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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 '24 Earnings Conference Call. [Operator Instructions] Please note that the conference is being recorded. I now hand the conference over to Mr. Uday Kotak. Thank you, and over to you, Mr. Kotak.
Good evening, friends and colleagues. And welcome to you on a wonderful Saturday evening. I know you have had a very busy day today. So have we. And I want to really start by sharing with you something which is on the top of my mind. For a long time, I did not believe in the concept of astrology and stars. But when I think about the Indian situation today, I really feel that the stars have aligned for India to be in an almost wonderful unbelievable position as it stands today. And if you look at just the geopolitics of the world, and I'm just keeping my fingers crossed, India can continue down this position. It is unique for us to see the nature and the depth of our relationship with the United States, with Europe, whether it's France, whether it's U.K., whether it's Germany, whether in the Middle East, whether it's UAE, whether it's Saudi Arabia, whether it's Israel, moving further, whether it's Japan, whether it's Australia, and we have been able to even manage our relationship well in the context of all the geopolitics with Russia. And in this context, the [ access ] for the new geopolitical dynamics are uniquely positioned in favor of India.And when COVID happened first, many of us were seriously worried about the impact on the Indian economy. India did a reasonably good job in managing itself through the COVID period. When the Russia-Ukraine war happened, we were all very concerned, including on the price of oil and how it will impact India. India navigated itself beautifully through this and actually ensured that our key necessity, which is energy, not only is taken care of, but actually, effectively, the cost of energy was lower than what it was in the pre-COVID world. And now the whole relationship with the rest of the world is almost at a stage, I can't recollect having seen in my career over a long period of time.So with this geopolitics, which is getting increasingly critical for how the global investors think about India's positioning, you combine it with an extremely benign and, I would say, positive macro situation on many fronts for India. Our current account deficit at 1% of GDP, that's what it looks like for the current year, a balance of payments, which is looking very strong, our reserves having crossed $600 billion. And over the last many years, we have also been able to get a better handle on some of the macro factors like inflation and to see our current inflation situation to a point where the differential between the Fed rate and RBI's repo rate is now barely about 1% as a differential. I haven't seen that for a long time in my career.And in that context, we have really moved a long way to a very sound macroeconomic fundamental situation. And I must take this opportunity to compliment our government policymakers and regulators for really giving India this very, very positive positioning which we are in. And in this context, I think both policymakers, governments and practitioners can take a bolder view for India's future. And I think it's a great time to be building and nurturing business in India from a medium-term perspective. And that's how I feel about India at the present and feel much more confident and bolder about India's future, and we all will have to take calibrated risks in the different areas we work in to take the calls and make this dream happen and make India in a much superior position, including over time, and I hope that's not too longer time where the Indian currency gets more and more acceptable as a currency in many, many more countries from where it is today.So with this background of a positive alignment of stars for India, strong geopolitics, strong macro and a mindset for us to really take this forward. We now need to ask the things we need to watch out for as we go forward. And I think one of the most important things for India will have to be a continuing stable political environment. And I'm using the words about of stable political environment for us to be able to sustain these growth rates over a long period of time. At the same point of time, I think we need to keep a strong united India through this period and the famous words of Unity in Diversity as a single country are going to be even more relevant as we go into the future. And if we can keep a strong India, a united India and a long-term stability with combined both political and macroeconomic stability, India truly has a great opportunity into the future.And with this backdrop, I'm happy to say that we at Kotak Mahindra Bank continue to strive and grow. And we are feeling pretty confident about how things are shaping. And while my colleagues will take you through a number of developments, there are 2 important developments which stand out for me to share with you. The first is a very significant lever in terms of our deposit growth. Our deposits have really picked up and are growing at a very good pace, driven by a product which we think is, again, bold and disruptive in this marketplace, which we call as ActivMoney and this product for us just in this quarter has grown at a flat rate of 24%, which would make it annualize nearly 100% growth on an annualized basis. And it's a unique product, which is now about 7% to 8% of our total funds or total deposits, and it positions itself beautifully from the point of view of cost of funds between a traditional deposit and CASA. So if a savings account cost for us is about average of around 3.6% to 3.65% average and a term deposit cost, which is between 7% to 7.3% and sweep deposit of ActivMoney, as we call it, we offer our customers 7% on a 6-month FD, and the corresponding rate if they break it earlier based on our experience, the effective cost of this ActivMoney is in the range of 5% to 5.25% broadly, which gives us a sweet spot between our savings accounts and our term deposits with significantly better alignment in the favor of the customer. So if the customer keeps it for a longer time, the customer gets it more. And this is a product which we are going all out. We will continue to go all out and focus on this as one of the core products we will offer. Yes, to a certain extent, you can see it in the CASA ratio, there is internal cannibalization on CASA as our customers move into the Activ product, but we believe this is in the interest of the customer, long term, giving us a much greater flow of deposits into our coffers, and we will sustain it over the medium term as a strategic intent to build a stronger, stable and a more customer-engaged franchise around ActivMoney in our menu.The second development, which is again making me quite in a way proud is something about our international fund management. More than 10 or 12 years ago, we started on our international platform, India dedicated fund called the Kotak Midcap Fund. The primary source of distribution and the purpose was in Japan. And we have now a very significant distribution network to Japanese investors and many, many Mrs. Watanabes and others have invested in this fund. And I'm happy to share with you that we have now, as of end of June, crossed this single fund, which is an active mid-cap fund has crossed $2.5 billion, making it one of the largest India dedicated active funds in the world. And just in the quarter, April to June in 1 quarter, we have got fresh inflows into this fund in excess of $500 million, and it's a matter of particular pride for us since when we started this, our entire offshore fund management, we were, first of all, countered with a question that you don't have a global platform, how will you build an offshore fund of scale? And it is that progress we have made on this offshore fund and other international funds. It gives me hope that if you have the right product and the right distribution, it is possible for an Indian firm to be thinking more positively about global opportunity as well. And the other point on this fund is that even in July, the flows continue to be very strong coming from various geographies, including Japan.And with that, I will now hand it over to my colleague, Jaimin Bhatt, and all our colleagues from my group management council are here with me to on this call to take you through the various aspects of Kotak's financials for the first quarter. Over to Jaimin Bhatt.
