Kotak Mahindra Bank Ltd
NSE:KOTAKBANK
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Kotak Mahindra Bank Ltd
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Ladies and gentlemen, good day, and welcome to the Kotak Mahindra Bank's Q2 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, sir.
Good afternoon, friends. And first of all, I wish all of you a very happy Dhanteras and a wonderful Diwali. As we look at Kotak Mahindra Bank second quarter numbers, I would like to first start by saying that we're in one of the most amazingly benign credit cycles I have seen for a long time. And it is just truly amazing how the credit cycle is going, and I hope that this cycle continues as we go forward despite the increasing interest rate scenario as we move forward.
Talking specifically about Kotak Bank, you would have seen our credit slippages numbers as well as NPAs and credit costs are continuing to be extremely low. And we do believe, at least at this stage of the cycle, we're not seeing any potential stress coming on to the balance sheet. We are, of course, very well adequately covered and prudentially underwritten in terms of the quality of our book.
On the credit growth, we're seeing both in the marketplace and at the bank a significant growth in the commercial vehicles, in the tractors, in unsecured retail, microfinance, MSME, and even the home loan product, a continuing growth in that cycle, which is enabling us to continue with a loan growth, which is quite solid.
We're also seeing an improvement in our mix on unsecured retail, which includes all of unsecured retail plus microfinance, which has now moved to about 8.5% of our total lending book. You may recollect at the last call, I had mentioned we look -- we are looking at this number in due course going into mid-teens as -- around the mid-teens numbers which is where we are comfortable going to.
Another very interesting aspect is that as interest rates move up, the nature of the book, which we have is about 70% of the book is a floating rate book and about 10% -- and out of the balance 30%, about 10% of the book is less than 1 year. The investment book, which is our government securities and bond book, has a duration of about 1 year, and therefore, much less exposed to pricing and MTM risks as we go forward, though we carry at about 64% of our book, which is mark-to-market book and HFT book is around 35% of our -- HTM book, sorry, HTM book, which is about 35% of our total investment book.
On the deposit side, we've had the historical advantage of a high CASA ratio, which as you know about a year ago was around the 60% mark. And as the interest rates have tightened, we have seen some bleed particularly in the savings account book mainly on account of our high net worth and affluent customer base, many of whom have moved their monies out of the savings deposit rate to liquid and fixed income instruments, which are offering short-term higher rates. We believe this bleed was inevitable because of the nature of the high-net-worth customer who has now started getting much higher returns at the short end.
At the same time, we are very closely monitoring and measuring our granular SA book, particularly SA balances up to INR 10 lakhs, and which is showing a continuing growth through this period. Our term deposits, which is other than CA and SA, has grown pretty well. And our overall non-CA and SA deposits now are growing at about 20% per annum.
On the current account side, again, our granular growth is quite good. We have grown about 13% Y-o-Y despite the fact that some of the balances in the custody business have dropped on account of reduction of floats led by foreign portfolio investors in their custody accounts. So CA story is still reasonable. On the SA story, the higher-net-worth customers have withdrawn some of the monies for significantly higher rates compared to the savings account, but the granular SA growth, up to INR 10 lakhs, continues to be pretty good.
On the deposit focus, as I mentioned, there is a very high focus as we go forward. And as you are aware, we have now got the government agency business. We were amongst -- we were amongst the later round of private sector banks, which got approval in this round compared to some of the other public sector and the private sector banks who have been in the agency business for a long time. We are seeing very good traction with our customers around the agency business payments and flows. We believe that, in turn, will lead to a granular growth in our CA and SA balances as the government business picks up. And we are looking forward to a very high focus on that in addition to the salaried customer in terms of the deposit strategy.
One of the other factors, if you look at with reference to many of our subsidiaries, they all continue to be very robust. Some of them have felt the pressure of the slowdown in the capital markets, which has impacted their earnings numbers relative to what they were in the same period last year, which was a bonanza time for capital markets businesses.
All in all, I think we are seeing a decent growth in profitability, a very, very strong and a robust balance sheet, high capital adequacy consolidated in excess of 23%, which also gives us room to be much bolder in terms of our strategy on the business -- different segments of our business as we go forward. I would here also like to mention that we are continuing to focus on new opportunities in some of these segments, including the alternate assets businesses which people plan to grow pretty rapidly as we go forward.
With that, I will now hand over to Jaimin Bhatt to take the -- take you through the numbers.
Thank you, Uday. Let me take the financial numbers for the consolidated first, which is for Q2 FY '23. We closed this quarter with a post-tax profit of INR 3,608 crores, which is compared to INR 2,989 crores in the same quarter last year. That's about -- if I look at the Q-o-Q basis, we have a growth of 31% not annualized as we are closed previous quarter at INR 2,755 crores. Our customer assets have at the consolidated level up 24% at INR 3,57,000 crores. At the consol level, our ROA at 2.61% as against 2.36% which was for the year ago, and ROE at the consolidated level at 14.1% and for the half year at 12.7%. The bank contributed 72% of our overall profits for this quarter at INR 2,581 crores.
Kotak Prime brought in a profit of INR 222 crores as against INR 240 crores last year and INR 157 crores in the previous quarter, whereas the other NBFC Kotak investments brought in INR 78 crores post-taxes against INR 89 crores. For quarter 2 last year, both the NBFCs had some treasury gains in quarter 2, whereas for KMP in the previous quarter, which is Q1 of this year, they had taken a onetime return on accounting change of pretax INR 111 crores.
Our microfinance business correspondent entity, which is BSS, clocked a post-tax profit of INR 70 crores this quarter versus INR 56 crores in the immediately preceding quarter and INR 8 crores in Q2 last year. The overall vending-related entities, therefore, brought in about INR 2,958 crores of the post-tax profit, which is 25% growth over the same period last year.
