Please note that this conference is being recorded. I now hand the conference over to the management. Thank you, and over to you.
Good afternoon, everyone. On behalf of Team IIFL, I thank all of you for joining us on this call. I am Prabodh Agrawal, Group CFO, accompanied by Nirmal Jain, our Group Chairman, R. Venkataraman, Managing Director, Sumit Bali, CEO of IIFL Finance, and Karan Bhagat, Managing Director of IIFL Wealth Management. I will now pass the mic to our Chairman to comment on overview of the group's strategy and plans.
Thank you, Prabodh. Our outlook, primarily we can take a quick look at the economy and the sector, then come to our plan or strategy. In terms of economy, many times there are certain good things happening, they get clouded by sensational news items that we hear, in the recent times, they are very frequent. Obviously, there's uncertainty related to elections. In this cloud, if you really look at the macro fundamentals, they are getting better. As oil prices are lower, that augurs well for our macro fiscal account or fiscal deficit as well as current deficit and in terms of inflation, interest rate, as well as currency. We are seeing that the headline numbers have been fairly positive. Also, domestic investors continue to invest. I mean, there has not been a situation of panic.
The monthly inflows can vary a little bit, at least regardless of uncertainties and volatile environment around, domestic investors continue to believe in the capital market and support it. Even from foreign investors' point of view, as we are seeing that China's growth has slowed down to the lowest in last 30 years, and in terms of investment destination, India becomes only large emerging market economy that can absorb investments from foreign investors' point of view. Even I've been meeting few of them. I think that regardless of what is the outcome of elections, India will continue to attract capital from foreign investors as well as domestic investors. In this background, next few months may be uncertainty because of elections, the overall outlook for the economy remains fairly positive and favorable. Coming to our businesses. Last quarter was challenging quarter.
It was a defining quarter in terms of maybe a trial by fire for a test for risk management policies, liquidity policies. I think once the dust settles, men will be separated from boys. If I look at little medium to long- term, then all our businesses have very strong positive outlook. I do not think anything has happened which will basically impact structurally and otherwise growth prospects of all our businesses. As you know that our businesses are now clearly divided into three segments and they will become three distinct entities very soon. We have IIFL Finance where our focus for growth, as I have stated in my earlier calls in last few quarters, has been on affordable home loans, gold loans, and small-ticket business loans.
That also includes microfinance, which is for a much smaller. Again, there is a focus on income-generating activities, or you can call them business loans. Liquidity last quarter, as all of us know, has been challenging, I think given our credibility with investors, our ability to securitize assets, as well as the maturity profile of our asset and liability, we have had a comfortable transition. In fact, maybe Prabodh will give more detail. We have reduced our CPs significantly down to 10%-12%, which matches the liquid assets that we keep at any point in time on our balance sheet. We also do not see any significant challenge in raising long-term resources over medium to long- term and continue to grow our businesses as usual.
You'll notice that real estate sector has been challenged. We have seen that there has been a spike in gross NPAs for our large ticket real estate or construction finance loans. Primarily because now the recognition norm is 90 days, so even if there are small delays, then auditors insist to classify them as non-performing. More importantly, in the last quarter, because of the chaos and panic, we have seen that many end users or the buyers of homes for these projects, they differ or they are delaying payment. We very strongly believe that our collateral is good in each and every case, and we should not suffer any losses.
As things recover, I think most of these loans will be back on track and become normal because we haven't seen any challenge in terms of quality of promoters or quality of the collateral that we have funded. The reality of realty sector is that gross NPAs for the time being has spiked. Our wealth business, Karan is with me, he'll talk more about it. With IIFL One, we have made a decisive move to an advisory model, and we want to lead the industry transformation. The initial response of our clients has been very exciting and very overwhelming. Our securities business again is bit more cyclical and investment banking activities have hit a low ebb and maybe they continue like that unless we see that the capital market sentiment changes.
For the time being, the securities business is volatile and has suffered a cyclical setback. Our focus remains on becoming more efficient in terms of cost and trying to move digitally and online as quickly and as much as possible, and also as easily as possible. Just a very quick update on our reorganization. That is on track as scheduled. Shareholder approval was done in December, and now we have final hearing with NCLT sometime in middle of February, so next couple of weeks. From there are few procedural requirements, which may take another couple of months. With this, I hand over back to Prabodh, who will take you through line items, and then we'll have Q&A. Thank you.
Thank you, Ribas. Our group net profit was INR 220 crore in third quarter FY 2019, down 12% YOY and 27% QOQ. For the nine months, net profit was INR 869 crore, up 18% YOY, and net profit after minority interest was INR 664 crore, up 18% YOY. In the NBFC business, loan AUM grew 33% YOY to INR 36,400 crore. It was flat on QOQ basis. Profit after tax computed as per Ind AS grew by 6% YOY to INR 108 crore. It was down 33% QOQ. Our Tier 1 CAR stands at 17.4% and total CAR at 20.7%. Primary drivers of our AUM growth are small ticket home loans, which grew by 49% YOY, gold loans, which grew by 57% YOY, small ticket MSME loans, which grew by 56% YOY, and microfinance loans, which grew by 205% YOY. The last one coming off a small base.
On the other hand, construction real estate finance, LAP, and capital market loans will continue to have declining share in our portfolio. In home loans, our focus remains primarily on small ticket loans to the salaried and self-employed sections. The fastest growing segment in home loan is the affordable home segment of Swaraj loan, with average ticket size of INR 13 lakh. Swaraj loans accounted for 23% of our home loan disbursement in third quarter and 15% of closing home loan AUM. Our Swaraj product is specially designed to support the informal income segment in fulfilling their dream of owning a home. As on 31st December 2018, we had over 7,800 approved housing projects, up nearly one and a half fold from 5,500 approved projects a year back. 55% of home loans were made through these approved projects.