Thank you, Uday. Let me start with the consolidated numbers first. Quarter 1 FY '24, as in June, we closed on a consolidated basis with a post-tax profit of INR 4,150 crores, which is 51% higher than what we did in Q1 last year. The bank itself brought in INR 3,452 crores during this quarter, we'll talk about the bank in some detail as we go forward. Kotak Securities brought in INR 219 crores this quarter, which is about the same as what they did last year and against INR 182 crores they did in quarter 4 last year. The market share of Kotak Securities of the overall market has increased from 4.2% last year first quarter to 7.5% this quarter. Kotak Prime got a post-tax profit of INR 218 crores this quarter versus INR 157 crores earlier year. Last year's quarter 1, Kotak Prime has taken a onetime hit of over INR 100 crores on a pretax basis due to change in accounting policy and brokerage. The vehicle book in Kotak Prime has actually gone up by 31% on a Y-o-Y basis.The other NBFC Kotak Mahindra Investments had a post-tax profit of INR 102 crores this quarter versus INR 63 crores a year ago. This is on the back of a 50% growth in the advances book there. The business correspondent and microfinance called BSS has now had a post-tax profit of INR 95 crores this quarter versus INR 56 crores a year ago. The life insurance entity brought in INR 193 crores this quarter versus INR 248 crores a year ago. The mutual fund entities contributed INR 106 crores, which is the same as what they did last year. In Q4, the mutual fund entities had a capital gains income of over INR 90 crores against pretax.The overall assets under management at the group level now, which have gone up by 23% on a Y-o-Y basis. At the consolidated level, you see an adjustment of INR 375 crores on the sheet, which is largely on account of dividends received by the various companies, the bank itself got about just over INR 300 crores out of this. The consolidated assets at the group level now crossing the INR 4 lakh crore mark and which is about 19% higher than what it was a year ago. The capital and reserves at the group level at INR 116 crores, both the NBFCs Kotak Prime and Kotak Investments have capital adequacy of 26% plus. The life insurance entity having a solvency of 2.68%. The ROA at the group level at 2.63% and capital adequacy comfortably at 23.3% with CET1 at 22.3%, book value now at INR 584 per share.If I go to the bank stand-alone, the first quarter recorded a profit of INR 3,452 crores, which is 67% higher than what we did in Q4 last year and tad lower than what we did in the immediately preceding quarter, in Q1 last year. The NII this quarter at INR 6,234 crores was 33% higher Y-o-Y basis. Q1 also saw fees and services grew by 20% to INR 1,827 crores this quarter. The other income, which is non-fees and services clocked INR 856 crores, partly helped by a reversal of INR 240 crores in MTM hits, which we have taken in previous periods. Q1 last year had MTM hits of INR 857 crores.We continue to have a large part of our book on AFS and HFT. As of June 30, this amounted to 74% of our overall book with a modified duration net of OIS 1.3 years. Overall cost during the period at INR 3,967 crores. The employee costs look higher this quarter compared to both last year first quarter as well as the previous quarter. Quarter 1 last year, the cost had dropped sharply due to change in interest rates and Q4 had a change, which a beneficial change on account of pension annuity rates. We don't have that benefit this quarter.The other operating expenses take a higher load on account of IT and promotional expenses this quarter. The pre-provisioning profits are 78% higher than what we did last year and this quarter at INR 4,950 crores. Our provisions at INR 364 crores gives us a pretax profit of INR 4,585 crores. In quarter 4 last year, we had a favorable tax order, which resulted in that quarter's tax rate being lower. This quarter is a more normalized tax rate. On the balance sheet stand-alone, we crossed the INR 5 lakh crores mark during this quarter at the bank stand-alone level.Before taking account of IBPCs and BRDS, advances grew 19% Y-o-Y and closed at INR 3,37,000 crores. On a Y-o-Y basis, advances have grown in most of the categories, credit cards, home loans, tractors, CV/CEs, SME, microfinance. Our unsecured retail book now, which includes retail microfinance, now at 10.7% of our advances. Net interest margin, which was 4.92% in quarter 1 last year, now at 5.57%, in quarter 4, it has peaked to 5.75%. As of June 30, the bank had 42.5 million customers, which is 9 million higher than what we had a year ago.On asset quality, the GNPA at 1.77% versus 2.24% a year ago. And with a PCR of 78%, our net NPA now are 0.4%. Slippages this quarter were INR 1,205 crores, of which INR 288 crores got upgraded during the same quarter. Our fund-based restructure on the COVID and MSME aggregating to 0.19% of our advances. SMA 2, which is for borrowers with exposure of INR 5 crores plus on funded basis at INR 203 crores. Our CASA ratio at 49%. And as Uday mentioned, during this quarter, we activated ActivMoney and the amounts on the PD suite grew by 24% during this quarter not annualized. The capital adequacy of the bank again healthy at 22% overall, with CET1 itself at 20.9%. And at the bank stand-alone, the ROA for this quarter at 2.81%.I'd hand over to Manian to take on the corporate book.