As Uday mentioned, we had a subdued capital market this time, and the broking and the investment banking subsidiaries, therefore, had dropped in profits, INR 246 crores this quarter as against INR 301 crores last year's Q2. Kotak Securities, though, increased its market share, both in the overall market to 5.1% and 11.2% in the cash market. The life insurance entity at the shareholders level improved its post-tax profit from INR 155 crores last year Q2 to INR 270 crores this quarter, whereas the domestic mutual fund entities brought in INR 106 crores, which is about the same level as last year.
Overall, capital and reserves at INR 1,03,000 crores, whereas our capital adequacy, both continue to be healthy at both the capital adequacy and the CET1 levels. Capital at the bank at INR 72,000 crores, and both the NBFCs continue to have capital adequacy in excess of 30%. Kotak Securities and the life insurance company, again, having healthy capital, the life insurance company with a solvency of 2.79%.
The bank's standalone profits, as I mentioned, INR 2,581 crores, 27% higher than same period last year. If I compare to the same -- to the immediately preceding quarter, that's a 25% growth, which is not annualized, thanks largely to the MTM hit which we had taken in the quarter 1. The NII growth for the bank is at 27% for the quarter and 9% on a Y-o-Y basis. We've seen the advances book at the bank grow 25% Y-o-Y, and we closed at INR 2,94,000 crores. Along with the credit substitutes, this would get to INR 3,21,000 crores.
The retail unsecured book, as Uday mentioned, we are now at 8.7% of the total advances. We've seen the NIM clocking to 5.17% this quarter as against 4.5% a year ago. And as Uday mentioned, 69% of our loans are on floating rates. Fees and services, we saw a growth of 24% on a Y-o-Y basis. While the syndication income saw a small drop, the general banking fees grew 37% on a Y-o-Y basis. As I indicated in Q1, we have taken a hit of INR 857 crores on account of MTM hits. For Q2, this is a much smaller number at INR 63 crores. And our HTM book continues to be at a low of 36% of our total investment book. Our modified duration also continues to be low at 1.05 years.
Q1 we had some negative cost, which is a write-back of cost on our retiral [ thing ], thanks, to our rising interest rates. Things have now normalized, and we've seen -- also seen a very sharp rise in DA in this quarter. Resultantly on a Q-o-Q basis, we see a rise in the employee cost. Nonemployee costs, again, we've seen a growth as we talked in the previous quarters as we push for growth, both on the asset side and the liability side.
We closed this quarter with a total customer base of 36.6 million. At operating profit level, we were therefore 14% higher than the same period last year and 28% higher than the immediately preceding quarter. We continue to look at COVID and restructuring provisions on the same principles as we'd done earlier. And we've seen, therefore, a small release of our COVID provision for this quarter.
Our credit cost this quarter at 26 bps, which includes a provisioning on account of standard assets -- as the book size has gone up. GNPA continues to be at lower levels. Total absolute number at INR 6,200 crores compared to INR 7,600 crores, which we had a year ago. And the GNPA percentage at 2.08% as against 3.19% a year ago. With our PCR now of 74%, our NNPA at 0.55% as against 1.1% last year. Slippages again have been pretty low at INR 983 crores, which includes about INR 330 crores, which actually got upgraded during the same quarter.
Our restructured advances, either under COVID or MSME, together account for about 0.34% of our advances book. And our SMA2, which is for exposures over INR 5 crores, continuing to be low at INR 119 crores. CASA at 56% and capital adequacy, which including the profits for the half year at 22.6%, and the CET1 itself at 21.5% at the bank level.
So that's broadly what we did at the bank. I would request Manian to take you through the Kotak Bank numbers.
Hi, everyone. Good afternoon. Let me take you through the Wholesale Banking business. As we usually see, we'll see it in 2 parts. Overall, in the SME segment, the growth remained robust, Y-o-Y 23% and Q-o-Q even better at 9%. We continue to focus on this segment as a growth area. We've been very successful with acquiring new-to-bank customers in this area and the growth in the NTB is even faster than what the book appears to be.
We are also seeing good demand here for capacity creation in the form of term loans. But, of course, these get drawn over a period of time. We've also expanded our footprint in this segment by adding 7 new locations in the last half year, and we'll continue doing that and go to a few more Tier 2 locations, and we are seeing good demand in these locations.
On the corporate book itself, while of course, advances look close to flat, as we usually do, we need to see that in conjunction with credit substitutes. We have a fair amount of irrationality in pricing here in this segment, and we remain choosy. We continue to optimize our PSL cost and ROE by suitable mix of credit substitutes as well as loans, and also rediscounting bills where necessary. We also were, of course, not taking on some of the mispriced assets on our balance sheet.
We continue to build our franchise here and believe that we have the right access and good visibility of all transactions that happen, and we are able to choose what we think suits our risk-return matrices. In the large conglomerate segment, where the price competition is even higher. The redeeming feature is that they are better rated, and we are able to substitute loans through credit substitutes. We are seeing opportunities to grow in the mid-corporate segment, and that -- where we can manage our profitability and risk much better, and we intend to focus on that segment.
The CRE part of the business has also remained stable. Of course, the residential demand, as you all know, has been extremely robust. But what that results in is a significant prepayment of loans -- of the project loans that we have done, putting pressure on the growth of the book. On the commercial side of real estate, I think the LRD pricing remains irrational, and we have relatively stayed out of this market. Overall, our philosophy of making sure that we earn the right risk-adjusted return remains.
Our DCM fees have moderated a bit this year, but all other fees continue to grow at a robust pace. Our portfolio quality has held up quite well. SMAs as well as NPAs remain low. The ECLGS part of the portfolio also remains as robust as the rest of the portfolio. Our digital and tech initiatives continue to gain momentum. We have upgraded our technical architecture and stack on the [ trade at cash ] and other payment platforms. The integrated banking portal is gaining good traction and adoption by our customers. These help us in gaining better share of the transaction banking business.
