and generally being conservative. So I think that the reason why we want to be transparent and want to kind of we have given this data is to make everyone understand that firstly, in our BB and below book, there are assets which have been in that book for some period of time.
As some of the promoters run out of liquidity and as liquidity becomes tight in the system, some of these assets will fall into NPL as has happened in this particular quarter. I mean, they've tried. They've not been able to raise funds. So on one side, you're seeing that. On the other side, you're seeing some companies falling into BB because of the stress they might be seeing at the promoter group level. At the same time, we are seeing some resolution. Hopefully, with the bill being passed yesterday, some resolutions happen at a faster pace than before. So there's a combination of factors at work. And as we said, for us, sustainability is more important. And as Jairam pointed out, that we have a pretty large contingency provision which we have already created. And this is not linked to any group.
This is at a portfolio level. We'll continue to evaluate what it will take for us to anticipate any changes and if anything else which requires to be created over a period of time. That objective will not change.
Okay. Thanks. Just reconfirming, the corporate slippage gross is INR 2,128 crores, correct?
That's right. That's right.
Okay. Thank you so much.
Thank you, Mahrukh.
Thank you. The next question is from the line of Kunal Shah from Edelweiss Securities. Please go ahead.
Yeah. Sorry. So again, to touch upon the.
Can you be a little bit louder, please?
Yeah. Sorry. So apart from this eight industry or say the eight accounts which you highlighted pertaining to these few industries, just want to get the sense in terms of NBFCs, HFCs, and real estate. So I think these three are not there in these eight particular accounts if I have not missed out on any of them.
Yeah. So Kunal, this is not a sectoral view. This is a specific group. As it happens, there is an HFC group in this. But we have not taken a sectoral view. We have looked at the groups that are TReDS. We do take a look at every sector on an ongoing basis. Last quarter, you might recall that we had done some specific provisions towards TReDS sectors. And some of the sectors you're mentioning were specifically called out as sectors that we had internally tagged as TReDS and made additional standard asset provisions on. So we are doing that already. As far as specific problematic accounts, our exposures are concerned, as Amitabh mentioned before, we took a good look at the entire portfolio.
Once again, given the news flow that has happened during the course of the last few months, we looked at the entire portfolio again to get ourselves a sense of what else is out there that might merit a downgrade into the BB pool. Whatever merited it, whether it was because of sectoral issues or promoter leverage issues or operating profitability issues or whatever it might be, whatever merited a downgrade into BB, we have attempted to put it down into BB during the course of Q1. And so what you see, the INR 2,242 crore that we spoke about as incremental downgrades to the BB book that have happened during the course of this quarter, that came from across various sectors. And the reasoning was very different in each of those situations.
Okay. Secondly, in terms of the investments in the financial companies, which is down from, say, INR 21,000 crore to INR 16,000 crore, so INR 5,000 crore or so; this is the rundown.
Excuse me. This is the operator. Shah, sorry to interrupt you. Can you speak a little closer to the phone and a little louder?
Yeah. Sorry. So this INR 5,000 crore of investment in financial companies in particular are being down by, from INR 21,000 to INR 16,000 crore. So this is rundown or this is even there is some markdown which would have happened here?
Rundown. This is all rundown. If you see our overall book, itself has come down by INR 10,000 crore during the course of this quarter. And some of that just happens to be from the financial services sector. There is not a mark effect.
Just to add to what Jairam said, we are very clear in our minds that we do not want to be holding such a large book, an investment book, as far as corporate bonds are concerned. We obviously are a very, we have been a leader in this space in terms of debt capital markets for, I think, last 10 years, if not more. We want to maintain that leadership position, but we will turn it over much faster than what we've done in the past.
You will see a continued push towards pushing our overall book down in terms of what we hold in our books. This is part of that strategy.
Sure. And lastly, in terms of.
Kunal, that's our corporate bond book was about INR 40,000 crores at the end of last quarter. It's about INR 30,000 crores now.
