Ladies and gentlemen, good day and welcome to IIFL Holdings Limited second quarter earnings conference call. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. 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. Good morning to all the participants and welcome. I'll just share my thoughts about the macro environment that our company and our group works in and then broadly on our strategy for our various businesses. Then I'll hand it back to Prabodh for a line-by-line discussion on financials and also for question and answer. I also have my colleagues Sumit Bali as well as Karan Bhagat, who head our NBFC and wealth businesses respectively, and also Venkat, who is Managing Director along with CFO, of course. If we were having this call about a week back, the things would have been very despondent, but now they are looking much better and much brighter. One of the key reasons is the crude oil prices have fallen from the recent peak of $85 to $72.
My last 30 years of experience with this, our Indian economy and market is, that crude actually matters lot more than even the Finance Minister or RBI Governor for that matter. Whenever crude prices have gone down, our current account deficit, our fiscal account deficit, liquidity, and everything looks better. Rupee also strengthens, and that gives more confidence to our foreign investors. Along with this, we are also seeing a few positive developments in global market. We are seeing that the U.S. bond yields, which people earlier panicking that will go up to 2% or 4%, but is stabilizing at 3.15 or thereabout. The Hong Kong market today had one of the strongest rallies. Most of the markets have started recovering. They're looking better. Back home also, liquidity is looking better. I mean, it's not a panicky situation that it was a few weeks ago.
A few more positive developments if we see them, IBC is working. Essar Group is one big name, but there are many other resolutions are happening. I mean, it's a democracy called India, where things have to move at their own pace, but still they are moving in the right direction, we are seeing positive development. Corporate earnings has been a mixed bag, but still there are quite a few sectors and companies have shown revival. Most of the companies that are domestically focused are doing better and some of the leading FMCG companies also have reported very good results. Coming to our various businesses. The first NBFC, which has been the sector itself has been in the eye of storm, people started talking about whether this sector will continue or its past glory is over, it has already peaked.
The kind of ALM mismatches they have, maybe they have exposure to real estate sector. Now they won't be able to grow. They won't get any funding. I just wanted to share some data before we get into a little more discussion on this and our company. Last year, NBFCs accounted for 37% of incremental credit. Today the situation is that private sector banks, public sector banks, and NBFCs almost account for one-third each. A channel or a vehicle or engine which is serving one-third the credit requirement of the country, you just can't take it away. Unless we really want our country's growth to be jeopardized in an irreparable way. Not only that, if you really look at it, the debt to equity ratio of NBFC sector is around 5.7 or 5.8. These are the rating agencies' aggregate estimate.
Which if you compare with banks use Basel III requirement for capital is 7%, they require another 2.5% to manage the volatility. In case of NBFC, the Tier 1 capital requirement is 10% and Tier 2 put together capital adequacy requirement is 15%. While banks do have advantage and a liquidity buffer of SLR, CRR, but still NBFC as a sector Okay. Important thing to note is that in last 20 years, there are quite a few banks that were required to be merged, otherwise on their own they had solvency issues. Touch wood from 1998 till now, no NBFC really has gone bust. The capital adequacy requirement really works very well. Now, many times question arises that is bank funds which NBFCs use.
From a systemic point of view is very good because you have a 2 layers of capital buffer. When banks are lending, they do their diligence, they have their capital adequacy, it comes to NBFC and they have their capital adequacy as such. Besides, of course, the advantage of last mile, lower cost, and their specialized skills in credit collection and underwriting in certain verticals and particularly the small retail loans. NBFCs don't typically fund large projects or big industrial houses, therefore their relative share in SMEs, the small and medium enterprises, as well as the consumer loan is much higher. I think that is what is the growth engine for the economy. I think NBFCs are here to stay. They have an important role to play. Whatever in a panic situation people can talk about.
In a panic situation, we can see stock market valuations also gyrates very widely. Being part of the industry, being part of running an NBFC, I feel very comfortable that once the dust settles, people again see that the sector is very well cleaned. About the liquidity, till now there is a trial by fire for the sector in terms of all kind of rumors, the scare and also whatever happened in mutual fund. Still, touch wood, I think the industry has come out very well. The things, whether one can improve the liquidity profile? Of course, yes. Whether there can be some NBFCs that are highly levered or have more exposure to real estate? That is possible. As far as we are concerned, we see tremendous potential for growth in this business.
Also, if you notice, and you would have seen in our presentation in the last quarter alone, we added 208 branches for our NBFC business, which comprises, of course, a large number of branches of microfinance, 135 branches, we also added branches for another loan product. We continue to invest in technology, people and infrastructure as required. In terms of our growth focus, we have been very consistent. If you see last several quarters, we've been talking about it. That we want to focus on retail lending and our focus is on SME small ticket lending. Our ticket size is just about INR 500,000 or small ticket home loans. Again, ticket size is INR 20 lakh, INR 22 lakh or microfinance loan and gold loan. These are the businesses that we want to focus on.
By implication or by deduction, you can see that construction finance, real estate, LAS or loan against securities, these are businesses which are growing at a slower pace or de-growing. In terms of interest margins, of course, there is a bit of a fall last quarter and one can see that as the liquidity profile of liability changes, there can be some more pressure on NIM. We are geared up to make sure that we have the right product mix and we save on our operating cost and we make up for this. Last quarter NIM was also impacted because quarter before last we had a securitization gain coming in, which the interest comes in interest and maybe Prabodh will explain more about it.
Going forward, I think there may be some impact on margins or NIM, which can easily be made up by over a period of time by product mix as well as having a tighter control on cost. In terms of liquidity, we repaid about almost more than INR 4,000 crore of CPs as a group. Some new CPs that we have contracted are for three months or longer period so they basically cross over December. Besides these CPs, INR 700 crore of NCD, which fell due for payment, they were also paid and all the debentures, CPs and bonds obviously have been paid in time. That way we paid about INR 5,000 crore of debt of short-term and long-term in this month alone, in the month of October.