As Uday briefly mentioned, our non-custody CA growth remains robust. On custody -- even in custody, our domestic custody seems to be growing reasonably. Of course, the FPI custody is where the negative growth is happening. Overall, we continue to gain momentum and traction in our transaction banking business. We have also launched an internal project to reengineer and optimize our processes to achieve better customer outcomes as well as productivity.
That's all I had to say on the corporate side. Can I hand it over to Shanti to take the commercial bank.
Thank you, Manian. The commercial vehicle industry has seen strong demand in Q2. Goods freight demand was strong and better availability of return loads led to improved operator economics. The bus segment has also bounced back and is doing well across all verticals.
For Kotak, the business has seen strong growth in disbursements, and we grew our SOH 26% Y-o-Y, helping us improve our market share across all segments of commercial vehicles. We will look to build our book with a focus on risk-adjusted returns. Collection efficiency continued to see improved levels for this segment.
Construction equipment, after a muted July and August, there was a sharp uptick in September for the construction equipment industry. Demand for road equipment has been a laggard while all other segments showed an uptick. Customers have reported better utilization of their equipment and better cash flow. We saw good disbursements in the business and our SOH improved 24% Y-o-Y, and we will focus to grow our market share and geographical presence in this segment. Collections again have remained very stable during this period.
Tractor finance. The tractor industry has seen an uptick in demand owing to better cash flows of last harvest and pickup of commercial deployment. Also, customers in this segment continues to receive good government support. We have grown our disbursement strongly across both new and used tractor financing and improved our market share in these segments. Given the good monsoon, robust cash flows, and outlook for the industry continues to look good, we continue to remain focused on rural customers in the pharma segment in particular with a focus to deepen our distribution and improve our market share. Collection efficiencies have improved and are better than pre-pandemic levels. Our SOH has grown 24%.
Microfinance. Our Microfinance business continued its growth momentum in Q2. We have almost doubled our portfolio year-on-year. The collection efficiencies in this business climbed to reach the pre-pandemic levels, indicating the ability of microfinance customers to service their obligations. The focus of this business will continue to be in rural and semiurban markets and primarily borrowers in the agri, allied agri, and microbusiness segments. We will continue our focus on our high-growth strategy in this segment.
Agri SME. In the food and agro processing space, commodity prices had peaked in Q1, due to which demand at that time was good. With a little -- with the drop in the commodity prices, we have seen a little reduction in the working capital in the commodity space. The cash flow of the customers, however, is quite comfortable, and the CapEx investments in this segment are seeing an uptick, primarily in the processing capacity and for augmenting the agri infrastructure, which is warehouse, cold storage, supply chain, etc. We continue to grow at a healthy pace in this business, including acquisition of NTB customers. With good monsoons, Kharif arrival is also expected to be good. Hence, we expect demand for credit also to remain strong in this business, and we will continue to deepen and widen distribution and grow in this space.
I now request Virat to take you through the consumer bank business highlights.
Thanks, Shanti. I will start with consumer assets. We continued our robust growth trajectory in consumer assets lending in this quarter clocking Y-o-Y growth of about 39%. This has helped us to gain market share in a couple of our product lines. In spite of rising interest rates and thereby EMI, demand for home loan is still holding. Even the demand for loan against property was showing positive signs. Our market business lending grew by about 29% on a Y-o-Y basis.
We had yet another good quarter on credit cards with an acquisition at over 7.25 lakh cards in the quarter. Spends using Kotak cards saw a robust growth this quarter showing 93% growth on Y-o-Y basis. Bulk of the sourcing continues to be from existing bank customers. Our co-brand partnership with PVR and Indigo cards are also yielding good volumes. This quarter we also went live with our assisted digital journey for new-to-bank customers enabled with soft decision upfront coupled with biometric KYC. Overall credit card advances grew by about 60% on Y-o-Y basis.
Demand for unsecured retail loans, that is personal loans and consumer finance, continued to be vibrant, and we grew our book by about 61% on Y-o-Y basis. We have scaled up our customer acquisition in both the traditional and data-led digital space in this business. Consumption finance or EMI business is a growing space for us, and we did 6 lakh units plus last quarter. As you know, this business has presence at retail outlets and on online stores. These numbers are over and above our EMI business in credit cards.
Now we'll move to business banking assets. We witnessed an increase in credit demand aided by better utilization and increase in CapEx demand from select pockets across retail business banking segment. We continue to grow and gain market share in MSME space by expanding distribution footprint, widening distribution channels, and technology enablement with ultimate aim of being holistic banker to this segment of customers. Overall, collections is well in control with new apparent deviation from the past, and we continue to seek our risk-weighted returns across customer segments.
Now we'll go to liabilities. The upward revision of the interest rate cycle during the first half of the current financial year have rendered attractiveness to the otherwise conservative investment avenues like term deposit and liquid funds for HNI customers. As the gap between the interest rate on SA and returns on liquid funds widen, some bulk SA deposits have moved to liquid funds. However, bank has observed good growth in the granular savings deposit book, which denotes the core strength of a savings franchise. The existing granular savings book, which is below INR 10 lakh has shown a healthy growth contributed by deeper customer engagement efforts and enhanced conversion quality via delivery of right-fit solutions. With enhanced focus on salaried segment, we are hopeful to continue to build our granular SA book even stronger.
We have also seen good traction in our agency business and a lot of retail customers have started using our platform to make customs duty, GST, and taxes. This will certainly help us build flows and balances in our CASA accounts. Government business is also a key focus area for us. During this quarter, we launched a couple of savings products aimed at retail customers, which encourages them to use Kotak accounts more frequently.
As we aligned the rates on the term deposits to market rates, we were successful in locking the outflows from the savings account deposit for a longer-duration term deposit. Retail term deposit growth trajectory changed to show a growth of around 16% on a Y-o-Y basis. Continuing with our focus on granular buildup of low-cost and stable deposits, we launched a new offering for our retail merchant segment called Merchant One account, which aims at digitizing merchants' business and has payment collection solutions bundled with the current account. The initial response to this offering has been extremely encouraging. We also launched a new pay by SMS or link facility for merchants who are part of Kotak Biz ecosystem. The new features allows merchants an additional mode of payment collection through a link sent on SMS to their customers.