Thank you, Jaimin. I'll make a short commentary on the wholesale businesses. During the quarter, we saw a reasonably strong demand for credit offtake, especially among the larger corporates. Our wholesale book grew by 7% Q-o-Q. Two other segments which did well were the MNC and the NBFC segments. In MMC, we are seeing good traction in terms of new to bank customers. With MNCs increasing footprint in India both in manufacturing and services sector, we see an opportunity there. We have a dedicated country-focused coverage strategy where we are seeing early success. On the NBFC segment, we are seeing good growth in credit offtake as the demand remained robust across all retail assets, including affordable housing, CV passenger vehicles, SME and even unsecured segments.While we have witnessed healthy growth in the number of SME NTBs, the book growth is lower than expected due to lower utilization of limits. Effective 1st April this year, we have also carved out a separate segment called Mid-corporate segment. We believe this segment has potential to grow faster, and we have put in place a dedicated team to focus on new client acquisitions and grow our franchise amongst mid-sized corporates. While it is still early days, in Q1, the business has grown at [indiscernible]. While volume growth has been reasonable, on the pricing front, we continue to witness spread compression due to competitive pricing pressures in the market. However, we continue to follow a disciplined approach of taking measured risks only where risk return metrics are justified. We are also focusing on identifying opportunities to leverage our structuring and advisory capabilities to identify better yielding opportunities without commensurate increase in risk.We continue to focus on fee income, which shows a healthy growth in Q-o-Q basis. We have also seen strong traction in our DCM business in this quarter with completion of some large deals in the large corporate space. We have closed diverse set of deals across high-yield structured credit bonds, high-grade bonds, REITs and InvITs. Favorable interest rate environment has seen also the wholesale bank benefit from MTM gains on credit substitutes in this quarter. Credit costs continued to remain low. On the liabilities side, we are seeing good traction on the noncustody current account balances. Custody flows have been a mixed bag. Global headwinds caused some amount of flight of capital, both in the listed and unlisted spaces in the initial part of the quarter, but we saw some inflows back by end of June in line with the change in market sentiment. The domestic custody business has done better than the [ SPA ] custody business in this quarter.On the digital front, Fyn, our integrated corporate portal for trade, CMS and account services continue to scale up well. We also implemented an online supply chain platform with industry preferred features like dynamic discounting. Overall, the business remains in good health and with healthy ROEs. Let me hand it over to Shanti to take you through the commercial bank details.
Thank you, Manian. I'll start with commercial vehicles. At the industry level, the volumes actually witnessed a degrowth of 3% Y-o-Y and immediately on a Q-o-Q basis, even lower at 22%. This is on the back of a very strong Q4. However, our disbursement in unit volume terms this quarter has grown 21% Y-o-Y, leading to an improvement in market share. At an industry level, the freight demand and availability of return load continues to be stable. We expect this to get better as we get into the busy season in Q3. Collection efficiency for us continued to be stable, and we will continue to build our book and market share in this segment with a focus on risk-adjusted returns and increased distribution across geographies.Construction equipment at an industry level showed a growth of 17% Y-o-Y in Q1 due to sustained execution of Infra projects and aggressive target for road building and expressway under the Bharatmala and big ticket infrastructure and the PM GatiShakti. This is giving a boost to growth in the C segment. Our disbursements were in line with the market growth and collections in the segment have increased. Tractor finance. The tractor industry actually degrew 2% due to higher rates and higher inventory at dealerships at the beginning of the year. While collection efficiency continues to be stable, impact of monsoon excess in some parts and efficient in other parts needs to be watched closely to address the impact it can have on both demand as well as collections. We grew our disbursement in used and new tractor financing in this quarter, leading to a step-up in market share. Overall, advances grew at a healthy pace of 26% Y-o-Y. This will continue to remain a focused segment for us as we [indiscernible] distribution.MFI, our microfinance continued its strong growth momentum in Q1 with disbursements growing at 69% Y-o-Y. We currently operate in 11 states through a network of 719 BC branches and have a customer base of 16 lakh women borrowers. Asset quality continues to be strong. Our outreach to the microfinance segment has also enabled credit for low-income households in micro enterprises and allied activities. We expect the credit demand in rural economy to be stable as well as see growth in our microfinance business. On the agri side, we saw some reduction in utilization as Rabi peak procurement started getting utilized. There were increase in charges of agro commodities, but processors and traders held on to the stock in the hope of higher prices. Although above factors led to a muted growth in our Agri advances in Q1, we continue to focus on new acquisition of customers across geographies. The credit quality in this segment has been very stable.I will now request Virat to take you through the consumer banking highlights.