Yeah. It's come off. Yeah. And lastly, in terms of real estate, out of INR 13,000-odd crore, if you can just give the breakup in terms of how much is in NPL and how much is in BB and below.
This INR 12,900 crore is all standard.
Please understand, most of our book in that is, I mean, apart from top-notch builders and LDR and stuff like that. LRD, sorry. I mean, our exposure to real estate side is not something substantial to be worried too much about. I mean, we obviously have been monitoring this portfolio for the longest period of time. Let me ask Rajiv to add a little bit more color here.
As Amitabh said, by and large, the portfolio is either LRD or loans to top-notch builders across some of the primary markets. Second is we don't do construction finance. And third is remember that we have a large mortgage portfolio on the retail side. So therefore, much of the exposure to the real estate side comes from that side.
We have mentioned this a little bit in one of the prior calls, Kunal, and nothing much has changed on that front, so I'll reiterate. Under-construction residential project finance is, for us, very, very small. It's something like INR 1,500 crore or something. It's just not a material amount too. We do have a little bit of exposure to some of these . And even though that exposure is to the very top developers in the residential space, we have a little bit of exposure in our NBFC. And the one in NPA that we have had so far in our NBFC is in the real estate space. But again, the overall exposure there as well is very small from the larger bank context.
Okay. Yeah. Thanks a lot.
Thank you. The next question is from the line of Abhishek Murarka from IIFL. Please go ahead.
Hello.
Hi, Abhishek.
Hi. Good evening. So a couple of questions. One is if I look at your provisioning and obviously, I'm not looking at the INR 1,000 crore which you've done for specific instances. But if I look at the INR 2,800 crore odd, that works out to almost 200+ basis points of loans. So how much is there any chunky element there? And in that context, how soon before we get to that normalized long-term level of 110-odd basis points of provisioning?
So Abhishek, you're right. If you look at the pure NPA provisions, that is 206 basis points which is annualized. And of course, it does tend to be Q1 high. If you look at last year, Q1 was 245 basis points. And we ended last year at a full-year level at about 195-odd basis points. So you are going to start the year high.
The trajectory is going to be of a particular kind. Q1 is going to be the high. So as opposed to 245 last quarter, we are at 206 this quarter. We do not have a specific guidance for credit costs for this year. So I encourage you to make your own sort of assumptions on how the seasonality would play out through the rest of this year. We have stated and we reiterate that in our FY22 sort of plan, the GPS 2022 strategy, we expect to be under our long-term average of 100 basis points. We are well on track towards that.
Okay. And secondly, given your commentary on the corporate operating environment in the large corporate or mid-corporate space, do you think that the downgrades to BB and below could intensify? And therefore, do you think the BB and below pool could sort of increase given the current operating environment?
Abhishek, your guess is as good as ours. We are all sort of watching the same developments as they are taking place in the environment. If the level of volatility that we have been seeing in the last few months continues, we have to keep reevaluating our portfolio. And we'll keep looking at it. As of now, we have done a thorough scrub of the pool knowing everything we know now. We have done a thorough scrub to figure out whether any account merits going into BB. And when in doubt, we have downgraded them into BB. And hence, you see a large number, INR 2,242 crore, in the downgrade pile. But honestly, we just can't kind of look too far out and make an assessment of whether something is going to change over the next two quarters.
Just to add to what Jairam was saying, all the incremental funding which we are doing or incremental lending which we are doing on the corporate side, a lot of it is coming from single A and above. So I think what you have to think through is that when you look at what our kind of historical book was and what we are adding to it gradually, slowly, year after year, the portion of highly rated the highly rated portion is only increasing over a period of time. So first, understand that the book itself is hopefully getting the weighted average rating of the book is changing. And that's for the positive. But yes, as Jairam said, given where the economy is going, how long it will last one doesn't know. Obviously, all of us are watching it very, very closely. We are cautious.
We are being very, very careful. But if some unexpected events do happen and some unexpected corporates do see stress, you could see some corporates going there. But today, what we are saying is the book reflects what we see today, for sure.
