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.

Yes, hi. So, firstly, with respect to this 14 bps- 15 bps of margin one-off, which will not be repeated, I'm not sure if you highlighted the reason for that and maybe where we are seeing it. Or is it more to do with the TD Sweeps and that's the reason you are confident that it will not come through, maybe that will stabilize now?

So Kunal, let me just take that. If you take the obvious ones, it is like you had the ICRR impact this quarter, which was not expect ed, it has gone. The liquidity buffer, which I talked about earlier, which we may continue to have that, but will not be as much as what we had in this quarter. So it's not that it is completely tapered off, but that's not likely to be at those kind of levels. I also talked earlier about the fact that we had some short-term inflows, which had to be kind of invested into short-term investments. Now on a marginal basis, this gives you positive returns. But if you look at the calculation of the NIMs, they kind of depress the yields overall because the denominator just flows. To that extent, the extent of those kind of marginal or short-term money which comes in could be different. So if I look at my average earning assets because that's what goes into the denominator for calculating your net interest margins, the best is if you can have as high the number as advances because that brings you much better yields. This quarter, if I look at sequentially, the segment or the share of advances actually has dropped from what it was a quarter ago. So maybe we do expect that this to getting back to the normal levels as we go forward. So that's broadly what we said is, some of this may not be of these kind of levels as we go forward.

Okay. So assuming that, if we p urely look at spreads in terms of yields and cost of deposits, then that should help in 16-17-odd basis points kind of an impact?

If I look at yields on advances, they have more or less held up. So yields on advances overall has not changed. So yes, the cost of funds would have gone up to that extent that would impact the spreads but yields on advances have held up. The rest of the commentary is on account of the other things like the change in the mix of funding, the cost of TDs going up and the rest. But effectively, overall advances yields have been holding up. Yes, overall cost of funds have gone up for two reasons, as one of you mentioned about the cost of deposits itself going up and the mix, which is the low -cost deposits share going down.

Okay...

Let me explain Kunal. If you look at just yield on advances, it's about the same level. If you look at cost of deposits, it's up by about 20 bps, yes. So roughly, that's the NIM drop. The delta of 15 bps is arising out o f all the other aspects, which Jaimin mentioned, most of which is unlikely to repeat next quarter.

Okay. Great. Yes. That answers the question. And second one now that the event is over with respect to CEO appointment, if you can highlight in terms of maybe how many names were shared with RBI and in terms of the order in which it would have been shared. And finally, we thought now, Vaswani getting appointed as a MD & CEO

Kunal, I don't get your question, but that's not relevant. The RBI has given its approval to our recommendation. I guess that's good enough.

Okay. Thanks. Yes.

Thank you. Our next question is from the line of Rahul from GS. Please go ahead. The line for Mr. Rahul has dropped. Our next question is from the line of Abhishek M from HSBC. Please go ahead.

Hi, good evening. So my question is on cost of funds or cost of deposits. How far along are we in the re-pricing? And how much more to go from here? If you can give a sense of that?

If you look at the average tenor of our liabilities which we've been talking about, it's roughly about 10 months to 11 months. And if you look at the interest rate cycle, we more or less are close to closing the 10 months to 11 months. So my sense, except for global factors, tight liquidity, increase in rates otherwise, we're more or less there on the re -pricing, maybe a quarter or so. The cycle of re -pricing has come its distance. That's the way I would put it.

Okay. And given th at your card rates are mostly roughly around 7 -ish at least in the one year to three year bucket where you're getting most of the deposits, that would leave about 50-odd bps on the TD side, 50 bps, 60 bps on the TD side for re -pricing, right? So that catch-up could happen in a quarter given the short tenor of liabilities?

I think a lot has happened. That's not correct, yes.

No, that's not the catch-up. That is not just TD.

Average cost of TD is not 7-ish.

That's right. See, you're assuming that everything is coming in the one year range, right? You have sweep at 180 days. And if you see this quarter, we've had very strong sweep flows. You have TD at one year. You have TD at 270 days. So, I am saying, your average cost of TD is not in the 7% because of the range of tenures that has come through, that's why your average liability cycle is around 10-11 months.

