Kotak Mahindra Bank Limited analyst Q&A

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

Congratulations for a good set of numbers in such a challenging environment. So, firstly, any update with respect to the RBI restriction? You have indicated that there is substantial progress, but if you can just indicate maybe where are we in terms of the audit? Is the report submitted? And maybe how has been the feedback from the regulator? Yes, that would be helpful.

Hey, K unal. Thank you. This is Ashok here . Like I have been saying, we are in constant communication with the RBI. We give them constant regular updates. We have consta nt meetings with them and we tell them about the progress that we are making. They look at a kind of stop and say, they do their own evaluations on where we are. And I would say the conversations have been helpful. And they provided us guidance which I am very grateful for. And it has been done in good spirit. Kunal, it's very hard to predict at what stage the RBI will say we are going to lift out of jail. I honestly do not know, so I do not know what to say.

But are we done with whatever was required from our end and all the submissions are done, or how should we look at it?

Yes, mostly all the work has been. Most of the work has been done. And the submissions also, there we make a whole set of submissions, then they will come b ack with some observations. We will go back on those observations. So, it's not like a one and done thing. And thank God it's not a one and done thing, because suppose we have to submit a report then they came back and again we go back, it would have become iterative kind of a cycle. This is like concurrent kind of conversations. So, we are spending a lot of time effort with them, and fingers crossed.

Sure. And the second question is on the overall stress. You indicated some build up of stress on the commercial vehicle side, but besides that any other segment that you would be worried about ? And PL we are seeing improved delinquencies, so would we start to push for growth in PL now compared to maybe 10% year -on-year which has been the re? A nd should that take the overall unsecured proportion up ex of MFI?

So, we are not seeing stress in any other segment. This quarter, a large part of our growth was driven by our secured assets . A nd across the secured assets we are not seeing any signs of stress , its reasonably stable . A s far as personal loans is concerned, we have been already growing our disbursements month-on-month. We had to sort of tune down in the initial four, five months because we could not do direct digital journeys. But we continue to disburse as far as PL is concerned. Like I mentioned, it's a very core offering in your affluent segment. Based on the underwriting , based on our analytics, etc., we will continue to grow the business.

And Kunal, of course, you know that the Standard Chartered portfolio will come onto the books hopefully in this --

This quarter.

Definitely in this quarter. Hopefully in the front end of the quarter.

The next question is from the line of Chintan from Autonomous. Please go ahead.

Can I ask two questions, please, one on your provisioning policy and one on growth ? If I start with provisioning policy, could you give us a little bit more detail around that, when do you fully write - off a non-performing loan, especially on the unsecured side? Or do you kind of assume some recovery rate, color around how you kind of treat customers where they default on one product when they have multiple products with you? A little bit of color around that would be helpful. And then I have one more on growth.

Yes. So, we follow an aggressive provisioning policy, obviously, as compared to the RBI. And within that also for unsecured asset it is even more aggressive. So, for example, the unsecured book will be provided 100% on a 180-day basis. In terms of the write-offs, Chintan is basically for retail portfolio. While we provide 100%, we do have a lookout period after which we sort of write-off. On the secured or more wholesale sort of assets, it is case-to-case basis based on merit of the case and the estimated collection amount and the time for recovery.

So, write-off on retail product 100%, but with a lookout period. So, I would say there's some recovery assumption there, and then it kind of tapers off if the account is non-performing.

Yes. For example for credit card, we do it at 270 days, right, the write-off. Whereas for other portfolio we may take some time because we certainly believe that by keeping it we do see value of recovery. Because even after providing after 180 days, in our experience, there is a recovery potential possible. So, while the credit card, we have elaborated earlier in the call also, it is 270 days, for other businesses it is case-to-case basis.

Thank you on that. And then on growth , the second question, I am just trying to think about the current environment. Your kind of current ROAs are at 2.1% levels, where can you take incremental market share where the front book RO As can reflect well on the back book ROA s without taking excessive risk? So, is it kind of retail consumer which has kind of being the main growth driver, but that's kind of slowing down so I am wondering if that can sustain the above average growth . Corporate margins look weak, deposit competition refuses to ease, just trying to understand that. And also, s imilarly on your subsidiaries, you have had very two strong years in capital markets , how should we think about kind of there, sequentially? Thank you.

