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Kotak Mahindra Bank Ltd
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Ladies and gentlemen, good day, and welcome to the Kotak Mahindra Bank Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Uday Kotak. Thank you, and over to you, Mr. Kotak.
Good evening, and welcome to all on a very busy Saturday for many of you. And of course, also a very busy weekend where you have lots of work to do, not only in the financial sector, but many other companies between Friday through Sunday as well.
I'll just go straight to the point and come to Kotak Mahindra Bank. As you may have noticed, for the year -- for the quarter ended June, we have shown a loan growth of 29% and 4% quarter-on-quarter, which is annualized 16%, if I take quarter-on-quarter, this is on loans plus credit substitutes. Our net interest margins have gone up since the last quarter now to 4.92%. And our ROA on a consolidated basis is in excess of 2%, and for the stand-alone is around 2%. Our credit costs, as shown in the P&L is 4 basis points annualized. But if I take out the COVID write-back as also the restructuring write-back, our credit costs, net of those write-backs are at 16 basis points annualized, which is 4 basis points for the quarter. Therefore, if I look at the credit cost again to reiterate for the quarter as reported in P&L, it is 4 basis annualized and without COVID write-back and restructuring, at 16 basis points. The slippages are very much under control, as Jaimin will separately explain. There has been a requirement of RBI on out-of-order accounts, which has been implemented by us fully, which does create some volatility intra month.
Our current and savings ratio is at 58.1%. And we are taking a host of steps, as Shanti will explain to ensure our continuing focus on CA and SA. Another important aspect which I would like to share with you is our unsecured retail. We consider unsecured retail to include microfinance as well because that is -- writes very major also unsecured retail.
In June 21, unsecured retail as a percent -- percentage of our stand-alone advances was at 5.6%, and it's now around 7.5% for the quarter ended June. We are looking at settling this as we grow this book over the next few quarters to somewhere in the early to mid-teens from the current 7-odd percent. So we would see continuing growth of the unsecured retail in our mix of the loan portfolio. Overall, we continue to be quite confident of building our loan book and are quite comfortable and confident to be able to grow our deposit franchise along with it. And with that, I will now hand it over to my colleague, Jaimin Bhatt, to take you further.
Thank you, Uday. Let me just take through the consolidated numbers first. We ended this quarter at an overall bank at INR 2,755 crores, which is 53% higher than what we did in quarter 1 last year.
Our consolidated customer assets at the group level at INR 337,000 crores, which is about, again, 28% higher than last year, with advances at INR 312,000 crores. Our capital adequacy at the group level at 24%, including this quarter's profit. A large part of it coming through CET1, which is itself at 23%. This takes our book value to INR 502 per share, and our ROE for this quarter's profit is at 11.2%. Of the overall, the bank contributed INR 2,071 crores, roughly 70% of the total profit including the subsidiaries. The bank's profit is 26% higher than what we did same period last year. Kotak Prime brought in INR 157 crores of post-tax profit as against INR 79 crores a year ago. And this quarter, actually, Kotak Prime took a hit of INR 111 crores pretax on account of a change in accounting policy, which is related to brokerage cost. The microfinance business, which is a -- microfinance business correspondent entity, which is BSS that clocked in INR 56 crores of post-tax profit against INR 7 crores first quarter last year. The other NBFC, Kotak Investments brought in INR 63 crores against INR 71 crores last year. The 2 capital market subsidiaries, which is Kotak Securities and KMCC brought in INR 270 crores with KS improving its market share on a Y-o-Y basis, both in the cash market and the overall market. Kotak Life had a loss in first quarter last year, thanks to increased COVID claims and it ended up first quarter of FY '22 with a loss of INR 243 crores. Things have normalized and this quarter, they have brought in INR 48 crores of post-tax profit.
The domestic mutual fund entities brought in INR 106 crores, which is about the same as what we did last year. And the international subsidiaries took some MTM losses and brought in INR 14 crores of post-tax profit this quarter.
Our overall capital and reserves at the group level crossed INR 1 lakh crores. The bank itself at INR 72,000 crores out of this. The 2 NBFCs end up being pretty well capitalized with each of them having a capital adequacy of over 30%.
Kotak Life also has a solvency ratio of 2.72% with a net worth of INR 4,500 crores. At the bank level, we brought in INR 2,071 crores of profits for this quarter, which is 26% jump on a Y-o-Y basis. Last year, quarter 4, we did take a reversal of COVID of INR 453 crores.
The NII this quarter is 19% higher than the same period last year with our overall advances book at INR 280,000 crores, roughly about 29% higher on a Y-o-Y basis. With the credit substitutes, we crossed INR 3 lakh crores. We are at INR 303,000 crores which is 29% higher than last year. And as Uday mentioned, our retail unsecured book, which includes the retail microfinance is about 7.9%.
Our NIM, which was 4.6% a year ago ended this quarter at 4.9%. Of our overall loans and advances, as much as 69% is on floating rates with our EBLR, which are repo-linked constituting 50% of the total advances book. This plus -- the total advances book, which are linked to floating plus the fixed rate book, which is due in less than a year, is totaling to 80% of our total advances book.
This quarter, we also acquired a small portfolio from DLL India in the agri and health equipment space, which is a standard portfolio of about INR 580 crores. Our fees and services did a 42% higher than first quarter last year with the growth coming both from the distribution side as well as the syndication and the general banking fees.
Our other income saw a hit on account of both trading and MTM on fixed loan book, which has resulted in the other incomes in the negative number this quarter. Our HTM book as of June 30 is just 39% of our investment book. And the total HTM is less than half of what is permissible as a percentage of NDTL. So we effectively have taken a hit on the 61% of our investment book which sits in AFS and HFT.
The rising interest rates saw some small benefit on the employee retiral costs. Of course, this is much, much smaller than the hit we've taken on the treasury side. As we continue to grow and push for growth, some of the nonemployee costs have increased on account of both pushing for growth on both asset side and the liability side as well as on advertisement and promotional, technology and communication.