We expect that this approach will reduce our operating and credit cost going forward for our housing finance company. IIFL Home Finance has been a significant player in the Pradhan Mantri Awas Yojana credit-linked subsidy scheme. Till date, it has provided benefits to over 19,500 customers and disbursed subsidies of more than INR 450 crore. The company is also expanding its footprint and currently has over 110 branches across 17 states. The customer base for our HFC has crossed 72,000 this quarter. Retail loans, including consumer loans and small business finance, constitutes about 85% of our loan book. Another strong characteristic of our loan book is the large proportion of loans that are compliant with Reserve Bank of India's priority sector lending norm. About 53% of our home loans, 54% of LAP, 83% of CV, 42% of SME, and nearly all of our MFI loans are PSL compliant.
In aggregate, nearly 47% of our loans are PSL compliant. Our average cost of borrowing rose by 31 basis points QOQ and 56 basis points YOY to 90% in third quarter. Incrementally, our borrowing cost rose by 75 to 100 basis points due to the tight liquidity conditions in third quarter. Presently, things are improving and funding cost has declined materially from third quarter level. In a rising interest rate scenario, we are in a position to commensurately reprice our loans. 46% of our loans are on a floating rate basis. In the last six months, we have raised our home loan rates by 90 to 100 basis points, LAP, construction finance, commercial vehicle, gold, and SME loans by 150 basis points, and capital market loans by 200 basis points. Our NIM was at 7.1%, expansion of 50 basis points QOQ and five basis points YOY.
89% of our AUM comprises of loans that are secured and about 11% of loans are unsecured. We believe our AUM mix is well-balanced with some scope for the share of high yielding and unsecured assets to go up. We currently have 1,862 branches, primarily for our HFC, gold, and microfinance businesses. Consolidated gross NPA and net NPA recognized as per RBI's prudential norm and provision as per expected credit loss method prescribed in the Ind AS. The gross NPA stood at 3.7% and the net NPA at 1.5% of loans. The NPA ratios appear higher, partially because the loan book has declined 11% QOQ due to portfolio sell-down. Besides, NPAs did go up across few loan categories, including real estate finance, capital market, CV, and SME.
Under expected credit loss provisioning in Ind AS, provisioning coverage on Stage three assets stood at 60% and on standard assets at 181 basis points. Return on assets for nine months FY 2019 was at 2% and return on equity was at 16.4%. Some update on liquidity. During third quarter, we were able to halve the share of commercial paper in total borrowing of IIFL Finance from 24% in end September to 12% in end December. In value term, outstanding CPs came down from INR 8,353 crore to INR 3,995 crore during the quarter. Our funding mix is well diversified, including 16% from NCDs, 5% from sub-debt, 39% from bank term loans and NBFC finance, 28% from securitization or assignments, and 12% from commercial paper. Following the 10 years subordinated bond raised from CDC earlier last year, we have initiated discussion with several other institutions to raise long-term funding.
We have received good response to our public issue of NCDs. The subscription amount has crossed INR 1,100 crore and we plan to close the issue tomorrow. We have a positive ALM whereby inflows cover or exceed expected outflows across all our buckets. On the asset side, our loan book has a relatively short maturity pattern, with 25% of loans having maturity of less than six months and 39% of loans having maturity of less than 12 months. We have liquid investments and sanctioned and undrawn trade lines totaling INR 3,750 crore in end December.
A little bit on digitization. We have continued our focus on digitization and compassing every aspect of customer loan journey. Of the total 9.12 lakh loans disbursed in third quarter, 99% were onboarded digitally. We are focused on bank and back-end process digitization through multiple innovations as well as partnerships helping us achieve process efficiency.
IIFL Loan App had 169,000 downloads in third quarter with 27,000 net new additions. IIFL Loan App is extended to personal loan customers, allowing customers to pay their EMIs and service their loans seamlessly. On analytics, we have continued to deploy advanced analytics and machine learning techniques for customer lifecycle management, from usage of credit scores and trade decisioning, to portfolio optimization, to increasing customer loyalty and managing collection risk vis-à-vis combination of predictive scoring and real-time dynamic notifications. Enhanced operational efficiency is being targeted via workforce analytics, geo expansion, and branch productivity analytics. Win back and cross-sell continue to be strong drivers of reduced customer onboarding costs, a multi-product, multi-channel cross-sell framework that factors into account for propensity as well as behavioral risk associated with exposure.
Continuing with holistic approach towards fraud and anomaly detection from pre-disbursement to post-disbursement stage, we have developed a fraud application scorecard for the digital finance portfolio. The scorecard is capable of assessing risk for customers with a bureau footprint as well as those who are new to credit. Now, coming to commentary on wealth management. IIFL Wealth PAT, computed as per Ind AS, was at INR 79 crores. Our assets under advice, management, and distribution have grown 11% Q-on-Q and 25% Y-on-Y to reach INR 1.61 trillion. We added 40 bankers during the quarter, taking the total number of bankers to 398 to further drive the growth momentum. We now have presence in 26 locations and nine geographies. IIFL Wealth offers a broad range of products and services to participate in the largest share of the client wallet.
This includes financial product distribution, advisory, brokerage, asset management, trade solutions, and estate planning. Net new money collected in third quarter FY 2019 was INR 2,633 crores. AIF assets have grown 23% Y-on-Y to INR 14,255 crores. IIFL Wealth Finance, which offers loan against securities and margin funding to high net worth clientele, reduced its loan book by 23% Q-on-Q to INR 4,748 crores, mainly due to conscious effort to de-risk the business by recalling low-yielding loans and exiting from non-core assets.
