Kotak Mahindra Bank Limited analyst Q&A

We will now begin the question-and-answer session. The first question is from the line of Chintan Joshi from Autonomous. Please go ahead.

Can I start with your recent interview where you had kind of expressed a desire to be the #3 private Bank in India? If I look at the kind of where consensus estimates are and extrapolate, it feels like you need to grow 8% to 9 % faster than your peers in the next five years . What I was interested in understanding was the products, the geographies and the subsidiaries in which you could outgrow your peers to achieve your objectives. And then the second question was on the margins. If you could highlight, what kind of sensitivity we would be facing from the RBI rate cuts and how much offset will there be from the Stan C deal and the savings account rate cuts that you ’ve announced? If you could kind of give us a picture on margins, how they might evolve over the next year?

So, Chintan, I will start and then I will ask Devang to also chip in. Look, I think on the vision, this is something that we have said as a team as a goal over the next 5 years. So, this is not like in kind of one quarter and the way we thought about it is that we have said that look, this will happen both from an organic perspective and an inorganic perspective. Obviously, we will see a step up. Inorganic is not in our control, depends when opportunities come up. We step up the pace of organic growth and we are going to do a whole bunch of stuff to kind of get that going. Now, you are going to see the impact of that immediately in one quarter. Right now, our first priority like I have been mentioning since April, at least, is that our first priority is to fix our technology estate and get out of jail. But as you would have heard Shanti talk, at the same time, we also are investing heavily in technology, not only from a risk and resilience purpose, but from a customer and a scale perspective, right? And that is the way to kind of get about. So, you will see more of those kind s of things happening. As far as NIM is concerned and margins are concerned, Chintan, as you know we manage this very tightly and we manage it on an ongoing basis. One of the things that we have been talking about is how do we at least align some of the rates that we pay in the marketplace, let us say our savings book. The rate change that we have made on 17th of October was really to bring our savings rate in line with that of the competition. Going forward, Chintan, it is obviously say , how do we monitor, what pricing we can get on our loan book. Once we get out of under the embargo, obviously we will grow our unsecured retail book and that will give you a higher yielding asset. Obviously, we are looking to grow our rural kind of book, which is both CV/CE and then hopefully come back strongly on Microfinance. Again, those are high yielding books, so over a period of time we will manage the rate, the yield on our asset and then manage our deposit rates such that come out with propositions such that we maintain our CASA ratios or maintain our kind of cost of funds. So, this is something that we kind of do, I mean like we call it every week, Chintan.

But just I am trying to think about the near term in terms of the NIM impact from three factors. RBI rate cut, the StanC deal and the Savings account reduction?

So, Chintan, RBI rate cut, it is anyone's guess when it will be and how much it will be. What is definitive today, which we have already declared, is the saving account rate cut which will add roughly about 4 bps improv ing the NIM margin. What we have already also announced is the Standard Chartered portfolio and unsecured book, which will also add about couple of bps to the average yield on the assets, rig ht plus what I think Ashok said will continue to take measures to improve the margin through change in the asset mix and maintaining the deposit ratio. So, these are the things which we can clearly see now, and we will see how the RBI rate cut as and when and how much it comes. And as you know, when the rates were higher, we took the benefit clearly when the rate cuts will happen, it will have initial reaction, but it will stabilize the way it stabilized when the rates went up.

Thank you. We have Sumeet from Morgan with the next question. Please go ahead.

I had a question with respect to margins over the last 2 quarters. So, margins have come down from 5.27 to 4.9 and I was looking for some waterfall and what has happened. So, I see three or four factors, one is basically change in loan-mix, second is higher liquidity as reflected in LCR, third is IPO flows and fourth is Sonat a the way in which it was accounted in the fourth quarter, then first quarter. So, if you can give me some breakup that will be very helpful because your margins have come down by 35 odd basis points?

So, I think you have given me the ans wer in the question itself, but I can only conclude by saying despite that fall in the margin at 4.91, we are still the leader in the sector with the highest margin. But you are right about your analysis. I think I can only add saying that in the current q uarter you saw the fall of about 11 bps. That is purely because of the mix change more towards the secured book. So, we have continued to grow our book at 18%, but the proportion of growth is more towards secured book, housing loan, LAP, working capital which are generally at a lower rate than a normal unsecured loan book. And as you know, we have a constraint we cannot grow credit card book and this being the first quarter where the full impact of the embargo in credit card is felt. So, these are the reasons which contributed, so clearly the reason is the yield on the asset and not much on the cost of fund or the deposits fund, which seems to have stabilized. That is the reason for this quarter fall in the margin.