Thanks, Shanti. I'll start with consumer assets. Our strategy to gradually build our market share in the unsecured business backed by data analytics continues to yield positive results. Our unsecured products in consumer banks have grown 51% on Y-o-Y basis and approximately 9% on a Q-o-Q basis. From a risk perspective, our unsecured loans portfolio continues to hold well and is adequately priced for risk. Our mortgage lending business continues to grow well at 18% Y-o-Y, and we see traction both in home loans and loan against property segments. The book continues to hold well on all parameters of collection.We continue to invest in our cards franchise with overall credit card advances growing by 67% on a Y-o-Y basis. Our market share has been steadily growing both on spends and cards in force. We continue to strengthen our co-brand product suite. Last quarter, we had shared about our new Indian Oil co-brand. This quarter, we are happy to share that we have gone live with a co-brand card with Myntra that would enhance our value proposition to our millennials and Zen G customer segments. We also went live with UPI on credit cards, which now enables our RuPay credit card customers to map their credit card on UPI payment apps and use the scan and pay functionality. Our story on digital acquisitions continues and significant proportion of the personal loans in credit cards continue to be sourced digitally.Moving on to business banking. Bank continues to focus on growing business banking franchise, both on assets and liabilities. While the demand for new working capital loans have shown healthy growth, improvement in the limit utilization is relatively slow. The demand for unsecured loans by the business customers continues to show positive traction both in terms of demand and portfolio performance. We are witnessing a steady in the formalization of informal units in MSME space with higher GST registration [indiscernible]. This is enabling us to improve both the speed and quality of underwriting to this segment.With focus on digitization, we have gone live with our new loan origination system helping us to further improve our turnaround times and enhancing our portfolio management ability. As the assisted digital current accounts opening have shown improvement in resource level productivity and customer experience. The traction on ActivMoney among current account customers continued to show encouraging results in higher acquisition of new-to-bank customers and also building balances of our existing customer base. With the aim of supporting the startups, we have revamped our start-up proposition with more power pack features on banking and nonbanking needs in their business journey. Our pure acquisition across merchants is gaining speed with growth in new merchants acquired and spends driven by product innovations. We have also empowered merchants to accept digital rupee from the customers, furthering the nation's march towards digitizing retail transactions.Coming to liabilities. The total deposits have grown at 22% on Y-o-Y basis with major contribution coming from fixed deposits. With an objective of building a retail staff franchise, we rolled out an ActivMoney proposition, which allows savers to earn higher interest on the deposit without compromising on liquidity or having to incur a penalty on withdrawal. This feature allows customers to enjoy up to 7% interest on savings balance above a pre-decided threshold. This not only facilitates in holding on to the existing deposits from being moved to higher-yielding investment options, but it also helps us in acquiring new customers. With focus on enhancing our large premium banking franchise, the all-new Privy League proposition with best-in-class features and lifestyle benefits was introduced. We launched Sankalp savings account with exclusive features that cater to evolving needs of emerging India in semi-urban and rural markets. The revamped corporate salary product offering is showing encouraging results. We were successful in building our term deposit book, which showed 49% growth on Y-o-Y basis.With this, I'll pass on to Milind.
Yes. Colleagues, before Milind starts, let me just introduce Milind Nagnur. Milind Nagnur is the Chief Technology Officer of the bank. Milind joined us on August 1, 2022. So he is now close to celebrating his first birthday, and we thought that's a great time for him to come and meet investors virtually and share the developments on the technology front as he's gone through nearly 1 year at Kotak. Milind comes with a very interesting background being an engineer for a long time, IIT Mumbai, then IIM Calcutta and spent about nearly 23 to 25 years in the U.S. across various banks, thereafter for a few years at Zelle, which is a company which is started by all banks similar to an NPCI concept in India, and Milind was the Chief Technology Officer there. And then we are really delighted to have him come and join us about a year ago. So over to you, Milind.
Thank you so much, Uday, for such a generous introduction. I'll provide a short update on our tech and digital strategy. Our tech strategy is aligned with what customers want from us. And whether it's in the branches or in the digital channels, customers who want tech that work fast, works reliably all the time and is always on and always available. We will, therefore, continue to invest in nurturing deep engineering talent, software engineers and principal engineers who know how to design and deliver fast, robust, reliable platforms. We will continue to fortify our digital and technology core with strong talent as well as robust systems design and architecture.A short glance at the metrics on the digital page show notable improvements in digitization across both the consumer and the corporate area. Overall, we strive to see ourselves delivering technology that would be a key differentiator for our customers. That would be my short update on technology and digital, and I'll pass it on now to Dipak for the next coverage.
Thanks, Milind. I'll take up Kotak Prime and Kotak Life. First a quick update on the car market. What we're seeing really is while the wholesale industry numbers are looking up, they're up 9% plus on a Y-o-Y basis, retail is down, down practically about 10%. And that really means we are seeing a lot more stocks at the dealer level. So inventory is piling up at the intermediate level really. On the demand side, entry-level cars still is a problem and that manifests itself in us seeing a lot more promotional drives from both manufacturers and dealers. However, when you look at the SUV segment or the luxury segment, both of them are seeing reasonably good demand. In fact, the waiting periods are only going up and up in some of these cases, really.I think when you look at Q2, one, probably we'll expect subdued Q2 for 2 reasons. One is, of course, monsoons have been heavy this time. And second, of course, this time, if you recollect, the entire festival season has got pushed by at least a month. So it really happens in Q3. So Q2 should probably be not as good as the past. Overall, from a financial point, financials, the profit after tax is significantly better. But remember, last year, this quarter, we had an accounting policy change because of brokerage because of which the PAT was depressed. Otherwise, KMP is doing fine.On the life side, Kotak Life, what we're seeing really is premium growth has been relatively slow, not as good as probably some of our peers. This quarter, we expect to catch up and grow faster, particularly on the group side. And the other big piece really on the life side really is that going forward, we'll have to watch out for how the entire expense of management philosophy really pans out and what it really does to product sales and product margins as we move ahead. From a profitability point of view, the profits for this quarter are slightly subdued as compared to the previous one.With that, I'd hand over to Jaideep to talk about securities.
