Certainly, sir. We will now begin the question -and-answer session. The first question is from the line of Chintan Joshi from Autonomous. Please go ahead.
KOTAKBANK · FY2024 Q3
Kotak Mahindra Bank Limited analyst Q&A
Thank you. So, I wanted to start off with understanding the sensitivity to your NIM for FY'25. So, the way I see it, you have something like 35-40 basis points of NIM improvement coming from the business mix shift towards unsecured. And also, 57% of your book is EBLR. So, if I think about FY'25, how do you see the impact of RBI measures on unsecured impacting your book? And how does that flow into NIMs? And also, if there is a rate cut, let's say at the end of FY'25, how should that impact your NIMs goi ng forward? If you could give some color on that, that would be helpful.
Let me just take that. Jaimin here. Yes, you are right, 57%-58% of our book is linked to repo. And to that extent, it is directly linked to what's happening there. This year, you have seen repo rates flat that have been effectively since the last increase in February '23, we have retained that number for all of this period. And likely to be at that level for some time. We don't know when it will change. But yes, the book is somewhat sensitive to the fact that 58% is linked to repo rates. If the repo rate falls, yes, those advances do get re -priced. And to that extent, it will depend upon how the mix on the asset side as well as the liability side is changing. Yes, the unsecured book, we have taken it now to about 11.6% of our overall net advances. We have talked in the past that we would be comfortable to take it early to mid -teens. We are pretty much on that journey. At this stage, there is no reason for us to put the brakes on it. While RBI may have increased risk rates and all, we are quite comfortable with that. And that wouldn't really put the brakes on what's happening on that growth. So, we will keep growing that steadily from where we are today, of course, keeping an eye on the collections and credit. But that will keep going on. So yes, if the repo rates drop, it will kind of rebalance what's happening. But the decision on going for higher unsecured will not be necessarily linked to, because the repo rates are falling, it's a mix of how the credit book would look like.
Thank you. And then the second question is on deposit competition. It seems to be competitive in the system. Liquidity is tight, which should be headwind arguably to your cost of funds. The question I have is, do you see room to move lending margins higher to offset some of these competitive pressures? Or do you think business as usual, is good enough for the moment?
Look, they are two different things. Both sides are in the marketplace. So, while deposits we need -- all banks would go for deposits and pay what is the right and what the depositor will take. Similarly, the borrower is also in the marketplace and you're not going to be able to price higher than what the market is willing to pay. So, it will have to be played out in the market. Yes, there is a challenge in deposits, which we've called out in our investor presentation. And to that extent, yes, we are taking all kinds of steps. We activated these Sweep deposits. We call it ActivMoney. That happened about six months ago and we've seen big traction on that. We had reasonable growth both in the previous quarter and in this quarter. Last quarter -- just a month ago, we've activated the senior citizen’s scheme. So that's again, we're pushing that out. So that is a separate play and what the market will pay you on the asset side is a completely different game.
Okay. Do you see any signs of lending margins increasing in the face of deposit competition pressure?
Not really. I think that will play it out. I think there are enough players on the lending side also.
It's a competitive market and each of the product segments and the customer segments you are in are very different pricing. So, it is a very competitive market and we sort of have a strategy in each of the segments.
Okay. Thank you. And finally, just wanted to say welcome to Ashok and congrats in the role.
Thank you so much. Much appreciated.
Thank you. The next question is from the line of Mahrukh Adajania from Nuvama. Please go ahead.
Yes, hello. Hi. My question is in general, a discussion on LDRs, because the presentation has talked about -- you just mentioned the deposit challenge. And then there are talks from some banks that RBI is monitoring LDRs more closely than it was earlier. So how do I view this in the context of Kotak, especially in FY'25? Because if you take the third quarter, say third quarter loans grew 3.3%. If you take like an annualization of 3.5, then you're talking about maybe 14% -15% loan growth. Is that the kind of loan growth that the bank will settle for or is there scope for LDRs to move higher? How does it pan out from here? Is there any guidance or any rough target that you could give on where LDRs should settle in FY'25?