I was looking for some quantification, but that is fine, Devang and second is on asset quality, when do things stabilize? This quarter was slightly higher on slippages, and I also see coverage moving lower Q-o-Q. So, I guess coverage moving lower Q -o-Q is because of fresh slippages, but I j ust wanted to get some idea as to how do you look at coverage and where are we on the slippages cycle?

As was mentioned earlier, the main areas where there was some amount of delinquency pickup were two, one is significantly in unsecured and within that credit cards. We have not onboarded any fresh credit cards as you know since April. And we have already taken a lot of action probably for a year before that, and some of the impacts are also because of the older vintage clients who normally behave better in the industry seeing some amount of delinquencies. So, the actions which we have taken all this will take a few quarters, maybe 2 or 3 quarters to sort of play out. Our recent sourcing, which we had done before the embargo kicked in, those are behaving much better. So, hopefully that will hold up and some of the slippages in the older book will play themselves out. And similarly on the Microfinance, we had ac ted much earlier and there again as you are seeing degrowth. So, the fresh onboarding will be better and some of the pain in the older book will play out over the next 2 or 3 quarters. So, that is how one sort of sees it.

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

So, firstly, with respect to the entire StanC portfolio, if you can indicate in terms of the profile in terms of the average ticket size, how it is panning out and earlier also we have seen Kotak doing not so sizable acquisition creating the MFI or the vehicle financing and that has continued even on PL side. So, should we assume that those inorganic opportunities would be relatively in few of the sub segments of a smaller size or maybe evaluate a slightly maybe a larger inorganic as well?

So, let me take that question. This was an op portunity that came up and when we looked at the portfolio, we saw that it was in keeping with our strategy of the Affluent segment. We have done our due diligence, as you may know, before we signed up for the portfolio. I think that what we found the portfolio is in keeping with our Affluent segment strategy, which is what evaporates strategy in the personal loan segment, so very much what Ashok has called the tuck -in acquisition strategy, which we will be looking for. And there is an opportunity we get ro ughly 95,000 customers which will help us onboard, upsell and see what other opportunities we have with us.

And when maybe RBI, slightly cautious with respect to growth in the unsecured side, maybe how would it be looked upon from the regulator side because that growth still continues from our end in this segment?

No. Look, I think the two are completely different. The R BI basically is saying right that you are going to get your technology stack under control, and we are working very hard on that. I think they have said as part of that you can't do digital onboarding, and the portfolio acquisition is something, these opportunities come along and when they come along, we will look at these opportunities and these tuck-in portfolio acquisitions is what we really like because we just bring in the portfolio, you don't have to pay for cost of acquisition. It is an easy kind of switch across. It is a business we know. It is a risk we understand, and it is very accretive right from word go. So, I just wish more of them came along, we did Sonata, we did Standard Chartered. If others come along, we will love to do these kind of things. The technology infrastructure build out that continues and those two events are completely independent of each other.

I just want to highlight, even today 89% of our book is secured which you have seen had grown pretty well this quarter and our earlier stated objective which continues is that we will look at unsecured up to the mid- teens level. So, as and when we see opportunities that show growth which fits within our risk and strategy framework, we will look it.

And secondly, on this RBI's supervisory reaction, given that we are very much like almost a quarter into it and generally the way we have seen the restrictions getting lifted for most of the other names in terms of the period that it generally takes, what is your assessment in terms of where we are? Would RBI look at some kind of piecemeal lifting of the restrictions? Wha t could be the timeline that you would want to assign given the progress which you are very confident about in terms of it is going very well on track if you can just give some comments on that?

Look, it is impossible for me to know how the RBI is thinking or on what date they are going to say the embargo is lifted, right? That is the question for the RBI and obviously the sooner the better from our perspective. What I do know is that we are working exceedingly hard and kind of systematically knocking out any kind of points of failure, any kinds of things that have been brought up in the RBI exam points, anything that we think can improve risk and resiliency. And of course, the work that we are doing is also being validated by our external auditor that should give the RBI greater comfort that what we are saying is validated by the independent kind of person. Having said that, that is all I can do. After that, frankly, it is in the hands of the RBI and at some stage they will determine that we have made enough progress to lift the embargo of us.