Thank you, Dipak. I'm here to talk on Kotak Securities. Just a brief before I get on to the numbers and performances. The cash market volumes this quarter have been pretty subdued and have started seeing some bit of improvement in the month of June, and that continues in July. The options market or the derivative market has gone up significantly. It's more than doubled year-on-year and shown maybe a 15%, 20% increase quarter-on-quarter as well. As for Q1, the top line of INR 805 crores compared to INR 744 crores last year and INR 682 crores in the last quarter. The PAT for this quarter is INR 219 crores, which is flat over last year and compares to INR 182 crores over the last quarter.The cash market share for KS as a firm for this quarter is 10.5% compared to 10.4% for last year as well as last quarter. But as Jaimin earlier mentioned and I mentioned earlier as well that the overall market share has nearly doubled on a doubled volume for Kotak Securities, which is something which has been good for this quarter. On the digital side, a lot of developments, we focused primarily on platform and product. The Kotak Neo platform is top of the line OMS and RMS as called by us, which is an order management system and a risk management system, which is what we're currently using. On the product side, 2 products which have met with a very decent success is Kotak Trade Free and Kotak Trade Free Youth which has been now in existence for some time. Clients have liked the product and are adapting to it or accepting it deeply.Our sales trading customers today contribute about 63% of cash market volumes and 97% of auction volumes for KS. 80% of customer service requests are served digitally. The Y-o-Y growth in mobile trading has gone up 3x of last year and on the web, it's close to 2x.I'll now hand over to Nilesh to take you through the AMC numbers.
Thanks, Jaideep. Let me take you through our asset management business. Our total average AUM grew 10% year-on-year in first quarter FY '24 to reach INR 3.12 trillion. Our equity average AUM growth was at 16% Y-o-Y to INR 1.67 trillion. Our active equity AUM market share grew to 6.43% in first quarter FY '24. Our SIP inflows for March '23 grew 21% year-on-year to touch INR 9.1 billion. Our retail AUM stands at 55% of total AUM. As mentioned by Uday, we now manage largest India dedicated offshore fund wise Kotak Funds India MidCap Fund for global investors and second largest actively managed onshore equity fund for local investors by Kotak Flexicap fund.Our profit after tax was flat at INR 106 crores in first quarter FY '24 as economies of scale was shared with unitholders. Our total assets under management across mutual funds, PMS, offshore, insurance and alternate assets grew 23% year-on-year to INR 4.67 trillion, led by alternate assets.I'll now hand it over to my colleague, Srini Sriniwasan.
Thanks, Jaideep. Let me take you through our asset management business. Our total average AUM grew 10% year-on-year in first quarter FY '24 to reach INR 3.12 trillion. Our equity average AUM growth was at 16% Y-o-Y to INR 1.67 trillion. Our active equity AUM market share grew to 6.43% in first quarter FY '24. Our SIP inflows for March '23 grew 21% year-on-year to touch INR 9.1 billion. Our retail AUM stands at 55% of total AUM. As mentioned by Uday, we now manage largest India dedicated offshore fund wise Kotak Funds India MidCap Fund for global investors and second largest actively managed onshore equity fund for local investors by Kotak Flexicap fund.Our profit after tax was flat at INR 106 crores in first quarter FY '24 as economies of scale was shared with unitholders. Our total assets under management across mutual funds, PMS, offshore, insurance and alternate assets grew 23% year-on-year to INR 4.67 trillion, led by alternate assets.I'll now hand it over to Jaideep.
Thanks, Srini. We'll be open to taking questions now.
We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Mahrukh Adajania from Nuvama.
My first question is on miscellaneous income. So it's been very strong this quarter, right? You have trading gains of around INR 240 crores, and then you have other and miscellaneous of around INR 600 crores. So would you have any breakup of that income?
Mahrukh, that's something I mentioned earlier. We get dividend from the subsidiaries largely in the first quarter. As I mentioned, that's about INR 300-plus crores in the bank stand-alone. This quarter, we also had some benefit of a transaction from our ARD team, which brought in another income into that category. So yes, that, in addition to the MTM gains which we talked about.
Okay. All right. And the other question is on loan growth. So personal loans, as guided by you are growing very well. We're growing at 7% to 8% Q-o-Q. Is that pace comfortable given talks around some asset quality issues in some segments, of course, there's a mixed feedback on that, but is there any issue in any segment of unsecured loans that worries you at all?
Paul would take that question, Mahrukh.
See, as we see it right now, we don't see any major issues in these segments. Having said that, the overall credit environment is normalizing right now. But overall, we are comfortable with all the unsecured segments and the way they are currently behaving.
