Kotak Mahindra Bank Limited analyst Q&A

Thank you very much. We will now begin the question and answer session. The first question is from the line of Kunal Shah from Citigroup. Please go ahead.

So firstly, the question on provisioning coverag e, now it is raised to almost 78%-odd and we are clearly seeing the decline in the slippages as well. So firstly, is this PCR largely the catch-up provisioning on the unsecured wherein maybe the 100% is provided with a lag and not maybe within 90 days? So, is that the fair assumption or this is more like a conservative step to get it in line with the industry average and maybe given this PCR and declining slippages, what would be the outlook on the credit cost?

Hi, Kunal. So, on the PCR, you are right. I think it has improved to 78%. I think PCR, as you know, is the provision which we make on the NPA cas es. Now, with the accretion in the gross NPA itself slowing down, I think that is one of the reasons why it is improving. And I think what we are seeing is that the new book which we are writing in the unsecured loans, it is much more better credit quality. However, the book which has been already become delinquent, the balance provisioning will be required under our policy going forward for the next couple of quarters. So , we will see provisioning for the old book, which is yet to be fully provided. Whereas for the new book, we expect the provisioning to be lower than the existing book.

Yeah, so maybe if you can just guide through in terms of like this kind of a run rate in the provisioning, could there be like, I would say like a broad improvement in the credit cost than what we saw in the second half. Given that you indicated most of the areas are now showing improvement in the slippages and the credit cost trend and secured retail plus corporate and all that is not showing any kind of a stress or incremental delinquencies?

Yes, Kunal, I think we gave our view based on what we see today as of now the trends and some of the steps which we have taken to prevent any further NPA buildup. But you know, as I think some of the sectors are still getting impacted by external factors which are b eyond our control. So, I think it be very difficult to give the guidance. But as I said, the new accretion to the book is certainly slowing down in personal loan. As I said credit card remaining more or less at the same level and the micro credit , it continues to be slightly elevated. So, it is very difficult to give guidance on the credit cost going forward.

Got it. And second question is on margins. Given we are in the repo rate cut environment, we have taken initiatives. We have cut the savings rate now almost to like 2.75 and 3.25, plus maybe some tweaking has happened on the TD side. Plus, there will be flexibility to cut sweep deposits as well. So firstly, maybe when you look at it on this cost of SA which is currently at 3.79 considering the rates which are prevailing currently at 2.75 and 3.25, would it be fair to assume that eventually it should settle towards 3% odd and should give like 20 bps advantage on the cost of deposit side and similarly some benefit flowing in from say the sweep deposit, so maybe ideally what is the kind of margin trends which you would look forward to in FY'26?

I think you have given the answer to the question itself, but you are right. I think the way we have to respond to the repo rate cut obviously is through the cost of deposits because that's what the margin is all about, right? So, if I look at the cost of deposits, it's in three broad areas. One is the saving account where traditionally we were paying actually higher interest rate compared to our peers. Now we have aligned the rate to 2.75 through cuts in the SA balances over the last one quarter. And therefore, now we are at the same level as our peers. And obviously, the SA rate cut is on the portfolio, effect is there. In terms of the ActivMoney deposit, as you know, it's a…

Sorry, so this can come down to 3% from 3.79, which is there currently, ideally?

As I said, today after the cut, the rate is 3.25 over 50 lakhs and 2.75 below 50 lakhs. So yes, broadly it is in that range, it can come, right? Continuing my thing on the sweep TD, as you know, it's a 6 months product, we offer for CA and SA. But actual cost of the sweep TD is somewhere around 5.5% against the headline rate of 7% indicating that the tenure of the deposit is much lower than 6%. So, the reprising part of that also will become much faster. We have also rationalised the sweep TD rates for current account to 5% with a 150-day bucket. And for the saving account, we have reduced it from 7 % to 6.5%. So, one is the rate reduction. Second is I think the reprising period which is faster, it should help. On the third bucket, which is the normal term deposit, clearly for the chosen buckets, and in line with peers and the competition, we have rationali sed some of the TD rates. Again, our TD maturity, on a residual basis is less than one year, so the reprising also should happen over that period time. So, I guess all this combined should help us to sort of navigate and respond to the repo rate cut which remains. Anyone's guess now, how many much further repo cuts will come, how much it will come, when it will come , I guess, but that's what the sort of answer to your question is.

Okay. Thanks, and all the best.

Thank you. The next question i s from the line of Anand Swaminathan from Bank of America. Please go ahead.