So, to answer the question on ROA, certainly we would like the ROA to be above 2%. But you are right, it depends upon the mix of the book and clearly currently given the stress in the unsecured book or the retail microcredit, which we spoke about, the higher yielding assets we have obviously a slowdown. In addition to th at, of course we have a embargo. So, I think it depends upon when the embargo lifts. We certainly believe that personal loan and credit cards are very, very big, good propositions for us. A nd once we are permitted, we will be going for the growth on those two segments for sure. And if you look at even today, actually before the credit cost my profit growth is actually 13%. So, once we come back to the normalized credit cost or credit cycle , and we have a lot of focus on non- interest-based income like fee income, distribution income which adds directly to the P&L. Plus , as you have seen some benefits of the cost optimization have started flowing in. So, I think given the combination of focus on non-interest fee income, cost optimization, and hopefully the credit cost sort of tapering off, all of this will add to ROA, which we believe will fill for the asset mix impact which it can have.

And Chintan, look, our market shares right now are so small, right, so we are not trying to grow the market, we are just getting growth of market share . And I really believe that with the kind of stuff that we are putting into place, we will be able to do that and continue to kind of grow in line with what we have always said. We have always said that we will grow our business at about 1.5 times to to 2 times nominal GDP, right. Obviously, you do not want to grow and put the firm at risk. So, we will continue to grow at that level and just keep going, right.

Thank you. The next question is from the line of Mahrukh Adajania from Nuvama. Please go ahead.

Hi, congratulations. I have two questions. Firstly, your loan growth ha s been strong sequentially, which is very good , you have grown in a balanced fashion in most segments. So, in that sense the ban is not impacting your growth , right, it's more about obviously banks have to be digital and you need digital for onboarding customers, and you need to be up to date in tech. But despite the ban, you have achieved a sequential growth which is materially better than other banks. So, would it have been different if the ban would have been lifted or the ban is impacting the overall customer franchise, but not really the loan growth? That's my first question. And my second question is that different banks are at a different stage of asset quality , but most of the channel checks or the macro checks or the bureau checks give negative indicators only. So, are these lagged indicators? Or is it that asset quality going ahead is likely to remain volatile given that these indicators are still emerging or still being seen , and therefore credit cost for the sector will continue to be volatile? So, you may have seen lower slippages now, do you think that your slippages would have peaked or there could always be some other link ed sectors of stress? That's my next question. Thanks.

Sure. First of all, thank you very much. Talking about the impact of the ban , Mahrukh, I think that there are certain areas which really have got impacted, which have got highlighted before. Clearly, I would have liked to continue to grow our credit card book. Our credit card book has not grown at all. In fact, quarter-on-quarter it has degrown, and that's not a good place to be. Our stated desire was to have our unsecured book, which is credit cards, PL as well as microfinance at about 15% of our total assets. And we have kind of dropped off to about 10 .5% right now, which is obviously I wish that had not happened. B, also it affected 811 which is another business that's kind of been impacted. And the reason that hurts is that 811 provides tremendous growth in granular deposits, low-cost granular deposits, and obviously that is very valuable at this time. So, definitely the embargo is hurt, and I am hoping we get out of embargo soon so that we can get back to our ways. And then once we get back to it, we are going to come out, I believe we are going to come out much stronger on both 811 as well as in other products, and that will be fun to actually go back to proper business.

Does the growth trajectory change, or will it just be a different mix?