We ended this quarter with an overall customer base of 34.5 million, which is as against 26.8 million, which we had last year. The operating profit this quarter was a tad lower than the same period last year, largely due to the treasury hits.
We followed the same principle as we did last year on the COVID reversal policy. And on the same principles, we've taken a INR 65 crore write-back in this quarter and other provisions and advances also -- on the advances also lower, partly due to recoveries of the past written off accounts.
Credit costs, as Uday mentioned, is a low of 0.16% on an annualized basis as against what we had 1.3% in quarter 1 last year. Our GNPA at 2.24% as of June 30, we had 3.56% a year ago. In absolute numbers, too, the GNPA is down to INR 6,379 crores as against INR 7,932 a year ago.
Slippages, which Uday talked about for this quarter at the gross level at INR 1,435 crores. However, INR 781 crores of these slippages which happened in this quarter, got upgraded or were recovered in the same quarter itself. Therefore, the net level, which has taken into account the split into NPA, but recovered in the quarter, our net slippages were INR 654 crores, which is 0.2% of our advances.
This happened primarily because of introduction of out of order from the fourth quarter last year, which took the full hit this quarter, where any overdraft account, which has interest debit as to have our interest credit on the previous 90 days.
Our fund-based restructured account in either COVID or MSME resolutions together are a low of 0.38% of our overall book. And our SMA2 book, which is with respect to borrowers with exposure of over INR 5 crores continues to be low at INR 159 crores. Our CASA, as Uday explained, continues to be healthy at 58% plus. And the capital adequacy at the bank level, again, at 22.9% with CET itself at 21.6%. So those are the broad highlights of what we did in the bank this quarter.
I'll hand over to Manian to take to the asset book.
Thank you, Jaimin. Good evening, everyone. So let me take you through the corporate bank and the SME segment. Overall, as I always do, I'll bring to your attention the credit substitutes in the table and request you to look at the advances in combination with the credit substitutes.
Before I get into the numbers, in the market, we saw extremely high price pressures and margin pressures in the corporate segment, clearly in the last quarter. Significant amount of irrational pricing in the market and we decided to stay away from some of those transactions. And we found that to be sustainable and being ROE accretive, it was important to select transactions carefully.
In fact, when there is pricing pressure, we also tend to do a bit more of credit substitutes. And in fact, the increase you see in the credit substitutes from INR 21,000 to INR 23,000 on a Y-o-Y basis -- on March to June basis, is largely in the short-term side, and we did not grow the credit substitutes on the longer end. We grew them on the shorter end.
Overall, on a Y-o-Y basis, the corporate segment along with the credit substitutes shows a Y-o-Y growth of close to 15%, while the Q-o-Q looks more moderate at 10% annualized. And overall, if I look at the wholesale as a segment between corporate and SME and credit substitutes put together, the Y-o-Y growth is about 17% on customer assets and the Q-o-Q is again slightly muted at annualized 8%. Within the segment on SME, the Q-o-Q is essentially lower because of lower utilization. However, we see continued traction on acquisition of customers and the segment looks robust in terms of overall Y-o-Y growth at 25%. So we continue to look at a 15%, 20% kind of growth in the corporate segment and 25-odd percent growth in the SME segment.
After our strategy to use credit substitutes to maximize returns on the lending side, does face the downside of MTM risks in the market where interest rates go up. So we did take some of the MTM risks that Jaimin talked about did happen on this credit substitutes book. The DCM business remained robust in the quarter, and our revenues continue to be good.
Overall, fee revenues, apart from DCM also remained quite robust. Transaction banking, trade and ForEx fees are quite robust through the quarter. While our transaction banking led granular CA continued to grow reasonably well, some of our businesses like custody and capital market-related entities that CA in these does reflect the weaker capital markets, and we did see some impact of that on the growth in current accounts.
Overall, the asset quality remained very good and credit costs have been absolutely minimal. So the health of the business continues to be good, and we are hoping to be able to capitalize the opportunities that come as the economy turns and further capacity creation happens with the corporate side.
We've also invested significantly in our platform. And the progressive rollout of our corporate portal proposition is being very well received and -- across corporate segments, and we continue to gain traction and market share in the transaction banking business. Thank you so much. Can I hand it over to Kannan.
Thank you, Manian. Let me start with the commercial vehicle finance business. The commercial vehicle industry saw good growth during the quarter as compared to the same quarter last year.
Our disbursements during this quarter is considerably higher than the same quarter in the last year. Demand for finance is being driven by replacement demand for the vehicles. Goods straight demand is good and the recent reduction in fuel prices is helping operator economics. Utilization of passenger vehicles have improved across all segments, staff, school, travels and intercity.
Passenger transportation business is getting closer to normalcy. Collection efficiency on current demand is stable and as good as normal times. Demand for construction equipment continues to be good. Demand during the quarter was much higher as compared to the same quarter last year.
Demand for equipment in the mining sector continues to show an uptick. Utilization of equipment across segments continue to be good. We continue to grow our disbursements and market share. Collections against current demand continue to be stable.
The tractor industry continues to grow both on a year-on-year basis as well as quarter-on-quarter basis. Our disbursements are strong, and we continue to gain market share in this business. Better crop yields and good commodity prices have ensured good cash flows in the hands of the farmers.
Given the good monsoons and robust cash flows, outlook for the industry continues to be good. We continue to focus on improving our distribution and market share. Utilization of tractors for commercial applications to -- continue to show improvement. Collection efficiency against current demand continues to be good.
Against the background of good monsoons and stabilizing commodity prices, demand for credit in our agri division is expected to be good going forward. Our customer cash flows continue to be good in this business. We continue to grow our retail micro finance book, focuses on semi-urban and rural markets and borrowers in the agri and allied segments. Collection on demand in this segment has also been good.
I'll now hand it over to Shanti to take this.
Thank you, Kannan. In continuation, I'll start with advances. All our retail lending products showed robust growth in Q1. At the consumer assets aggregate level, we grew 44% Y-o-Y and about 6% Q-o-Q.