In terms of liquidity, we don't want to get into granular details but I can only assure that we are monitoring on a day-to-day basis, the core management team, all my senior colleagues and we are completely in control and comfortably placed with adequate margin of safety for all our businesses. Coming to our wealth business, Karan is also there. He'll probably take question and answer and talk more about it. The velocity of the flow of funds, the new money is INR 5,000 crore which has been similar number for last several quarters and that shows the fundamental robustness and stability of the business.
Very interesting number to note in our presentation if you've seen that over asset base of INR 1,40,000 crore, we actually segregate the changes in AUM by showing new money as well as the market losses or profit separately and this we have been doing for last several quarters. The market losses on this base is just about INR 1,500 crore in last quarter which is just about 1% on an aggregate basis. That shows that our asset allocation with our client has been fairly prudent and there has not been excessive exposure to mid-cap or equity which probably would have resulted in larger losses and the flow of money also continues over a period of time.
I think these are the things that we are more concerned about that we keep getting new money and we make sure that the business remains stable and robust from a longer term fundamental perspective. Securities business, although many people expect this business to be more volatile but if you look at the earnings then they exhibit similar trend as other businesses. In this business, of course, investment banking was impacted last quarter and there may be more impact in this quarter because our investment banking revenue is mostly from ECM which depends a lot on IPOs and QIP. At least at this point in time it looks like that many issues might have been deferred and this quarter may be a tough one. More importantly the other two segments of securities business that's retail equities and financial product distribution and institutional business, they're becoming less volatile.
They are becoming less volatile because the dependence on foreign capital or FPIs or FIIs has reduced and local mutual funds for our institutional equities as well as the mutual fund distribution because many retail investors, we have been gearing them towards mutual funds rather than direct equity and I think this trend will continue which will make this business more robust and stable from a longer term perspective. Coming to corporate reorganization or our demerger is on track. Most of the important approvals like RBI said we have already been received. NCLT which is equivalent of High Court has convened shareholders meeting on 12th December. Once shareholders under the supervision of NCLT approve it, I think most of the things are procedural which basically you submit the approved scheme to NCLT. They're obviously in the process of getting it listed through exchanges.
We expect this to be done in the last quarter of this financial year, which is as per the schedule that we have discussed earlier. With this, I hand over back to Prabodh, who will take you through our financial numbers, and then we are all there for the question and answer. Thank you.
Thanks, Nirmal. We are very pleased to report a 29% year-over-year growth in our group net profit to INR 301 crore for second quarter FY 2019. Net profit after minority interest has grown by 30% year-over-year to INR 230 crore. ROE was 16.4% and ROA was 2%. In our NBFC business, the loan AUM has grown 40% year-over-year and 8% quarter-over-quarter to INR 36,373 crore. Profit after tax computed as per Ind AS grew by 70% year-over-year to INR 161 crore. Our Tier 1 CAR stands at 15.5% and total CAR at 18.7%. Primary drivers of our AUM growth are small ticket home loans, which grew by 59% year-over-year, small ticket MSME loans, which grew by 113% year-over-year, and microfinance loans, which grew by 259% year-over-year. The latter two products growing off a small base. Besides these three fast-growing products, we also recorded good growth in gold and CV loans.
Growth in LAP and capital market loans was moderate as planned. In home loans, our focus remains primarily on small ticket loans to the salaried and self-employed sections. The fastest-growing segment in home loans is the affordable home segment of Swaraj loans, with average ticket size of INR 13 lakhs. Swaraj loans accounted for 22% of our home loan disbursements in second quarter and 14% of closing loan AUM. Our Swaraj product is specially designed to support the informal income segment in fulfilling their dream of owning a house. IIFL Home Finance has been a significant player in the Pradhan Mantri Awas Yojana credit-linked subsidy scheme. Within construction and real estate finance, the mix continues to change towards construction finance for small ticket housing projects.
As on 30th September 2018, we had over 7,300 approved housing projects, up nearly one and a half fold from 5,000 approved projects a year back. All our construction finance loans and 50% of home loans were made through these approved projects. 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 RBI's priority sector lending norms. About 50% of our home loan, 56% of LAP, 87% of CV, 42% of SME, and nearly all of our MFI loans are PSL compliant. In aggregate, nearly 46% of our loans are PSL compliant. The large share of retail and PSL-compliant loans are of significant value in the current environment where we can sell down these loans to raise long-term resources.
The share of loans sold down currently stands at 15% of our AUM, and our endeavor is to take this up toward 20% in the next few quarters. We have been selling down both PSL and non-PSL loans in 6 product categories, including home loans, LAP, SME, CV, gold, and microfinance. In this regard, we have an ongoing relationship with several government, private, and foreign banks. Our average cost of borrowing rose by 10 basis points QOQ and 20 basis points YOY to 8.7%. Incrementally, our borrowing costs have risen by 75-100 basis points due to the liquidity crunch. 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 four months, we have raised our home loan rates by 90-100 basis points, LAP, construction finance, CV, gold, and SME loans by 150 basis points, and capital market loans by 200 basis points. Our NIM was at 6.8%, contraction of about 50 basis points QOQ and about 75 basis points YOY, primarily due to upfront gain of INR 40 crore booked on direct assignment portfolio in the previous quarter. In this quarter, we did asset sales of INR 1,492 crore versus INR 2,400 crore in the previous quarter. The volumes were slightly lower. The upfront gain booked in the current quarter was completely offset by the reversal of gains in the previous quarter. Medium and high-yielding assets currently constitute 52% of our AUM. These include microfinance loans, MSME loans, gold, CV, and construction finance.
The other half of our AUM consists of relatively low-yielding assets, including home loan, LAP, and capital market loans. 90% of our AUM comprises of loans that are secured and about 10% 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 continue to add branches in our HFC, gold, and microfinance businesses. Total number of NBFC branches have grown by 52% YOY to 1,755. Consolidated GNPA and NNPA recognized as per RBI's prudential norms and provision as per the expected credit loss or ECL method prescribed in Ind AS stood at 2.2% and 1% of loans respectively. As a result of implementation of the expected credit loss provisioning under Ind AS provision coverage on Stage 3 assets stood at 53% and on standard assets at 191 basis points.