Thank you. I have a couple of questions. One is on capital management. What, according to you, is the optimal capital level for Kotak, especially since loan growth has come down to 13%, 14% levels now? In a 2–3-year period, where do you see CET1 and what would be the strategy to achieve it? And number two, in terms of the unsecured book and credit card, it's good to see that things are settled down and starting to improve. But just as a diagnosis of what happened over the last 12, 18 months, clearly a couple of bigger peers in the market, their credit card and unsecured performance has been meaningfully better. And what do you think was the delta for Kotak in this cycle? And would it change anything that you do in the coming cycle in those two segments in terms of risk or customer selection or anything like that? That's it from me. Thank you.

So, let me deal with that question, Anand. First on the capital management, look, there is no doubt we have excess capital and the way we think about capital is that really it pro vides a fortress balance sheet. And when I say fortress balance sheet, it really means that it gives us the ability to kind of deal with any kind of downturns as well as gives us the ability to take advantage of any opportunities that come for growth. So, we have always said that M&A and inorganic activities would be an important part of our strategy. And we continue to look at every single opportunity that comes along. Now, just because we have capital, we are not just going to kind of spend it and waste it. Obviously, any kind of acquisition opportunity that comes up has to make sense from a strategic perspective as well as from a financial perspective. Now, so keep that on the side. As and when that happens, we will be ready to do that. And we have got a watchful eye. Two is, what are we doing with this excess capital and how are we dealing with it? The key thing is we run our businesses. Devang allocates our businesses at about 15% capital, and he then has excess capital. The way we utili se or invest our excess capital, first call is business, second call is our alternative asset businesses, which historically have given us a very, very good return in the high teens post-tax. Now, you do not see the benefits of that on a quarter -on-quarter-on-quarter basis. It comes in lumpy, but still the returns are there. Three, we like investments in financial market infrastructure. So, things like KFin, MCX and other such opportunities, we are constantly on the watch to say, do other such opportunities because we think long term, that will provide us great kind of growth opportunities. Now, apart from these three, we are looking at other areas where this cap ital can generate a return. It will not generate a return as much as our businesses do. But if we can get, generate a return as close to our businesses, then it is a Nirvana situation where we have the opportunity to take advantage of any opportunities, manage any downsides, yet get a decent kind of return. So, that's how we think about capital management and understand that this is lumpy and opportunistic and doesn't happen in a clean row. But that's how we kind of think about it. Moving to your second question on unsecured book. Yes, the overall book, unsecured book fell from about 11.8% of our total advances to about 10.5% of total advances. Our desired state, obviously not in one year, but over a period of time, is to get to mid-teens. And we will continue to grow that. We like the credit card business a lot. And we are redoing our entire credit card business, rethinking of the strategy and aligning it with the broader strategy of getting the right product for the right customer. So, that's work in progress. But like I was talking about Solitaire, we have just come up with a new credit card for that truly affluent customer which will really meet the needs of that kind of customer as we kind of go ahead. There are important learnings from what we have be en through. See, we have got to recogni se that at its core, at its core, Kotak is an SME bank, right? That's where our strengths are. And that's how we have got to kind of think about it and how we kind of cater to that. Number two, right, we have always been very conservative, and I like that on the corporate side of the house, how do we take it and tweak that on the retail side of the house and get a better balance of risk reward? We went out and we did a whole bunch of tests and experiments. And frankly, we could have kind of put that into a box or limited the exposure that kind of came out of the test/ experimental portfolio. We recognise that we are different from our competition in the sense that we are more SME and less a Corp- Sal kind of bank. And therefore, what are we going to do about that? So, I think we have learned some very, very, very important lessons from this painful episode. And we are committed not to making those mistakes again.

Thanks, Ashok. That's very useful. Just, you know, if you can enumerate a bit more on the lessons in terms of, was it customer selection, was it some processes , collection, and what would change in the current cycle, that would be useful.

No, the lesson, and you compared us with some of the large peers as well. I think one, as Ashok was mentioning, is we had consciously tried to do certain test und erwriting in order to be able to cross -sell more to our existing base. In hindsight, probably that those percentages, the exposure to that segment going forward will keep much smaller such that the risk is contained. And this is something we have already taken action well before the embargo itself, but we will continue with that. The second is, smaller ticket size credit card limits. Those have larger risk. That again we had addressed before the embargo itself, but we will continue with that as well. Our S olitaire proposition is an affluent proposition. That will help us to get affluent clients who inherently carry lower risk as well. You were then comparing the portfolio with larger peers. You know, as you are aware, our credit card portfolio has been traditionally a much smaller portfolio. And we had gone really slow during the COVID period. And you probably are aware that vintage books perform significantly better. So, our portfolios are newer books which have been built more recently post the embargo. A nd therefore, those will naturally carry higher delinquencies. So, that was a fact, not because of our post -COVID book, which would therefore, it doesn't reflect underwriting. It just reflects the nature of mix of the book and the fact that our credit card portfolio is much newer. But the policy we have written, it was pre -embargo itself. And what we have rolled out post - embargo is a much tighter policy on many of these factors, with much lower target loss rates.