Coming to capital markets. IIFL Capital Markets, which largely comprises of retail broking, institutional broking and investment banking businesses, grew its YTD net profit by 5% Y-on-Y. During the quarter, our average daily cash turnover was down 15% Y-on-Y to INR 1,183 crores versus 3% Y-on-Y de-growth in exchange cash turnover. Our average daily total turnover, including F&O, was up 10% Y-on-Y to INR 16,370 crores.
Our NSE market share in the cash segment was around 3.5% and in total, around 1.5%. We are continuously enhancing our offerings on digital and mobile platform for retail customers in our broking business. Our mobile trading app, IIFL Markets, has had over 2.3 million downloads. Presently, about 48% of our retail broking customers trade through the mobile app. We completed 12 transactions in investment banking in the year to date and have a substantial pipeline of deals in various stages of execution. With that, we'll now open the floor for Q&A.
Sure. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask questions may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask questions, please press star and one on your touch-tone telephone. We have the first question from the line of Vikram Sharia from Antique Stock Broking. Please go ahead.
Yeah. First my question is on this securitized book of INR 9,060 crores. How much of it is in that true sale or the direct assignment format, and how much of it would be in our book, which will be the securitized part?
Out of the INR 9,068 crores of total off book, INR 1,677 crores is securitization and about INR 7,380 crores is direct assignment.
Okay. That direct assignment, this number for this quarter would be how much, if we just want the securitization plus direct assignment for the current quarter?
It's about INR 5,200 crores.
Okay. Would your interest income have any Because I think under Ind AS, you have to account everything in the current quarter itself. How much would that component be in the interest income line?
It's about INR 45 crores.
Okay. All right, thanks for that. Second question was on Nirmal's commentary that a large part of the ALM adjustments and those things are done. For in this, I believe that maybe a quarter more and most of that should be over. What would be the incremental lending rate and the incremental borrowing rate for the NBFC as a whole once these adjustments are over?
No. Adjustments are over last quarter itself. Right now the mix that we have is fairly stable, and we can continue with the same mix, which is CCPs are around 10%-15% of our total borrowing. Now the interest rate, again, that depends on environment, which is something, again, there's a crisis or there's a crunch, interest rate may go up. Most likely indications are that interest rates are headed southward. We don't see any reason to further increase the interest rate or do anything, at least at this point in time.
Okay. Yeah, I get it that borrowing cost is a variable. On the yield side, we have generally been at 14%-15% kind of a blended yield. If I take into account all the yield hikes that we have taken, should we still be able to be in that 15%-16% kind of a range in terms of yields? I understand borrowing cost will probably, I'll ask you next quarter when things are better.
No, I think, if you see we are maintaining our yield, and our yield will remain in that range, what you're saying, around 15%. It's around 14.5%-14.5% or 15% is what our yield will continue to be.
Okay. All right. Thank you.
Last quarter it's 14.3%, but so anywhere between 14-15 is the range that we look forward to.
Okay. All right. Thank you. I will come back to this.
Thank you.
Thank you. The next question is from the line of Shivakumar from Unifi Capital. Please go ahead.
Yeah, thank you for the opportunity. Sir, can you give some more granular sense on the stress in the construction real estate segment of your NBFC? As in what gives you comfort that most of this stress won't translate into a write-off kind of situation?
Yeah. I think last quarter was an extraordinary quarter when you know the entire lending facility for real estate came to a standstill and that was even more aggravated by even the home buyers deferring their purchases or basically in an environment of very uncertain cure, people just wait and watch. I think things are getting better and it's just matter of time that we should see that this is on track because I don't see any long-term problem with the sector. It's just question of liquidity crisis, which is little temporary in nature.
Okay. Sir, your comment on the operating expenses, which have been trending at somewhat elevated levels over the last two quarters. Last quarter it was, I'm talking about the NBFC space, wherein last quarter it was about INR 279 crores. In this quarter again, we are seeing an elevated cost of around INR 298 crores. What is leading to this higher cost structure?
Yeah. We've been expanding our branch network fairly aggressively. You see that our branch network has gone up to 1,872. We continue to expand and add people in our home loan and microfinance businesses, that is adding to the cost. When you look at operating percentages, what has happened is the loan book on a quarter-on-quarter basis has been flat. Obviously, they will seem little more elevated. It's all in line with our strategy for growth. As we have said that we'll expand our physical network of branches, which will basically service our home loan, business loan, and microfinance segment of the business.
Will this expansion continue, sir? Is there any number you're working towards to?
Actually number is very difficult to put a number because. The pace may slow down little bit in terms of the number of new branches that we'll add, but really it's not possible to put a number to this. I mean, that way expansion will continue forever. As I said, the pace may slow down little bit in next quarter.
Right. With regards to your cost of funds, I see it's about 8.8% for the nine months. Maybe you can give me the incremental cost of funds for the immediate preceding quarter. Your retail NCDs, you have priced them between 9.5%-10.5% and a INR 2,000 crore NCD should bump up your cost of funds, right? If you're able to secure all-
No, really. Our cost of fund is a weighted average mix of long-term, short-term, and those NCDs that we are raising, they are for 39 months, five years and 10 years. This incrementally this won't, as Prabodh mentioned, that our cost of fund has gone up in line with the industry. Whatever incremental borrowings we are doing, these NCDs are lined with that. Maybe Prabodh you want to give some of the numbers?