Return on assets for the NBFC was 1.9% and return on equity was 16.7%. Some update on the liquidity position. We have a positive ALM mismatch across all our buckets. On the asset side, our loan book has a relatively short maturity pattern with 28% of loans having maturity of less than six months and 40% of loans having maturity of less than 12 months. Our funding mix is well diversified, including 18% from NCDs, 5% from subordinate debt, 35% from bank term loans and NHB refinance, 16% from off-balance sheet borrowings, and 24% from commercial paper. During the month of October, as Nirmal mentioned, we were able to contract new CPs and repay old ones. In October, we have repaid and prepaid CPs worth INR 4,725 crore. Also, we repaid NCDs worth INR 795 crores.
We had liquid investments of INR 2,400 crore and undrawn trade lines of INR 1,535 crore as on 31st October. On digitization, we have continued our focus on digitization encompassing every aspect of customer loan journey. Of the total 8.18 lakh loans disbursed in second quarter, 99% were onboarded digitally. We are focused on back-end process digitization through multiple innovations as well as partnerships helping us achieve process efficiencies. With 162,000 mobile app downloads in second quarter and 4.4 lakh cumulative downloads, IIFL Loans mobile app is growing steadily, fulfilling account management and servicing needs of our customers. Consequent to the change in policy regarding usage of Aadhaar, we have moved to non-Aadhaar based KYC processes across businesses.
On analytics, we continue to drive the use of credit scores and automated decisioning across products and strengthen risk mitigation by developing and deploying behavioral scorecards for purpose of providing repeat funding of existing customers. We have retrospectively deployed advanced analytics in CV business. We have tightened our trade approval thresholds in regions we anticipate greater onboarding risk. There is continued focus on cross-sell and win-back with our analytically driven gold loan win-back generating strong volumes for both gold business as well as group wide products. Analytics triggers are also being used by Fraud Control Unit or FCU to eliminate fraud applications in pre-disbursement stage, as well as for initiating proactive action in post-disbursement stage. Some commentary on the wealth management business. IIFL Wealth AUM computed as per Ind AS was at INR 1,40,000 crore .
Our assets under advised management and distribution have grown 3% quarter-over-quarter and 23% year-over-year to reach INR 1.45 trillion. IIFL Wealth raised equity capital of INR 746 crore in June 2018 through a private placement to six institutional investors. Out of this amount, we had allotted shares worth INR 652 crore and the same form part of net worth as on 30th June 2018. Allotment of the balance INR 94 crore worth of shares was completed in August 2018. We hired 10 bankers during the quarter, taking the total number of bankers to 358 to further drive the growth momentum. We now have presence in 24 locations and nine geographies. IIFL Wealth offers a broad range of products and services to participate in the larger share of the client wallet. This includes financial product distribution, advisory, brokerage, asset management, trade solutions and estate planning.
We raised net new money of INR 5.7 crore in second quarter FY 2019 versus average quarterly run rate of around INR 6,000 crore last year. AIF assets have grown 53% year-over-year to INR 13,676 crore. IIFL Wealth Finance, which offers loan against securities and margin funding to high net worth clientele, grew its loan book 28% year-over-year and 10% quarter-on-quarter to INR 6,191 crore. Average lending rates for this book is around 10.5%. Some commentary on capital markets. IIFL Capital Markets, which largely comprises of retail broking, institutional broking, and investment banking businesses, grew its net profit by 23% year-over-year. During the quarter, our average daily cash turnover was up 9% year-over-year to INR 1,334 crore versus 19% year-over-year growth in the exchange cash turnover. Our average daily total turnover including F&O was up 59% year-over-year to INR 21,070 crore.
Our NSE market share in the cash segment was around 3.7% and in total, around 1.9%. We are continuously enhancing our offerings on digital and mobile platforms for retail customers in our broking business. Our mobile trading app, IIFL Markets, has had over 2.1 million downloads. Presently, about 44% of our retail broking customers trade through the mobile app. We completed four transactions in investment banking. With that, now we'll open the floor for Q&A.
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 please press star then one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star then two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask a question, please press star then one. The first question is from the line of Viral Shah from Credit Suisse. Please go ahead.
Hi, good afternoon. This is Sunil Tirumalai from Credit Suisse. Thank you for the opportunity. I have three questions. Firstly, continuing on the discussion on the liquidity situation. We understand, going ahead into November, also you have a fairly large INR 7,000 crore, INR 8,000 crore worth of maturities redemptions coming. Just wanted to understand how are you approaching it. Is it through bank clients? What additional cost do we see over and above the 75 to 100 basis points that you mentioned in your opening remarks?
No, we don't have INR 7,500 maturing in November, actually. Maybe if you're talking about total TP, it will be different. We got INR 4,000 crore liquidity with us, which is INR 2,500 crore of cash and INR 1,500 crore of undrawn bank line. Besides that, as we have mentioned in our presentation, the INR 2,000 crore of securitization is going to conclude in next, maybe it's very advanced stage, we should expect it in this week itself. That meets all our requirement for the month of November.
Okay. Overall, what outlook would you give for your growth, loan growth?
I think loan growth in our focus segments will continue. Maybe last month was a bit of everybody was in a state of uncertainty. I think stabilizing very soon. If you look at maybe next quarter or this quarter, next quarter, then our core businesses, which is gold loan or small ticket home loan or SME, that should be back on normal. Except for one caveat, which is that if the interest rates go up, then that can impact the demand itself, which will be difficult to figure out at this point in time, whether interest will go up in a permanent way or will stabilize again back to the normal level. With or without that variable, I think if you ignore that for a moment, otherwise the real economy is doing well, and we don't see any letdown in growth.
Okay, thank you. On your GNPA number, there seems to be a fairly sharp rise. Just on absolute INR crore terms, it seems to be like an 18%, 20% jump on a quarter-to-quarter basis. What's happening there? Which are the segments, and what's the outlook on this? Is it something that should be worried about?