Thanks a lot. That's very useful. Thank you.

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

Good evening. Thanks for taking my question. My first question is on the quarter P&L on the NII line. So, in the PPT, we called out that we have seen the margin expansion quarter-on-quarter. There is also a loan book growth quarter-on-quarter. So, you know, 1% Q-o-Q NII growth doesn't tally with that. So, can you take us through the math for that? That's my first question.

The NII of last year included the interest on income tax refund which was there almost Rs. 142 crore. If you refer our slide on Number 9, it gives you. That is one of the one-off item which was there. It was part of the NII. So, if you actually sort of remove that, then you should look at the impact of the growth in respect or NII.

Devang, I meant quarter-on-quarter. I mean, we are showing that there is a 4-basis point improvement in margin.

Yes.

And there is a Q-o-Q loan growth of 3%.

Sure. No, I understand.

So, NII increase is only 1%, right?

Sure, I was explaining the Y-o-Y part. The Q-o-Q kind of what happens is that the March, there is always the effect of the number of days. What happens is that because of the 31st March and February be ing a lesser number of days, it gives you the kicker in terms of the NIMs improvement, which is there marginally. But that is what creates this issue every last quarter of the year.

Okay, so just to be clear, so you accrue the NII over a lesser number of days. So, it affects your absolute NII versus the last quarter. Is my understanding right?

That's right.

Okay, perfect. This is really helpful. Secondly, on your CASA ratio, or rather on average SA , right? So, we have taken some rate actions on SA. And our average SA balances are like flat Y-o-Y. And I think if I am not wrong, I heard you say that, you know, we are open to taking more action. So, how should one look at that with, say, overall CASA growth outlook for next year as well?

So actually, I had talked about that when I said that at this quarter, if you see quarter -on-quarter, we have seen our regular fixed rate SA grow by 2% quarter-on-quarter. And we have also said that from an average accretion basis on the customer acquisition side, we have seen in the last two quarters, a much better average accretion given the focus, you know, the increase in acquisition of affluent customers. So, we are very clear, CASA focus both C A and SA. SA, the core banking customers continue to grow SA. In fact, balances up to Rs. 10 lakhs have continued to grow quite robustly. The affluent customers’ accretion is better, but you will see some amount into investment. So, it's a combination of CA and SA and ActivMoney SA. We hope to focus on our CASA balance.

Okay, just to follow up on that, Shanti, so in the past when liquidity has been very accommodative, we have also seen CASA ratios go all the way up to 60%. So, I am not as king for a guidance per se, but do you think the CASA ratio as such has legs to go up from where you are despite taking SA rate cuts from here?

So, one thing, one is on a quarter -on-quarter, we have improved the CASA ratio. Probably most banks have. That's good. But when you talked about 60%, you must realise at that point in time, we had stopped taking term deposits. Because during COVID, even lending had been everybody batten the hatches. So, I think as you expand your balance sheet and you sort of look at ratios, CASA ratios will show very different growth. Suffice to say we will grow our CASA, but ratios will depend upon your growth in balance sheet and the mix of the TD base. What you should look at is cost of funds and whether you are competitive on the cost of funds. I think if you see that even in this quarter, they have been very competitive on the cost of funds and that's what is actually correct.

And just to add to that, Shanti, I think linking the asset, the CASA or SA growth to rate may not be really the right thing to do because the elasticity of pricing at the lower end of SA, right, is very, very, very low. And that has been demonstrated over the last four or five months when we initially took down the rate, right? So, I would not equate those two.

Perfect. Thanks, Ashok and Shanti. Just one more question, if I may. Any number around growth that you have called out average advances growth of 18% for this year. So, you know, any number around growth that you want to call out for next year in terms of guidance? Yes, that's it from me. Thanks.

So, you know, true to our philosophy, we have always said, look, we will grow assets somewhere between 1.5x to 2x nominal GDP growth. Frankly, that's a risk appetite statement, right? If the economy is, you know, if you are growing assets faster than 2x times nominal GDP growth, one has to ask the question, are you taking on too much risk? And if you are growing lower than 1.5x nominal GDP growth, then you ask the question, are you leaving money on t he table, right? Because this is not about a day in the sun or a quarter in the sun. It's all about a sustainable franchise, which is really something our customers admire. And therefore, we target somewhere between 1.5x to 2x nominal GDP growth. That will continue into Fiscal Year 2026 as well.

Thank you. Thank you and all the best.

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

Hi, team. Congrats on the quarter. Actually, most of my questions are just follow -ups on previous questions. Firstly, for what Kunal asked about cost of SA deposits, from the 3.79, do we assume it goes down to 3 or do we just assume it goes down 25 bps quarter-on-quarter?