I will now hand it over to Dipak for digital.
Thanks, Virat. On the technology side, you would have heard that Milind Nagnur has joined us as our CTO. Milind comes with a very strong technology background, coupled with global banking experience.
On the technology side, the key focus areas which we've outlined in the near term really are: a, building resiliency, as the customer base grows and the technology pieces become more complex, it is extremely important to build resiliency. What we are finding really is ensuring that your systems and technology, particularly the customer-facing systems are focused, it is very important for them to be resilient to attract customer and customer journeys really.
The second piece on the technology side which we are focusing on is creating scale and capacity for meeting future growth. Some of the areas, particularly on the payment side, which is really on the UPI piece, you are seeing growth multiple times within a quarter itself, and it's extremely important to build scale and capacity in these areas. And similarly transitioning to the cloud is a key focus area for us. Over the next 6 to 12 months, we expect a large part of our technology systems to move to the cloud, except probably the core banking piece really.
And finally, on the technology side, we want to significantly enhance all our customer journeys, whether it is acquisition journeys, it is do-it-yourself or assisted journeys, and all customer engagements. And a lot of the activity which you see really, what we've been building and we propose to build are essentially to enhance all of these do-it-yourself journeys.
On the digital channel, a lot of effort has really gone into ensuring that the UPI-related pieces are stable and meet the increasing requirement of customers on that front. Our mobile banking app still has a very healthy rating on the iOS side, probably amongst the best in the industry, and a reasonable rating also on the Android side. On the merchant and the corporate side, you heard what Virat mentioned about building digital update, and Manian touched upon the transaction banking technology, which we are putting in place through [ Fin ], we've seen very significant transaction throughputs on both these counts really.
Some of the digital highlights are mentioned out there. What we're really finding is close to 98% of our SA transaction volumes were in digital and close to about 95% of our accounts are now opened entirely digital. We've been investing and participating actively on the India stack and various components of that. We've been the first bank to go live on OCEN account aggregator is now pretty much a [ practice ] proposition. We've recently experimented with and have been the first in the industry to launch face authentication. This is a new piece which offers an additional mode of authentication to customers.
That's all on the technology side. I'll now move on to Kotak Prime. Just a quick update on it. What we are finding really is the car finance market is growing pretty comfortably, close to 18%, 20% growth on the volume side. But interestingly, the value growth has been significantly higher. And one expects the value growth to be close to about 25% during the course of this year.
Some interesting trends what we are finding really is while the demand for the lower-end cars is stable, we find a lot of dealer inventory building up at the lower end. But the mid- and upper-end cars are moving at a pretty healthy pace. In fact, the midrange cars, which is really the INR 10 lakh, INR 12 lakh range now seems to have become the choice of a first-time car buyer now really. And that's an interesting change, which we really are seeing.
On KMP's performance, we now have a customer asset base of over INR 20,000 crores. Jaimin talked about our profit after tax being INR 222 crores in this quarter, which is up significantly from the previous quarter, primarily because last quarter, we made a significant accounting policy change on brokerage.
That's all from my side.
I'll hand it over to Gaurang to take you through the insurance.
Thanks, Dipak, and good afternoon. For the quarter 2, we posted profit after-tax of INR 270 crores, which showed growth of 74% over last year and on Q-on-Q at 9%. Gross written premium for the quarter was 11.5% Y-o-Y, reaching INR 3,250 crores premium. Individual new business APE for quarter 2 grew by 13.7%, where private industry growth was 7%. So I think more or less, the premiums are getting more normalized as the base effect is weaning.
The good story was on protection. The protection premium was 54.1% up compared to the previous year. And this is also a combination of more lives covered as well as higher rate of protection premium which is getting charged, which also contributes to a certain extent to the increased profitability. The AUM showed the growth of 13.8% to reaching INR 53,785 crores. The death claims also have now normalized and to pre-COVID levels. So in Q2 FY 3 (sic) [ FY '23 ], death claims, net of reinsurance, was INR 275 crores, exactly half than what we posted in the previous year. Our net worth has now reached INR 4,792 crores, giving us a very strong solvency ratio of 2.79%.
Now I'll hand it over to Jaideep to take the presentation forward.
Thank you, Gaurang. The total revenue for Kotak Securities for the quarter ending September '22 was INR 631 crores. This is comparable to INR 613 crores in the corresponding quarter last year, and the number for the previous quarter was INR 616 crores. This resulted in a PBT for this quarter at INR 298 crores compared to INR 325 crores in the corresponding quarter last year and INR 291 crores for the previous quarter. The PAT for Q2 of '23 is INR 224 crores compared to INR 243 crores for Q2 of '22 and INR 219 crores for the quarter ending 30th June '22.
The cash market share for Kotak Securities has been seeing a steady increase and has reached 11.2% versus 11% in the corresponding quarter last year and 10.4% in the previous quarter. The option volumes have been driving the market volume significantly. The ADV for the option volume alone has reached INR 64.7 lakh crores, of which -- and this was -- the total volume is INR 64.74 lakh crores, of which option is INR 63.47 lakh crores. This is compared to INR 30.4 lakh crores in the same period last year, which is more than a 2x increase just in options alone.
There have been significant upticks in our digital journey. We launched our state-of-the-art trading platform, Kotak Neo sometime in the last quarter. And in a short span of time, a large percentage of daily volumes are happening there. The plan is to shift majority of our trading volumes or all our trading volumes on to Neo in the next 9 to 12 months. We launched a smart Payoff Analyzer for option traders, which has helped them significantly, and we've seen a lot of customers move because of this Payoff Analyzer, which we launched in the last quarter. The sheer volume increase in mobile and web has seen a crazy increase in the last year or so.
