Kotak Mahindra Bank Limited analyst Q&A

Thank you very much. We will now begin the question -and-answer session. Our first question comes from the line of Kunal Shah from Citigroup.

So, firstly, particularly on the asset quality side , s o you indicated that the incremental slippages and credit costs coming in from MFI , retail CV as well as some seasonal stress in rural, but if you can quantify with respect to MFI given that the portfolio is maybe at least last quarter was closer to Rs. 6,700 crore, would it have meant that almost like, say, 5%, 7% of that would have been the credit cost on that? Because ideally, when you look at it, like last time, Rs. 900 crore of credit cost also had the impact of Rs. 300 crore on increase in the provisioning coverage from 73 to 78. So, ideally, when we look at like-to-like increase seems to be quite high. So, would MFI would be such a high portion?

Devang?

So, I think you are right. MFI continues to be , and I think as we have guided last quarter also, that we expect , look at it this way . The MFI stress started building and reflecting the books from the Q3 of last year, right? And clearly, the gross NPA, which sort of flowed during Q3, Q4, given the prov isioning norms of 75%, 25%, I think all accumulated towards the Q1 hit, which has resulted in a higher credit cost for the quarter . And that's the reason it has happened. And Karnataka issue, which happened during the January and February month, which also resulted in additional stress, which sort of also reflected in this quarter results as the additional credit cost.

But if you can quantify the number of slippage, maybe amount of slippage from MFI, that would be really helpful. Maybe you generally do not do that, but given that it is quite high, particularly MFI slippages would be helpful.

Yes, I think you rightly said generally we do not do that. So, we would like to keep it in that way. So, but I think it is one of the key reasons besides, as we said, the CV retail. But I think the important point as Ashok and Shanti also mentioned, it is sort of splitting down and it has peaked during this quarter now. So, going forward, it will only sort of start tapering off.

Okay. And secondly, on margins, so if you can highlight in terms of maybe the repo rate cut, what is the kind of reset period and how much of the rate cuts in April and June has been passed on? And even on cost of fund side, when we look at it, it is n ot declining much adjusting for the SA benefit. We have cut the SA and if we look at it like say on 25%, in fact, that is higher than the overall cost of funds declined. So, not really sure in terms of we have not seen any cost of deposit benefit getting reflected in the 1st Quarter even except for SA.

Yes. So, I think you are right. So, if you look at the average SA cost, which we have mentioned in the EU, which is around for Q1, is about 3.25%. And as you know, now we have aligned the fixed SA rate finally to 2.5%. So, clearly, the SA cut, which we have done over a period of various months and more latest one in the month of June will obviously flow through in the Q2. So, clearly, directionally, the SA portfolio, we will be paying about 2.5% interest, which the average cost of that in Q1 was about 3.25%. So, you can easily see 0.50 is reduction coming and flowing through in the Q2. That is one part. Second part, what you are saying is right in terms of the repo rate benefit, which transmits to the customer, it happens on the interest reset date which happens on a fortnightly basis as the loans get repriced, and that flows over time. So, I think what we are saying basically that while the hit on the repo on the earning asset is upfront, I think with some of these cost reductions, as well as the CRR cut, which will also start kicking in from September, it will effectively even out over 3 to 4 quarters, of course, assuming no further repo rate cut, right?

So, 50 basis points would be entirely left out to be passed on, that will reflect in 2Q?

As I said, it's difficult to say because it has happened over a different period of time; it will also depend upon the asset repricing. But all I am saying is that, again, also the deposit also repricing, but over next 3 to 4 quarters, we will see the effe ct of earning loss getting offsetted by the cost of fund reduction. That's what I am saying.

Okay. Will take 3-4 quarters. Okay. Thanks.

Thank you.

Thank you. Our next question comes from the line of Mahrukh Adajani a from Nuvama. Please go ahead.

Hi. So, just a couple of questions. Firstly, that obvious reasons unsecured has grown slower, I mean, much slower than secured and mix is down to less than 10%, a little less, almost 10%. So, do we still aspire to grow unsecured in the mid -teens, or will we take a breather here? That's my first question. And then I have a couple of other questions.