There are two things. One is real estate and CVs. In commercial vehicles, what happens when we recognize GNPA on a 90-day basis, many times truck drivers don't have a culture or in terms of availability also, and even one storm and mist becomes basically GNPA. That is one problem that we are dealing with and grappling with that how do we get this under control. Other than that, the real estate sector has lumpy loans. These are the two. We also give a GNPA of each product category separately. If you really notice, other than these two, most other businesses have remained stable. There's not much change.
In the real estate book, can you give some color? Is it how many accounts are under problem and which geographies?
Real estate. We have exposure to all over the country, but most of the accounts that we are talking about, we have adequate collateral, which is clean and in case we can recover our money. Our book there is fairly diversified, is not really focused on one geography. In terms of borrower segment also, is not really a concentrated exposure. I think the sector has been under a bit of a stress and more from the cash flow and not from the point of view of value or the quality of collateral. Over a period of time, we are confident that we'll recover all the money.
Yeah. The real estate sector stress that you mentioned, is that something at an industry level you would be worried about in terms of liquidity for the builders-
Yes
Probably on home loans, some people may be going slow, maybe that's impacting some home sales, et cetera. Some color on that would be helpful.
I think the major issue will be in a very high price luxury segment of Bombay primarily followed by maybe some other areas in Gurgaon with their premium properties. As far as affordable is concerned, a small ticket home loan or the builders, they are building either in the suburbs of larger cities or in the smaller cities. There I think at least till now things have been stable and moving. In terms of about the industry, our exposure is limited. We don't have as to the whole sector, as out of our 36,000 crore AUM, the builder developer sensitive segment is not even 10%. I really can't talk about the industry, but obviously I'm hearing what you hear.
There's a stress in the high price, high value segment because offtake or sales are slow and therefore cash flow is slow and that is causing concern.
Thank you. The last question is on the wealth management piece to Karan. Having had a quarter or more to discuss with various AMCs on the SEBI changes on upfront commission and Tier 1, et cetera. How is it now playing out? We see that your yields on slide 25 is down sharply quarter-on-quarter. Is it an effect of that? How do we see this going into the long term? Thank you.
Karan. Karan.
Mr. Bhagat, please unmute the line from your side.
Yeah. Can you hear me now?
Yeah.
Yeah.
Excuse me just a sec, operator. Mr. Bhagat, we can't hear you. Hello? Hello?
You might go ahead, sir.
From an AMC side there's not too much changes from what we discussed last quarter. I think the broad impact on the retrocessions and commissions has not really changed. From a yield perspective, I think on the mutual fund side as we go forward, there will be a greater migration towards direct plans as compared to broker plans. The mutual fund part of the business is going to transition to an advisory business over the next 12 to 18 months, where clients will essentially, as I've said earlier, put in a mix between direct plan and broker plan. Slowly the market will move towards an advisory flow. The small variations or the little bit changes in yield is a function a little bit more of asset class investment. For example, in the last quarter, investments are more fixed income biased as compared to equity.
That causes a little bit of variation in yields over the quarter-on-quarter basis, as opposed to any large change in mutual fund commissions.
Mr. Shah, do you have any further questions?
Sorry. Yeah. The 55 basis points yield that we have now, where do you see that settling given what you said over the next 12 to 18 months, the trends?
I think retentions will continue to be in the region of around about 75 to 80 basis points, which will be a function of a combination of fee-based income as well as fund-based income. I think the fee-based income on a consolidated basis will hover around the 60 basis points, 55 to 60 basis points, and the fund-based income will add another 15 to 20 basis points going forward.
Got it. Thank you very much, everyone.
Thank you. The next question is from the line of Anitha Rangan from HSBC. Please go ahead.
Hi. I had a question on slide 17 and slide 18. In slide 17, you've mentioned that your cumulative inflow is about for six months is about INR 15,484. In your loan maturity in the next slide on the zero to six months is about INR 8,729. I just want to understand in the liquidity flow, what is the difference between these two inflows here?
Slide number 18 is based on historical past data, which is how do our loans mature and what is the loan book.
In reality, it's a growing concern. We'll also have a flow of new disbursements as well as collections.
What is the amount? Which amount we are trying to reconcile?
The inflow amount in the six-month bucket, like cumulative inflow. This is INR 15,000 versus INR 8,700.
No, one second. This inflow, yeah. This INR 15,000 in a six-month cumulative bucket-
versus INR 8,000. This INR 8,000 is just the repayment of loan, the INR 15,000 is including the new loans and also it includes opening liquidity, which is around INR 4,000 crore.
Okay. Understood. Okay. The second question is in this slide 18, you mentioned the loan book, I mean, the zero to six-month bucket is about INR 8,700 crore. Does that include any prepayments here in the normal course of business?
Based on the historical trend.
Okay.
What we've done is that we take the past data of the foreclosures and prepayment and also the normal payments, based on that we work out percentages for each product category also we keep updating as the trends change.
Okay. Another thing also I want to understand is INR 4,700 crore of CP, which you have repaid. Was the entire repayment or there has been some rollovers also and you are able to prospectively get some rollovers in the market?
There have been some rollovers also and some prepayments also.
Okay. Got it.
I think up to ninth November, whatever had matured, we already prepaid. Many of the mutual funds are reluctant to take the money back early.
When you're sitting on liquidity then there's a bit of a negative carry.
That comprises both the normal repayments as well as the prepayments.
Okay.
the rest of that which is rolled over as well.
Okay. also one thing is when you talk about close to INR 5,000 crore of liquidity in terms of unused bank lines and securitizing, everything put together, this is at a group level, right? Or it is for individual business?
This is at the finance level.
Is it so?
Yeah. This is only at the finance level. I can confirm liquidity. I'm talking about INR 4,000 crore liquidity as at 31st October.
Just day before yesterday.
Five thousand what you are referring to is 30th September. Both the numbers are there in the presentation. That is why.
Okay.