No. See, definitely the growth trajectory for cards and PL will be much higher, right. And it's not all linked, right. What we have always said is that overall growth we will try and do at about 1.5 times to 2 times GDP growth, right. And we will continue to kind of , and that's the kind of range that we think we will be able to grow. The mix will of course change because right now credit cards is zero, so obviously credit cards will contribute to that growth. And linked to that volatility, there's no doubt, Mahrukh, there is a volatility in the market. We are very mindful of that. We evaluate that on an ongoing basis, and we tweak and adjust the kind of things which we do in the business to make sure that we are not kind of caught out. Generally speaking, we are conservative , people accuse us of being overly conservative, but I much rather be conservative and maintain this stance of conservatism through what we do. So, we are very, very conscious and we react to the situation. The business is not on autopilot as you can assume, right. All of us, as a management team , are kind of adjusting what we do on a very regular basis.

And can I just slip in one more question please?

Sure, go ahead.

So, in the last call you had mentioned that you wanted to be among st the top four banks, right, over five years. You meant organically or a material inorganic, I mean, a material acquisition as well?

Mahrukh what I said was that I want to be within the top three private sector banks in the country in terms of profitability and get there over a period of time in the next five years, which is like 2030 kind of timeframe. I also mentioned there that we will look at opportunities, both organically as well as inorganically, right. And if the opportunity fits the str ategic perspective of what we are trying to do, that's a big tick. After it fits the strategic perspective, we then look and see whether it makes financial sense. And if it ticks on the strategic fit and it ticks on the financial kind of thing , we will definitely do it. And therefore, we look at every opportunity that comes our way and then we see whether it makes sense or not.

Thank you. The next question is from the line of Saurabh from JP Morgan. Please go ahead.

Sir, just two questions, one is on your slippages again. Is it possible to quantify how much of it would have come from microfinance and what is the write-off policy on microfinance? And the second is, in Kotak Prime you have seen a profit drop sequentially, can you exp lain what's happening here? Thank you.

Saurabh, hi. I could not hear properly, but you mentioned slippage breakup, right?

Yes, on microfinance, how much in microfinance and what’s the --

Yes. So, I think this quarter the contribution in slippage for this quarter, microfinance does contribute a higher percentage in that sense . B ut obviously , there is a improvement in some other secured businesses, which is why the slippage for the quarter is lower than the last quarter. And your second question was around KMPL, so KMPL, it's a car finance business where obviously the business is facing some margin pressure. And also, it has an MTM on some OIS which has been a negative, it is more of an accounting sort of hit which has happened during this quarter, which has resulted in a loss. But having said that, on a pure core business also it has margin pressure, and the delinquencies are higher in the two-wheeler business. So, that's the reason why sequentially it is going down.

Sir, just on asset finance if you can just quantify how much will it be higher?

It is higher than the last quarter, as a proportion it is higher.

Sir, just in terms of if you can give some clarity. And when will the write-offs come because the concern is that if it comes in forward quarters, you could see another tick up in credit cost, that’s where I am coming from.

See, what we can certainly say, there are two parts, right. One is the fresh inflow, which is the slippage thing, and second is the resolution of existing NPA accounts, they are two separate things, right. So, the slippage as we said has come down as a overall number, yes, but the proportion of microfinance is higher there . B ut if I look at on an only microfinance business on quarter-on-quarter, w hile slippages are there, it is showing a downward trend in te rms of the slippage part of it. However, the real issue I think Saurabh is the existing NPAs in those unsecured businesses where the collection continues to be a challenge on the ground.

Can I ask just one more question?

Yes, go ahead Saurabh.

Will there be a case to, at some point, tighten the provisioning policy on these unsecured loans in line with your like the Bank, or that's not something which you are considering right now?

So, we anyway provide 50% on 90 day and 100% on 180 days. So, it is far, far more conservative than the IRAC norms or the RBI norms, right.

No, I was comparing to, let's say, a private Bank, the bigger private banks.

We do not have information on others.

I mean, provisioning of 120 and write-off, around those lines.

Write-off may reduce the gross NPA, it may not impact the credit cost or slippages, in that sense, right.

So, Saurabh, 50% at 90 and 50% at 180, it’s a pretty aggressive provisioning policy. Honestly, I do not think there’s a need to get more aggressive than that. Write -off, frankly, it's just an accounting entry. It's a pure accounting entry. And we do that, obviously it affects the GNPA, but we do that just to make sure that there's no pressure of the collection to continue to push for collection . And that's not the only reason . From a P&L perspective and from a return perspective and stuff like that, it makes absolutely no difference.