So, Mahrukh, let me just put a couple of things there. One is what you talked about, the 3 odd percentage as advances g rowth for the quarter is at the net -net level. If you look at the level before the IBPC, BRDS and others, the number of customer asset growth is about 5.3%-odd for the quarter. So that takes you to about 20% thereabouts annualized. So that's broadly the asset side growth which is happening at this stage. IBPC, BRDS is like a way of funding that to keep that going. On the LDR, yes, we are at 88-odd-percent at the end of December. Let's also recognize the fact that while 88% may be optically higher, we also have among the highest Tier 1 capital in the industry which is pure equity. Our CET1 today is about 21% which is giving a lot more cushion to what we can do with it. Plus, look at the fact th at on the LCR, we are at about 126% overall at group level, about the same level as what we were a year ago. So, there is enough liquidity there. And yes, we will keep looking at that and we also at times fund coming through other means. Take this quarter itself where we did about INR3,000-odd-crore through borrowings which were from refinancing from SIDBI. There are other avenues which are available to fund the asset growth, we will keep looking at it. Of course, deposits is something which we are very focused on.
Okay. So, we can still see high-teens growth next year?
Yes. The standard thing if you have noticed Kotak for the last 20-odd years has been that if you take the nominal GDP, we would typically end up in the space of 1.75 to 2 X that growth at a time when we want to grow. Of course, there are times when we hunker down which is not the state at this stage.
Okay, so hig h teens should be possible. And my last question is on basically again deposits only. With so much competition in deposits, do you think deposit rates are likely to rise or you could see margin pressure going ahead?
Okay. So, Mahrukh, let me take that question. I am saying that if you look at what we did, you have savings at about 3.5%, you have term deposits at about give or take 7.2%. And we introduced ActivMoney which actually gives a cost in between savings and TD s. S o, we introduced another product that gives us another flow of deposits. We will have to keep on innovatively looking at sources of funding for the purpose of our balance sheet and also look at how do you optimize cost of funds. We will do what it takes. I am saying if you see the market now, all the banks are raising deposits to fund their growth because there is growth and finding the various initiatives and strategies to play this game. So, we are right there and will be competitive in order to make sure we have adequate fuel for our balance sheet.
Okay, perfect. Thanks a lot.
Thank you. We have the next question from the line of Kunal Shah from Citigroup. Please go ahead.
I was just saying maybe if you can just highlight in terms of the COVID provisions outstanding. Last quarter it was INR320 odd crore. How much have you utilized this quarter and where do we stand now?
So, Kunal, that's an arithmetic which we are following which is why I have not put that number this quarter. We are following a formula-driven provisioning on COVID now. That was done long back in the period. Technically, we could take all of that back but we worked out a situation where we use a formula with the consent of the auditors and others. So, in t his quarter, we would have taken away a provision of about INR26 crore. So, out of that 321 which you talked about, 295 is still being carried.
Okay. So, 295 still continues. Okay.
That's correct.
And when we look at it in terms of the overall deposits, so these Sweep deposits are now almost like INR42,000 odd crore. Looking at where the savings pool is, maybe we have seen this shift almost like 35% out there into Sweep. Obviously, this is more of a behavioral change but where would it largely settle looking at maybe your interaction with the customers and how much impact could it continue to have in terms of the overall cost of SA moving up or maybe combined cost of SA plus TD moving up? Yes.
So, you see, we launched this ActivMoney with a clear strategy that, okay, we get in more customers and when we get more customers, they help us build both SA and the high-valued customers which were mo ving money to the places where there was a high interest gain for them. We retained that money or got more money from the other places to build our Sweep balances. I think that strategy has worked for us so far and we will definitely continue going forward is to get more customers, more SA balances and money moving into Sweep. So, at least the money that we have as deposits keep on growing.
And last quarter, in fact, you indicated when there was 35 bps decline that 20 bps was spread impact and 15 was maybe one-off. Maybe this one-off would not unwind but maybe it will not repeat this quarter. So, if we just look at in terms of the maybe curr ently 5.22% staying as it is as Q2, if you can just give the breakup in terms of how much has been the impact on the spreads and how much maybe if any of the unwinding which was there maybe which has helped this quarter. So, that would have maybe because expectations were of a decline?