This INR 4,000 crore liquidity is INR 2,500 crores worth of cash and INR 1,500 crores is unused line. This is overall above what we have in IIFL Wealth now.
Okay. Understood. Just one last question. On the real estate side, your average ticket size is about INR 11 crore here. Just want to understand, I mean, what would be the highest, say, on the peak side, what kind of lenders you would have lent to and can you give some color on the geographies and kind of apartments these developers are selling?
Eleven crore is the average size, but on the higher side it can go up to INR 150-INR 200 crore also.
Okay.
This is diversified, it's spread all over the country.
Most of it is to the affordable segment where the apartments are of lower value.
any kind of stress or anything you're seeing in any of the larger ticket size developers?
Yeah. There are one or two cases that we've seen in last quarter have gone into the NPA bucket.
We are working on that. As I said that, in all cases, we have adequate collateral, we think that the value of the collateral is good.
In case we are able to recover, then we can liquidate the collateral or maybe of course sell the collateral. We are fully covered, but there's a liquidity stress in the system and that has impacted real estate sector more than anything else.
Mm-hmm. Right. Okay. Thank you very much, and all the best.
Thank you.
The next question is on the line of Shivakumar from Unifi Capital. Please go ahead.
Yeah. Thank you for the opportunity. Sir, can you revisit the AUM growth target and the margin trajectory from the NBFC point of view?
As of now, situation is very fluid because one doesn't really know how this will. More important thing, there are 2 parameters. One is liquidity and the other is interest rate. Unless we have fixed on interest rate, it's very difficult to rework the growth number because that is something that will impact our home loan business more and which is very significant. I mean, currently almost half of our business is coming from mortgages. There it's relatively interest sensitive because people will defer their home buying if the interest rate goes to double-digit then they're very resistant. I think maybe it's too early to get on to that, but we'll wait and watch how the November month goes in terms of liquidity and how the whole sector and industry recovers from this.
Right. Sir, how is the mutual fund industry behaving? As in post September 20th, are the lines with mutual funds open or they're still figuring out as to how they should go forward?
Maybe there are 2 types of mutual funds. One of them are still figuring out and some of them have started doing business back at a slightly higher yield. What we are seeing is that the AUM is getting concentrated more with the larger mutual funds. If you really look at AUM, then some of the larger mutual funds may be at a level higher than what they were prior to the crisis. Some of the smaller funds are getting decimated completely.
Right. Sir, coming to the wealth finance business, given the volatility that we are seeing in the markets, how has been your risk management practices in that particular segment? Because if I were to take a case, we read from the media that in the case of Ashapura Intimates, you had to actually take ownership of the shares which were actually given to you as collateral. Have there been such cases? Have you seen an increase in such cases and have you taken some kind of provision for any losses in such cases given the volatility in the markets?
I think you have two different questions. One is about IIFL Wealth Finance and the other is about Ashapura. Let them be taken separately. Maybe I'll ask Karan to talk about IIFL Wealth Finance in a minute, but before that I'll just talk about Ashapura. In case of Ashapura, we are exposed through NBFC as well as through margin funding, the main NBFC. Now what has happened to this company has been very unexpected and unusual, but the company had a business which had a good track record and has a brand which is Valentine and there's one other brand, and there are people who are willing to take over the company also.
We have not taken over the shares, but what we did is that we there's a pledge created on that and because a large amount of the pledge has got reported and what we are seeing is a pledge that we have on those shares. Because being liquid, normally we take much larger cover, so it appears to be very significant part of the company. I think the family and the key people in the company are working on a transition of ownership and along with that management also. I personally feel that we don't have any losses there. It's just question of the family and the company might have passed or to which has failed, but as far as we are concerned, we are fairly well covered.
We almost about 32%, 33% of company's equity for cover and our exposure is about INR 40 from both these put together. That is one part of it. The second part of question which you asked earlier is that how is our risk management in IIFL Wealth Finance and are there any stress or losses? Maybe Karan, you want to take that?
Yeah, I'll take that, Nirmal.
Yeah.
On the wealth finance side, our loan book is fairly conservative. We work on a 50% margin and typically most of the book is funded back to our wealth clients against their portfolios. In India, we typically see, clients don't typically borrow to invest. They borrow against their investment portfolios for temporary liquidity needs. We've been doing this business under the aegis of wealth finance for the last two and a half, three years. Before that we kind of had a compartment within IIFL Finance itself. Over the last 10 years at least we've not had a situation even once since 2008 where we had to incur a single INR of loss as of now.
Even in the current stress over the last 30 to 45 days, we've not really encountered a situation where we need to or we are even on a marginal case of not being able to recover money. There's really no need for looking at any kind of provisions on our loan against securities book on the IIFL Wealth Finance book.
Right. Karan, staying put with the wealth business, what will be the mutual fund AUM in the overall AUM and what is your ballpark effect on the yield that we'll get to see once the SEBI rules on trail commission are implemented?
Our ballpark AUM of mutual funds would be in the region of around about INR 50,000 crores, which is kind of broken up into two segments. One is mutual funds, which would go under the broker plan, and second, mutual funds which would go under the direct plan, where we'll function as what is called an RIA, which is a registered investment advisor. Under the broker plan, it'll be in the region of INR 28,000-INR 30,000 crores. RIA would be another INR 20,000-INR 22,000 crores. Typically, on the RIA, we do not get any commissions as we speak now. We work on an advisory fee basis from the client.
On the INR 28,000 crore, our retrocession on a trail basis, because we've discontinued upfront for more than a year on mutual funds, is in the region of around about INR 135 crore-INR 140 crore a year, which is around about INR 35 crore a quarter. Which makes up around about 14%-15% of our overall net revenues. This may come down by around about 5-odd%, 5%-6%. Effectively, 14% of our revenue will be down by around about 5%. There'll be an impact of around about 0.8% of our revenues because of the SEBI change in TR commission laws.
Right. Thanks, Karan. Getting back to the holding company. Sir, we have been reading in the media about this commodity license issue, which is being tackled by SEBI, and also that fit and proper clauses were under consideration. Would you like to comment as to how severe is the issue there? It seems there was a meeting between SEBI and the brokers about two weeks back. What's the consensus there?