Mortgages. We continue to see demand for home loans in this quarter. Last quarter, we shared with you about the launch of our DIY Journey. Taking our tech investments further in this business, we went live with revamping our core tech stack for home loans on the sales core platform. We expect it to enhance our customer experience even more.
We continue to focus on acquiring quality customers and strengthening the market share in this very important focus business for us. We saw good volumes in LAP on account of business momentum in the quarter. Our mortgages business grew 46% Y-o-Y and we continue to consolidate our business in both home loan and LAP.
Unsecured retail, we had 1 of our best quarters in credit cards with acquisition of over 6 lakh cards, and the card spends also saw their best ever quarter. Bulk of the sourcing has been from existing customers. We launched a marquee product, white reserve targeted on the ultra-HNI segment and has been one of the best offerings in this space. Overall, credit card advances grew at 77% Y-o-Y. Personal loans, we had a healthy quarter on account of increased demand in consumption from segments like travel, wedding, home loan, renovation and over 40% of the personal loan continues to be sourced digitally and internally.
We have scaled up our acquisition in both the traditional and the digital-led data space. Consumer Finance, a good quarter across physical and digital distribution, and we continue to focus and scale in this space. Across personal loans, consumer finance and business loans, the advances grew 77% Y-o-Y.
In the working capital and business banking segment, we have been focused on growth and focused on prime quality. Businesses are witnessing higher input prices and currency volatility along with interest rates. However, we continue to identify opportunities through sector focus and with clients which are at the top end of their respective industry and segments.
We have been sole bankers for most of these clients with a full suite of loan and banking products. We are seeing a demand for CapEx picking up and therefore, some increase in demand for their working capital as well. Unsecured business lending is seeing steady demand from all sectors, particularly the services sector. We were the first bank to go live with transaction on GeM Sahay platform this quarter, and we hope to scale this up on a real-time lending basis. About 85% of the business banking portfolio in consumer qualifies for the priority sector. On collections, our bounce rates continues to be better than pre-COVID level and demand efficiency stay stable across all products during the quarter. We've invested significantly in the consumer assets across tech, digital and data and will continue to grow this business.
Now to deposits. The average fixed rate deposit -- savings deposit grew at 8% Y-o-Y, current account at 19% and term deposit at 16%. The focus continues to be on granular retail customer growth across digital and physical channels, and 811 continues to contribute successfully to our digital customer acquisition. The bank had 34.5 million customers as of March '22 versus 26.8 million customers, a growth of 28% Y-o-Y.
Our CASA ratio was at 58.1% as of March '22. CASA and TD below INR 5 crores comprise 88% of deposits. TD Sweep deposits were at 7.4% of total deposits. Cost of savings was at 3.59% this quarter versus 3.73% in Q1 last year. We continue to be focused on asset cross-sell to our customer across all the retail consumer and the commercial space. This was driven by deep analytics and thus help deepen our customer base.
We continued our focus on fee income across trade, FX, insurance and investments. Post receiving in-principle approval from the Government of India for Agency business, we've gone live with customs and income tax the payments for our customer and will go live with GST customs and railway pension upon receiving necessary approval, and we intend to build each and every 1 of the individual proposition. Our savings deposit growth has largely [indiscernible] from granular retail customers, and we have seen funds move to liquid and other higher interest-bearing options by HNIs and UHNIs. We have a very low base of government business, which we have started our journey after the agency business approval, and we'll focus on scaling this with a continued focus on retail segment. Customer acquisition, deepening in CASA is at the core of our consumer bank strategy and will continue.
I will now request my colleague, Dipak to take you through the digital highlights.
Thank you, Shanti, and good evening, everyone. The broad tech strategy continues to be three pronged; a, sharpening the acquisition engine; two, enabling customer engagement; and three, enhancing customer experience.
And if you look at this quarter, we focused on all above 3 aspects. And to that extent, we've been working largely on building resiliency, reinforcing all our core systems and improving the customer journeys. Shanti mentioned about some of the interesting introduction of products, particularly on the tax payment side, you will see a lot of those going forward and this will help us build not only government deposits, but acquire new customers while it helps our existing customers in their transactions.
On the digital side, we have progressed with the market. Initially, several of our digital initiatives were largely in the payments space really. This piece keeps witnessing continuous technological developments, driven primarily by UPI and other P2P and P2M customer segments.
We've recently launched Spendz account as an interesting proposition. Spendz is a prepaid account for customer -- our customers, that is Kotak customers to manage their everyday expenses. And we've seen a lot of traction from customers on this proposition. You secure your small payments without exposing the main account or debit card through the Spendz accounts really. While payments continues to be an area of focus, we have moved on to the retail asset segment and again, Shanti touched upon some of these, basically, the consumer lending space. The key focus of technology and analytics here has been to, A, improve the customer acquisition metrics, convert or cross-sell to a larger base of our existing customers, and our work is going on in the unsecured retail segment in this area. And B, significantly improve the customer journeys through DIY, that is do it yourself and assisted digital processes. An ongoing endeavor in all these digital pieces is to continuously improve the customer experience. So a lot of work on the mobile Neo versions, state-of-the-art versions and developments on the mobile, on the net and several other channels for that matter whatever the customer choose is ready. While a lot of digital is focused on the retail customers, I must mention about the work on the retail commercial side and Manian also mentioned briefly about the corporate side. Kotak.biz is our offering in the retail space -- retail commercial space. It is a mobile app which offers a sort of all-in-one bundled merchant proposition. A lot of digital generally tends to be largely focused on the retail side. We've actually invested very significantly also on the wholesale and corporate side. We talked about briefly about Kotak Fin in the past, that's state-of-the-art transaction banking offering, and we've added a lot of functionalities to that really. The key digital metrics are outlined in our presentation and just to name a few. Our mobile banking app continues to be among the top-rated banking apps. 98% of our SAAR transaction volumes are in digital or non-branch modes and increasing trend in digital sourced retail asset product study. I'll hand it over now to Gaurang to take you through the Life Insurance business.