Sure. Look, aspirationally, we would like our retail unsecured book to be at 15%, always in line with our guidance. In that three kind of elements, one is MFI, which we have talked about. And we have talked about how we are stepping back and starting disbu rsements. Currently, our disbursements level is more or less equal to the run -offs. But over a period of time, as the credit thing gets better, we will start building our MFI book again. Personal loan is again a very, very important product for us which ou r customers need and we will continue to grow that book and we are doing a lot of work there to really make, to step up the pace of personal loans. So, both MFI and personal loans will be more immediate. Card is one area where we have kind of getting our engine started, launching the new products, trying to get the right product into the right customer's hand. And card, as you know, it takes a bit of time, but it's clearly an area of high importance to us and we will go after it. This quarter, like we said , we launched Solitaire and the Indi Go card. There are other card product launches that are coming up and cards is one area that we will grow quite aggressively going forward. So, our entire focus of trying to climb up and get a higher percentage of our assets and retail unsecured is very much on the cards and we will do it in a sensible kind of fashion.

Okay. And just in terms of margins, obviously there were multiple things that happened which took down margins this quarter. But is this the bottom or the earlier rate cut may not have been fully passed on and therefore there's some more catch up to do on yield. So, how do we view margins? Is this an up-fronted impact and therefore it is the bottom or which quarter do you see it bottom out?

So, I think, Mahrukh, if you see the latest repo cut happened in June. So, clearly the full effect of that 50 bps will reflect in Q2. So, therefore Q2, it is likely to bottom out before the repricing and the CRR benefits start accruing from Q3 and Q4. So, I think the other thing I just wanted to also highlight is that while that is happening on our organic growth on current account and saving account, we have been having growth. So, that will also add to some improvement happening going forward. But I think to answer your question, the repo rate effect on the advances will be felt during the Q2 quarter just because the 50-bps cut happened in June itself. So, it's only for 15 days you have taken the hit in Q1, right? The full quarter effect will come and that's of course hold good for all the banks.

And the deposit repricing will happen as per maturity.

Absolutely.

And so we expect that to take somewhere between 3 to 4 quarters.

3 to 4 quarters. Okay. But the repo repricing policy is what, it's T+1,30, 90. I mean, in how many months does the entire repo book reprice following a rate cut?

Broadly 3 months.

Okay. Perfect. Thank you. Thanks a lot.

Thank you. Our next question comes from the line of Chintan from Autonomous. Please go ahead.

Hi, thank you for taking my question. Can I just come back on MFI? You said that you want unsecured to be 15% of the mix, but you're stepping away from MFI for the moment. When you think about that 15%, how much of that do you think should be MFI roughly?

I think we look at it on a total kind of basis, right? We are not going to get to 15% overnight, but it's kind of building it up. Look, MFI as an overall book, as an overall of total assets will not be more than 3% or 4% of our total asset book, right? But I think th e more important thing is to say that we would not like our retail unsecured assets to be more than 15%. Currently, we are at a low of 9.7%. So, there is a long road ahead of us.

Okay, thank you. And then the second question I had was on the, and again, sorry to come back on this, but perhaps, Devang, if you can help us understand the moving parts this quarter. So, the day count impact will probably be 7-8 basis points. Then you have adverse loan mix shift effect, you have an adverse funding makeshift effect because of the CASA deterioration. Is there anything else that we are missing out here that would explain the quarter-on-quarter decline in NIMs outside of these factors?

Sure. So, I think there are three primary reasons, as I explained in my opening remark. First, of course, is the repo rate cut and the cost of fund impact. Second, I think the mix of the unsecured which reduced in this quarter compared to Q4. And the third, as I explained, even in the last call, the way o ur system calculates the interest on the retail book and the number of days count. So, typically, Q4 has a benefit because of that and every year, Q1 has a reversal of that. So, effectively, these are the three key reasons which has impacted the movement of the NIMs.

Okay. So, no other one off that might explain any or something, that is unexpected?

No.

And if I may, a very quick one, on the AMC AUM, you highlight 18% growth. How much of that is net new money?

Can you just repeat that question, please?

So, of the 18% growth that you have seen in AMC, asset under management, how much of that would be net new money, as in money coming in from clients as opposed to market price increase or asset price increase?