So, hi, Piran. I think 3.79 includes, besides the fixed rate SA, also the floating rate SA cost. So, while we have taken actions on the fixed rate SA to reduce the rates to 2.75 and 3.25, the floating rate SA rate remains as of now. But I think it all dep ends upon what the balance of that in the SA which will remain. So, when I answered the question, it was more from a fixed rate SA perspective that it would be around 3%. The floating rate SA will be based on the MCLR rate and as well as the quantum of suc h deposits as we go, MIBOR sorry.

Understood. Okay. That's pretty clear now. Secondly, again, just following up on Param's question, the 1% NII growth, but NIM being up. Now, we get that there is this number of days effect other banks have also mentioned it. But if I look last year, right, our NIM was up 6 bps Q-o-Q, but we still had a good 5%- 6% NII growth Q-o-Q with about 5%-6% advances growth or customer assets growth.

Yes.

So, I am just trying to get the disconnect here.

So, I think that is what, Piran, I was saying when I was explaining that last year, last quarter, and if you refer Page 9 of our investor presentation, it included almost the income tax interest on refund of Rs. 142 crore, as well as the tax credit of Rs. 200 crore, right? So, in the NII, you had Rs. 142 crore. Again, just to take you, the interest on income tax refund is not considered for the NIM calculation because it is on the earning assets. But when you look at the NII, it includes the Rs. 142 crore of that.

Okay, but this is just Rs. 24 crore number which is...

That's correct.

Okay. And just lastly, on this SA thing, right, now, even a few quarters back, we mentioned that there is a new, let's say, revamped push for SA. We will have a micro -marketing strategy in the top 25 cities. We will focus on specific customer segments, the affluent customer, etc. We will launch bundled products. But even if I now, obviously, maybe one or two quarters might not be the perfect time period, but it's been now six, seven quarters where the SA book is kind of stuck at this Rs. 1.2, 1.3 lakh crore. So really, what here are we missing? Is it just simply that competition has he ated up from private banks, PSU banks? Is it the fact that we are over-indexed to wealth customers, and they will continue to put money in TD, whatever we offer? Like how do we get comfort that SA starts picking up this? Otherwise, the performance of the b ank has been good. Just that this SA has been one sort of tough point out here for a few quarters, not just one quarter.

So, look, I mean, if you do an analysis, right, in the first three quarters of the year, liquidity was very tight. And you compare it to every other bank on the street, right? Pretty much we are there and there about. Okay? On SA. Right? This is despite our 811 proposition being put on hold because of the embargo. Okay. So, that's one point. The second point is that, loo k, with the ActivMoney kind of proposition, a lot of money gets swept. And you can see ActivMoney grew very handsomely year-on-year.

Last two years.

I think 47% year-on-year growth this year and an equally amazing number last year.

Average.

And that ActivMoney dampens the SA kind of growth. I think Shanti said this. The real way to look at this is our cost of funds. And you will see our cost of funds still is about the best there is in the industry. Because of the way we manage CA, SA, ActivMoney and TD.

Got it. Okay, that's useful. And just lastly, if I may squeeze in. This jump in OpEx Q-o-Q, that's just more seasonal due to PSL purchases, etc. PSLC purchases or is there anything else to read into?

Yes, there is PSL purchases. You are right. Having said that, look, once we got out of the embargo, it was important that we came out strongly. And we came out strongly with the brand campaign, as well as restarted the engines on credit card acquisition and 811 customer acquisition. Like I said again, you know, this is not about a day in the sun or a quarter in the sun. We are trying to build a solid franchise and therefore, it could have been so easy not to spend on the brand campaign and improve the expense. But I really want to build a long -term sustainable franchise for our shareholders. And that's what we are going to do as we go about it.

Piran, just to add to what Ashok is saying, in the last quarter what has also happened, because of the G - Sec rate falling, the actuarial provisioning for the pension fund liability has to go up because of that. And I think the second part is, because our share price is doing well, some of the share price-based incentive provisions on SARs and all also got a bit higher compared to the earlier quarter. So, besides the one -off cost on the brand campaign, which is the 'Hausla Hai Toh Ho Jayega' and some of these payroll -related costs, the cost has been higher in the last quarter.

Okay, this explains it perfectly. Thank you so much and wish you all the best.

Thank you, Piran. Thank you.

Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Ashok Vaswani for closing comments.

So, thanks a lot. I once again sincerely apologi se for starting late. We have had quite a rollercoaster FY '25, but I think a lot of the stuff is behind us. We are committed to driving our strategy and executing on our mission to move from product-centricity to customer-centricity. And we are really looking forward to FY '26 and giving you regular updates every 90 days or so. So, once again, thank you so much, a nd see you at the end of the next quarter. Thank you.

Bye-bye. Look forward.

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