Thank you. The next question is from the line of Rahul Jain from Goldman Sachs. Please go ahead.

Just a couple of questions. So, just to maybe ask differently on credit cost and slippages, so I think what I understood is, MFI’s still a bit of a trouble, CC’s plateauing, PL is gradually improving. Not the recoveries but whatever fits into NPA but the new formation of NPLs. So, does it mean that the slippages will peak in this year and thereafter in the next year it will start to improve, considering, whatever has been happening in the broader economy?

So, I think we will have to see it over next t wo, three quarters. While yes, this quarter the slippages have come down. And if you recall, in the last call I had mentioned that essentially the tractor business and other commercial businesses other than microcredit normally perform well in the second-half of the year. So, I think we will have to be watchful in terms of the slippages going forward. But we see it today, the slippage on personal loan is tapering down , credit card has plateaued, remaining at the same level. Let's see at what stage it starts coming down . But the micro credit continues to rise. So, it will be a question of when will the other sort of taper down and to what extent the microcredit set off will happen. And again, it's also a question of size of the book, because if you see the retail micro credit is only Rs. 8, 000 crore as at December out of over Rs. 4 lakh crore book. So, I think we will have to be watchful. And that's why I mentioned that I remain cautiously optimistic. So, we will have to see this trend over a few more quarters before sort of commenting on this.

And Rahul, we also have to look at the broad economy and how things are going, right. Obviously, we are affected by those kinds of things . But as we sit now and where we are, Devang has kind of summed up how we think about it.

Got it. And credit costs should see a similar trend, therefore, right? I would reckon that this quarter a significant part of the credit cost may have come from , let's say, the write-off of the MFI loans. We know the write-off figures and maybe unsecured share to recognize. So, as we get into the next year, all of this would have been recognized as a slippage trend further, keeping in mind , like you said Ashok, where we are in the economy , credit cost also should start to taper off. Would that be a fair assumption to make? Is this how you are also thinking about this line item?

Yes. So, Rahul, clearly there is a direct correlation between slippages and credit cost , no questions about that. So , that will kind of hold . I think what we have got to look at and say is how does the economy kind of move along. And if the economy kind of stabilizes or gets better, then your analysis is absolutely correct. If there's a worsening in the economy or there's a fair amount of volatility in the economy, the question, and that's what we constantly keep a lookout for is to see whether we are seeing any contagion in any other kind of portfolio . As of now we do not see it. But am I cautious and looking at it on a very, very regular basis? I sure am.

Very comforting. And on the similar note, any qualitative trends you can share about the early bucket movements in both the secured and the unsecured portfolio ? Secured, I mean excluding the home loans and the LAP book, if you can just share qualitatively how you are seeing those, are those stable. Because the environment, I mean, the different players are sharing different views and different data points versus seeing different trends. So, how are you seeing in your portfolio, a qualitative comment would be helpful to us.

So, Rahul, I think Shanti covered it, right. Look, most of our growth and everything has come from secured. Our secured book, touchwood, is behaving very, very well. We do not anticipate any issues there. The unsecured book by definition is a little more volatile, right. And that will be a function of how the economy kind of shapes up, right. We have talked extensively about PL, card, microfinance, I am not going to repeat myself . And then there are other books like CV /CE which we are looking out to see how things go. The good news, Rahul, is that we are quite diversified. There is no particular segment of loan type that overwhelms the balance sheet. So, to that extent that gives me a slightly greater degree of comfort.

Just slightly switching gears to the margin, so clearly the mix has changed over the last two quarters with absence of new CC onboarding and M FI, etc., which is a high yielding portfolio. So, now margins are clearly stabilizing this quarter, which is great. How should we think about it next year? Because I think some of these components will come back, you'll have Standard Chartered book also, so shall we assume that margins are bottomed out and next year they might have the upward bias?