So, I think, Kunal, it's not easy to put that into an arithmetical formula but yes, just to give a thing, last year there was a CRR impact which was a one-timer which is not there this time. We had some hit taken internally last quarter which is not there again this time. So, those would be about 3-4 bps differential. Of course, there is the other thing which we have done smarter this period is now that we know the behavior particularly of what's happening on ActivMoney and all, the proportion of money which is going into advances from the investable amount has gone up and that does make a difference. Because what you earn on advances is significantly higher than what you would earn on just putting into liquid investments or whatnot. So, that is the difference where the mix of the earning assets has changed a little more in favor of advances and that's again continuing to be an effort and we'll keep doing what it takes there.
So, then investment rise of almost INR17,000-odd crore during the quarter away from the cash. So, in fact, investments are also growing on a quarter-on-quarter basis from 128 now, it's gone up to 146. So, maybe obviously some cash has been put into the investments but if you look at between the advances and the investments, investments is also growing and largely credit substitute is a part of it?
That's correct. That's the credit substitute growth which is effectively what we looked at as customer assets…
Yes, okay. So, you are saying not maybe mainly the low -yielding one but still getting into the credit substitutes and that's helping. Okay.
That’s right
Okay, good. Okay, yes. Thank you.
Thank you. The next question is from the line of Saurabh Kumar from JP Morgan. Please g o ahead.
The 2.2%, actually what you are saying, the 2.2% I presume you are talking about is at standalone level. The 2.2% has also got hit thanks to the two hits which we took including the AIF hit which is purely accounting. So, it could actually be higher. But the numbers which you are talking about , the 1.9% and odd, were in a different era. We've raised capital after that. It does help you on the ROA number which effectively we raised about INR7,000-odd crore in 2020 and that's taken up our CET1 ratio. So, that does help on the ROA. But I think overall, the margins have tended to get higher. If you again go back to that era of 1.9% thereabouts, NIMs were operating more in the 4.5 range. We are now talking about consistently in the 5 plus range.
In a mixed shift in the book, that's a higher ROA book. So, my question was like now we should expect Kotak to be now structurally above the 2.1%-2.2% ballpark, right?
Again, that is the ROA is more of a consequence and yes, the mixed change has helped on the asset side. And yes, the consistent thing of pushing the CASA numbers again.
Okay, thank you.
Thank you. The next question is from the line of Jai from ICICI Securities. Please go ahead.
Hi, good evening, sir and thanks for the opportunity. Sir, my first question is on cost of deposits. So, last quarter we had said that considering our duration of term deposits, the TD cost should be more or less plateauing. So, while we don't give the interest on deposits or the TD cost separately, is that a fair assumption that the TD cost would have been plateauing? And just a supplement to that is that in the fag end of the quarter, SBI and maybe some other banks had raised their deposit rate. So, how should we look at the cost of deposit for our banks?
That's a market -driven thing technically and yes, you've seen if the big boys play the deposit game, some of us will end up having to raise the deposits. Yes, so I wouldn't say it's absolutely plateauing, but yes, the range has been narrowed.
I'm saying that it's not just the repricing of deposits, which we had said 10 -11 months more or less time. There's a mixed change also, right? We talked about the fact now that there is SA, there is ActivMoney and there is term deposits. The mix of deposits are also changed. It's not just a function of repricing of the TDs, but the mix of deposits as we go forward.
Right. So, that is one. And secondly, if we can also talk about the PSL fulfilment for our bank, I think there is some change by the RBI in terms of Ud yam registration, etc , wherein they had made mandatory that registration for MSME. Is there any change in the PSL framework for our banks and how are we doing?
So, let me take that. So, there is no recent change in the framework of PSL. Udyam registration has been the norm for a while now, a couple of years actually. So, there is no significant change. We, by and large, meet our PSL requirements other than in the SMF category, where we meet it through trading of certificates. And we have a small shortfall there, which we make up. Otherwise, we meet the PSL requirements prescribed by RBI.
Understood, sir. Thank you so much.
Thank you. The next question is from the line of Piran Engineer from CLSA. Please go ahead.
Yes, hi. Thanks for taking my question and congrats on the quarter. Just firstly, I wanted to understand industry-wide and for Kotak, what are the sort of rate actions on PL and loans to NBFCs post the risk weight guidelines?
What is the question? Can you just repeat that, please?
Can you repeat the question, please?