Yeah. Sir you know our average cost of borrowing has gone up by 31 basis points quarter-on-quarter and for the third quarter it was at 9%. That's the average cost of borrowing for the NBFC. It has gone up by 31 basis points quarter-on-quarter and 56 basis points year-on-year. That's the average. Incrementally, as I said, the costs have gone up by about 75 to 100 basis points and there has been a commensurate rise in our lending rate also.
Right. How was it in Q4?
Q4 was 9%. Sorry, Q3 was 9%.
How is it panning out this quarter?
This quarter, actually incremental costs are already down by at least 100, 150 basis points compared to the peak borrowing rate that we saw in the month of October and onward. For example, CP we would have borrowed at 10%, but incrementally now we're able to borrow at something like-
8.6
8.6 we are able to borrow. That's just one indicator. Similarly, now term loans are also easier to get and the rates are also now much better. We would have done earlier direct assignment at, say 9.5, 9.6. Now incrementally now we are able to do at 9.15.
Right. Yeah. The next question is with regards to the wealth business. We see a steep drop in the fee-based income in spite of the fact that your AUM has grown by 11% Q on Q. What led to this steep decline in fee-based income?
The fee-based income has declined primarily because of two reasons. One, obviously there's a slowdown in activity for the last three months. Post the IL&FS fiasco and in general because of volatility in the market environment, a lot of investors are sitting on the sideline to invest new money. Even though the new flows are extremely good and strong, the postponement of the investment activity is fairly high. The clients are wanting to keep the money in liquid funds and safer debt funds rather than investing it immediately into the market. While the asset flow continues, on a Q-on-Q basis the decision to invest gets kind of postponed a bit. The second is obviously even within that, the mix of investment has been predominantly on the fixed income side as compared to the equity side.
If you see a mix of our gross flows or investments for the last quarter compared to a typical average quarter, where we see 50%-55% of the money going into non-AAA debt, last quarter would have seen 72%-73% of our investment going incrementally into AAA or better debt or AAA sovereign debt and only 27%-28% of the flow going into non-fixed income. That has an impact on the yield because AAA debt as well as primary sovereign funds we end up making a substantially lower fee income. It actually leads to a little bit of slowdown in activity itself and second, the mix of the activity also has been relatively muted towards a more risk-free approach. That's the reason for the decline in the fee income.
Right. Current-
Asset flow is pretty strong. Yeah.
Yeah. What about the IIFL One strategy? How will it bring down the yields?
Necessarily it doesn't bring down the yield. Essentially IIFL One is more an advisory mandate as opposed to running a broker-dealer scope distribution mandate. While the advisory mandate itself is going to be giving a yield of, let's say, an average of half a percent. We've just launched it round about two months back. Response has been excellent. As we speak, we would have promoted already around about INR 6,500 crores to INR 7,000 crores of our assets into IIFL One or similar at an average retention of half a percent. What we need to keep in mind and what is very critical to understand when we are looking at yield is the following. Typically in a broker-dealer scope distribution model, you end up earning commission on the transaction, not on the full portfolio.
Typically in a year, a client does not end up transacting more than 20%-25% of his portfolio with us. As far as the advisory fee goes, that is being charged on the whole portfolio. While earlier we were able to get, let's say on an average a percent quarter on 20%-25% of his portfolio. Here we are able to get half a percent on his full portfolio. There's really no impact on the yield and it is much more sustainable because then a lot of passive assets also end up getting the advisory fee. However, it's a process because it needs changes at the back-end in terms of technology. We need to maintain multiple portfolios for the client as opposed to maintaining one portfolio.
As clients gradually change, they want part of the portfolio to continue in the broker-dealer setup, part of the portfolio to move into IIFL One. It's a change which will not happen overnight, but we are confident it will take place over the next six to 12 months with a much more hectic pace and the impact on the retentions actually might end up being slightly more positive over the next 12-15 months as opposed to being negative because you end up getting your advisory fee on the full portfolio as opposed to getting a transaction fee on the part of the portfolio.
Any numbers you're working with as to how much of the portfolio would you want to migrate to IIFL One?
We just launched it two months back so I don't want to really look that much into the future but the response over the last 45 days has been excellent and honestly if you personally ask me, out of the incremental shares we are getting in terms of new assets coming to the firm, we are seeing nearly half to two-thirds come in the form of IIFL One. In terms of the older assets, I think we should be able to move around 25%-30% over the period of next 15 months. I think by the end of the current financial year, we would be hoping to be around at least INR 10,000 crores-INR 12,000 crores under the IIFL One platform. Potentially be four to five times that number by the end of the next financial year, with an average retention of 50 basis points.
Okay. I take it that this 75 basis points yield that we are seeing for the nine months is more of an aberration, right? As and when the market activity picks up, you would actually go to slightly higher levels closer to FY 2018?
Yes. See on the distribution side, the fee is obviously a function a little bit of the mix of the investment, between equity and fixed income. Last quarter is pretty much in terms of client activity and aversion to risk. Pretty much comparable last to, I remember, only the first, second quarter of 2013. You've seen the risk aversion from clients being as low as what it was in the last quarter, last only in 2013. It may continue for another quarter given the fact that the elections are around the corner. It will come back sooner than later because the flows are continuing, and the money for the moment is lying in liquid funds, waiting for a better opportunity or for more clarity, and therefore less volatility.
Okay. If I can squeeze in a last question. What is the impact of the upfront commission regime in mutual funds?