Thanks, Dipak, and good evening, friends. We had a more normalized quarter for Life Insurance business with profit after tax at INR 248 crores for the quarter against a loss of INR 243 crores last year. Last year, we had significantly higher debt claims and COVID-19-related provisions and claims net of reinsurance for this quarter, Q1 '23, was at INR 306 crores against INR 562 crores in Q1 '22. The premium growth also came to more normal. Gross written premium has gone up by 35.8% from INR 1,663 crores to INR 2,258 crores in Q1 '23. Individual new business APE grew by 44.6%, which is more or less in line with the industry and the group new business premium grew by 78% on the back of strong recovery in credit term business.
The AUM growth was 15% Y-o-Y. We ended the quarter with a net worth of INR 4,522 crores with a solvency ratio of 2.72% compared to 2.57% at the end of Q1 FY '22.
Now I hand over to Manian to take the presentation forward.
Thank you, Gaurang. In absence of Jaideep, let me stand in for Kotak Securities. As you can see in our presentation, the cash volumes in the market plunged from about INR 56,000 crores last year and INR 48,000 crores in the Q4 of last year to INR 42,000 crores in the current quarter, right? The option volumes grew to INR 51 lakh crore from INR 22 lakh crores a year ago and INR 46 lakh crores a quarter ago. So we have gained cash market share in the quarter from 9.6% to 10.4% on a Y-o-Y basis. You can see a drop in the Q4 to Q1 from 11.5% to 10.4%, that is essentially because we closed some large block deals in the last quarter in the institutional segment of the business.
Overall, our market share has grown from 2.4% last year to 4.3% and 3.7% in the last quarter primarily because we gained market share -- significant market share in the option segment in the retail side, where we made a specific customer offering to enhance this market share. Overall, our franchise remains strong, both on the retail and the institutional side. We continue to gain new accounts opening market share in the retail side.
And on the institutional side, our research analysts and sales teams continue to be rated very highly by institutional clients. The retail side is also seeing significantly enhanced usage of digital channels. Those numbers are there in the presentation. But more importantly, we have gone live with our new app, Neo, which has been launched for acquiring new customers and a gradual migration program from -- of existing customers from the old app to the new app is on the way.
In profit terms, we ended the quarter with about INR 219 crores of PAT, which is a small decline over the Q1 last year at INR 236 crores and a 13% decline from the sequential Q4 quarter.
Taking you through KMCC, we capitalize on the small window that remained open kind of before it closed in the first quarter on the ECM side of the business, and we were involved with several marquee transactions in the first quarter, and we could sustain our revenues in the first quarter based on that.
We do see pressure on revenues, especially on the ECM side in the subsequent quarter. We do have a reasonable pipeline on both ECM and advisory mandates. On ECM, of course, depending on markets returning and getting comfortable with launches of reasonable size issues, we do have potential to book revenues through the year.
On the advisory as well, we are seeing transactions take slightly longer to close than we have seen in the last couple of years. But we do have a good pipeline there. Overall, the business ended with quarterly profits, our profits after tax of INR 51 crores, which is better than the first quarter as well as a sequentially quarter behind us, Q4.
I will now hand over the presentation to Kannan to take you through Kotak Mahindra Prime.
Thank you, Manian. Kotak Mahindra Prime had a profit after tax of INR 156 crores -- INR 157 crores for the quarter. The profit after tax was lower due to onetime charge of INR 111 crores, the -- though the PAT is much higher than the same quarter last year. Demand for cars and car finance continue to be good in spite of increase in vehicle prices and interest rates. At Kotak Prime, we continue to invest in our distribution infrastructure and technology to grow our market share. The collection environment through the quarter has been quite stable.
I'll now hand it over to Nilesh to take over through the AMC business.
Thanks, Kannan. Our total average AUM grew 15% Y-o-Y to INR 2.84 trillion. Our equity average AUM despite market correction was flat at INR 1.44 trillion. Our total AUM market share increased to 7.43%. Our SIP Inflows for June 22 grew 34% year-on-year to INR 7.3 billion.
Our SIP book and average AUM growth continues to outpace industry. Our retail AUM stands at 49%. We continue to serve investor requirements by launching active as well as passive funds focused on local as well as offshore markets across debt, equity and commodity. Our profit after tax was almost flat at INR 106 crores for June '22 quarter.
Our total AUM across mutual funds, PMS, offshore, insurance and alternate assets grew 10% year-on-year to INR 3.78 trillion. Our relationship value across private banking priority and investment advisory grew 24% year-on-year to INR 5.01 trillion. With this, I will hand it over to Jaimin Bhatt.
Thanks, Nilesh. We would be open to taking questions from many of you.
[Operator Instructions] First question is from the line of Rahul Jain from Goldman Sachs.
The first one is, I just wanted to understand about the savings deposits, and thanks for giving the -- giving more disclosures around it. So the fixed SA, can we really know the average balances and how sort of that is moving? And what would be the cost of deposit on the fixed SA?
I think first part you answer, I mentioned...
Cost of deposits, what you see there, the 3.59% is the overall cost of the savings deposit. Technically, there's not much between what is fixed and floating. Average could you hear that? -- average deposit base -- average, Uday, could you hear that?
That's not what he is asking. Rahul, what's the question? We missed it.
Yes. The first part, we couldn't hear.
Yes. So Uday, I just wanted to understand about the savings deposit base. What would be the average balance per customer in the fixed SA part that you've shared this time.
So Rahul, this is Shanti here. It's different across different customer segments. At a very retail end, it would be below a lakh. In the HNI segment, it is much and significantly higher, several [ excess ]. In the NR segment, again, it is about INR 4 lakhs, INR 5 lakhs. And in the Institutional segment -- Retail Institutional segment, it's much higher. So different customer segments have different average balances. At absolutely retail level, it will be just under a lakh of rupees.