Right. Got that. And just secondly, Dipak, opening comment on growth t o NIM trade-off will be better than the growth to credit trade-offs. Does that mean incrementally you'd be looking to do more of higher quality, let's say, home loan, corporate loans and something of that sort? Just wanted to get a sense of what you meant?

No, it doesn't mean that. It just means that the credit cycle is still playing off and we are still pretty well off continuing the product mix, which is outlined. Yes, it's still good, it's safe to play the growth path assuming the mix of credit which we really have. Yes, rather than start being cautious on credit at this point of time. That's what I really mean by that.

Thank you.

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

Yes, hi. Good evening, sir. In your opening remarks, again, more or less the same question, you had mentioned that the growth versus NIM and growth versus credit cost, at the same time, at two quarters back, the bank had a view that corporate growth was the risk reward apart from credit cost also, but in terms of tenure and in terms of pricing, was also not that favorable, and the bank had let go of a few hundred crore of corporate deposits because of these issues. However, in the last two quarters, corporate growth has picked up really well. So has anything changed in the way you think on the corporate growth side, large corporate side?

So I'll have Manian is answer that, but it's not really a deposit side issue. It's really the growth you're seeing is primarily driven on the asset side. So Manian, do you want to answer that really?

Yes. So when you look at the growth you must -- like we always do, look at the advances and credit substitutes. So if you combine them that and look at it, the growth trajectory is not dramatically different. I would say the mix is changing more favorably. Advances give us better net yield than credit substitutes. So I would say that, it's more profitability driven than size driven and there's not a dramatic change in customer assets per se.

Okay, sure. And in your view, has anything changed on the home loan risk reward? Because the trajectory Y-o-Y growth in that product, that has come off subsequently and now we are below system growth, whereas two, three quarters back we were like 2x of system growth that has climbed below system growth?

I think you must look at two parts and you must look at the overall mortgage business per se, which is home loans and LAP together and I'll have my colleague, Virat try and answer your question.

Yes. So if you look at in terms of purely home loans, I think on the disbursement front or the demand side it is working fine and we are growing there. But given th at the interest rates have risen in the recent past, there are people who are actually part repaying or foreclosing their loans. And that's where the impact comes on the overall book size. But if you look on the home loan and LAP together, I think our grow th was in excess of 15% and LAP is a segment where we have been traditionally very good. And I think there is no -- what do you call, we are getting growth both in terms of new customers as well as the book is holding well.

I just wanted to add to that. You asked about risk. I think the home loan product and environment is extremely stable, both home loans and LAP. I don't think there is anything about risk. There is high competitive pricing and you've got to make sure that you get your business based on pricing. And as Virat said, we have a combination of both LAP and home loan, but no issue of risk at all.

No, ma'am, I was just highlighting that the home loan and LAP put together the growth in the last four, five quarters hav e been 45%, 40%, 30%, 21%, 18% and now 15% right? So there is a dramatic shift or dramatic moderation in the growth rate. You are still growing at 15% plus. But has anything changed because, of course, the rate cycle has changed as -- is anything apart from that one should take note of?

No, it's not a risk issue. It is probably just a spread issue. So yes, as your ROAs and ROEs of pure home loans fall. Yes, the desire to do more of that reduces. And that's part of our product mix management on the asset side strategy.

Sure. Yes, so that is all for me. Thank you.

And then that’s what I meant when I said really, we can still continue with the credit cycle still looks decent. So your product mix on the asset side is still not something which you want to trade off really.

Right. Understood, sir. Thank you.

Thank you. Our next question is from the line of Saurabh from JPMorgan. Please go ahead.

Sir, just two questions. One is this recovery and upgrade that you are seeing from your net slippages, if we adjust for this intra quarter change, the recovery upgrade is like 64%, 65%. Is that something which you think is normal in the retail business? Or is it just elevated at this point?

No, actually, it's fine. We've been seeing the recovery upgrades continuing to be a reasonable part of the slippages during this period. So this quarter as -- there are two different parts of recovery and upgrades. One is the 300 which we talk about is 1, 300 slipped during the quarter. 300 out of those 1,300 got upgraded during the same quarter itself. So net-net, they didn't really slip into NPA for technical reason they slipped into NPA and got back. The overall recovery in upgrades is about INR 900 crore out of the 1,300 which includes this 300 crore.