Upfront commission regime in mutual funds for us, we had moved to trail on mutual funds nearly a year and a half, 2 years back. It's already kind of there in the books. There is a small minor impact of the fee change which is going to be round about close to 7% of our mutual fund income. Our mutual fund income as a percentage of our overall revenues is around about 12.5%. Around about 7%-8% of 12.5%. Around about close to 1% of our revenues, 1%-1.5% of revenues is impacted because of the change in mutual fund fee, which is already getting reflected from the last quarter onwards. We have a mutual fund trail income of around about INR 130 crore-INR 140 crore a year, which will reduce by around about INR 10 crore-INR 15 crore, INR 225 crore.
Got it. Thank you. That's it from my side.
Thank you. The next question is from the line of Ankit Gupta from Bamboo Capital. Please go ahead.
Good afternoon. Can you just say more details about this real estate portfolio which is seeing some stress? How many lenders are under stress, and what steps are we taking to recover them?
It's not an epidemic or a crisis at this point in time. I really can't give precise numbers of how many people are under stress or what stress. What happens is that many a times some of the builders may be under a temporary stress in the sense that one quarter installment is delayed. Basically, they come back on track very quickly. The only damage that one can do to them is a disclosed amount and then people start talking about them a lot. As I said that the underlying collateral is solid and good, and my belief and our belief is that this is just a matter of this quarter to next quarter, that most of these builders or the projects will be on track.
Okay.
Wherever the action has to be taken we do that. In fact, whether it's 50/50, but these cases are very few and far between.
Okay. Any specific geography where you're seeing this stress building up or where the NPAs have shot up and are these loans to real estate projects which are targeted towards premium segment or these are normal?
Primarily, most of our stress is coming from the premium segment. Primarily at Bombay. Premium in the sense that the main Bombay and maybe a little bit of Delhi, I think these two are the primary contributors.
Okay. Secondly, on the home loan book, we have been seeing very sharp jumps in growth rates, and overall the industry is seeing a lot of activity and a lot of competition. Can you elaborate more on how is the competitive intensity and our growth rates has remained very high. Any reason for that? Any specific apart from this affordable housing, which itself is seeing a lot of competition. Any comments on competitive dynamics for this sector?
This is Sumit Bali here. On the home loan side, I think we have a good niche going for us in the affordable segment. That is where we are also seeing competitive intensity has weakened a bit. Our belief is that post this crisis of liquidity in the Q3, we will see better times for some established players going ahead. There was just too much of froth before it, we do believe that the growth rates we have on that are sustainable. We are similarly in line with the affordable home loans also looked at low-ticket LAPs. Early days today, I think it's a differentiated good offering, and I think that's another product we scale up. Overall on the mortgage piece, I think the whole integrated story of looking at
Small developers who are building affordable homes. To work with them have large number of ATF, fund some of these good builders and also have a first right of refusal of getting home loan in time. We have an integrated play here and we are confident that growth rates will be good. We do see some space being vacated by some competitors and we hope to benefit from that.
How much growth rate do you see for home loans going forward, let's say in FY 2020?
See, we are also in bit of a time where liquidity situation is what it is in front of us. Our efforts in the last quarter are showing results and with this NCD issuance and some other borrowings coming through. I think we should be in decent growth rates of upward of about 25%-30% for this quarter and next year also we should be able to sustain that.
Okay. Overall on the NIM side, if we see now we are saying that we'll be able to maintain NIMs at this level and the proportion of retail portfolio in our overall loan portfolio is increasing. What gives you confidence that our NIMs will be maintained at this level?
If you see the page 13 of our presentation and if you see the growth rates on gold loan, microfinance, MSME, I think these are businesses which are growing at very healthy pace. All are higher than our current NIM. Home loan as I said, is the only one which will be slightly below that. We are seeing rate transmission happening on the entire book. There we should really see the book which is there. Given that three out of the four products are higher than the current NIM and are growing higher than home loan rates, I think we should be able to maintain the NIMs.
Okay. From overall portfolio perspective two, three years down the line wholesale book as a % of overall portfolio where do you see that going down to?
Pardon. Can you repeat the question which % you said?
What I'm saying is in our overall loan book, over the next two, three years what will be the mix of retail and wholesale book in our overall loan book portfolio let's say two or three years down the line?
If you look at our book today it is 89% secured, 11%-
85% is retail.
85% is retail, 11% is unsecured. Going forward I think over the next couple of years the attempt should be to move around 75/80 on the secured side and 20/25 on the retail side. That's the journey we are progressing towards.
Okay. Last question on the wealth management side. With the yields coming down to almost 75 basis points this year, do you see some improvement with IIFL One coming in FY 2020?
No, I think the yields are unlikely to go up beyond 75 basis points too much. I think the steady yields really to target would be in the region of 75 to 80 basis points with a ±5 basis points variation. If you see a really good environment you could see a 10-15 basis points or a bad environment 15 basis points compression on the other side. I would be very surprised if the yield goes too high beyond 75 basis points.
Okay. 75 basis will be the new base for us in terms of yield and let's say if the market improves it might have some improvement but that might be depending on the market conditions.
Yes. I think 75 basis points is a fair long-term view.
Okay. You said when the equity market improves so the AUM growth rates might improve with the improving sentiments.
AUM growth I think from where we sit and see the market right now I think if I take out either the growth in assets or fall in assets because of the mark to market movements I think domestically we should be targeting ₹20,000-₹25,000 crores on a yearly basis. It may not be exactly symmetrical on a Q-on-Q basis but I think a domestic AUM growth around about ₹25,000 crores a year on net basis is the number I think which is definitely achievable even for next year.
Okay. Thank you.
Thank you. The next question is from Nischint Chawathe from Kotak Securities. Please go ahead.
Hi. Just on the assignment income, how much loans did you assign this quarter?