Yes, so I'm saying that after RBI's risk weight guidelines for personal loans and loans to NBFCs, how much have we and the industry increased pricing in these loans by?
Yes, so if you see most of our unsecured loan segments, they a re largely fixed rate products and the pricing are already at reasonably elevated levels and therefore, we haven't significantly increased pricing at that end. On loan to NBFCs, yes, we have made our adjustment to prices that are required to get us the right ROEs on the products.
Keeping with the principle of the risk -adjusted returns, yes, there is a slight increase on the unsecured personal loans that we are doing today. So, there is some increase that we have done.
Is that like 10, 20 bps or more like 40, 50 bps, when you said that?
Yes, it is exactly between that.
Okay, so 20-30 bps. Okay, fair enough. Secondly, just wanted to understand, festive demand for commercial vehicles was a bit muted. A couple of your peers have reported. But we've delivered like 9% Q-o-Q growth. So, what exactly are we seeing or is there some sort of one-off in the base that we need to understand out here or some market share gains? Can you just elaborate on that?
It's a distribution strategy as well as, volume strategies that we are looking into and also segment strategy. I think there's a combination of all these three, which is what I said in the opening while the industry has seen muted growth disbursed in Q3, Y-o-Y muted growth. But we've sort of been deepening our distribution and also looking at the segments where w e are growing in certain segments. So, it is a growth strategy focus in that sense, market share.
Is it like some new segments that we have entered into within commercial? Like started doing used commercial vehicles?
Yes, so we have done two things. One is the proportion of used commercial vehicles has gone up slightly. And we are also, we have made some penetration into what we call the small commercial vehicle segment.
Got it. And just lastly, in terms of opex to assets, now we used to be at 2.5% pre -COVID, now consistently north of 3%. Is that a consequence of our strategy of going more into unsecured retail, which of course is a high-cost product? Or should we think about that over a two, three- year period?
No, right now, yes, there is some investment more, which is happening on the cost side. But yes, the effort over a period of time is to stepping it down. I don't think we are wanting to be staying at three plus overall.
Got it. Got it. Okay. Thank you so much and wish you all the best.
Thank you. The next question is from the line of Abhishek Murarka from HSBC. Please go ahead.
Hi, good evening. So, my question is on deposits costs. If you can share what is the incremental cost of deposits or cost of term deposits, whatever you find easier to share? And also, LCRs, I think you mentioned 120% at the group level. Can you also share that number for the bank?
The group level LCR is 126.9% and the stand-alone bank is at about 119.5%.
120, Yes.
So similar to last quarter?
That's right.
Yes.
And on cost of term deposits, the incremental cost?
I wouldn't want to get into incremental, but our overall deposits, I think as Shanti alluded to, would be about 6.5- 6.7, in that range.
Term deposits?
Term deposits. Yes.
Term deposits is 6.5 to 6.7. Is that correct?
Okay, okay. So basically, in terms of deposits, the gap between your outstanding deposit costs and incremental, can you give an indication of how much that would be?
I said I don't want to get into incremental ones. What my book today would be in that range.
Okay, got it. Got it. All right. Thank you so much.
Thank you. The next question is from the line of Nitin Aggarwal from Motilal Oswal. Please go ahead.
Yes, hi. Thanks for the opportunity. One question on the unsecured business, particularly the credit card, while you talked about that you'll want to take the unsecured mix to mid-teens, as earlier indicated, but there was a blip on the credit card sourc ing in the quarter. So, if you can talk about how the sourcing rate is trending and what is the strategy there?
Look, strategically, we have been always focusing on issuing cards to our own customers. And as of today, if you ask me, about 85% to 90% of the cards that are issued are to the existing bank customers. So, from that perspective, at least on the issuance side, we are consistent with our strategy.
So basically, I'm referring to the month of November, wherein there was a drop in terms of the net card addition versus like 100,000 plus run rate that has been the usual trend. So, anything to read into that?
Nitin, what we did in the last quarter was that the lower end card with low limits, we rationalized our sourcing in that segment.
Okay, sure. And one clarification on the treasury loss that we have quoted for the quarter. So, what has driven this? Because, across all the banks who have come so far, we are seeing steady treasury gains. And both equity and bond markets have been moving pretty good. So, what has really driven this loss this quarter?