I think Okay, this is my personal view, nobody knows how the ultimate verdict will come. I don't see a very serious or significant cause to worry there. This is a case which is almost now five, six years old. This was done through commodities. We have not done any proprietary trading. We never had any funding exposure. This notice was given to five top brokers. I think SEBI has issued notices to 281 brokers. It is a systemic issue because everybody relies on NSE and the SEBI brokers, they have done more or less similar thing. Of course, SEBI show-cause notice was there and there was hearing.
The way I think this is getting reported in media, obviously I can't really know or tell you that who's behind that, somebody's trying to put it in a very exaggerated manner or a very one-sided manner, which gives the wrong picture to the people who are reading. The fact of the matter is that there was EOW investigation based on that SEBI picked it up. Being a regulator, they have issued show-cause notices, they want to investigate the matter. They basically called the top five brokers. They've been hearing, I think one or two rounds of hearing and all the hearings are over. The next process is, SEBI has asked for written submission, if any, which are called additional written submissions beyond what we have given to a show-cause notice. Based on that, they will pronounce the final verdict.
If brokers are not happy, they can go to SAT or they can go to higher courts also. Interesting thing is that now this investigation started with almost about 300 brokers. Whatever will happen, has to happen to all of them and not to just one or two brokers.
Right. That was useful. Thank you, sir. That's it from my side.
Yes, Shivakumar, one more thing I'll tell you. This was done through a commodities subsidiary company, which is being investigated. The commodities business has shifted to the step-up parent company, which is securities company, under the unified license.
Right.
Thank you.
Thank you, sir.
The next question is from the line of Mr. Chetan Chavate from Kotak Securities. Please go ahead.
Hi. Just going back to slide 17. I was just wondering how one should be reading this. Let's look at the six-month bucket. When you say cumulative outflow of INR 12,339 crores, this means what? That these are the redemptions of your borrowings, or these are the redemptions of your borrowings plus the disbursements that you need to make?
No. These are static liquidity. These are redemptions of the borrowings and committed payouts.
Okay. Whatever be the disbursements that you would do in six months would be over and above this.
The collections also.
Of course.
Yeah.
Sure. On the NII part, you did mention that there was some adjustment. I believe there was some assignment income booked in the second quarter of last year.
Sorry, first quarter of this year.
First quarter of this year. Okay. You did some assignment in the second quarter as well, but there was effectively no assignment income booked because of some write-back. I didn't kind of quite follow that.
Yeah.
This is something.
Historically, what has happened is that new Indian Accounting Standards have come into effect from this financial year, and we are also just trying to understand and get ourselves stabilized in terms of how the accounting will take place. What happened that when the last year accounts were recast, based on those things, the provisions were created for every quarter separately. This year, first quarter, we had an assignment on which INR 40 crore of income was there upfront, which is booked. In hindsight, we realized that maybe this was a little aggressive booking of the income because there's some prepayments that happen, and the actual accrual may vary from quarter to quarter, and eventually it may be little lesser than this. Out of that, there are some reversals this quarter. Whatever new assignments we have done.
That's what Prabodh was mentioning, that out of INR 40 crore, we had a reversal this quarter of almost about INR 14 crore, which is more or less matches with the income on the new assignment. That's why you see quarter-on-quarter, you see a fall in our Ind AS accounting profit for IIFL Finance.
I believe when you are doing the assignment income, you would, I guess, normally be accounting for prepayments, right?
What happens in assignment income is when you're doing assignment income without recourse, means the risk is fully transferred to the buyer of the asset, then you can take the full income upfront. What you have to take care is that you really estimate how the portfolio will behave in terms of prepayments, foreclosures, and that assumption will become very critical in taking the income going forward.
I guess last quarter you had not assumed the prepayments and now you recast the portfolio to assume.
What we had assumed and what actually was happening was different. We are again just trying to balance it properly.
Sure. Just finally on the fund mobilization side, on the IIFL W ealth business, how should really be thinking about it in terms of the AUA growth going forward?
Karan?
I think as we've guided earlier, around about a 20% growth in corpus year-on-year approximately, with a ±5% variation is what we should be looking at. Effectively, this year around INR 20,000 crores-INR 25,000 crores of net asset flow into the business is essentially the guidance number, which effectively translates to around about INR 5,000 crores-INR 6,000 crores of corpus on a quarter-on-quarter basis, stripped out for the mark to market impact on the portfolio.
Mark to market can be either way.
Yeah, of course. Incrementally, if you look at the next 6 months or possibly looking forward to the next year, which asset classes or which kind of products you think will drive this mobilization?
I think from a portfolio allocation perspective, it's kind of a diversified portfolio with a broader mix between fixed income and equity. As we stand today, nearly 54%-55% of the assets would be in equity and equity constituents. 45% odd would be broken up into fixed income. Within fixed income, most of it would be in AA+ to AAA kind of categories through mutual funds or direct holdings. On the equity side, again, it'll be a combination of mutual funds, alternative investment funds, PMSs, and a little bit of direct equity. It's a fairly diversified portfolio. I don't see any change in that. I think clients would continue to spread their allocation between all these instruments.
On an asset allocation basis, I think if markets continue the way they've been for the last 30 to 45 days, you might see around about a 5% shift from equity to debt, but that's about it. I expect it to be in the region of the 45%-60% in fixed income and 45%-55% in equity going forward. From an instrument perspective, not many radical changes. Obviously, on the high net worth side, alternates as an alternative investment funds have a bigger share of new flows as compared to equity funds. That's the only kind of new trend we've seen over the last 12 to 18 months. Barring that, really it's the same old instruments.
Just one last thing, on the AIF side or on the PMS side, do you really see a risk of realizations going down given the fact that mutual fund TRs have come down as well?