Nishin, I gave you that number. It is INR 5,200 crore of the total of securitization/assignment that we did. I think out of this about INR 750 crore odd we have done is securitization, balance is all assignments.
On this almost INR 4,200 crores all that you booked as upfront income is INR 45 crores. How should we really think about this?
There's always a reversal also of the previous deal that we had done. This is a net amount.
The gross could be how much?
Very actually. I don't have the gross number, the net amount is this INR 45.
Sure. Okay. On the wealth side, are there any concerns on the LAS book? I believe you have kind of unwound the book to a very significant extent this quarter. Should we see further unwinding in the book?
No. The only book we've unwound is which is not core to our wealth clients. We've not really unwound in any significant way. Where we purely had loan against shares where clients did not have a significantly large relationship with us on the wealth management book side is where we unwound the book. Otherwise, as a book, as you see, we are massively unlevered. It's just less than an INR 4,900 crore book. We practically have, on a net basis, zero CP. Our ability to expand the book is very high. However, we want to only and only use the book as a conduit to facilitate our wealth business as well as our investments as a sponsor to the alternative investment fund business. Otherwise, on a standalone basis, we really don't want to expand that book.
Sure. Just if you could give some insights in terms of the asset management side of the business. I believe you've given some disclosures on the breakup of assets, et cetera. Maybe in terms of some plans, how we should see revenues playing out?
Yes, absolutely. That's one side we're extremely excited about. Within the asset management business, obviously, there are three or four, five mandates which we are running. As of now, our largest focus has been on the alternative investment fund side of the business. There we've seen the AUM grow nearly to round about INR 14,500, INR 14,600 odd crores grow nearly 30%, 35% over the last year, which is a significant number purely on account of the fact that we are coming from a large base last year where we actually raised INR 7,500, INR 8,000 crores in our three IFO funds. That's something which we are fairly excited about. Within that, we are running three or four different kinds of strategies, which include everything right from private equity to listed equity to private credit to real estate funds.
There we have a fairly successful track record for the last six to seven years. We have recently closed real estate fund a month and a half, two months back, all of which is still lying in liquid. We've got participation from four, five large institutions across the world. We recently also won a large mandate to manage money for a large university in the U.S. on a segregated managed account basis. All that AUM put together on the alternate asset management side has moved to around about INR 24,000 crores. We also recently got our U6 license for our IIFL Singapore entity called IIFL Capital. There we've completed an acquisition of a small fund with an asset base of $80 million. These are the broad activities we are focusing on within the alternate asset management space.
The PMS and the mutual fund business continue to be relatively small for us. We're, as of now, not looking to expand the mutual fund piece apart from a couple of flagship schemes massively. A larger part of our initiative within asset management will continue to be on the alternate assets as well as the segregated managed accounts. That's where we believe we will be able to keep our net retentions around the 65, 70 basis points after accounting for all the direct distribution costs.
In terms of revenue, if you could give some sense this quarter, what was the revenue contribution or, I mean, any color that you could give on this?
Yes. We can approximately the revenue contribution for this quarter would be around about I don't have the number immediately, but would be in the region of INR 45 odd crores for the quarter.
Sure. Just moving on finally.
This will be broadly INR 24,000 crores into 60-65 basis points. Around about INR 140 crores-INR 150 crores annually. Around about INR 40 crores on a quarterly basis with the run rate we are running at right now.
Okay, sure. Finally, just moving on to the broking business. You reported a quarter-on-quarter decline in cash market volumes of something like around 10%-11%. Just trying to kind of understand how should one be thinking about it. Very interestingly, 5paisa which was kind of a part of IIFL some time back has reported like a 19% volume growth in the cash segment. I was just wondering as to how should one be thinking about it. Is the market moving more towards the 5paisa kind of a model and how would this company then post-separation play out?
I think there's a segment of the market that's moving towards discount brokerage, and you'd have seen that how quickly Zerodha has emerged as a larger player and ICICI Securities as well. What is happening is that market will get divided in two parts. There are still investors and of course starting from wealth to mass affluent, who basically look for individual and personalized service and advice, and they realize that few basis point of cost is worth the advice and also the service that they get.
On one hand you see that incremental growth is coming from. As I said that as the whole story plays out fully, I think discount brokerage will have certain market share. There will still be a market or a significant segment of the market that will remain with full service brokers.
IIFL-
They have started from zero basis. They're quickly grabbing the market. These are very DIY kind of customers who prefer to do things on their own and they don't know why should they pay the full service brokerage.
Sure. The IIFL will remain focused on full service model?
Yeah, absolutely.
Sure. Thanks a lot, and all the best.
Thank you.
Thank you. The next question is from Viral Shah from Credit Suisse. Please go ahead.
Hi. Good afternoon, Sunil. Viral Shah from Credit Suisse. I have two questions to Karan. Now that the presentation on slide 22 is kind of different from what it used to be earlier, I just wanted some reconciliation. The top left chart, breakup of wealth management assets adding up to 100 bases, 100%, is the breakdown of the previous slide's INR 1.6 lakh crore. Is that right, or is there something excluded from that?
No, it's the breakdown of INR 1.6 lakh crores.
Right. Where does the right-hand side breakup of AMC assets sit within this?
It sits in third party.
Okay. It's your AMC, you categorize this on the-
The double counting, which is reported-
Yeah
which is not taken to arrive at the INR 160.
Okay.
Yeah. There is the INR 14. Our total assets will be INR 174 if I look at it individually. The total assets will be INR 174, of that INR 14,000 crores of our asset management assets have been distributed by the Wealth Management. We knock that off.
Out of total of INR 25,000 crore, INR 14,000 crore distributed in-house.