Rahul, on you second -- yes, on your second question with reference to cost of SA, while the average is for the last quarter is 3.59, if you note that you may be aware that we were amongst the first banks to increase our SA rate because of the changes in interest rates post RBI on May 4. So we did it sometime late May, if I'm not mistaken. We increased the deposit rates as of June. So as things stand today, our deposit rates -- savings deposit rates for up to INR 1 lakh is 3.5%. And about -- up to INR 50 lakhs is 3.5% and above INR 50 lakhs is 4%. So this, in general, is compared to the other larger banks, our savings deposit rates are 50 basis points higher than the larger banks.
And it would have fully reflected in the 3.59 that you've reported or yet to reflect...
Just as this thing, Rahul, as I said, the change happened in June, somewhere around the 10th of -- 12th of June. So if I look at the comparative number for the previous quarter, the savings average number was 3.53.
Understood. And then just the reason why I actually ask these average savings balances just to understand the strategy behind growing the savings deposits again, in this cycle, given the LDRs have already touched close to 90. So what strategy are we sort of looking to follow will the pricing far more in the higher end of the customer base, the Ultra HNI, the HNIs et cetera? Or this will be all across? And again, just on the LDRs, what's the comfort level that you all have 90%, 92% is this where we would want to run, or it could be even higher?
So Rahul, basically, we feel that our current view is that we are in a comfort zone considering significantly higher capital adequacy. Our credit deposit ratio has also to be looked at, number one, with your overall capital adequacy. Second, the refinance -- medium-term refinance which we have got from financial institutions. So we have taken a reasonably significant refinance earlier from some of the financial institutions, which was fixed rate, which was taken and locked in through entire '21-'22, which does not reflect in the credit deposit ratio because that does not come in as deposits. And in addition to that, as Jaimin said, we are sitting on capital of around 23%. So both these give us greater flexibility to be able to be comfortable in the broad around the 90% range, maybe a little lower is what you would like to see. But at 90%, we are still comfortable. So that is what our broad strategy is. And in terms of the savings deposit rate, we obviously have significant discussions on strategy how to go forward. And when we are sort of looking at that and implementing that, I'm sure we will definitely share with the marketplace.
Got it. And if I just squeeze in one more question on -- actually, that's more on the credit card split or shall I get back into the queue?
Go ahead, ask.
Sure. On the credit card side, you've been building up the receivables base. So can we just know what sort of revolver book that you're running in? Or this is more like the EMI loans? What's the nature of these balances that you're building up? And what kind of customers are these around [Technical Difficulty]
So Rahul, our current revolver ratio is ratios are around 30%, which is more or less in line with the industry.
And these balances would largely revolve or there would be an EMI element also in this or that goes and sits in the P&L group?
In fact, EMI has grown reasonably, maybe faster than the revolver.
Rahul, I can say that we are absolutely in line with the industry in both segments, both EMI as well as the revolve, in the industry, and EMI has grown more than the revolve as Uday said.
And Rahul, as I just mentioned, we have moved from 5.6% to 7.9% in the mix on unsecured retail. Please keep in mind unsecured retail has a significant amount of front-ended costs in acquisition, which is what we are taking through our P&L, and the benefits of margin on unsecured retail come over time. And as I've mentioned to you. And we are also looking at our pre-COVID numbers over time. So -- and we like to include microfinance also in unsecured retail. We don't think it's any different. Overall, our comfort is to move in unsecured retail to early mid-teens from the current 7-odd percent, as we have discussed. So you would see that growing as we have seen in the last quarter with a much greater comfort on our credit and deep analytics. Our ability to take higher risk for adjusted returns, especially with annualized credit cost at 16 basis points, our appetite is reasonably significant.
The next question is from the line of Adarsh from CLSA.
Congrats...
Sorry to interrupt you, Mr. Adarsh. Your audio is not clear from your line. Please use the handset mode.
Okay. Just checking on the liability side, term deposits, so there you mentioned that we are now priced marginally higher than some of the larger banks. And obviously, it is a similar which is in our growth. And we -- it kind of run down a lot of extra liquidity that we had in the bank [indiscernible] down. So what kind of delta are we seeing once we move on the term deposit rates, like, how comfortable are you with the pricing? Or would you need to have a higher differential?
Let me just clarify, when I talked about deposit differential, which is 50 basis points on SA, that is on savings deposits compared to the larger banks. So most of the larger banks are up to 3% on SA. We are 3.5% on SA up to INR 50 lakhs. And most of the larger banks are at 3.5% above 50 lakhs, we are at 4%. And there is a reason why we are at 4% because we think that's in India, cricket matters, okay? And 4 is also a very important cricketing terminology. So I'm just in a lighter way, sort of sharing with you. So our -- when I said 50 basis points higher, it's with reference to savings deposits. On term deposits, I'll ask my colleague, Virat, to give you a sense about how the flows are going as we talk. But on term deposits, the difference between the -- some of these -- some of our banks is barely 15 basis plus/minus depending on the situation of each bank, and it's nowhere near the 50 basis points I talked in the context of savings deposits. With that, over to Virat Diwanji.
Yes. The growth in the retail TD that we have seen in this quarter has been, what you call, mainly coming from the fact that the interest rates have started looking up. And hence, the investor is investing in the TDs. And I think this has given us the growth and it continues to continue in the coming quarter.
Pretty strong growth this quarter.
So Adarsh, I hope that clarifies for you.
Absolutely. And just a follow-up question [Technical Difficulty]
Adarsh, again your -- Adarsh, again, it's not clear.
Not clear.
Okay, I'll take it offline. I think the line is bad here.
The next question is from the line of Mahrukh Adajania from Edelweiss.
So I have two questions. Firstly, just on the AFS book, so how much would be G-sec and how much would be non-G-sec?
The 61% which I talked about is overall, which does include corporate bonds and all, it's not just to give you something...