Sure. Sure. Thanks. That's enough. That's it from my side. Sorry. Just one quick data-keeping question. You said 79% of the net slippage in the corporate book was from BB and below. Can you give the same number from the gross slippage, so 21, 28, 4?
Yeah. No. There's a specific reason why I avoided talking about the gross slippage number because there have been some accounts that have slipped and gotten regularized. I mean, they slipped for technical reasons and gotten regularized during the course of the same quarter. So looking at it as that percentage is less meaningful. That's why we talked about from a net perspective.
Sure. Okay. Okay. Thanks.
Thank you. The next question is from the line of Saikiran Pulavarthi from Haitong Securities. Please go ahead.
Hi. Just moving away from the corporate asset quality challenges, what is it that you are seeing on the retail side, especially on the unsecured book? I do understand in one of the remarks, you said that the NPAs are under control. But looking forward, there's a couple of comments on that. Emphasize the caution.
So I will say a couple of lines, and the real content will be given by Pralay. I just want to kind of reiterate what Jairam said, that we have as yet not seen any sign which tells us that it is going to deteriorate. But the external factors are telling us that there is a possibility. And some of the banks have been talking about it, that they are seeing signs in their portfolio of deterioration. And obviously, external factors seem to indicate that there could be an impact and there could be deterioration. And yes, obviously, the leverage of individuals is rising. So let me just ask Pralay to kind of pick it up from there.
So yes, in the ecosystem, they're talking about it. But I have looked at our data very hard with all kinds of possibilities. And whichever way I see the trends of the quality of the portfolio is only looking up, whichever way I look at it, whether it is MOB or delinquency, 30-plus, early mortality, various factors, but at the same time, I do understand when the whole ecosystem has an issue. There would be marginal issues with everybody in the ecosystem. Based on that, I have told the team to do a stress testing on the portfolio based on superimposing a scenario of a slightly worse ecosystem environment and then show me how it looks because I'm not able to find any problem. But in the ecosystem, people are talking about it.
Having said that, let me tell you why probably we are a little more safe and secure vis-à-vis some of the other ecosystems. Two, three things. One is, A, we do almost 80% to 90% of the businesses depending on which unsecured you're talking about into our internal base. B is our analytics engine is extremely strong, not only when we are underwriting, but we also do a lot of post-underwriting constant scrubbing and constant other kind of analytics to ensure that our portfolio remains strong. And we do keep changing things whenever it's required in our scoring or analytics model, etc. Even for resolutions, for example, businesses like credit cards, you can do limit upgrade. You can do limit reduction also. So all of those models are available with us.
The third important thing which sometimes we miss is we are only looking at growth of the book which we have. But when you look at even within our retail book, the unsecured book is still not touched 20%. Even if I look at the business loans, even if I look at the credit cards, even if I look at the personal loans, whichever way I look at it, including the SME unsecured, etc., it is not well below, but reasonably below 20%. So given that perspective, our risks are well distributed between secured, unsecured home loans, and all of the products and services. So to that extent, I think we are in a safe zone right now. But we need to be cautious. We will continue to be cautious at a customer level.
As we are talking, we are actually raising the bar in terms of credit quality as we are talking when it comes to underwriting.
Got it. Thanks. The second question is on the SME side. When I look at SME- 3 and above, which is at 85% of the overall loan book, compared a year back, it was around 88%. Would you like to comment on any trends which you are seeing on the SME side? Thank you.
I think on the SME side, there are no real worries from a book perspective. However, you have seen that growth has been a bit muted. I think to a certain degree, that part is really the supply chain finance side of our business which is seeing some slowdown as a result of the well-articulated issues that we see on the auto side. But from a book perspective, at this moment, we are not worried.
The one thing, if I may add to what Rajiv just said, is that when growth slows, it is the higher or the better quality clients that are going to continue to stay away. So what we are seeing in the SME businesses, what was yesterday in your SME, let's say, 4, 5, 6, continues to be with you. But SMEs 1, 2, and 3, which were growing at a particular rate, are growing more slowly now. And that optically just looks like a greater proportion of your book is now in worse rating. So it's a growth story, not an asset quality deterioration story. As Rajiv mentioned, we continue to look for good risk-adjusted returns in SME. However, in recent quarters, it has been a little bit of a challenge. And growth has been hard to come by.