That's right. That's why it's knocked off, and then the net number is 160.
Okay. My second question.
They're not double counted.
Yeah.
They're not double counted. Yeah.
Understood. My second question, you mentioned about how we are seeing investors park money in fixed income funds from equity funds. Is there a risk to that as well? With not just market risk, but even credit risk becoming an important factor for investors.
Actually, as a firm, we have very low exposure to credit funds as a whole. I think our largest exposure has been really to AAA funds as well as more FMPs. Our exposure to open-ended credit funds is extremely low in percentage terms. When I said last quarter risk appetite is low, I meant including credit funds. There's hardly any new inflow into credit funds. What really is, in that sense, is all classified into two broad asset classes for the last quarter. The first asset class is AAA, and within AAA, only six or seven names, and everything else quasi-sovereign or sovereign. When I say 72% of the trades are debt, I'm only meaning this world. 72% of the trades are in this part. Everything else which has got a credit element to it, including debt, sits in the remaining 28%.
The remaining 28% is not only equity. It could include equity, it could include credit funds, it could include a AA+ instrument, it could include a private credit trade. All of that sits in the remaining 28%. 72% of the money is going into either AAA fixed names or AAA sovereign.
Right. How do you read the market? Going forward, is it going to remain like this or worsen from here with recent events?
From what I'm seeing from our client portfolios, all the new money we've got and a lot of new clients we've got over the last two months, even today, as I talk, more than 85%-90% of the portfolios are sitting practically in liquid, waiting for a better time to deploy, or at best, sitting in AAA and sitting aside. In that sense, the level of activity is drop. I personally don't see it changing massively before the elections, at least. I think that kind of broader slowdown in activity might continue at least till the elections. After that, obviously we need to see some more clarity or definite conclusive view across the world in terms of some volatility going off, because otherwise, I really don't see the mindset in terms of investments changing rapidly within the next 30-60 days.
Right. Lastly, did I get you right that you said that the overall retention yield of 75 basis points, which is fund-based plus non-fund-based, that should remain in this range of 75?
Yeah. Obviously, it's an estimate. It could be minus five or plus seven, eight, because the advisory model will throw up its own vagaries and challenges over the next one year. Given my test marketing and the fact that we moved INR 7,000 crore in the last two months, last 45 days actually, based on those data points, I think it's a fair enough estimate to assume the 75 basis points will hold.
Okay. Got it. Thank you.
What you have to appreciate in that 75 basis points is the dependence on any kind of retrocession or commissions from the manufacturer is zero. It's actually reductions in TER. We are the first ones to launch direct plans in alternative investment funds and portfolio management services. Effectively, in a sense, we are kind of even killing our, I don't want to call it killing, but even redirecting our clients even for alternate products to come into direct plan. The ability of that retention to stay becomes very high and practically non-dependent on the manufacturer.
Okay. Understood. Thank you very much.
Thank you. Before we take the next question, we'd like to inform participants that in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. The next question is from Ashwin Bal from HSBC. Please go ahead.
Hi. This is Ashwin Bal from HSBC Asset Management. My question was regarding asset quality. You referred to the real estate part, but even if I look at the other segments, you've seen asset quality deteriorate quite sharply. Like for instance, CV your net NPA has gone up from 2.9 to 4.4. Any color on that in terms of the geography or particular segments there, which have caused that stress? Because other players in that segment have not reported. Also on the real estate asset quality itself, I just wanted to check because you referred to the liquidity situation kind of being responsible, but wouldn't a lot of that just have flown in the 0 to 90 bucket in the last quarter?
Is that full effect sort of yet to play out because some of that 0 to 90 would also now flow into the NPA bucket in the current quarter?
Specifically on the commercial vehicle, it was a pretty challenging quarter and historically we've seen last year also the last quarter remains the best quarter and so we're hoping that happens. This quarter, I think a couple of things happened. I think, a) lot of vehicles which we had in stock could not be sold because typically they depend on some other smaller NBFCs to fund that purchase, which due to the credit tightness was not forthcoming. This month is already started looking good. Volumes also were down in the last quarter, so that's also amplified the percentage ratio. We are hoping that this quarter the numbers on CV would come down.
On the real estate?
Yeah. Real estate, I have already spoken couple of times on that the last quarter was an extraordinary quarter in terms of liquidity and the state of real estate. We are confident that these things will get on track and the NPA spike that we are seeing will be reversed. The GNPA number on real estate and our belief is in the next two quarters will come down to the earlier level.
Okay. Just one question on the.
Again, there's another accident, another crisis and another set of new worries that nobody can predict that. Under normal circumstances as things are today or as things are in last few weeks and I think they'll get better. That's what the hope is.
Just one additional question on the, in terms of the availability of funds from, let's say the banking channel, how has that been? How much of incremental lines would you got sanctioned, let's say during the last quarter till now? Also how do you see that part there and what's your unutilized bank lines currently?
Banks are focusing on securitizing. What they are doing is they are incremental available funds they are trying to use to buy assets from NBFC. Prabodh you have some more details on that.
As I mentioned in the call we have sanctioned and undrawn state lines of close to INR 3,000. This is a combination of sanction for direct placement as well as for term loans. We have from various PSU banks as well as private banks sanctioned lines for securitization deal for our home loans, for our commercial vehicle, SME, et cetera. That's a pretty large pipeline which will fill up the next quarter.
Thank you. The next question is from the line of Megha Hariramani from Pi Square Investments. Please go ahead.