Yes. Sir, basically 600 out of 1,000 that's the broad number 642 out of 1000 so that...

No, the 600 will not be out of the 1,000, the 600 will be out of the previous period's balance.

Okay. Okay. Got it, sir. And sir, just very quickly, what's the LCR for the quarter now?

We talk about group level, average would be 126% -127%.

Yes about 127%.

And bank.

Bank is 120%, about 120%.

Okay. Thank you.

Thank you. Our next question is from the line of Chintan Joshi from Autonomous, Bernstein. Please go ahead.

So thank you for taking my question. If I observe the CASA ratio, it is down 70 basis points this quarter. If I look at CASA as a percentage of total funds, it's down 90 basis points. I hear your focus on ActivMoney product and scaling up activities there. The trend in CASA are more marked f or Kotak than for other banks. I'm wondering how these trends will evolve, where do you think CASA ratio will land at post maturity of the ActivMoney product?

Well, there are 2 parts to what you asked really. I think CASA has CA and SA of the 2, the SA part, I see it as a challenge for the industry itself going forward. And you must look at SA even across other peer banks net of government business SA. When you look at pure customer non-government SA. I think it's a challenge for the industry going forward, Yes, because customers are moving from lazy money, low interest rates to term deposits. Definitely, one sees that as a phenomena. And one has to be worried about that as an industry as we look ahead. The second part, which you mentioned is t he choice really is, yes, money moves out of SA. It actually -- it either goes into term deposits or do you retain some of that money at lower costs through products like sweep deposits. And that's the strategy which we've gone in for and it does result in some amount of cannibalization of SA itself into sweep deposits. But in general, you do manage to lift your overall SA out of that as well as get incremental new deposits at a cost lower than the cost of term deposits. So net -net, it works well from a cost of deposit point of view.

But do you have visibility on kind of where would CASA land for you after kind of the trends that you see?

Well, again, you must look at it from a slightly different perspective. When you're talking about growth rates in the 20s, SA and CA and the problem is more with CA than SA in that case, takes time to move up , yes? CASA does not move up in steps. It moves up sort of more granularly at a constant slope. So it takes time to catch up. So I expect CAS A to catch up and progressively start moving up once overall growth rates stabilize. We'll have to wait for that. Yes. But I don't see too much of downside pressure at the second half.

Fair enough. And the second question was on lending yiel d. You highlighted on cost of deposit, the duration is 11 -12 months, and most of it is done now. On the lending side, how much of the book is yet to reprice. There was a healthy 32 basis point increase calculated on yields this quarter. How much more can we expect how much is left to be repriced?

On the asset side, I th ink largely the repricing is more or less done. We don't see -- especially given the scenario that we don't see repo rates rising. I think currently, the entire industry faces the issue of assets which are based on repo pricing and the liability cost rising, the basis different basis risk playing out slightly. So I don't see advances rates further going up.

So about 70% of our book is anyway on floating rate. So they are linked largely to the repo or at best the MCLR rate. So about 58%-59% linked to repo and the balance to MCLR and what not. So these are reasonably changing as we go, as Manian mentioned, as long as those rates don't change, they will remain where they are.

MCLR-based the loans may somewhat change, but repo rates are not likely to keep pace with the cost rises.

Got it, but the 16% of the book has got duration greater than 1 year. Is there any more repricing left in that part of the book?

That's fixed rate. That's a fixed rate straight.

It doesn't have as much as pass through.

Commercial vehicle EMI, tractor loans, all of those. Those are all fixed rates.

Our next question is from the line of Manish Shukla from Axis Capital.

No, I can't make an absolute this thing, but the sharpness of what you saw this quarter is going to be nowhere near that. And what we are talking about is to that extent, the kind of fall, which we saw this quarter, the 14-15 bps is things which are not regularly happening every time. So difficult to say, it will not fall, but I think we still continue to be the highest net interest margin in the industry, I think, will pretty much remain there. And the sharpness will not likely to be of this variety as we go forward.

So this yield d rag one-off drag of 14 -15 bps doesn't repeat and hypothetically if cost of funds rise only 15 bps sequentially. Margins ought to stay where they are. It's a fair way right?