With this, I'll hand over to Nilesh for the asset management.
Thanks, Jaideep. Good evening, friends. Let me take you through our asset management business. Our total average AUM grew 4% year-on-year to INR 2.84 trillion. Our equity average AUM, despite market correction, grew 6% to INR 1.52 trillion. Our net equity market share is at 6.31%. Our SIP inflows for September '22 grew 26% year-on-year to INR 7.8 billion. Our retail AUM stands at 53%. 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 commodities.
Kotak Business Cycle Fund collected INR 2,266 crores during the NFO launch. Our profit after tax was flat at INR 106 crores for September '22 quarter. Our total AUM across mutual funds, PMS, offshore, insurance and alternate assets grew 2% year-on-year to INR 3.90 trillion. Our relationship value across wealth, priority, and investment advisory grew 20% to INR 5.54 trillion.
I will hand it over to Jaimin.
Thank you, Nilesh. Can we take the Q&A session, please?
[Operator Instructions] The first question is from the line of Mahrukh Adajania from Nuvama. [Operator Instructions] As there is no response from the current participant, we move to the next question from the line of Manish Shukla from Axis Capital.
First question is, for the last couple of quarters, again, we've seen credit substitutes start growing. And today, it's almost more than 9% of loans. I just wanted to get the thought process around the same given the rising rate environment. And what would be the nature of these credit substitutes in terms of duration, et cetera?
Yes, I'll take that. The credit substitutes that we have built through this year are all relatively short term, less than 1 year kind of tenure instruments. And like I said, it helps us to optimize our returns in terms of PSL costs as well as risk and pricing. So in larger rated -- better-rated corporates with lower tenure, we prefer to do a credit substitute than loans.
And if I may add to what Manian said, just on that point, we've got to keep in mind that where we have done credit substitutes for a longer period, we have also done floating-rate credit substitutes. So we are, therefore, not exposed to interest rate risk. And separately, we have disclosed our total duration of our investment book, which includes credit substitutes as about 1.05 years. For the total duration in that includes the credit substitutes duration.
Okay. That's clear. Second, Jaimin, if you could help with TDs less than INR 2 crores, which is how RBI defines retail TD, what would be the proportion of that?
Sorry, I didn't get you.
Retail TDs less than INR 2 crores, what would be their proportion?
Yes, it would be about 60-odd percent of our TDs -- of our overall TDs.
And really, the last question is that margins obviously are at very high levels now. How do we think about margin trajectory from here on? Because given the nature of the book considering that 80% is either floating or less than 1 year, should we expect more room for margin expansion from your end?
It's always -- you've got to keep in mind that we are a very disciplined bank, and we are focused on risk-adjusted returns. At the same time, we are focused on growth. And despite some denudation on our SA because of the high-net-worth individuals moving their SA, we are still at a healthy ratio of 56%. And in the absence of any decision to change rates, which obviously is always an open-ended question with reference to savings deposits. But in the absence of that change, you've got to keep in mind that as of 30th September, 56% of our book is fixed rate or quasi fixed rate because CA at zero is a fixed rate book, and SA at the current rates is a quasi-fixed rate book.
So what it does in terms of margins, because we have -- as we've also disclosed fully our repo rate or external benchmark rate lending book, our MCLR lending book, our short-term book, we've given you all the data. As an analyst, I'm sure you can do your homework and figure out what it means. It would be difficult for us, at this stage, to conclusively say from a NIM rate of around 5.2% where we end. But keep in mind, I have also mentioned that our unsecured retail, which is a high-yield book, which is currently about 8.7% and is growing faster than the rest of the book, you can put that also in the equation.
But having said all that, I want to bring one caveat right at the top. We are probably in one of the most important Cinderella times of the credit cycle. Now you and I can debate whether that Cinderella time is 1 p.m. in the afternoon, 7:00 p.m. in the evening, 9:00 p.m. We can figure out the time of the day where it is Cinderella time, and then take a call how long this positive credit cycle remains, which is very closely linked to the terminal rates of interest and the external account situation of the country. Therefore, we will be guided by a lot of factors as we go about our underwriting business with a singular focus on risk-adjusted results.
And at the same time, I think you can see it from our operating expenditure. We are investing, and Dipak mentioned about it, continuing to invest heavily in technology and also growth of both the asset and liability business. So whatever it costs, we will take those costs even as the rate cycle -- interest rate cycle and the margin cycle looks, at this stage, pretty benign.
We'll move to the next question from the line of Saurabh from JPMorgan.
Sir, just 2 questions. One is, what will be the LCR ratio for the quarter?
Saurabh, if you can speak closer to the device, please. Your audio is not clearly audible.
Yes. So the first is, sir, what will be the LCR for the quarter?
The LCR is 119.1%.
[indiscernible]. Okay. The second, sir, you mentioned about this percentage of unsecured. Is there a target you have in mind? And if you can also expand on what's happening with this microfinance growing very quickly? Is this now focused business...
First of all, I want to clarify very categorically that when we give you unsecured retail number of 8.7% that includes all unsecured retail, including microfinance. So microfinance is part of our 8.7% unsecured retail. We have given an indication at the last quarter that our current comfort, based on the cycle, is to move to around mid-teens. So we are currently at 8.7%. So we still see reasonable room for growth even as the overall book grows in terms of the mix. And we will take a view based either on the cycle or once we reach closer to the mid-teens number, what percentage of the mix we want as unsecured retail, including microfinance.
Okay. And fair to say microfinance is now a focus area because the way you're growing it [indiscernible]?
It's a part of our overall mix. We are very clear that whether it is a sector, segment, customer, security, one of the most important factors in our planning for risk-adjusted return is keeping an eye on concentration risk.
Understood, sir. And sir, last question, this NIM improvement, which you've seen quarter-on-quarter, is it possible to break down how much would have happened due to back book repricing and how much would be mix related?