And one last question on incremental slippage. Would it be fair to assume that larger part of incremental slippage would be from the credit card or are there other segments as well, including MFI and the others?

Kunal, as you know, the credit card business generally speaking has most of the credit losses. So, if you look at our total credit cost, credit card is always going to constitute a very significant portion of that total and that will kind of continue.

On slippage?

Yes. So, you are right from the slippage, credit card does constitute about 30%-35% of the share of that, the net slippage. I think we are very hopeful that in quarter 3 and 4, we wi ll have recoveries from the rural and secured businesses which will sort of help us to reduce the slippage going forward further in the Q3-Q4.

Thank you. The next question is from the line of Piran Engineer from CLSA. Please go ahead.

Firstly, just wanted to understand the rationale for the SA deposit rate cut in an environment where our SA deposit growth is weak and the benefit is merely 4 bps?

The SA deposit card, first of all, it is restricted only to balances below 5 lakhs and we were paying a rate of 3.5% which was more than what competition was paying and really the rate cut is to bring our deposit rates in line with competition. Based on everything that we have looked at and based on the analysis we have done, the impact from a volume perspective is going to be at best muted.

And just to clarify, if I back calculate, it means that only about one-third of your SA book is less than 5 lakh ticket size?

So, I think it is not th at simple because this is up to 5 lakhs means across the buckets up to 5 lakhs where that is not the way perhaps you will calculate, so that will not be the right way to calculate it.

Why Devang because if cut by 50 bps, and if it is only a 4-bps impact, it means it is less than 1/10th of your deposits and if SA is 30% and this is 9% or 10%, it means one third, right? Where am I wrong?

So, I think we should separately take this. I will explain you. As I said, this is across the buckets up to 5 lakhs.

It is the first level of 5 lakhs across the entire portfolio.

Yes, of course I will explain to you separately offline.

And just secondly, just wanted to confirm this in terms o f our outlook on slippages in credit cards and microfinance, it remains elevated in the second -half, but we also have some offsets from the secured loan book. Did I understand that correctly?

So, yes, you are right about the offset about the recovery, but I think the slippage itself, we expect with the measures what Paul has described to reduce going forward especially in the microcredit book.

But this can continue for a couple of quarters, but the measures have been taken su ch that each of these are, so if you look at microcredits loan. So, as the old legacy loans run down, what is left will be fresher underwriting and that therefore automatically means that these slippages come under control. So, that is already how it will play out and we have done this a few quarters back. It is not that we saw it this quarter, yes, but it is something we saw a couple of quarters back, but this has to just play out.

Thank you. The next question is from the line of Manish Shukla from Axis Capital. Please go ahead.

I wanted to check what proportion of your loan book is linked to repo and external benchmark?

About 60% of our book is linked to the external benchmark loan.

So, the question here really is that we are at a margin level where we were in June ‘22 and May ‘22 is when we had the first-rate hike. While I appreciate that timing and quantum of RBI rate hike is not known, but if we take a 6-12 months view, rate cut is inevitable. So, what contingencies would you have in that scenario? Because if 60% is linked to repo and we get 50 bps cut, that is a pretty decent yield on your yield on loans?

So, I think, it is not just on the rate cut on the advances side. As you have seen, when the rates went up, there was a repricing of the deposits as well with a lag. So, similarly as when the rate cut comes down, we also would expect the cost of deposits also to fall with a lag. And 60% is something which is if I look at the peers it is something across the board. Kotak is no different from the others. So, I think as we got the benefit when the rates grew up, as the deposit repriced with a lag, similarly when the rates go down, the depo sits also will reprice downward and you will start seeing the inflow coming.

Lastly, in terms of credit cost, should one expect credit cost should remain in the 65 to 70 bps handle or do you expect it to go up before it comes down?

So, my sense is that credit cost will more or less stabilize and then over the next 2 or 3 quarters actually come down. But of course, these things you got to be, this is like looking into the crystal ball. We got to be careful, depends on how things kind of play out. Right now, the macroeconomic indicators look strong, a bit of stress on micro. But let us see how it plays out. But given everything that I am seeing, I feel pretty comfortable when at least two quarters out, we will see, loss rates come down.