But I think you also need to appreciate that that reflects a bit of a cautious stand which you have taken on the SME side. As we have seen the economy slowing down, I mean, our growth numbers itself should be telling you that we are being quite cautious here. We want to maintain the quality of our book. And again, it cannot be at the expense of the quality. We cannot grow at the expense of quality. We're very clear internally. And the entire management team is aligned to that. So I think you need to look at both these factors when you look at our SME book.
Great. Thanks a lot, everyone.
Thanks. Bye.
Thank you. The next question is from the line of Adarsh P. from Nomura. Please go ahead.
My questions are answered. Thank you.
Thank you.
Thank you, Adarsh.
The next question is from the line of Suresh Ganapathy from Macquarie Capital Securities. Please go ahead.
Yeah. Hi. I have two questions. One is on the INR 75 billion BB and below book which is flat QOQ. If I were to look at the movement, Jairam you said INR 22 billion got added and INR 10 billion got upgraded, right?
Yes. There was a INR 10 billion movement which was either upgrade or repayments that came in. That was together INR 10 million. And about INR 12 billion slippages.
Correct. INR 12 billion slippage. So in that sense, if you were to look at it, the total slippage of about 48-odd billion, almost INR 36 billion actually came outside of this INR 12 billion number which is the BB and below book, right?
I would frame it differently. I'd say that the base that you should look at is not 48. The base is 21 which is essentially the slippages in corporate because this is only for the corporate book. And in that, there were some accounts which slipped and got regularized during the course of the same quarter. And hence, they don't show up. What shows up in this INR 1,200 crore is what slipped and stayed slipped as NPA. So INR 1,200 crore slipped from here and stayed NPA. Outside of this INR 1,200 crore, on the corporate side, from a net slippage perspective, there was basically around INR 100 crore more that came from outside the BB list.
Yeah. Yeah. I agree with that point, Jairam. But everybody looks on a gross number basis. On a gross number basis, if I were to compare your slippage this quarter outside of the BB and below book, the run rate has been 3% annualized. And if I were to compare with your peers also report numbers on a gross basis, the numbers are far lower. So that's the reason I'm a bit worried because though you might have seen that it got regularized in the same quarter, the gross numbers are not enthusing at all. So that's where the worry that comes from. What happens if it doesn't get regularized next quarter if you have something like this happening?
Suresh, there was exactly one account in gross which was from outside BB which slipped and got regularized. So this is not a big issue. So I'm not sure about the math and what comparison sort of you're doing here. But there was exactly one account which was in that kind of zone of any materiality. And so.
I mean, as you want to, Suresh, understand, we can take it offline, the calculation.
Okay. Okay. Fine. It's perfect. I think this explanation is perfect.
But it is not what you're thinking. Yes.
Okay. Okay. Cool. The other thing I had is on your 18% ROE target. The problem, Amitabh, I have here is that your margins are just not improving. I mean, there is some reason or the other whether margins have just got stuck up in one zone. And you're also thinking of raising $1 billion-plus capital. If I were to do the math, it's a mathematical impossibility that you guys are going to have 18% ROE in the next three years if I factor in a capital raising and if the margins necessarily don't improve. So I'm just wondering, how realistic is your 18% ROE target?
Suresh. Suresh. Suresh. Suresh.
Yeah. Yeah. Yeah.
Suresh, obviously, if the margins don't improve, it is a mathematical impossibility. You take one of the most important drivers of 18% ROE out, obviously, it will not happen. So yes, you're saying margins are not improving. We are working towards it. I mean, the numbers have been quite volatile in terms of how the when you look at CASA, when you look at RTD, how the RTD has been priced. On one side, you have seen lowering of interest rates. On the other side, you're not seeing the RTD deposit rates go down. RBI has just announced yesterday that they're lowering the deposit rates. I think as then some of that transmission happens as our portfolio mix and costs change. Plus, I'll ask Jairam to add to it. I mean, we have a roadmap and a glide path.