Right, yes.

Second question is the high margin and low credit cost environment, some of that has gone as reinvestment in business. How do you think of cost ratios going forward either later this year or more into next year in terms of cost to income or cost to assets?

So normally, before Jaimin tries to answer that, I would barge in and say, yes, downward, except the only caveat is my friend Milind Nagnur here to the extent he keeps on bringing in technology efficiency, some amount of tech costs will come in and what happens really is as tech costs come in, there is an intermediate period of a bubble where you run your existing costs and you spend on tech. At the end of it, and that bubble probably will be another 6 months really for us. You should see movement downwards of operating costs.

I was talking about the fact that this quarter versus last quarter, our costs have been reasonably flat despite the fact that we spent a lot more on promotions, we got some one-offs as interest rates rose up, some retiral costs came down and what not, but I think pretty much an eye on costs as the industry develops.

Our next question is from the line of Nitin Aggarwal from Motilal Oswal. Please go ahead.

So my question is on the credit card business, like we have been rep orting pretty strong growth. So if you can talk about the key changes in our sourcing strategy? And what is the mix of NTB customers? And related to it on the overall unsecured piece last quarter, we guided for mid -teen levels of book size. So are we still keeping that intact because there has been some big concern on the overall unsecured loans?

Yes. So first of all, as promised, yes, our unsecured is just 11% of our loan book. So we are very much there within what we had said earlier. Comin g to your question on credit card, mind you, 92% of our credit card base comes from the cards of our existing bank customers. And most of our new to bank acquisition comes t hrough our existing customers of co - brand partners. And that gives us a very good comfort to grow both in terms of numbers and the spends. There might be a slight elevation in 90 -plus numbers, but I think overall risk metrics on card business are absolutely in control. And there is nothing to worry at this stage as we see the card portfolio.

Paul, do you want to give a flavor of card delinquencies as you see it?

Yes. So overall, as we look at cards and the broader unsecured, the slippages and delinquencies are still in line with levels which we are comfortable. We are not seeing anything which believe we should change trajectory or change growth. And some of our bounce rates, etc., all those metrics are sort of holding up right now. So nothing to worry about.

Our next question is from the line of Gaura v Singhal from Aspex Management Limited. Please go ahead.

So just 1 thing. So the new CEO, can you give us a sense of when he will start because the current interim CEO term expires, I think, at the end of October and the RBI letter says needs to start off no later than January. So can you give us a sense of how this transition will happen?

Well, the current CEO, term expires on 1st November so we had a Board meeting today. So we will be applying to RBI for extension of the current CEO. We'll have to wait for RBI's approval to see what the extension is like. On the new MD and CEO, hopefully, over the next I think, 8 weeks, we should have a better idea of when about he will be joining really yes. The approval is for the joining not later than 1st Jan. So hopefully, we'll probably have him before that. But we just got to get back and chat because the approval came last minute really.

Got it. And my second question is on NIM. So just so that I heard the correction on the previous question. So if there is like a 15 bps rise in cost of deposit, let's say, for example, next quarter, our NIM can be flat, because the 15 bps or one -off roughly may not repeat. Is that the right understanding?

Yes, that's the right understanding.

Got it. And secondly on NIM, when will we reflect the Sonata acquisition in our numbers because hopefully that can be NIM accretive. And including the Sonata acquisition because we had given this 5% exit -- a minimum 5% exit guidance by the end of March '24. But if we factor in Sonata acquisition, do you think that can be better because it's proven NIM accretive.

So just to take that, Sonata, we just got the approval from the RBI, and it's subject to a couple of other requisite approvals. We do expect that, as Shanti mentioned, to be done by the end of this financial year. Yes, it is a high -yielding book like microfinance. But at the end of the day, if you look at the size of Sonata advances, if I remember, it's about INR 2,500 crore. So while it is high -yielding net-net, it is about what 0.6% -0.7% of our overall advances. So it's not likely to make any meaningful difference in overall margin.

Ladies and gentlemen, due to time constraint, that was the last question of our question- and-answer session. I would now like to hand the conference over to Mr. Dipak Gupta for closing comments.

Thank you friends and wish you all happy Dussehra and Diwali. Thank you.

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