I mean, while Jaimin is giving you the breakup between G-sec and non-G-sec, I wanted to just clarify another important point. If you notice, the duration which we are carrying on our non-HTM book is about 1 year. And I want to highlight some facts to you as analysts, which I'm sure you're aware of, if you look at our overall fixed income book, it's just about INR 88,000-odd crores. Out of which, if -- about 39% is HTM. If I take that out, around 50%, about INR 50,000-odd crores, is what is AFS and HFT. And you would have seen a hit on our P&L, which is about INR 857 crores coming out of our fixed income book. Please keep in mind, all these are government securities with shorter duration. They are not e-bills, if it was e-billed, there will be no need to mark-to-market. But because they are government securities, they have to be mark-to-market. But for comparison for analysts, I'm just highlighting 2 touch points. On 31st of March, 1-year treasury bill yield was 4.45%. On 30th of June, 1-year treasury yield was 6.2%. Therefore, if the difference is 175 basis points on 1-year maturity paper. Now because in our case, it was G-sec's with a duration of 1-year and not e-bills or any other paper and which is both completely in the AFS book. You have to do your mathematics, 1.75% differential on a INR 50,000 crore book, which is our 61% gives you the number which will explain the size of the hit which we have taken. We want to be completely transparent about the hit we have taken in this quarter. But please keep in mind, along with the MTM hit, our entire book is repriced to that extent going forward.
Got it. But you wouldn't have transferred anything to the HTM though you have limit at this time. I mean though you have...
No, we have not transferred anything to HTM. Our view on HTM versus AFS and HFT is we like to put a more tenured paper, which is longer duration paper, if any, into the HTM book. And whatever is shorter tenured paper, we are much happier to take it -- keep it in our AFS book. I mean this has been our philosophy for a long time. And as a result of which, if there is volatility, I would rather take the pain up rather than have a long-term drag on my NIM, which inevitably happens with having a lower yield paper stick in my HTM and give me lower NIM over a long period of time. And more importantly, it reprices my book to the current market price, which means if 1-year duration security is today trading at 6 30, 6 40 and fully priced to market in terms of my yield going forward.
Got it. That helps. Uday sir, you did not give any overview on the sector this time. So I mean...
I thought, Mahrukh, some of it you may get from my tweets.
Yes, I do follow your tweets. But in general...
Okay. I think my view is that this is early stage of the interest rate cycle increase. I think there is some way off. It depends on how this whole business about commodities plays out globally. My personal view is the U.S. Fed goes all the way up to 3.5% short-term rates by end of this calendar. It is right now every Central Bank is following suit and different Central Banks have different choices. Our Central Bank has to make the tough choice between sort of supplying dollars to the market and increasing interest rates versus some level of currency depreciation. At least based on the evidence as of now, our Central Bank seems to be more comfortable with supplying dollars in reasonable amounts based on the data available, which undoubtedly reduces the liquidity in the marketplace. I was just looking at the commercial banking liquidity numbers, 30th September 2021, the liquidity in the system was INR 808,000 crores. The number I saw day before yesterday, the liquidity in the system was INR 1,29,000 crores. My colleague mentioned that there is about INR 2 lakh surplus unspent government money. So even if I took back about INR 8,08,000 crores, you are down to about INR 3 lakh crores of liquidity. So as you supply more dollars in the market, you take rupees out. So I'm of the view that at least the short end, Indian interest rates continue to tighten. We can see that situation clearly. And in that context, Mahrukh, if you look at, I'm connecting the macro with our overall asset book. Our asset book between floating rate plus fixed rate below 1-year is more than the 80% of our advances -- sorry, fixed rate less than 1-year, sorry. My floating rate book plus fixed rate book less than 1-year is more than 80% of my advances. So that is consistent with our macro view that the short end interest rates move up, and therefore, we must be less stuck on the long-term fixed rate loans. And for us, more than 1-year fixed rate loans is now below 20% of our total book, which means our entire loan book of up to 80% gets more reasonably priced in the short-term, consistent with our macro view.
Makes sense. And do you see any risks to loan growth for the sector and therefore, for you, either in retail or corporate going ahead maybe in the second half?
Mahrukh, I can't -- my view is that, yes, there are different factors which are demonstrating different trajectories. My view is that it is possible for us as a bank to grow 1.5 to 2x nominal GDP.
The next question is from the line of Shubhranshu Mishra from UBS.
Just to ask question on the credit cards again. How do we source can we split that into own liability customers? And when you split it into own liability customers, how many of them are coming from the salary accounts versus other liability customers? And what proportion is coming from open sourcing? And what is the cost of each of these sourcing? And when we have to look at the value split right now, you get the revolve rate, but what is the percentage of revolver [indiscernible] percentage of transactions and percentage of EMI has been booked? And was just a year ago? And what would be the steady-state ROA of credit card business?
I think you're asking too many questions. Let me address the larger picture. Close to 100% of our credit card sourcing is from internal liability customers. Yes -- sorry, from our internal asset and liability customers, close to 100%. So it would be a very marginal percentage come from outside. And we have a good mix of both corporate salary as well as the noncorporate salary, but customers with salary accounts and segment as well. As Uday had stated earlier, our revolve is around 30%, and our EMI and revolve is in line with the industry, exactly what was it a year ago as well as now. I think, a year ago, the revolve ratio was around close to 27%. It's about just under 30% just now and similar to the industry trends that we have been following.
And the steady state. ROE, ma'am?
Sorry?
The steady state ROE ma'am, just books?
Right now, we are having [indiscernible]
ROE, yes. No, I don't think we sort of talk about ROE specifically for a product. But Uday made a general comment, last year, the risk-adjusted return on our asset products, including unsecured retail, is holding state, and the NIMs reflected.
The next question is from the line of Saurabh from JPMorgan.
Sir, two questions. One is, what will be the LCR during the quarter, both average and period end? And secondly, sir, I mean, could you just explain what's happened in Prime and Investments both? So I understand the accounting policy changed, but there seems to be some addition investment this year.
I request our Head of Risk, Paul Parambi to answer that, please.
Yes. So our average LCR for the last quarter was 119.9.
Okay. And period end, sir?
End of period was -- Saurabh we'll ncome back to -- we'll just come back to you on that one. And on your second question.
Prime and Investments, both the profit hit?