NIM improvement is, as Uday explained earlier, on the back of repo, the mix change which is also happening on account of unsecured going up and it's a mix of all those things.
But would it be possible to break down what would be due to the back book and how much would be due to mix?
No, not exactly.
It's not easy, Saurabh, but the mix impact at this stage is still low.
Because on the unsecured side, the absolute increases are still small.
So Saurabh, the impact of unsecured retail is still absolute size of the book is 8.7% on the [ stock here ].
The next question is from the line of Rahul Jain from Goldman Sachs.
Just a couple of questions. First, just talking about deposit growth, you started raising rates from last quarter. Perhaps a bit too early to see the momentum building up. But when should we start seeing the momentum building up across different pieces of granular deposits? If you can just throw some light on that.
Rahul, first of all, I have very high focus on granular deposits. In the early part of the call, we mentioned about on savings, we've lost some money in the affluent and the high-net-worth segment, particularly some of that moved to the liquid funds, which offered -- which now offer close to 6% -- 5.75% to 6%. Therefore, high-net-worth individuals are more sensitive to it. But our core transaction customer base and balances below INR 10 lakhs have seen a healthy growth. And I will ask my colleague, Virat, who spoke about it and who heads the consumer bank, to share how he sees that grow. Virat?
Yes. Look, in terms of growing of the granular book, I think we have couple of plans in place. First, how do we make the customer engagement easy? And as we engage with the customers, we expect the book to grow. That is one part of it. The second thing is now we are trying to use the digital route to acquire customers, and that will help us to acquire more customers in that sense.
The third one, as I had mentioned earlier, is the salaried customer base, and that's a learning from this COVID era that this is -- the salaried customer book is usually a steady book. And hence, we will go a little more focus on that to really build the salaried book. Obviously, some help from the flows happening because of we becoming an agency bank and that will have a rub-off on building up the balances within the retail customers. So these are a couple of things that we are doing just now, which will help us to build the granular book.
Having said that, Rahul, a bulk of our loss in SA, as I mentioned, is on what I call as high-net-worth lumpy SA balances, which, obviously, when we were running, as I mentioned, at a 60% plus CASA, that was a place where we would obviously be vulnerable in a sharp interest rate increase cycle. We think a lot of that lumpy money has moved in the last few months as interest rates have gone up. After that, our CASA ratio is 56%. We believe that there's a continuing growth in the granular book in SA. Our TD growth -- sorry, our overall non-CA and non-SA deposit growth is 20%, as 60-plus percent of our term -- 67% of our term deposits is deposits below INR 2 crores.
So between granular SA, term deposits below INR 2 crores, focusing on customer segments which are around the salaried customer, greater focus on government accounts, which I think gets an even bigger boost post agency business [ approvals ]. And the agency business, we actually started, for example, the tax collections on income tax only in September. So we are still in very early days of agency business. Some of the larger peers have been in this business for 15, 20 years or more. And therefore, we are in still very early days of these engagements. And therefore, our high focus is on granular growth. Some of the lumpy deposits, and when I say lumpy, I'm talking about deposits in the INR 5 crores-plus category, which used to keep a lot of money in their savings accounts with us, thanks to a customer-focused wealth management division, a lot of that has also moved into liquid funds.
And is that phenomenon by and large over when you see the behavior of these customers, or are we expecting some more?
We think a lot of the high-net-worth money -- they don't wait, Rahul, you know that. If somebody has got INR 25 crores or INR 50 crores with us and is earning 4% in his savings account, and when you have a pretty good private banking business, the relationship managers would do what is right in the interest of the customers and the liquid funds start getting 5.5% to 6%, you know where the money goes.
Yes, fair. That was very useful. Just moving on to the cost part. So I think part of the increase in employee expenses, as Jaimin explained, was because of DA. But even otherwise also it appears quite chunky and even the nonemployee expenses. I know I think it would be a fair strategy for you to perhaps deploy some of these gains in capacity building. But if you just look at the branch increases, that's again pretty less. And I would -- I guess your argument would be the digital element growing. So can you just help us understand where you're deploying these resources and branches which, of course, are becoming, again, very critical focus for some of the larger peer banks. How do you approach that in the coming quarters?
Rahul, the highest winner of incremental growth is Mr. Dipak Gupta who is focused on the technology and digital function. So he's taking the highest percentage growth between digital and technology costs. And we are really -- as you know, we've added the new Chief Technology Officer. We have added a new Chief of Customer Experience. So we are fundamentally and structurally changing how a bank is thinking on the technology front to a transformative mode. And maybe, Dipak, you want to talk a little bit on the whole technology transformation.
And on the branch, we will continue to steadily add branches. We believe branches still continue to be important. Our view, however, is that the density requirements of branches compared to the past may be less, therefore, branches are still needed. But instead of being at a distance of 100 meters from your home, I'm sure people can live with a branch which is 0.5 kilometer to 1 kilometer from the home. So that is a continued steady increase in branches, not dramatic, more focused, also more focused on the current account customers because interestingly, we find the savings account customers are moving much more digitally compared to the current account customers. And therefore, technology is the place where we are putting the money. Dipak Gupta, please.
So Rahul, since Uday has talked about all the costs, all I can tell you is the mobile today has become the largest branch. So whether we add physical branch infrastructure or no, the mobile and to some extent, the [ net ] do take away a large part of the technology costs really. So a large number of projects and investments going into that, like I explained, significant investments in do-it-yourself journeys and assisted journeys. But that's one part of the cost on the technology side, which you see out there.
The other significant delta on the cost really is 2 subparts: one is, if you see all the retail asset pieces, all of them have grown at a pretty healthy trot. There is a significant amount of upfront costs, which you take on account of acquisition; and then there are direct variable costs. For example, cards, you've seen a pretty healthy growth on the overall AUM on the cards. All of that requires you to keep spending continuously. So those are direct variable costs of the growth in the AUM. And of course, all the asset pieces are, like I said, growing pretty well, and the acquisition costs on those just hit you upfront. So all those costs really are technically, if you see, more than anything else, onetime cost really. The regular costs, the increase really is on the employee side really, nowhere else.