The next question is from the line of Kunal Shah from Citigroup.
Yes. So the question is with respect to asset quality. So in terms of the slippages compared to the run rate which we had seen in the past few quarters, it has gone up. And even credit cost is almost like 50 basis points plus. In fact, the [indiscernible] should be able to sustain the relatively lower credit cost of say less than 30-odd basis points because that was not much visible, so can you just highlight maybe what's leading to that? And what should be the sustainable level of slippages and the credit cost would be subject to your portfolio.
Yes. So if you have to look at the entire credit environment and how it has evolved over the last 2 or 3 years and then look at the current context, the COVID period is one which really served to flush out a lot of the stress in the entire system. That had 2 impacts overall. One, if you take out a lot of the bad assets over a period of time, therefore, in the following periods, the overall credit costs come down and the flows also come down because recoveries tend to be good in that period and super normal. The second is because a lot of the weaker accounts have got flushed out, what you also find is that subsequent underwriting in the immediately subsequent period tends to be much better. So this is really the phenomenon one saw in the last couple of years. I believe the environment is now normalizing. And to that extent, therefore, while we are not seeing anything to worry about. I would say it's now becoming more normal and what we would usually expect. Yes.
Yes. Anything on [indiscernible] flow from the SME [indiscernible] relatively higher in the overall slippages or maybe broader slippages across the segments have been similar to what we have seen in the last few quarters?
No flows from SME were not higher than normal, and they're absolutely normal right now.
The next question is from the line of Gaurav Singhal from Aspex Management.
So because of the success of the ActivMoney product. I'm just wondering if you would still maintain the stance you had in the previous quarter call, where you said that NIM probably based on our assessment so far does not decline below 5%, would that still be correct given the ActivMoney seems to be cannibalizing CASA? That's my first question. I have a follow-up.
So just let me take that. Yes, if you look at the fact that this quarter, last quarter itself, we have talked about the fact that the 5.75 was a peak, and you could see some correction there. We've talked about this period, we've closed at 5.57. While the ActivMoney does mean that we are paying higher than what we would have done on savings account, but recognize that the ActivMoney cost us decently lower than what equivalent time deposit would have cost. The time deposit would cost us north of 7%. ActivMoney would be more like 5%, 5.5% on the assumption that you will not pay the thing stays there for 180-day period. So it's a mixed balancing between the 2. And more importantly, we are getting a flow of deposits, which has improved significantly in this quarter. So while it can have some impact on the margins, it's not just because of ActivMoney, it's also last year, we saw the NIMs improving quarter-on-quarter on the back of repo rate rises. This quarter, in April and June, we've seen that becoming flat. So to that extent, some of that is also impacting the NIM. And your question about being north of 5, I think for the current year, we can reasonably safely say we'll be there.
And then the second question related to that. So while the deposit growth has been quite good this quarter, our loan growth at like net loan growth at 2.7% in Q-on-Q, I think it's below system, which is like 4% to 5% Q-on-Q roughly. So just wondering, you mentioned last quarter, we want to be 1.5 to 2x nominal GDP, which is like to be towards close to 2x, close to 20 year-on-year. Does that view still hold? Or do you see pricing competition is so intense that 20% or maybe close to 2x GDP might be difficult?
Okay. Let me just take that out. It is, quarter 1 generally has been a slower quarter. So if you look at pre IBP and BRDS, we are still at 3-plus percent, 3.5% thereabouts. So to the extent of the fact that we clocked for the full year, maintaining a loan growth number at about 1.5 to 2x the nominal GDP growth. I think we are reasonably comfortable at this stage that we would be in that range.
Sorry, I see that the cash and other balance increased quite a bit. at the quarter end. Is there some one-off here or some reason?
I can't hear it. What did you say? Sorry. Can you just repeat that?
Cash balance has increased 36% Q-on-Q. So just wondering what's the reason?
Some of that is INR 2,000 notes, which came in there. That's not a significant one. It's actually, if you look at the last year, it was 40,000, we are at 44,000 right now. So it's not completely unusual there.
The next question is from the line of Prakhar Sharma from Jefferies.
[Technical Difficulty] results. I just had a question on this...
Sorry to interrupt, Prakhar, but the line for you is not very clear. Please use handset while you're speaking.
Yes. Is it better now?
This is a much better, yes.
Sorry for that. So my congratulations on these results and best of luck. My question on this ActivMoney program. At a strategic level, do you think this has an impact on customer behavior and how they think of deposits with this Kotak Bank because while I understand that the blended cost of ActivMoney is lower, term deposits terms easier to withdraw and they can be far more sensitive to the rate environment, whereas programs like ActivMoney probably have [indiscernible] branch level people and the customers think of deposits that actually as Kotak. And that's why in this period, you have had a lot of savings deposit impact on the growth. So I just want to get your pulse on what you think of this ActivMoney type of programs on the way people see Kotak Bank and the deposit relationships?
So this is Shanti here. The whole program was structured based on customer needs and customer requirements. Now go back to our customer. They have short, medium, long-term needs. One of the long term needs they pass in term deposits. They have their short-term needs in savings. Now the savings bank rate is at about average of about 3.5%. and even loan, where the customer wants to have the flexibility of the savings, but slightly better returns is when they keep the money in the savings account but sweep above a certain threshold into ActivMoney. It gives them 2 things. Whenever they want liquidity, they get it immediately, there is no penalty of breaking. So it gives them the comfort of saying, I'm keeping my money liquid. I'm getting a better rate than what I get in savings account. It is this customer psychology and behavior that [indiscernible], and we are seeing the results of this in ActivMoney. So that is why [indiscernible] it is between savings and term deposits. People don't keep in term deposits and the growth in term deposits has also been healthy as you can see because somehow people [indiscernible].