I haven't understood the question, but just to explain that, as I mentioned, it is probably the bond swap strategy which we are f ollowing. Where in effect, we lock the spread over the life of the asset, where the OIS curve can move differently. And this quarter, it had moved sharply. So, we would have intermediate fluctuations on the thing, but over a period of the life of the asset. So, do I need to repeat the answer again? Then I'll do that. So just to explain the treasury loss which we took this quarter. It is basically a part of the bond swap strategy which we do, where over the life of a security, the swap enables us to fix up a lifetime spread which we are protected on. While this swap curve moves, there could be volatility in the intermediate periods. We saw a profit in the previous quarter. We've taken a hit in this quarter. But over the life of the asset, the spread is protected and that's what we play on. So yes, we'll have to live with this volatility over periods. But I think over the life of the security, it's a gain which we quite liked and we'll continue that.
Right. And lastly, on the ROA, while you talked about the sustainable ROAs that you looked at, but how do you really look at the ROE in the medium term? Because that's one metric wherein Kotak has been really behind other banks.
I take the point just as the ROA is helped by the equity which we raised. It is a drag on the ROE because at 21% CET1, it's significantly higher than what we would need. So, to that extent, yes, we would look at and we would take a look at what we do with that. But yes, the capita l which we raised three, four years ago has effectively, the profits have been enough to keep the growth going. And to that extent, we'll keep looking at what we do with the capital.
Sure. Thanks so much and wish you all the best.
Thank you. The next question is from the line of Param Subramanian from Nomura. Please go ahead.
Yes, hi. Thanks for the opportunity. Just one data keeping question. So, for the investment book, how is it split between GSec and non- GSec? Because the credit substitutes have gone up and you mentioned you manage margins by moving cash into credit substitutes. But at the same time, we maintain the LCR. So, if you could just explain how that happened?
Well, broadly GSec book is about 108 out of the 145. So, we've seen that, I think somebody asked earlier about 128 in the previous quarter going to 145. A large part of that has gone into investing which is in credit substitutes. Effectively of the 145, about 108 would be with respect to GSec and about 28 which is the credit substitutes there. The balance will be including our investments in subsidiaries and whatnot.
Yes. Jamin, could you explain how the LCR has been maintained despite? Yo u said that the margins have been managed, the 15 bps drag on margins which was their last time has been managed.
There are two different things. I'll talk about the margin. I'll let Paul take the LCR bit. The margin is there because of the f act that you have the proportion of advances to the earning investments has increased. And even a small change does make a difference because what you make on your advances is from a yield basis higher than what you would make on investing or interbank funds. So that's how the margin was maintained over the last quarter . In terms of LCR, you're speak on that?
See overall LCR is good because we are fairly comfortable in our liquidity position and therefore that is really what is helping us to m aintain our LCR. However, we sort of balance -- carefully balance how much, our inflows and outflows in the short term. We manage some of that. We manage our HQLA. We manage our investments and therefore also try to optimize LCR using that. So, it's a combi nation of these that helps us to manage our overall LCR. But I think the underlying factor is really that we are fairly comfortable on liquidity.
Fair enough. Thanks a lot. Just one more question if I can squeeze in. I think in this quarter we increased the deposit rates in some of the higher tenure buckets. So, what's driving that because if we are at the fag end and could be heading into rate cuts going ahead, why are we increasing in higher tenure buckets?
In terms of the opportunities in the market plus an option to get higher. This is a time where the interest rates, people believe they are at the peak and from here on it will come down. And hence there is an opportunity for us or for the customers to lock in the deposit s at the higher end. And that's where we saw the opportunity and in certain durations, we have raised that rate. And there again to be competitive with the three or four competitors whom we benchmarked.
Okay. Thanks a lot. All the best. Thank you.
Thank you. Ladies and gentlemen, we will take that as a last question. I would now like to hand the conference over to Mr. Ashok Vaswani for closing comments. Over to you, sir.
Guys, just on behalf of the entire Kotak team, I wanted to say a very big thank you and appreciate you doing this on a Saturday evening. And with this I call it to close for this quarter's results. Thank you.
Thank you. On behalf of Kotak Mahindra Bank, that concludes this conference. T hank you all for joining us, you may now disconnect your lines.