In addition to the retail asset businesses, I just want to add, even 811, we have been growing aggressively month-on-month, and those acquisition costs are also upfront. So they all add to what Dipak talked about the customer acquisition costs and growth costs.
And Rahul, keep in mind, for the relative size of the branch network, we've added 21 lakh customers in this quarter.
Got it. I've got a couple of more questions, but I'll just keep the last question this one as, the competition -- given that everybody is benefiting on the margins, margins are increasing by 30, 40 basis points quarter-on-quarter. We have seen, let's say, PSUs taking a lead and passing that back to the customers. SBI launched that festival scheme of home loans. I think HDFC also responded. Maybe I think if the environment remains like this for banks, the competition might inch up. So when we are seeing growth all across the board in your loan portfolio, which are the segments that will grow faster in the next couple of quarters? Do you have anything in mind? Or you will be like wherever the demand comes from meeting your risk-return criteria, you will keep going? How are you thinking about the growth versus profitability?
See, broadly, it will be driven by the risk-return metrics, and that does not make us shy if we want to penetrate a particular segment to go aggressive on pricing, okay? But if you look at this quarter's Y-o-Y and Q-on-Q growth across different customer segments, you will get a pretty good idea where we are growing rapidly and pretty well. And some of the segments which were down for a long time has suddenly come alive, like the commercial vehicles segment. Commercial vehicles has had a very tough previous 2 years, but it has come back.
So we are very focused on where we think there's opportunity and where we think we can make reasonable margins. We are not necessarily focused on disproportionate margins. But if we get -- we are comfortable with our risk, we will go ahead and take the volume, as long as we believe our ability to fund appropriately, which is there very much, and we think, for us, getting money is less of an issue, more is about the price of money. Even now, if you look at our cost of funds calculations, we are extremely competitive on cost of funds. But we like to make sure that -- Rahul, you know this. As I said, this is a wonderful Cinderella time. Only point is we don't know what time of the day it is. So we are actually very conscious that this is still probably a little early in the Cinderella time, well before midnight. But we have to be ready that if and when that clock strikes, we are in a good shape to be able to handle that time.
Absolutely. That's the reason I asked that question. The moment it strikes the midnight, you should be able to exit or maybe slow down [indiscernible].
At this stage, I think we are not -- we don't think Cinderella time is like happening too soon. Now whether it is after a year or later, a lot of it depends also on what's happening around the world, and also the external position of India, which is currently robust, but this is a fast-changing world.
The next question is from the line of Prakhar Sharma from Jefferies.
Sir, just 2 questions. One on the treasury loss. Last quarter you had a very big loss, roughly INR 800 crores. And your duration is short generally about a year. So what we had seen generally is last quarter, we saw 150 basis point rise in yields and you had INR 800 crores of M-to-M loss. This quarter, 1-year bucket had still seen a 50 bps rise, but your yields have -- your MTM loss is less than 1/10 of what it was. So could you explain what's the reason for this?
Prakhar, the portfolio would have churned also. It's not that it was static for this period. So the rates have changed, but you've also taken the portfolio some of that out and bought some new also during that period.
Would it be fair to say that the fact that your deposit growth is lower and you sold investments to convert in practically...
No, no, they're 2 independent things. No, it is not linked. They're 2 independent things.
Got it. And just based on your past experiences...
One other thing, for some of the other portfolios which are there as part of this, where you have taken a mark-to-market negative, some of that actually turned out to be better than what was there. So you got a slight uptick on that.
Got it. And just based on your engagement with the customers, the HNI customers, who basically move money around. In times like this, is there a way you can convince them or whatever to hold more deposits? Or it's basically that you just hold tight during the cycle and things normalize, you get back?
I'll ask my Head of Private Banking, Oisharya Das, to explain how she is able to talk to her HNIs, but the first principle she always tells me is my customer comes first.
Yes. I think -- this is Oisharya. I think for all of us, it's always the customer first, and the right advise should go to the customer, so there should be no conflict there. And we've always given that. So if interest rates are...
Maybe a bit granular.
And we are looking at building the customer base granularly. And if interest rates are on the rise, we will move customer money there. So does that answer your question?
Yes.
The next question is from the line of Kunal Shah from ICICI Securities.
Congratulations for a great set of numbers, and wish you all a very happy Diwali. So firstly, again, with respect to deposits, and that's across the system, and that's lagging the credit growth. But when do we see actually the action on pricing? Because this has to come through from pricing as well, and I think people are still holding on to savings rate. Deposit rates have also not -- TD rates have also not gone up to that extent. So when do we see that there is a catch-up in pricing across the board?
Kunal, if you are not getting good pricing on term deposits from any bank, you're most welcome to speak to our bank. We have significantly moved our term deposit rates, and we would welcome you as a customer to keeping term deposits with us, in case the policy of your firm allows you to do it. So that is...
So overall thing is, in terms of maybe 60 or 70 odd bps, we are also at 6.2% currently, and further increase out there. But still when we look at kind of the margin expansion...
Kunal, you would be in the high-net-worth customer segment where we pay even higher. And you can see our rates on our website.
I'm just talking about the overall...
I think for high net worth we are paying you 6.6%, in case that would interest you a little more. And it's I think if I'm not mistaken, at 6.6%. So please look at it and you please look at the rates what they were 1 year ago. And on savings deposits, the last I saw was one of the banks actually dropped savings deposit rates for amounts below INR 10 crores.
Okay. No, so when do we see...
I can assure you one point, we are not dropping rates.
Okay. No, but catchup on the deposit growth, that will be required given this a momentum on the loan growth side and credit cycle is also there, in terms of demand is also very high. So finally, we have to say it from the system. So are we like just a few months away wherein we see this kind of a rate action across the board?