So if you look at the accounting only in Prime, it has nothing to do with Investments. Broadly, what we did in Prime is you do get sourcing of car loans through brokers and the expense which you incur was kind of being amortized over the life of the loan. From April 1, 2022, we have taken the entire hit upfront. So we will ongoing take the entire hit upfront. And whatever was there as unamortized as of 31st of March, we've taken that entire hit into the current quarter. So that's the pretax number of INR 111 crores.
Okay. And sir, investments also, there's a profit hit quarter-on-quarter in Kotak Investments?
Yes. Investments is a small dip. If you look at quarter 4 for Investments is always a very healthy quarter. So it's not correct to look at quarter 4 to quarter 4 -- quarter 4 to quarter 1. Quarter 1 last year was about INR 71 crores. So that has dipped by about INR 8 crores in the quarter, which is not significantly.
The next question is from the line of Kunal Shah from ICICI Securities.
Yes. So firstly, with respect to margins, this improvement, which is there, there could be various levers to it. But just want to understand in terms of the repricing benefit because of EBLR and MCLR has it happened is it like a 1-month reset and it is already reflected maybe up to from the period from which it is effective, but at least it's already done into the reset?
I think, Kunal, the way EBLR works is a 3-month reset. Some part of it has come in this quarter. Balance will flow over the next few months in terms of the repricing benefit. Similar for MCLR, bulk of our MCLR book was 6-month MCLR. Therefore, depending on when the 6 months gets over, it starts flowing in. So both those, I think, significant part of those benefits, some part has come in, but a lot of it will come in second quarter.
Okay. So EBLR 3 months, MCLR 6 months. So larger part of the increase is again in terms of deployment of liquidity and growth in unsecured?
Right.
Okay. And maybe as you highlighted in terms of the -- your view with respect to the short-term Indian rates still getting tightened, I think it's very much unlike of Kotak in terms of still having more than 60% in AFS and HFT. So what's there in terms of keeping it all through this entire cycle rate hike cycle, okay? So you have articulated that, but it still seems slightly difficult to get because all the other banks are much lower, and they are accordingly maybe...
Kunal, I think I've given you the mathematics. At 61%, it translates to INR 50,000 crores of book. The average duration of the book, I said around 50, somewhere in that range. Average duration of the book is 1-year. I gave you 1-year treasury bill rate on 31st of March, which was 4.45%, which is a publicly available number. I'm giving you 30th June 1-year T-bill rate, which is also a publicly available number of 6.20%, that is 175 basis points difference. If our number was -- if our 1-year duration, G-sec book was 50,000, 1.75% x 50,000 trade converts to INR 850 crores. Of course, there are some other variations now, but I'm trying to simplify it. Therefore, I don't need to look at what other banks are. Our number is clear, 1-year duration, INR 50,000-odd crores book, INR 857 crores hit, 175 basis points, increase in 1-year T-bill's rate between 31st March and 30th June. So it's very clear. I cannot comment on others, I can talk about us. And let me again bring you back to history. On 30th in September 2013 -- in September 2013, if you go back to Kotak history, we have always followed a philosophy that the short end book is always kept in AFS and HFT. So I don't think if you have a short end book, you keep it in HTM as a philosophy. Maybe we are different. But even in September 2013, we had taken a very large hit because a very large part of our book was in AFS. You are aware of September '13 tantrums and the significant amount of MTM pains, which happened. Kotak had a very high MTM number. Even then -- and we did not -- at that stage, RBI has allowed banks to amortize it over time, Kotak had taken a decision not to amortize it and take the hit on the chin in that quarter. So the philosophy in September '13 and June '22 is no different. What we care about more is the substance of our duration from a risk part management point of view. And in terms of substance, our duration is 1-year. I mean we cannot make it significantly lower from that keeping in mind the risk-adjusted returns. So duration is 1-year. 61% of the book is AFS, HFT. Movement in treasury bill yields are publicly known, and the translation to us is transparently put in front of the investors in the marketplace. We cannot comment on what others are doing.
And in many cases, like Uday explained, the whole book is repriced already. So you're running a higher yield for the remaining period now. So ultimately, financially, it doesn't really make too much difference.
Sure. Got you. And secondly, in terms of credit costs, so again, you said like in terms of the unsecured, we would want to take it to somewhere around early to mid-teens. So on a steady credit cost, what we had seen prior to COVID. In fact, I think now it should settle at a relatively higher level. But at the same point in time, margins are also improving. You said you always talk about risk-adjusted th3e return as such. But maybe in terms of the underwriting and the kind of credit which we are doing, we are very confident that it can actually lead to relatively better profile because we would still be able to contain the credit cost better than what benefit we are seeing on the margin side?
Kunal, I think it's always -- on credit cost, it's always better to walk rather than talk too much. And let me give you the history about. Again, the analyst community concern in December 2020 when we wrote a large ECLGS book compared to many other players. There was significant concern that this is going to hit us in credit costs. We said that we feel reasonably confident about what we are doing. Now all that is now reflected in our current credit costs, which are not considering credit COVID write back and all of 16 basis points annualized. We think this is very, very good. But we also realize that some of this, we are in a very sweet spot. Therefore, how sustainable 16 basis points annualized is, is something which I don't want to speculate at this stage, yes. Our pre-COVID credit costs used to be between 40 and 50 basis points. We are today at 16 basis points annualized. I don't want to be a predictor of where the credit costs will be, but we are brutally focused on risk-adjusted margins, and that's what will drive our behavior.
Sure. And couple of data points from Jaimin. So firstly, on the breakup of SA between more than INR 50 lakhs and less than INR 50 lakhs, if you can give? And the second, in terms of the consolidated earnings, the intercompany adjustment seems to be quite high. It is almost equivalent to what was there in full year of FY '22. So anything to read into it? And does it have any impact on distribution income?
No. Okay. Let me -- the first one, honestly, I don't think we are talking about giving that data about what is over INR 50 lakhs and below INR 50 lakhs. So I'm not getting into that data. The intercompany adjustment, actually, if you look at quarter 1 last year also, it will be a reasonably large number. That is to a large extent, the largest portion of it would be intercompany dividends. So if my subsidiary has paid dividend to the parent or subsidiaries also held by some of the other entities, those will all get knocked out at the consolidated level. So if you look at last year first quarter also, it was a high number, almost equivalent to the whole number which we had for the year, and that's also reflected in the current quarter.