I think as I said, the secured book recovery from Q3-Q4 will ensure that the slippage comes down as we go forward.

Thank you. The next question is from the line of Param Subramanian from Nomura. Please go ahead.

Firstly, again on the credit cost. So, in the fourth quarter, a couple of quarters ago, we had taken a big write off and we had explained that it was largely unsecured and credit card businesses. So, that pertain to the longer vintage unsecured NPLs, right, so what we are seeing now in this quarter is more pressure delinquency is of more recent vintage. Is that the way to look at it?

No, one second. What we did in March, about for the quarter ended March was we changed the way we do the accounting, right. Throughout the period, what we have been doing on unsecured, we have been providing 100% at 180 days, right? But the actual write of f which we take we were taking 2 years hence. So, what was happening is our GNPA was showing elevated kind of numbers. To try and make it in line with industry, we bought down the write off from 2 years out to 270 days DPD, right? That was the big change t hat we did for the last quarter of last year, right. That is just an accounting change and that has nothing to do with, frankly, it made no difference to the P&L or anything like that. That was just so that the numbers for you could become, it made your li fe easier because you could compare numbers across banks. What we are saying separately is that separately and frankly, we called this out about 2 maybe 3 quarters ago, 2 or 3 quarters ago , we said that there is a certain amount of over leverage in the sys tem and that over leverage in the system is starting to show up. The initial place where it showed up was in the microfinance business and then it showed up to some extent in the credit card business. And so you see the loss cost and the credit cost kind of following through, but we are also saying now is that, we expect post Diwali that we will see a certain amount of recoveries particularly in the businesses that are linked to the rural parts of India and a improvement in credit costs in the next 3 to 6, 9 months in portfolios like credit cards. That is the entirety of what has happened, how we think things will happen, and what you are referring to for the last quarter of last year was really just a big accounting change.

If I heard you correctly, Ashok, you said 270 days is when you write off unsecured retail, right? That is correct?

Yes, 270 DPD. So, other banks, we are banks who do 180 DPD, we have chosen to do it at 270 because providing at 100% at 180 and writing off at 180, we felt was not appropriate from an accounting point of view because from an accounting point of view, when you provide at 100%, you expect to get some kind of recovery. Earlier on, we used to have that keep that recovery period open up for two yea rs. Now, we should keep the recovery open up for 90 days. It makes zero difference from all perspectives, because we continue to do recovery irrespective of whether we write off at 270 or at 720 for that matter.

So, my second question again, this is just data. So, how much of the slippage in this quarter was from the microfinance segment or is this something that where we expect slippages to come through in subsequent quarters?

No, this quarter also had slippages from microfinance business. So, as I said, while the majority of that is from the credit card business, microcredit also had its share in the slippage ratio.

And lastly, just on this quarter, there wou ld have been some impact of the float from the capital markets on the margin, right, if you could call out that number for this quarter that would be great?

So, you are right. So, we had a short -term surge in the deposits which obviously you could deploy only in a lower yield asset that we did impact ed the NIM. The impact is about not more than 2 bps basically on account of this IPO surge bit.

But I guess the bigger point with that is that the strength in one part of the business flowing through, you can see how it flows through so many other parts of the business, right? The fact that we get IPO mandates flows through the deposit side, it flows through on the Treasury side, it flows through on the corporate banking side. A nd therefore, the power of the financial conglomerate really comes through with these kinds of deals.

Thank you. We have the next question from the line of Saurabh from JP Morgan. Please go ahead.

Sir, just two questions. So, one is, on this RBI norm on investments, what are your thoughts if you had to consolidate both Kotak Prime and all the lending subsidiaries within the bank? And the second is just in terms of Kotak Prime specifically and also in the bank, how many of these customers will have like Kotak Prime customers will have an account from the bank as well?