So, our total assets under management has grown about 8% quarter -on-quarter, of which new flows, thanks to the liquidity coming into banking system, was disproportionately higher on the debt side. Mark -to-market was less, and client flows was higher. On the equity market, again, markets have been fairly stable. So, the flow from clients will be almost equal to the mark-to-market gain.

Thank you.

By the way, that was Nilesh Shah, the CEO of our Asset Management Business.

Thank you. Our next question comes from the line of Sumeet Kariwala from Morgan Stanley. Please go ahead.

Hi, good evening, everyone. I have two questions. First is on the cost of funds. So, that has declined by almost 8 -9 basis points. Now, if I look at the number of measures, you've cut savings deposit rates, ActivMoney deposit rates, and so on. I was looking at cost of SA. Cost of SA itself has come down by 50 basis points Q -o-Q. Now, that itself would explain, say, 10 basis points of funding cost decline. So, is it fair to assume that we have not seen much repricing on the term deposit portfolio or the active money portfolio?

You are right, Sumeet. The term deposit portfolio, as you know, our average tenure for the term deposit is between 9 months to 12 months. So, most of the term deposit repricing will happen over that period of time. As far as fixed SA is concerned, the price reduction, today we have a 2.91% interest rate, which obviously will move down to 2.5 as we grow, as we already sort of declared the price. I think if you have also seen in the breakup, our reliance on the MIBOR related SA, which is a high cost SA has also gone down during the quarter. This will also obviously help us in reducing the cost of fund further.

Okay. And the second question is on asset quality. So, if I look at MFI, credit cards, personal loans and retail commercial vehicles, we have been highlighting that stre ss for last 2 -3 quarters. I just wanted to recheck on segments out of this, out of those segments. Is there any deterioration that you're seeing in the early buckets, particularly in the business banking and SME portfolio, please?

As of now, Sumeet, we are not seeing anything in SME and business banking in this quarter as well. And as I mentioned earlier, personal loans, we have stabilized, both flows and collections, cards have plateaued. MFI, we believe, has peaked this quarter. Retail commercial vehicle, we think it will, based on what we are seeing, maybe continue over the next one odd quarter. We will watch that if we are managing that dynamically. But otherwise, as of now in our SME and business banking, we are not seeing any stress as of now, but we are monitoring it very carefully.

Just to add, Sumeet, in our case, both SME and MSME, both the portfolios are fully secured. So, to that extent, we have that.

Thanks a lot, Devang. Thanks, Shanti. That was from me.

Thank you. Our next question comes from the line of Piran Engineer from CLSA. Please go ahead.

Yes. Hi, team. Thanks for taking my question and congrats on the quarter. Just firstly on SA, I wanted to understand sort of movement. So, our opening balance was about 1.3 lakh crore and close at 1.28. But the average is more like 1.24. So, was it that we had some quarter end flows in the March quarter which impacted it or did we see some outflows when we cut SA rates during the quarter? How do I just reconcile this phenomenally?

So, I think, Piran, first of all, we have not seen till now, impact due to the interest rate cut on the SA balances. What has changed clearly is the breakup between the floating and fixed rate SA. So, if you refer to the slide 10 of our EU, which effectively will show you that the saving account average balances has improved by from 1.22 to 1.24. And also on the left side, if you see the EOP balances which have been broken down between floating and fixed rate SA.

So, let me just add to that. Actually, we have been bringing down our MIBOR book. Our MIBOR book is down. If you look at it, Y-O-Y from 18,730 to 13,288, while our fixed rates SA, which is curren tly at 2.5, but has gone up from 105 to 114. So, the mix of savings is moving to better quality customer granular savings, which is the fixed rate SA and MIBOR we have been reducing it. We always have shown them differently because there are different customer segments and different strategies. So, it is the granular fixed rate SA that's very critical.

And the 3.32 cost, what you saw below is actually both put together. It is MIBOR as well as the non-MIBOR SA.

Sorry. Maybe I miscommunicated. I am not referring to the mix or the cost of SA. I am just saying that the total SA balance as of 31st March was Rs. 1.32 lakh crore. And as of 30th June was Rs. 1.28 lakh crore. One would broadly assume the average to be 130. But the quarterly average is more like 124. Maybe I am overanalysing, but just wanted to understand if there was any…?