So, I think the margin has various components, as you know, the yield on the earnings asset and cost of fund. And both of them have different levers in addition to , of course, the regulatory repo rate change, right . So, it's very difficult to comment on that. But yes, you are right , a s the share of unsecured business grows, either by lifting of embargo and once we are comfortable with the credit quality, it will obviously add to the yield on the earning asset . As far as cost of fund is concerned , the cut in the SA rate is helping us. And of course, as the share of current account deposits which we grew nicely during this quarter continues, then the margins will continue to remain or improve from thereon.

Very helpful. Just one last data keeping question, two data points if you can share , o ne is the employee count at the Bank level. And also, in your business banking book, how much is unsecured? Thank you.

So, our headcount approximately, this is including on rolls is close to about 77,000 people as at 31st December. And with this, what you said, sorry?

The business banking, as we presented it there is fully secured.

Yes, correct.

Very comforting. Alright. Very helpful. Thanks. And once again, congratulations on a great quarter.

Thank you. We have the next question from the line of Abhishek M from HSBC. Please go ahead.

Good evening and congratulations for the quarter. So, the question I have is, on this RBI Bank subsidiary norms, how are you positioning the Bank and the group to meet that circular? For example, I mean, if you take the example of real estate, different stages of financing is done in different entities. How would that adjust or be adjusted? Or would you have to do everything in the Bank? So, just from a business angle, how are you preparing for that circular?

Yes. So, Abhishek, the October 4th circular, we have kind of studied it like every other Bank, I think. We have given our comments on what we think makes sense and does not make sense. Look, in our case, the level of overlap is actually very, very, very low. There are very few instances where we do the same kind of business in multiple entities. And therefore, in our case, if the circular goes through exactly as was indicated at the time of issuance, it really will just be about consolidating it into the Bank. So, that will be a lot of operational matters but not going to have a dramatic impact on anything else.

I want to add what Ashok said. What we cannot do in the Bank we cannot do in our subsidiaries. You talked about different stages of financing in real estate, we cannot do different stages of financing. What the Bank can do the subsidiaries can do. And this changed about two years ago, so we do not do any differential type of financing in the subsidiaries as far as real estate is concerned.

And if you do not mind, can I squeeze in just one more question?

Yes, go ahead.

Thank you. So, this is on cost of funds specifically, one, can you give the balances in ActivMoney maybe this quarter and the last quarter? And second, if I look at the Q-on-Q movement in the cost of funds, there's been 8 bps, 9 bps decline. Maybe 4 bps or 5 bps out of that is coming due to the SA rate cut. But the rest of the drop Q-on-Q, is that because of ActivMoney balances going up a lot or is there some other repricing? Or how has the cost of funds really come down sequentially ex of the SA rate impact?

Yes. So, if you can see the update where we have the share of current account and the growth in the current account average balance shows a 12% growth Y-o-Y actually, r ight. So, on a sequential quarter also it has grown by 5%, right. So, as the non-interest-bearing current account share increases, the mix of the cost of fund obviously reduces, right. And you are right, we implemented the SA rate cut on 17th of October, the effect of that is also obviously coming in the cost of funds. So, these are the reasons for that. And of course, as I mentioned, the growth in ActivMoney continues to be 36% on a Y-o-Y basis on average basis, so I think it is also obviously --

It's growing at a sequential basis.

So, obviously it is because the rate of interest on the sweep TD is lower than the normal TD, so it is also helping us in lowering the cost of funds.

So, how sustainable is this average current account growth? I mean, what are you doing at a business level to keep pushing it up ? Or it can be a bit of an aberration and then it subsides , so that's what I am trying to understand because this is critical to your cost of fund and NIM.

Sure. So, as I mentioned in my speech, I think it is also helped by the IPOs. As you know, we have the large custody business, so it also depends upon the F PI flows coming in. So, I think it's very difficult to predict . But I think at the consumer Bank level, there is a sustained increase d growth happening. The one with the volatile part obviously is in the wholesale IPO and the custody segment, which depends upon also obviously the capital market part of it in that.