So, obviously the draft circ ular we got it on October 4th. We are looking at it in great amount of detail and trying to analyze it, trying to understand what the spirit is and what kind of makes sense. Now, clearly, one aspect of this circular is that the business that you can do in the s ubs has to be businesses, which can be done in the bank, right. And there is nothing that we are doing in the subs that frankly we are not doing in the bank and therefore it is not a question of whether we have to shut down businesses. It is more a question of where we are going to do certain businesses. We have time till November the 20th to kind of go back and actually talk to the RBI about the implications and what our suggestions would be in light of the spirit of the intended kind of regulation. Now at the end of the day, the RBI will obviously take the collective view of the industry, evaluate it. Some of it will make sense, some will not make sense for them and they will come out with the final circular. When they come with the final circular, we will have to abide by the final circular. There will be some elements of business which we will do only in the bank. You have got a couple of options that we are kind of looking through, walking through, trying to understand what the implications of that are and get ahead. There are advantages, there are both pros and cons in terms of going there. We are evaluating that very carefully and we should be able to provide a greater degree of clarity once we get a sense of what the final circular is. Also, finally, there is a sense of timing. Let us see, they have indicated on some elements, a certain level of timing. Let us see what the timings actually land up to be and we will work through it.

Sir, in terms of your slippages, what percentage would be coming from the se linked accounts, so basically, would you expect the stress in credit cards to also go up in your personal loans portfolio?

So, when you say linked account, means a card customer who has got a personal loan.

I think, the real way to look at it is these are usually customers who have also got a bank account and usually have their salary coming through us and those are actually our best customers. And obviously we monitor total unsecured exposure across products, right, and particularly a salaried kind of customer usually gives you the best credit. So, that area, I am a little less worried about.

Saurabh, I don't have the exact percentages, but the percentages are low and we clearly identified this as a potential area of risk probably a few quarters back and clearly therefore cross sell to customers of weaker segments of one asset to the other, we have actually clamped down quite a bit some quarters back. So, that is how we are looking at it, but the percentages are low. That is not the major contributor.

And at this current point you would not expect the credit losses in your card busine ss to eventually go up to the PL portfolio. Will that be a fair statement.

No, definitely not.

Thank you. The next question is from the line of Rikin Shah from IIFL. Please go ahead with your question.

Just one basic question, the stage III, the provision coverage on NPAs has come off sharply in this quarter. Just wanted to understand what would be the comfort level that we would like to operate given that we are not carrying any buffer provisions?

I think what happens is when there is a slippage increase in a quarter, you will appreciate that the coverage ratio will come down because the provision on the fresh NPA, you will not be providing 100%, right? So, the incremental slippage will always resul t in coverage reducing which will get corrected. If it us unsecured loan, as we provide anyway, 100% over 180 days over next quarter, right? So, I think it will depend upon the nature of business where the slippage is occurring and the quantum of it. But with the increase in slippage, you will see coverage sort of reducing, but to answer your second question, we are comfortable maintaining coverage ratio at about 70% on an average.

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

Sir, on this StanC transaction, what is the price that we are paying? I hope because there is a bit of a risk or the rising stress in the personal loan portfolio. Are we paying at par or is this subpar and are there any risk mitigants in case the delinquency turns out to be higher than maybe the current level. The public disclosure says that their retail GNPA is 2.6% which is at the retail level itself Rs. 20,000 crore, not the personal loan portfolio. So, would you like to get your comments there?

So, like Shanti mentioned obviously, we have done very detailed due diligence on this portfolio. We have obviously compared it to our portfolio. We are obviously aware of the situation and the over leverage in the market. We are obviously aware of the trends of risk in personal loan portfolios and all of those factors have been taken into account in us determining whether we want to do this transaction and if we want to do this transaction, do it at wh at pricing. We obviously had those discussions with Standard Charter ed and have agreed upon a deal, but we are not in a position to disclose the exact price that we paid for the portfolio, but obviously we have taken factors like this into consideration.

Thank you. Ladies and gentlemen, I would now like to hand th e conference over to Mr. Ashok Vaswani for closing comments. Over to you, sir.

Thank you very much. First of all, thank you so much for being with us on a Saturday evening as usual. It is highly appreciated. As you can see, this has been a v ery busy quarter for us and I think the power of being a financial conglomerate shone through very strongly and some of our subsidiaries as you saw Nilesh bhai take you through the AMC have seen some kind of stellar kind of growth and that is really the po wer of Kotak. That is the difference of owning Kotak of really bringing it all together to meet the needs of our customers and I am very confident and as we kind of grow, we will see more such success stories where we bring all the power of Kotak together to meet the needs of our customers, to deliver for our shareholders. So, with that, thank you very much and let me take this opportunity to wish you a very Happy Diwali and I look forward to meeting you, if not before, at the end of the third quarter. Thank you. Good Night.

Thank you. On behalf of Kotak Mahindra Bank, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.