I think I wanted to add something here. This is Uday here. If you go back to 2011, when savings deposit rates were opened up. Most of the strong entrenched incumbents did not change the rate. We went out and started a 6% savings deposit rate and sustained it with the higher pressure from 2011 to 2020. We were perceived as the potential disruptor. In this period, we grew our savings franchise for a period of over 9 years at 40% plus compounded CAGR. We are looking at total cost of funds. We believe that we have a strong position in the CASA, which we are quite confident we will maintain at a reasonably high level versus the broad industry benchmark. So we are not worried about that in terms of absolute CASA percentages. But we also believe that there's a huge opportunity for space between CASA and traditional term deposits with some short-term pressure on CASA. And we are very clear we see this as a sustained program. And this is not about being a disruptor for disruptor sake. We think it's a hugely positive customer engagement and customer franchise program, and we will be going guns blazing on this for a long, long time.
I'd probably add 2 more nuances to what Uday and Shanti mentioned. One is the product in itself helps you attract a lot many more customers. So it is a phenomenal NTB tool, new to bank tool. And we are seeing early signs of that on the franchise. The second really is for a certain set of customers who otherwise probably would have just gone because of rate, particularly the more affluent type of customers, This is a good product to hold them back. And again, we are seeing a reasonable insight into that. So the combination of this does give you a far better control over your customers.
Perfect. Thank you for explaining in so much detail.
The next question is from the line of Param Subramanian from Nomura.
My question is on the cost of the term deposits. So you provide us the cost of savings accounts. Now if I try and improve from that the cost of term deposits, it seems to indicate that from the bottom of first quarter last year, it seems to be up about 200 basis points. So is that rough number correct? And does that mean that there is not much incremental repricing that is to happen on term deposit book? That's my first question.
No, I don't think it's as sharp as 200. If you look at last year to this year, it will be certainly lower than the 200 bps which you're talking about. We need to look at it on an average basis, not on a period-end basis.
Okay. Maybe I can connect with you offline on that. So any indications on where we are in terms of the incremental versus the stock of term deposits perhaps? The differential between what we have.
Yes. So lot of the term deposits which were taken earlier, our durations are not long. So a lot of them have got priced in in terms of their renewals. And as we go forward, some more will get priced in. But assuming the rates stay as they are, then maybe after a quarter or so, I guess most of that would have happened.
Okay. Okay. Another question perhaps on the operating expenses. So any color on how we see this shaping up over the next couple of years because we've actually seen the cost of assets increased quite substantially over the last couple of years. So when do we see this start moderating? That's it from me and congratulations on the quarter.
So on the cost, as I explained, this quarter, on the employee front, the delta looks higher because of the retiral cost. If I take that out, the employee cost delta between last year and this year is about just over 20%. This is including the increments and all which we have done at the beginning of the year. And again, the other things are we've been spending this quarter on promotion, particularly on the ActivMoney promotions. The technology cost has got elevated, and it will possibly remain there for a while. So a lot of attempt and a lot of plans which we have to bring down the cost to income and the cost of assets. But you will see that somewhere elevated for some time. But as you've seen from last year to this year, we're kind of getting some traction. And as we go forward, we would have a plan to get that down as we go forward.
[Operator Instructions] The next question is from the line of Pankaj Agarwal from Ambit Capital.
Sir, your attrition rate has gone up quite sharply over the last 2 years. What's causing this and how it's impacting your operations?
Yes. So, I'll take that question, Shanti here. So if you see the breakup of the attrition, and I just want to quote some numbers. At the senior management level, it's less than 10%. At the middle management level, it's less than 20%. It's only in the junior management, which is really at about 50%, which is what our disclosure is. And this is largely in sales, service and call center, some amount in collections. Now this has had several reasons. Firstly, I think this was the first full year of post-COVID where people have decided the calls as far as the careers are concerned, and we have some spillover of attrition this year. At the industry level, there's a strong demand supply gap, which continues, and that's something that continues. Despite that, we were able to fully resource our requirements despite the gap and the attrition. We are focusing on a number of areas to reduce the attrition. Sorry, another point. We also include probationary officers in the calculation, which is not really permanent employees, but we include them in the calculation for the purpose of attrition and a lot of them are reflecting only in the junior management. Working on a number of platforms and areas, including how to make ease of working, better engagement, training, benchmarking and technology, automation and how to make the life easier. So a number of initiatives are being worked on to see how we can control the attrition. So far, it's not really impacted in terms of our business. You can see that, but it's important that we work on this.
Okay. One related question. Is it the reason that employee cost is going up for all the banks? And can it put a special pressure on cost-specific pressures for the banking sector?
So I think if you look at it, I think from an employee cost perspective, Jaimin gave you the number. If you take out the retirement onetime cost, it's 20% Y-o-Y. And if you see banks across, that's a number that is more than in line with industry trends. I think more importantly, it's important from a longer-term productivity perspective to reduce the attrition. So I think that's where I would put the emphasis on. It's not necessarily costing us that much. yes, there is a cost, but I don't think that's a significant part of the cost.