To be fair, alternative investment funds and PMSs fees have been much more competitive than mutual funds for the larger ticket sizes. Contrary to typical perception, for clients who put in a 5 crore or a 10 crore check into alternative investment funds and PMSs, unlike a mutual fund, you have a tiered fee shares of management fee structure. As soon as the client is putting in 5 crores or 10 crores, even today, before the reduction of TR of mutual funds, he was able to get a management fee share class, which was nearly 50 to 70 basis points cheaper than a regular share class in mutual funds, and possibly 25 basis points cheaper to what he would get in a direct plan in a mutual fund. PMSs and AIFs in that sense have already been fairly competitive.
In case direct plan fees in mutual funds come down even more, right now on an average they are 125 basis points, direct plans. More or less most large clients cutting in, let's say a 5 crore check in either a PMS or an AIF would already be getting that fee structure but possibly even lower. In case direct plan fee structures come even lower on the mutual funds, then we may see some 25 basis points reduction in fees in PMS or AIFs. Otherwise I really don't see it because that change has happened practically over the last two years for all large clients.
Sure. Karan, that's very helpful. Thank you very much.
Thank you.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in this conference call, please limit your questions to two per participant. If you have any further questions, you may come back for a follow-up. The next question is from the line of Keyur Shah from Emkay Global. Please go ahead.
Yeah, thank you for the opportunity, sir. You mentioned that you see that there's some stress in high price and premium segment developer inventories due to lower offtake. Do you see that continuing for some time, or how do you think it's shaping up?
Yeah, I think it will continue for some time. The best case scenario in my opinion is a time correction that the prices remain static and the value of interest or money becomes cheaper or there could be correction. When I say high price segment, I'm talking about the Parel, Worli area and a lot of construction that has happened there. It can continue for some time.
Okay. Do you see any prices going down due to this situation?
I guess so. I think it's already coming down. If you have money, you're set to go with the check, the price is yours. Today, if you really want to buy a house, a premium apartment in Bombay's premium area at the heart of the city, then as I said, Worli, Parel, or maybe two-kilometer radius from our office in Parel.
If you have a check, then you can ask your price and get a discount.
Okay. Very well. Thank you very much, sir. All the best.
Thank you. The next question is from the line of Atul Mehra from Motilal Oswal Asset Management. Please go ahead.
Yeah. Good afternoon. Thanks for the opportunity.
Just one clarification on this Ashapura incident. Does this trigger an open offer for us in any form? Is there regulatory clarification on that?
No, it doesn't. It's just a pledge. We are not doing anything beyond that.
No. The point is that if you were to acquire the shares and resell it to anybody who's interested.
We'll not acquire the shares. We sell it in the market only. We'll never acquire the shares.
Got it. Secondly, sir, on wealth management, what is the mix of equity in the net new money this quarter and on the fixed income side that we would have released the money. Is it coming in liquid instruments which are very low yield or is it coming in any other structures we would have in fixed income?
I'm sorry, I won't have an exact breakup of the equity in the net new money. In the gross flows, fixed income is a large portion this quarter. Fixed income will be nearly 70%. 70% would be the breakup of fixed income and the gross flows. Net new money, I can come back. My quick number would be exactly the inverse of that. It would be around about 30% approximately, but I don't have that number handy with me. I can come back. Approximately gross flows, 65%-70% has found its way into fixed income and related instruments, 30-odd% in equity on the gross flow side. Net flow breakup of corpus, I don't have. I will come back.
Just one more thing on the same question. In terms of fixed income, is money coming on extremely low yield liquid kind of instruments or is it any other structures that you may have?
No. It's been a combination. Most of the money in the last 30 days specifically is coming to fixed maturity plans. Fixed maturity plans obviously have a lot of flavor.
Typically your three and a half year HBL kind of FMPs. Typically low risk FMPs is something which has gotten a lot of attraction. We also closed a large private equity fund, which was essentially a private equity fund of professional entrepreneurs. Really where the fund owns a majority of the business. That fund we closed around INR 1,000 odd crores. A large part of that collection happened in the last quarter. That also in a sense is immune to market levels and the fund is more or less sitting in cash right now because we enter the business pretty much at face value.
Got it. Sure. Thanks, Anish. All the best.
Yeah, thank you.
Thank you. The next question is from the line of Dipan Mehta from Elixir Equities. Please go ahead.
Yes. My question relates to the operating expenses in IIFL Finance and those are consistently going up quarter-on-quarter, year-on-year as well at a much, much faster pace than the net interest income or even the total income. What results in is that flat kind of pre-provisioning profits. What is the main reason for such sharp increase in the operating expense? I understand you're opening branches and so on and so forth, but there has to be some synchronization with the net interest income increases as well.
What you're saying is a very valid question and the number of branches and number of people have grown up very significantly. If you see the number of employees almost up 85% year-on-year because the microfinance and new business that we've taken and we are also building strength in our housing finance and gold loan. Going ahead it should taper off. The pace of growth will slow down for sure. In last year, if you see then number of people that we added has been very, very large numbers. Primary reason is branches and people actually, and microfinance and housing finance, these are the businesses where we added a lot more people and also gold and branches.
By what point of time do you think Q3, Q4 that will come back?
As I said, the incremental growth will be slower as compared to what has been in the past.
Okay. The second question relates to what the CFO said about the interest write-back . I am not very clear. Isn't that for Q2 we would have INR 40 crores more of net interest income? What exactly was the effect on securitization?
No, in Q1 there was a securitization profit of INR 40 crores.
Okay.
Which is not there in Q2.
Okay. Even if you then assuming that is the case then the net interest income growth is hardly 20% for Q2 over Q2 FY 2018. That, I mean, is a sharp slowdown from what we've seen in earlier quarters.
That's what I'm saying. The INR 40 crore gets accounted as interest flipping in the interest income. The securitization gain that comes gets clubbed with the interest income. That's why you're seeing interest income being not growing.
Okay. Thank you and all the best.
Thank you. The next question is from the line of Jehan Bhana from B&K Securities. Please go ahead.
Yeah. Sir, in the presentation, it is shown that the NBFC has an ROE of about 16.4 and consolidated number for ROE is about.