Piran, we can sit across and discuss this. Thanks a lot.

See, look at page 10. So, if you see page 10, right, that kind of explains it, right? It's gone from March, it was 111. That's the fixed rate SA going to 114. Correct?

The floating rate SA has come down.

The floating rate SA has come down.

If you add both, it will be down, but there's a big difference between the two.

That's correct.

You have to look at it separately.

Okay. I will take it offline with Devang. Secondly, just how do we think about the quality of the book that has been underwritten in the last 12 months to 18 months across segments. So, we can talk about CVs, unsecured lending, credit cards obviously has not happened much, MFI, etc. Is the new book showing significantly better outcomes than let's call it legacy book?

Look, let's just go into the areas where we are seeing stress and what is happening there, right? So, currently, the stress is in MFI. And in MFI, clearly the newer book, say for the last, call it three quarters, or maybe even four quarters, definitely the newer book is much, much, much better than how the old book is kind of performing. Cards, as you know, we have not been growing. Actually, we have been de-growing. So, on a percentage basis, you may see a lift in losses. But actually, the portfolio is getting better, because all the bad stuff is kind of getting washed through. PL, definitely we are seeing improvements and the new book is definitely better. So, no concerns there. And in CV, we had actually spotted this trend about two quarters ago. If you remember, Shanti had mentioned this over the last two quarters, that we are seeing some stress in retail CV. So, it's not in the entire CV market, it's only in small retail CV that we are seeing stress. And over the last two quarters, we have tightened our underwriting for that segment. And that the new origination from that segment now has come to a real fraction of what we were doing earlier. So, generally speaking, we k ind of stay, we kind of are like watching these books like a hawk, particularly since we are worried about the trend in the economy and I covered that in my opening statement. Look, the RBI says 6.5% GDP growth, which is a slip from last year. But we are just seeing where the implications are, and therefore monitor these books very carefully.

Got it. And just my last question is on gold loans. So, after COVID, we had been expanding branches quite significantly. But last year, we cut about 20% of our gold loan branches. So, anything to read into that? Have we merged branches or what's going on there?

So, I will ask Manish Kothari, who Heads up our Commercial Banking to deal with that.

So, gold loans, we continue to, the numbers I don't know where one is seeing . The gold loan branches which we would have reduced would have been more coming out of possibly towns where we were not really seeing much of the growth. But otherwise, actually the book has grown, despite the reduction in the branches, the book has grown by 30% plus. It's a small book, but it has grown 30% plus over Y-O-Y basis.

Yes, we have identified 488 branches, where we are concentrating on gold loan, building the capability, both operationally as well in tech in those 488 branches. And as Manish correctly pointed out, albeit of a small base, Y-O-Y growth in gold loans is 30%.

Okay. That answers my question. Thank you and wish you all the best.

Thank you.

Thank you. Our next question comes from the line of Harsh Modi from JP Morgan. Please go ahead.

Yes, thanks. My question is just on asset quality. To what extent does it appear concerted slowdown across multiple places, as well as some degree of unwinding of the microfinance book? How much more of stress do you think it shows up? Does it show up only in second quarter? Or you think it continues over second half of the year? Thank you.

So, Harsh, like we said, look, a lot of microfinance has been actually qui te painful. Started Q3, Q4, we believe it's peaked in Q1. We believe it will start coming down. And with both credit cards, kind of plateauing and PL being stable, some uptick in commercial loans, but the uptick in commercial vehicles, I doubt very much is going to be as much as the drop off in microfinance. So, what we are looking at is, if the microfinance book actually kind of drops off as much as we hope, then we should be in a better shape. But these are, as you know, Harsh, these things, you have to m onitor them virtually on a daily basis, we are all over it. But we feel pretty confident that microfinance will peak in Q1. Look, the microfinance book has also come down quite dramatically and therefore, our confidence that lost rates will fall off is rel atively high. And so I am hoping that same time next quarter, we have a better picture to report.

Thanks. I just wanted to dig in a bit more on that. Once the guy knows that the bank is kind of in a runoff mode in microfinance, does the willing ness to pay back go es for a toss and when do you end up seeing a much higher probability of loss? And also on MSME, one of the smaller or for example large players, said that economic growth is a univariate variant which has a significant impact on ability and willingness to service debt in MSME segment, especially for the smaller guys. Is that something, you said you're not seeing a lot there. I think Shanti said that. But is there something there where there's any early warning signs? Thank you.