My question is on the Q4. How does that look like? Do we see any pressure in the next quarter? Second on the IIFL Wealth, how do we plan to expand or probably grow this vertical? I know you've been answering a lot of questions on this, but just in a nutshell if you can say what are we focusing on and how do we see the income on the advisory side or on the other income, fee income that we get? How do we see that expanding? Thank you.
I think expansion on the wealth management side is essentially going to be a function of two or three things. The first function of expansion is essentially going to happen through deeper penetration in, I don't want to call it the tier 2 cities, but the cities beyond the top six cities. We're seeing a lot of traction in the last six months in these cities. For example, even places like Baroda, Raipur, Goa, Ahmedabad, we've seen massive traction build up. That I think a large part of the wealth which is typically being either informally invested in ICDs or in fixed deposits or in real estate, is finding its way into financial assets in these regions. Second, across and irrespective of all the chaos and mayhem in the markets, the quantum of new money coming to the industry continues to be very strong.
Even now, on the unlisted equity, we place at least a couple of transactions every 15 days, where people who've exited businesses are ending up with a large amount of capital in the secondary form. That money continues to be fairly large, and we continue to have close to around about 70%-75% incremental market share, where we have ensured that we are either the lead manager, lead bankers or at least a large manager of the money for all these cases. Thirdly, as I said, we're very excited on the alternate asset management side. I think that's a business which for us can, over the next 18-24 months, grow three to fourfold from here. There obviously a lot of investment is required in identifying the right people to manage the right strategies.
In that sense, Anup coming in over the last six months has enabled us to build our business well. As we build out that business, we also recently closed a private equity fund of around about INR 1,000 crores a couple of months back. There we've got a great manager, Prashant, managing possibly his second private equity fund. With the first one, we had a great experience, both in terms of returns and exit. Those are strategies which I think will continue to do extremely well. In terms of advisory, as I said earlier, I think overall at the end of this funnel, the average fee on a consistent basis will be higher than under the broker distribution model. It will take its own nine, 12 months to kind of play out before it settles at that range of 77, 75, 80 basis points.
Okay. The fourth question was on Q4. How do we see the next quarter? Will it be under pressure as compared to the last March quarter?
Things are very fluid actually, and they keep changing every day. Like last two days, development hasn't been very favorable for the sector. On the whole, I think last quarter was extraordinary in terms of panic gripping the market. I would think this quarter should be definitely better than the last quarter. It may not get on track as much as things used to be six, four quarters back, but still things will be slightly more positive.
All right. Thank you so much and wish you all the best.
Thank you.
Thank you very much. Next question is from Sahil Shah from Edelweiss Asset Management. Please go ahead.
Thank you for the opportunity. Firstly, on the wealth RM side. This quarter, we have added about 40 RM, and in last one year, we have added about 70 to 80 RM. Our implied cost is going down year- on year. Can you put some light on that?
This quarter, RM's addition is 29 because of the integration of wealth advisors.
Yeah, whole year it's about 70 to 80 RM addition, if you look at the number. Our cost is year- on -year is going down.
Okay. That large implied cost has gone down because of the relative bonus provision variable. It is a function of the incremental profit post breakeven coming down.
Sir, our PAT is also falling on the wealth side. It is about INR 15-INR 18 this quarter. How do we see that going forward?
I think I've addressed that mostly through the full call. The PAT is a function eventually of the gross retention and margins on both the fund-based as well as on the sales side. It is largely a draw down from the fact that the retention on assets is in the region of 60, 62 basis points as compared to 75-80 basis points in the previous quarter.
How do you see that going forward?
As I said, if the level of activity is largely directed to an extreme position, as extreme as the previous quarter with 70%-75% in AAA and AAA bonds only, then the retentions can remain muted. It's something which is once in a blue moon. Last I saw it in the second quarter of 2013. It may continue for another quarter or so, as long as the net flows continue to be positive, the retentions bounce back sooner than later.
Okay. On our asset quality front, this quarter there has been a GNPA went up about 150 basis quarter-on-quarter. Probably that's come from real estate and the CV financing. Where do we see that going forward? Are we expecting the slippage likely to continue, or what could be the
Our call on that. Overall, I think again through the call or we've said real estate has seen a very challenging quarter, but underlying assets are good and it's just that some of these things also have external dependency in terms of getting sorted out. The other granular retail businesses like CV, et cetera, I'm sensing better times ahead. We do see fourth quarter being the best quarter for the last two years. That's how we look at it for Q4.
Sir, could you quantify the number of developers who slipped into the GNPAs this quarter?
No. We have lots of the number of developers that default is around few hundred. It is difficult to quantify numbers.
Okay. Sir, lastly, on the credit cost. This quarter compared to last year, Q3 FY 2018, our credit cost is very high. How do we see this in Q4 FY 2019?
Sorry. What's your question? Our credit cost is high.
Yeah. Credit cost is very high, mainly because of transition to IND AS. How do we see the Q4 FY 2019 and FY 2020?
I think if you look at our credit losses, they are in the range of 1%.
1%.
Is that percentage for the full-?
No, for the quarter.
For the quarter.
Yeah.
Maybe, given the profile. What happens that if you really look at SME and other product categories, there the credit losses are higher, but they are made up by higher yield as well. It might taper off because the last couple of quarters have been difficult, but they may be in the longer- term, if you see our historical trend, they've been in the range of around 1% or maybe 80 basis points to 1%. You can say that 1% ± 20 basis points, there's a trend line that it should come back to.
Thank you very much. Due to time constraints, we'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.
Thank you so much. Thanks everybody for being on the call, and if you need any more information, clarification, please feel free to get in touch with our investor relations. Have a good day. Bye-bye. Thank you.
Thank you very much. On behalf of IIFL Holdings Limited, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect the lines.