The next question is from the line of Sumeet Kariwala from Morgan Stanley.
Congratulations on great numbers. I had a question on OpEx. And if I understand this well, there are 3 key drivers. One is disbursement, second is tech and digital, third would be collection for structure that you generally been saying that you've been investing it. Should we expect some of these expenses to now normalize over the next 2, 3 quarters and the jaws between revenues and cost to open up by the end of this year?
I think I'm going to ask Mr. Dipak Gupta since -- he is now our champion on tech and digital and also on acquisition, he can also comment on it. So over to Dipak.
Sumeet, did you say jaws open up or jaws shutting?
Dipak, I'm talking about revenues growing faster than cost, which logically should happen. I'm just trying to...
Yes, yes, that's logical. But I think some amount of tech spend uptick will happen. But having said that, you see, as your retail piece grows faster than others, the upfront cost hits you. The revenue stream happens over a period of time. And that goes on until you slow down the growth rate. I don't see retail slowing down in the next 1 or 2 quarters as such really. So I think for the next 1 or 2 quarters, you will continue seeing the upfront acquisition cost too and the tech costs really hit too. The rest of them probably will normalize. And then also what happens really is once digital, see, one of the things which I mentioned on digital really is a lot of DIY and assisted digital processes. Now once this fall in place, yes, a lot of your acquisition costs, particularly manpower-related acquisition costs, start evening out, right? That automatically gets your acquisition costs down. But that impact will take about 2 to 3 quarters for it to start reflecting. But it will happen in big time because we are changing aspiration journeys practically across all asset products, including the nonretail one, really. So that will have a significant efficiency over a period of time.
Very clear, Dipak. And the other question was on fee income. So I'm not talking about fee income this quarter, which was 42% and partly helped by the pay. But generally, should we expect fee to assets improve over the next 2, 3 years? One is because you're doing unsecured much faster. And second is, there could be some fee income pools on deposit side that you might be able to capture. So just trying to get some sense and how things are [indiscernible] 2, 3 years?
Yes. All 3 will happen. The corporate side will happen. I think, see, on the retail side, again, products like credit cards and all have very significant fee pools, yes. And the third one, which also depend on markets to some extent are really the distribution-related one. So all 3 streams should happen really.
The next question is from the line of Praful Kumar from Dymon Asia.
Congratulations on great [indiscernible] Uday, one question on the deposit side. Since you have significant advantage now as assets reprice your yield, investments you have taken the hit already. Any broad strategy on this strong deposit rates? Or how do you accelerate the deposit growth over the next 3, 4 quarters?
I think let me first say that by design, we had slowed down the engine on retail term deposits in the last 2 years in terms of not pushing it as aggressively as we used to do it before that. And I think retail term deposits, it's not that we were [ shoeing ] customers away, please don't mistake that, but we were not necessarily wanting to be the most aggressive on the price on retail term deposits. We are finding that, that engine is cranking up pretty well on TDs. And we, therefore, feel reasonably confident that -- and I joke internally that if I look at our deposit market share -- at our bank, okay? So there's 98% out there. Therefore, we don't feel it is that difficult for us if we decided to crank up and get our deposit bill higher. And the franchise, we feel is strong enough for us to be able to do it as we are sort of getting our engine cranked up. So I don't worry about the term deposit part and getting our act together in terms of cranking it up significantly. We have also -- the other very important difference between us and some of the larger banks is, till now, we were completely absent from payment of taxes and government revenues, which since we were not empaneled. As you know, the budget last year opened up empanelment, and then we had to do all the tech connections with the central government and also some of the state governments who depend on central government signal, whether we are empaneled. Now we are fully empaneled. We've got all our tech stacks getting cleared or some of them cleared. Therefore, a whole new sense of flows, which was otherwise not available to us versus the larger banks has now opened up. And we see the government payments, tax, GST, all those being available for our customers. A simple point is on Tax 2.0, which is a new system put in by the government, we are amongst the first banks with -- run with the ball literally about a couple of weeks ago. And some of the existing banks have to come to the new platform, they're still on the older platform. And over time, government expects all the players to be on the new tax platform. We are already there, and we are starting with a new tax platform. We don't have the legacy issue. But we see some of these actually making much greater customer stickiness -- many of our customers. Otherwise, what was happening is existing customers would say that [indiscernible] bank maybe cannot pay taxes, GST and then you do -- they have to either use another bank or pay 1-day early. Therefore, there was a friction for our customers. That literally has last 2 weeks ago has now opened up. So we think some of these, along with a much greater focus on getting our liability engine firing across the board, which is a big area of focus for us as we speak. And I would like to believe that Kotak management, when we make up our mind, we do bring the change. Many of you about 18 months or 24 months ago would have said Kotak Asset engine [Foreign Language]. Now you are asking the question where we have historically been good at, which is a deposit engine. So I think we are getting our act together. That's all I'll say.
No, that's a very comprehensive explanation. Uday, one anxiety that all the investors have with the management transition. So maybe broader thoughts on when do you think shift under in terms of time lines it happens, what would be the overlap? We understand and appreciate that you remain the largest shareholder and you worry about things much more than we do. But that is one pushback that a lot of analysts with that and management transition within the risks?
Please rest assured that the 26% shareholder is fully committed to the balance 74% shareholders to ensure smooth transition.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Kotak for closing comments.
Thank you very much. I think we are certainly into volatile times. Having said that, we think we are reasonably positioned, and we see ourselves being able to navigate through this in a reasonable manner. I'm going to share with you a comment which I've put in my annual shareholders' message for this year, which will be out shortly, that -- the change -- the word change is the new comfortable feeling at Kotak. Change is the new comfortable feeling at Kotak. Okay. With that, I will end this call. Thank you very much.
Thank you. Ladies and gentlemen, on behalf of Kotak Mahindra Bank, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.