Excuse me. This is the operator. Mr. Bhana, may we request to use the handset, please?
Yeah, I'm on a handset. Sir, broadly, sir, the NBFC and the consolidated ROE is at a similar number. My question is on the wealth side, ROE again over there should be at similar number. What is the outlook going forward? Can this number of ROE go up to 25% odd? What are the levers that will push that number higher?
In Wealth we raised capital last quarter, and that is what has depressed the ROE of Wealth, and thereby for the group. As we start using this capital more effectively over the next few quarters, judiciously our ROE moving up to the target.
Okay. Do you have any targets in mind as to what can be the steady state ROE for the Wealth business?
The steady state-
Yeah, Karan, go ahead.
Steady state ROE for the Wealth business should be around the 25%-27% region. Obviously, we had acquisition in mind over the last three to four months, which was a part of the reason for raising a bit of the capital. Secondly, obviously, we wanted to kind of, even in the Wealth Finance side, reduce our dependence a bit on CPs. That essentially led us to raise a bit of capital in the second quarter of the calendar year. Essentially, as Nirmal pointed out, over the next 12 odd months, as we chart out on our next growth path. The third utilization of the capital is essentially to act as a sponsor for alternative investment funds. That business is growing fast. We've nearly got INR 3 billion, INR 20,000 crores of capital commitment in that business.
We end up putting 1%-1.5% of sponsored money as our own capital contribution. These three things essentially is where the capital will get utilized. As the business scales up, the ROE should move up. If you see over the last three to four years, consistently, we've been around the early twenties in terms of ROEs. It's just a quarter since we raised the money effectively. Over the next 12-18 months, we should be closer back to the 20%-25% ROE number.
Right. Thank you.
Thank you. The next question is from the line of Megha Hariramani from Pi Square Investments. Please go ahead.
Thank you for the opportunity. Most of my question's been answered. Just on the same IIFL Finance consolidated numbers, the loan loss provisioning has come down. Any substantial reason for that?
Yeah, because last year provisioning was abnormally higher for the new accounting index in which we had to consider expected credit loss on each and every item. Relatively it's appearing low because last year is extraordinarily high.
Okay. Lastly, on the expected growth going forward, how do we see our AUM and the net interest income growing going forward?
Historically we have given a guidance of 20%-25%. I don't see any reason to change. Of course, we have seen very extraordinary things happening in the liquidity for the sector as well as one doesn't know there's uncertainty about how interest rate trajectory will be from here on. At this point in time, there's no change, my personal view is that the sector will continue to do well and will grow at that pace only, which is around 20%-25% on the top line. If you can be managing your business efficiently into the margins, then 25%-30% on the bottom line.
Okay. One more, if I may. On the IIFL Wealth consolidated results, in the footnote you have mentioned that in Q2 FY 2019 we had a lower weightage of offshore subsidiaries in the PBT. Is it like the offshore subsidiaries are also slowing down for a particular reason?
I think this is about the tax, I think you are mentioning because the tax incidence is very high in Q2 because we have provided for dividend distribution tax from the dividend received from our overseas subsidiary. Karan, you have the numbers, you can just clarify this.
Yeah, I will. There are three basic impacts because of the tax calculation. One, we've done a dividend out from our offshore subsidiary to India, there's an incremental 15% impact on the dividend. It obviously helps us save on the cash flow of the dividend distribution tax. Second, our NBFC business was taxable at 25% last year because of the business we acquired last to last year, therefore, the revenue was less than 250 crores. That business is back to 24% in terms of tax. Third, like you're putting it rightly, the offshore business contribution to profit is not in the same percentage terms as it was over the last two years. It is not to say that it is not growing.
The proportionate growth in the domestic business is much larger than the offshore business, which is having a small impact on the tax rate. The larger impact on the tax rate is on account of the dividend distribution tax and the NBFC moving from 25% to 24%.
The dividend distribution tax can be completely offset against the dividend that Wealth will pay because it's a Wealth subsidiary. I think Wealth has already declared interim dividend of INR 5 per share this quarter. Am I right?
Yes, that's right.
Yeah. This quarter, Rent is paying 5% dividend, against that, the dividend distribution tax will be offset. If you see the numbers on a quarter YOY basis, the tax provision has gone up significantly because of that.
Okay, that answers all my questions. Thank you so much.
Thank you. The next question is from the line of Shubhranshu Mishra from Motilal Oswal Securities. Please go ahead.
Thank you for the opportunity, sir. My question is around your construction book that you have. Can you give us some color on it? What kind of names we have? How many SPVs we have? What kind of geographic domicile it is?
No, sir, I can't give you details because they are spread out. If you really look at our book, when I say INR 11 crore average ticket size is a large number of cases.
What about the geographic-
I don't think it's fair to disclose the names, unless there is a reason for that.
Right. What I'm trying to figure out is that do you have exposures to Amrapali, Vatika, Supertech, or these kind of names?
Not to all of them, we don't have any exposure to Supertech or Amrapali.
Right.
Actually, we have some exposure to Vatika. But as I said that these are the things that, say if there's any issue or whatever, then obviously it gets classified as GNPA and gets reported there.
What percentage of this is exclusive charge and what percentage would be pari-passu?
almost our entire book is exclusive. Our primary charge has to be the first charge, an exclusive charge.
Right.
all the 100 that we have is by our internal policy. There has to be exception for anybody to say pari-passu, but almost entire, predominant part of our collateral is exclusive and not pari-passu.
Right. If you can just give us what percentage of the book is in NCR, MMR, Bangalore, Pune, and so on and so forth.
I don't have that breakup with me right now.
Okay, sure.
Fairly spread out, as I said.
Right. Sure. Thank you for your time, sir.
Thanks.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
Thank you so much. If you have any more questions, feel free to write to us, and I also take this opportunity to wish you, your families, and loved ones a very, very happy Diwali and a very prosperous new Samvat year as well. Thank you so much.
Thank you very much, sir. Ladies and gentlemen, on behalf of IIFL Holdings Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.