So, Harsh, first of all, in the microfinance book, look, what we have done is that we have replaced the joint liability group model with individual underwriting risk -based models. And therefore, the way we are stepping back or the way we are, where we are dispersing and where we are not dispersing has a lot to do with what the model says are the propensity for repayment. And we have back-tested these models, and the models seem to indicate that that works into a very acceptable level of risk and loss rates. So, that gives us comfort that going forward, the model for microfinance has changed from a joint liability model to individual risk-based underwriting, I think we can get into a much better place. On SME, particularly the smaller SME, we are monitoring that portfolio very, very carefully, because obviously, we want to look to see whether ther e are any signs of a contagion. Monitoring very carefully, there are a couple of things that kind of help. One is usually these customers are solely banked and therefore we get the holistic view of the customer. And two, not a 100%, but for the most part, it is secured. Right? But having said that, given where the economy is, we are definitely looking at it and monitoring it very carefully.

Right. Thanks for that. Just so I understand, the probability of default may go up in SME, but loss-driven default may not, but the probability probably is moving up?

As of now, I am not stressed about the SME piece, but of course, we are monitoring it.

Thank you.

Thank you. Our next question comes from the line of Jay fro m ICICI Securities. Please go ahead.

Yes. Hi, sir. Good evening. It's a question on your OPEX. So, this quarter, the growth has been 6% versus loan growth of 14%. And I think you mentioned in the opening remarks that as credit card and PL book keeps, I mean, gains momentum, there may be some rise in the OPEX there. But for full -year basis, do you think that OPEX should be broadly similar to loan growth or you believe that it can trail loan growth significantly?

So, I also mentioned th at while we continue to spend on IT, which obviously will bring efficiency, and we are already seeing some green shoots there with the payroll cost growing at much lower pace than earlier. So, I think it's a combination of the mix of the spend has changed towards more IT and less towards the payroll part. And I think the other part which will grow is related to the acquisition cost as we sort of start onboarding higher 811 customers and issuing the new and new credit cards, right? So, to that extent it will be a variable cost, but also those new acquisitions will bring the income also, which is currently not reflected in the other income line. So, to that extent, I think I would like to see the acquisition cost increase in line with the income also for the new onboarding of customers. And we are clearly seeing efficiency of the IT spend now coming gradually into the cost.

Thank you. Our next question comes from the line of Zhixuan Gao from Schonfeld. Please go ahead.

Thank you so much for the opportunity. Just one question on the CV part that you're highlighting. On retail CV asset quality, do you mind sharing with us more details? Is there any sub-segments, either new versus used, or any sub-segments of retail CV that's having more stress? Because we have a CV player that reported yesterday and their commentary seems to be, things are pretty fine on the ground. It's just seasonality. So, I just want to understand, is there any sub-segment that's causing this for you guys?

Between CV, which is the segment, which is retail sub-segment, that is it.

So, what we are really saying is that within CVs, it's the retail CV, not really the transport operators and stuff like that, it's the retail CVs where we are saying.

In the goods segment, retail CV is placed. In the goods, retail. Goods and retail.

Does that make sense?

Okay. Goods and retail CV.

It's a retail commercial vehicle and in the goods segment, which is the goods. Transportation. Movement of goods.

Got it. Thank you. And then overall credit cost, are we expecting this to be the peak credit cost or how should we think about the next couple of quarters?

Like we said, we expect MFI to peak. We expect MFI to drop off. Cards, like we said, have plateaued. So, I don't think there should be too much change to cards. PL is also stabilized. So, that should be more or less the same. We will see some stress in commercial vehicles, like we said. And that's what the outlook looks like. And then, of course, the wild card in all of this is corporate recoveries as to how much you can get in a particular quarter , which is not, that's not the annuity piece, right? That provides to some extent the swing factor.

Got it. Thank you so much.

Thanks.

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

As always, thank you so much for joining us on a Saturday evening. Thanks again and we will see you next quarter. Thank you.

Thank you.

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