No, term deposits, we are very clear, we are pricing on market. And we, obviously, look at the marketplace, we look at the benchmarks, and which is why if you look at our term deposit growth, we're pretty healthy.
Sure. And secondly, in terms of...
Kunal, there is also a decision between incremental and stock, yes? What will impact your incremental and what will impact your stock? At this point of time, it looks comfortable with incremental. So why are you so keen that everyone increases the stock price really.
And Kunal, and also, it's not about benchmark or anything, but we are all aware about the fact that we, as of 30th September, sit on a CASA ratio, which is 56.1%.
And in terms of credit cycle, so when there is such a pass on which is happening in a few of these segments being EBLR linked, no doubt, we are coming from a very low level. But maybe within a very short span when the rates get passed on, do we see that eventually maybe when the portfolio seasons and a few quarters down the line, there could be credit cost issues in any of the pockets, and that's where you would want to strengthen the underwriting standards as well?
No. Kunal, underwriting standards are a constant thing which we evaluate at every stage. And we are very focused on risk-adjusted returns. And irrespective of how the finance office or analysts or investors like to look at, in my view, as a banker for all these years, the concept of operating profit and net profit are inconsistent. In a banking business, the credit cost is a core part of an operating profit. And anyone who looks at the 2 separately is making a cardinal error in looking at the banking business in 2 separate parts because it's one and the same thing. The difference between the 2 is only the time. Therefore, you may get a short-term boost to operating profit and credit costs hit you with a lag. And I would strongly recommend, please look at the 2 lines together when you're looking at a banking business. It is a core part of a banking business. And we look at the credit cost as an integral part of a decision-making upfront when we underwrite.
Sure. And one last question on distribution and syndication. So the debt seems to be still not overall within the fee income pie. That seems not to be growing and are lower than last year's run rate as well. So is it more to do with syndication or anything on the distribution side as well that there is some missing link here?
So there's some impact on both. Of course, you must remember that we had an extraordinary year on DCM last year, so it has moderated from there downwards. And obviously, given the flows into the equity side of the business, there is also an impact on the distribution side as well. It's a mix of both.
The next question is from the line of Seshadri Sen from Alchemy Capital.
Happy Diwali to Uday, the happy Diwali to everyone on the team. And congratulations on great results. I have 2 questions. One is on the margins. If the large part of this is coming from the front-ended asset repricing, what is the expected timeline before which the margins start to normalize? When you look at your book, how long do you think this is going to last where margins will be elevated because assets are repricing faster than deposits? And what are your plans to mitigate it? Loan mix change is one of them that you've been discussing. But is that going to take care of that normalization when it happens, I presume somewhere in FY '24?
I think, Seshadri, you got to keep in mind that there are 2 counterforces working. Of course, it depends on the situation in each bank, with the mix between CASA and the rest of the liability franchise. A lot of the book is getting priced of repo. So it's your judgment about where you think the repo rate peaks. And that would determine the one-side movement on the floating rate book as we go forward. Of course, it's linked to MCLR, which is not linked to repo, but a larger part of the book is linked to repo. So that is one side of the equation.
The second side of the equation is the rest of the non-CASA deposits, the costs are rising. So that will be an increased cost on the liability side and then, of course, how well banks can manage the absolute percentage level of CASA, okay? So the absolute percentage level of CASA out of the total deposits, the cost at which the balance deposits delta cost goes up versus on the asset side, the terminal rate at which repo rate slows down are the 3 most important variables in terms of how the pricing and the spreads will go.
And, of course, it's also linked to the mix of our book. In our case, we have seen a reasonably significantly faster growth in, across the board, our retail assets and even the commercial assets compared to the wholesale assets of our mix besides unsecured retail, even in the broader retail assets, both consumer and commercial have grown faster, which normally have higher yields compared to the wholesale assets. So it's a mix change beyond unsecured retail where, again, as you know, that we are increasing that as a percentage of the total mix. Our retail and commercial growth on the asset side continues to be robust. And the whole liability side equation I've discussed.
Understood. So another question is on the -- more addressed to Dipak, is on the tech spend, and it's hard to see that you are aggressively spending because the banks probably need to catch up a little bit. What are the key metrics that you are tracking in terms of return on that tech spend? And how have they been -- how have they delivered so far? What are the timelines by which you -- and as analysts -- you obviously will not disclose all the details. As analysts and investors, what is that we should track to figure out whether these tech spends are actually delivering results?
You see from a tech spend and return point of view, you must look at 2 separate pieces: 1 is where you can bring about reasonably direct relatedness between input and output, which is normally on, let's say, the journey part, which is really the engagement pieces. You invest in do-it-yourself journeys. You engage a lot more of the customers on your net and mobile. And you see a direct output really. So that's one piece.
The second piece really is more to do with the back end, which is resiliency, scale, where you build capacity and you build sustainability. Now that results in customer satisfaction over a period of time. And hence, to some extent, it becomes a non-compromisable irrespective of the cost, it becomes [ base tech ]. So at this stage if you see, the spend is happening on both sides: b, which gives you direct benefit; and b, which creates a strong foundation, which ensures that the customer stays with you or has reasonable reason to stay with you.
And for example, you want your systems up 99.99% of the time really. It's very difficult to say, hey, what did it result in terms of outcomes? You had far more satisfied customers. They've stayed with you. They did a lot more transactions. That's very difficult to quantify in terms of outcome. But when you spend on engagement, you have direct outcomes. So I think the 2 are measured differently, and we do have metrics more for the latter than the former piece really.
Ladies and gentlemen, due to time constraint, we take that as the last question. I now hand the conference over to Mr. Uday Kotak for closing comments. Over to you, sir.
Thank you very much. Wish you all a very happy Diwali, and let's watch the macro and micro as we go forward into the rest of this fiscal year. Thank you very much.
Thank you, sir. Ladies and gentlemen, on behalf of Kotak Mahindra Bank, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.