The next question is from the line of Manish Shukla from Axis Capital.
First to reconfirm on credit cost. Was it said that now credit costs have normalized to 50 basis points and it is broadly expected to be in this range?
This is Paul here. What I would say is that, yes, the credit environment is getting more normal. So I would expect that going forward, the behavior in terms of fresh flows and all of that should be in similar terms as it is currently. The second thing one has to keep in mind is that credit costs to a certain extent are also influenced by mix. And as the mix of our unsecured portfolio goes up, you would find that the credit cost can pick up a little bit. The risk and return are therefore priced in as you think about unsecured. So one has to look at the overall credit cost in this context.
Sure. So now if we put the 3 together, margins normalizing to 5% plus levels, some normalization of credit costs moderating OpEx, broadly, how should we think in terms of ROEs, given where we are right now at 2.8% or somewhere around that, where does it bottom out?
Manish, 2.8% this quarter is also helped by some of the ones which we talked about, like the MTM gains, dividend comes in this quarter, doesn't happen every quarter. So we've been generally north of 2, 2.81, don't go with that number as a normal one.
At least, the number 2.8 to 2 is a very long range, right, so...
Yes, I said 2.81 don't go with that as a normalized number going forward.
The next question is from the line of Dhaval Gala from Aditya Birla Sun Life Asset Management.
A couple of questions. So I just wanted to know, you've been fairly having strong views and bullish commentary about Indian banking as well as the country's economy. Just wanted to understand how do you differentiate Kotak Bank's progress from here on, say, for next 3 to 5 years, what is the competitive advantage Kotak Bank would have and differentiation Kotak Bank would have versus the market?
Thank you for that question. I think we should get you for a strategy session, and we can take you through that. I think I just want to make a general point. I would like to believe at Kotak, we will take decisions which are medium term in nature. We are not colored necessarily that if we believe a decision is right, it will be taken from a point of view of what does it do for value addition over the medium term. And therefore, we will dare to be different. We will be dare to be bold, we will take calls, which may seem at the point of time we take the calls a little ahead of what has to be done. And I can give you a number of examples of that in our history, whether it's a distressed asset division, whether it's alternate asset business, whether it's international offshore fund management, whether it's a tractor finance business where we continue to have probably the largest market share in the tractor finance business, whether it's private banking, which is something which we really built as a bank because we thought it was a very significant opportunity going forward, whether it's our product excellence in our investment bank or institutional equities franchise, whether it is technology, we believe, going forward. If I have to say, where do I think we will focus on the difference. I think it will be product excellence, customer obsession and differentiated talent, including in the field of technology. And just so that I wanted to share, I don't want to get into numbers, but we think the future is going to be different from the past. We think a transformation is undergoing the financial services sector. We genuinely believe the future is neither physical, not even phygital. We think the future is at least digical, which is digital first, along with physical. AI and machine learning are going to question even that. So if you ask me a 3- to 5-year view, financial services landscape is going to be wholly different. And I share, as I've said, both excitement and paranoia when I look at 3 to 5 years ahead.
Sir, just would request, you made a very good presentation last year same time on your 811 update. Would like that maybe in the half year, if you could present something or you could [indiscernible] for everybody across all businesses.
What we currently are doing is we are doing a yearly update of the 811 and currently at present, I think that's the idea that we'll do a yearly update, which is a reasonably detailed update on what's happening there. We did that after our annual results in '22 and '23, and we'll do that again next year....
And you also got to keep in mind that we want to remain competitive in terms of our strategy, and you have to wait for it to unfold rather than sharing it upfront.
We have the next question from the line of Sameer Bhise from JM Financial.
Congrats on a strong quarter. Just wanted to hear how would the more time lines on the leadership transition move here on? And secondly, in terms of the next 3- to 5-year journey, do any inorganic opportunities fit into the picture? That's all from my side.
I just wanted to share that we are on track for our leadership transition. And at an appropriate time, we will share with all of you as we go forward. And on inorganic, we are always open. We have done inorganic in the past, and we will continue to do it if we believe that we are getting either product excellence or significant addition in customers or a differentiated strategy based on geography and markets or something which gives us a cutting-edge through technology. We are very open to all of those. But we need to make sure that we evaluate that very carefully and closely rather than rushing into a deal.
Thank you. Ladies and gentlemen, we will take that as a last question. I would now like to hand the conference over to Mr. Uday Kotak for closing comments. Over to you, sir.
I think I've shared my views at the beginning and also in the last couple of questions. I continue to be very optimistic about India's future, about the Indian financial services landscape and about Kotak. I do believe Kotak will be and continue to be a player, which will be differentiated in many areas, not for the sake of differentiation, but because we believe it adds value to our stakeholders. And I see actually Kotak having the ability and the resilience to change with the times as the times change. And particularly in the last 18 to 24 months, we have made a very strong beginning that, and I will assure you, we'll continue to nurture talent both in terms of attracting talent externally as well as internal talent, and we see a long-term huge roadway out in front of us to see this as a multiyear and hopefully, a multi-decade opportunity for growth. Thank you very much.
Thank you. On behalf of Kotak Mahindra Bank, that concludes this conference. Thank you for joining us. You may now disconnect your lines.