There is also core customer franchise in the wholesale and consumer side, then there is custody flows, then there is capital market flows. So, different quarters give you different flows. Our aim is really to keep growing the core customer franchise, which is the payments, the collections, both on the wholesale and in the consumer business banking and current account services . But we did benefit from custody IPO and that's a month-to-month change.

Great. Thanks. And all the best for the next quarters. Please share the ActivMoney balance if you can, otherwise it's great. Alright. Thank you.

It's there’s in the deposit. If you look at the deposit slide, it is there, Slide #12 in the investor deck.

Slide number 12. It is called TD sweep,

Yes, I am sorry, my bad, I will take it from there.

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

Congrats on the quarter. Just a couple of clarifications, firstly, on slippages which are down about Rs. 200-odd crore Q-on-Q, is it entirely driven by retail, which means that unsecured slippages have still remained as high as last quarter? I am a bit confused here.

Hi Piran. So, yes, the slippage break-up, obviously as I mentioned, the slippages for the secur ed or the commercial business like tractor finance and all that have come down compared to last quarter, but unsecured I think we continue to maintain that credit card is sort of remaining stable, personal loan is tapering down , and retail m icro credit is sort of showing a growth. So, this is how our composition has changed. So, the fall in the secured and commercial businesses compared to last quarter has helped it coming down.

Got it, that clarifies. And secondly, just on fee income, fee income growth, which was strong since last year has been moderating for the last two quarters, and now we are barely at 10%. Is this merely a function of, A) lesser credit card spend; B) maybe slower disbursals in personal loans, or is there more to it?

No. So, you are right, this has impact of the credit card business because obviously we are not able to do any incremental card business. It also actually got impacted by the referral fee circular, which was there, in that sense. And also, some of the transactions related fees, so we had in earlier quarter some debt capital market transactions, compared to last quarter this quarter has been lesser. So, these are all deal based income which was there. And of course, there is some IPO-related fee income also which is lower as compared to last quarter. These are the reasons why the fee income is lower.

Thank you. The next question is from the line of Suraj Das from Sundaram Mutual Fund. Please go ahead.

Thank you for the opportunity, I think a few questions have already been answered, just a follow-up. I think in the commentary you mentioned that there are signs of stress building up in the CV segment. However, if I look at the growth that is impact, in fact the growth has been in this quarter 4% versus last quarter 3% on a Q-on-Q basis. So, I just wanted to know if you can give some color in terms of the segments where we are growing or you are seeing pockets of opportunities and where do you see it going in LCV, HCV, MHCV , what kind of group? Or is it the construction equipment piece or what kind of growth you are seeing in this book from which segment? If you can give some quantitative color, that could be great.

So, if you look at the CV, there is a CV retail, there are large fleet operators and you have construction equipment, all of them are bucketed. If you look at the growth, it's 4% quarter-on-quarter. It is the retail CV where we saw a slight increase in delinquency, which is in accordance with the i ndustry levels where disbursements and the growth are actually slower. And it's construction equipment and the larger CVs that we have seen growth.

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

Thanks for taking my question. Most of them have been answered, but just this one on prime , on Kotak Prime you mentioned there is a pickup i n the delinquency, whereas on the secured assets of the Bank we are very comfortable. So, what is driving this divergence in asset quality?

Yes, so I think I mentioned the delinquencies, Kotak Prime also does two-wheeler finance, so there is a higher delinquency in two-wheeler financing which is not obviously done in the Bank. So, that is where the delinquencies are higher, yes.

And in the last quarter we had made a comment saying that we expect credit card and microfinance delinquencies to largely be absorbed within two quarters , largely. Are we holding onto that sort of guidance?

I think as we mentioned, credit card delinquencies remain flat quarter -on-quarter and the retail microcredit delinquencies are yet to peak. So, that is how we look at it as of now.

So, guys, it's already I guess 6:30 on a Saturday evening , I am very conscious of your time and therefore I just wanted to say a sincere thank you. I appreciate it. I hope you got a good sense of the business and the progress that we are making. And I sincerely forward to catching up with you again. Thank you.

Thank you.

Thank you. Bye. Good evening.

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