I mean, we do believe and we continue to maintain that our aspiration is to get to 18% ROE which keeps us awake at night. This keeps us asking the same question on Mancom as to how we'll get there. We have a glide path. We're not obviously going to detail to everyone what that glide path is. But you will see movement in some of the other areas. If you look at our jaws, if you look at what we've done on the expenses, what we've done on the fees, there is a movement on that. Yes, NIM has to improve. Yes, we have talked about a capital raising. And we got approval for the next one year. And by the way, end of the day, the reason capital is being raised, when we raise it, is related to growth.
Growth will also help us. Obviously, we believe that when we'll be one of the few banks as a last man standing when most of the others will suffer through this crisis, we will get the right pricing. Then you will see a positive impact on NIM, Jairam. Do you want to add?
Yeah. Just sort of just a math thing to add to what Amitabh is saying. Clearly, if you ask yourself the question, assuming a certain size of capital raise over the next little while, what does it take for us to get to 18% ROE and sort of compare that with what we delivered in FY19 already, what's in the books? Clearly, net interest margin has to be at the very high end of the medium-term range that we have spoken about. So somewhere in that 380 range as opposed to the 350, 360 range. So it needs to be there. Our fee to average assets has to be a few basis points higher than what we delivered in the last year. And cost-to-average assets has to go down to under 2%. And of course, credit costs have to be under 100 basis points.
With that and with the high levels of provision coverage that we are carrying with us now, the math for us, in some versions, does work. You're right that it is not a certainty. There are many possibilities of how this might pan out. But there is a version in which it does work out. And that's the version that's being rolled out as goals and targets internally in the organization. And we recognize the element of stretch here. But that is the goal that we have rolled out to everybody internally and that we are all uniformly pursuing.
Thank you so much. I appreciate your response.
Thank you. The next question is from the line of Nilanjan Karfa from Jefferies. Please go ahead.
Hi.
Hi, Nilanjan.
Hi. Just two quick questions. So in this 8 group that you talked about on the investment part, I reckon we only took about INR 400 crore of provision. How confident are you on the rest of the INR 1,200 crore? So that's one. Second is, when we look at the below investment grade book, I believe this is just the loans. Would you have a comparable number if we include all the investment book as it stands today? And.
I cannot understand the second part of your question, Nilanjan. Sorry. What is the loan you're talking about?
No. The below investment grade book, my guess is that's only loans, right? That's not.
Oh, oh, 7,500. Yeah. But there is a text there which talks about our non-fund. INR 2,500 crore is our non-fund base. Slide 52.
Not non-fund. I'm talking about, let's say, the bonds. The bond portfolio.
Yeah. Yeah. So on slide 69, you see our bond portfolio. And you see the investment book there.
Oh, okay. Okay. I see that now. Okay. Right. Right. Right. Right. Okay. And the following.
So the first question on the investment book in the stress groups and the fact that we have INR 2,000 crores non-NPA. There's INR 200 crores NPA. Let's put that aside. We have INR 2,000 crores of non-NPA investments. Against that, we have a INR 400 crore mark. Is INR 400 crore sufficient? We'll have to keep looking at it. We'll have to keep evaluating how this stands out. Sorry, Amitabh. You wanted to.
So Nilanjan, you have to understand one more thing which is very, very important. We have a large investment book. And we said we're running it down. But you also have to appreciate that when the interest rates are declining, there are other parts of the book which are well-rated where you will get a positive MTM also. So I understand and appreciate where you're coming from in terms of what the MTM on this could be when you saw in the market. And we understand you have to understand and appreciate that in some cases, liquidity might be limited. But you have a positive side to this also. So we obviously are evaluating it very, very closely. We do believe that overall, if you look at our investment book, we have disclosed the numbers to you as much as we can.
The number, in our minds, should be broadly sufficient. That's where we are.
Okay. Fine. I'll probably take it offline. One or two other data-keeping questions, Jairam. What would be the non-funded exposure on NPAs? And beyond this BB and below book, is there something on the restructured all the RBI restructuring schemes? And is it all overlapping with that? Or there is something additional outside it? So two questions.
Yeah. There's INR 2,800 crore, Nilanjan, which is NBFC on NPA side. And restructuring, there is nothing over and above this BB stuff.
Okay. Great. Thank you so much, Jairam. Thank you, guys.
Thank you.
Thank you. Ladies and gentlemen, we take the last question for today from the line of Pankaj Agarwal from Ambit Capital. Please go ahead.
Hello, sir.
Hi, Pankaj. How are you?
I'm fine, sir.
Sir, what do you think are the key reasons behind slowing CASA growth for you as well as the industry?
So this is a long question to end the day, Pankaj. But I'll do a couple. And then I'll request Pralay to jump in. So there are a couple of things happening. One is that at sectoral level, you're seeing household savings go down. So that's an important element of what drives down CASA. You're also seeing stiff competition from small savings which are at fairly high rates compared to CASA. So that continues to take away money from the sector. And internally, within the sector, if you see, while money is not flowing as much into mutual funds, etc., as they were in the previous year, there is still within the banking industry, there are term deposits which are very attractive instruments right now for customers to put money into. And hence, money is flowing in there preferentially.
And those three things at a macro level are impacting your CASA. But I'll request Pralay to jump in if there is anything else.
No. I think Jairam has covered most of it. But just to give a flavor to this, what does CASA do? First of all, CA and SA are two different kind of reasons to have those balances so that transactions actually build CA. And SA, when their activity is happening in and around the consumer, SA balances build unless, of course, there are certain rate-related issues which sometimes count into SA as a portfolio so which we are not playing that game, right? So from that perspective, I think the systemic CASA is primarily the whole flow through the consumer accounts are going down to some extent because the activity levels are going up.
Also, some of the high-net-worth customers are moving back into some of the wealth businesses and some of the other businesses we are seeing. But it's a function of basically what you said. Savings is coming down. Transactions are not going as much as it was happening for EMIs or some of the other things which generally SA and CA is used. And the transaction banking actually has taken away the efficiency which has created in the CA accounts, has taken away some of the balances from the current accounts. Generally, overall business environment in SME as well as in some of the retail is not on the consumption side, is not as good as it was a year back. So I think a lot of these are combining all of this stuff. But do we have an exact fix why it is going down?
I think beyond that and beyond that, the savings is going down a little bit into the ecosystem. I think that's what it is.
Sir, do you see a scenario where you might need to match SA rates offered by some of your competitors, probably a couple of quarters down the line?
See, what happens is that SA rates, both ways, they're going. Some people have given SA rates which are higher, some rates. Some people are bringing it down, etc. So we are keeping it more or less constant where we are. If you look at people who are giving higher SA rates, if you divide it into two parts, some are not exact SA. Some are SA. But how much has really moved into that? While growth of some of those banks are higher, but actually, from the ecosystem, not much.
If you discount that as well, overall, CASA is also down. So I don't think rates is an issue here. That's very tactical. That's very short-term. But the larger piece is that I think there's an ecosystem. Transactions are moving down. Our reasons for keeping balances in the SA is not high. And also, the savings itself is coming around the ecosystem. I think it's a combination of three things. Also, I've seen that capital market, when it does well, sometimes builds in balances into SA balances at times. So I think some of these things are not playing out. Rates is not going to make a difference in my view. That's a few percentage here and there in the ecosystem.
Okay, sir. Thank you. Thank you very much, sir.
Thank you, Pankaj.
Thank you. I now hand the conference over to Jairam Sridharan for his closing comments. Over to you, sir.
Thank you, Karna. Thank you, everybody, for participating in Axis Bank's quarterly earnings call. Thank you for all your questions. I wish you a very good evening.