Kotak Mahindra Bank Ltd

NSE:KOTAKBANK

Earnings Call Analysis

Kotak Mahindra Bank Reports Solid Growth Amid Strategic Adjustments

In Q2 FY '25, Kotak Mahindra Bank posted a profit after tax of INR 5,044 crores, a 13% increase year-over-year. The bank saw a notable 16% rise in total deposits and an 18% growth in customer assets. Despite challenges in the unsecured retail segment due to a tech embargo and higher delinquencies, advances in secured lending remained strong, with a CASA ratio stabilizing at 43.6%. The bank anticipates further growth in H2, driven by improved rural income and government spending, alongside a focus on technological enhancements to improve customer experience.

Financial Performance Overview

For the second quarter of FY '25, Kotak Mahindra Bank reported a consolidated profit after tax (PAT) of INR 5,044 crores, reflecting a 13% increase year-on-year and a 14% increase quarter-on-quarter. This growth was primarily driven by strong performances in capital markets, asset management, and insurance segments, with year-on-year growth rates of 52%, 58%, and 50%, respectively. The bank's customer assets reached INR 450,000 crores, which indicates an 18% growth over the previous year.

Asset Quality and Challenges

The bank faced challenges in its unsecured retail business, notably in the credit card segment where stress levels have risen due to a tech embargo limiting new card acquisitions. The gross non-performing assets (NPA) ratio stood at 1.49%, while the net NPA was at 0.43%. Measures to improve asset quality include tightened credit underwriting and increased focus on collections. The management anticipates slippages particularly from older vintage credit card clients but expects recoveries in the rural and secured segments by the third and fourth quarters.

Growth in Deposits and CASA Ratio

Kotak Mahindra Bank saw a notable deposit growth of 16% year-on-year, with a CASA (Current Account Savings Account) ratio of 43.6%, solidifying its position as among the leaders in the industry. The growth in savings accounts spurred an overall improvement in profitability metrics despite a marginal increase in the cost of funds by 5 basis points quarter-on-quarter.

Strategic Initiatives

The bank is focusing on technology enhancements and improving customer experiences, which include the launch of a new customer-facing mobile app. From an inorganic growth perspective, the planned acquisition of a personal loan portfolio from Standard Chartered is also highlighted, contributing to the bank's strategy of expanding its affluent customer base.

Future Outlook and Guidance

On the margins front, the bank's net interest margin (NIM) fell to 4.91%, down 11 basis points during the quarter due to a shift towards lower-yielding secured assets. The management plans to manage yields proactively and expects margins to stabilize as unsecured retail lending resumes and as they optimize their asset mix. The anticipated impact from a recent savings account rate cut is expected to add roughly 4 basis points to the NIM.

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Kotak Mahindra Bank Q2 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ashok Vaswani, Managing Director and CEO of Kotak Mahindra Bank. Thank you, and over to you, sir.

[Ashok Vaswani, executive]

Thank you so much. Welcome, everybody, for our quarterly call. For the second quarter, let me cover kind of 4 points. The first point I'll kind of cover is financials, but at a very high level. I'll get Devang to do it in detail. Two, talk a little bit about the progress that we are making on the technology front. Three, a little bit about the personal loan portfolio that we've acquired or are going to acquire from Standard Chartered. And fourth, I know for a fact that you will have the recent draft RBI circular on your mind. So let's try and address that as well.

So starting with the financials. We ended Q2 with a group profit after tax of INR 5,044 crores, that's up 13% and year-on-year. I've always talked about Kotak being a financial conglomerate and a conglomerate compared it to a plane flying with multiple engines. And this quarter, if you see 3 of the 4 engines grew at over 50% year-on-year. Capital Markets at 52%, Asset Management at 58% and Insurance at 50%. The bank grew at a less -- at a less higher number. And the reason for that is for, number one, this was the first quarter where we saw the full impact of the embargo. But despite that -- despite that we grew deposits by 16% year-on-year and assets by 18% year-on-year. In our deposit growth of 16% year-on-year, our CASA ratio stabilized at 43.6%, which I think continues to be industry-leading. Now even though CASA ratio was 43.6% and customer deposits grew by 16%, our cost of funds went up by about 5 basis points quarter-on-quarter.

On the asset side, like I said, we grew our customer assets by 18%. This was largely in the wholesale bank and on the secured advances in the consumer bank. We had more muted growth in the commercial bank on the back of slow growth in the CV and tractor industries, that is more of an industry kind of trend. And what we are hoping is that this industry trend kind of changes and moves to the better for in Q3, Q4.

On the MFI side of the business, we restricted growth because as we called out about 2 quarters ago, we were seeing some strain, and we are being cautious of growing in the MFI space. We expect this trend to continue for the next quarter, maybe 2 quarters, and then it should get okay. It's obviously confined to certain states and some states are getting -- coming back quite nicely, while in some cases, the strain kind of continues.

On the unsecured retail business, Obviously, the tech embargo has had an effect, particularly on the credit card business. And as you can see, our total share of retail unsecured asset businesses has dipped a little bit to a shy over 11%. In the credit card business, we've also seen some level of credit stress due to the overleveraging of certain kind of customers. Our loss rates are pretty much in line with industry, though the percentages may look a little elevated. And the reason the percentage looks a little elevated is because our denominator is not growing as we are not issuing fresh credit cards.

Overall, our CD ratio continues to be in our acceptable range between 83% and 87% at 86.4%. So that's where I'll leave for the financials. I think a strong quarter of INR 5,000 crores in the quarter with 3 of the engines clocking at over 50% year-on-year kind of growth.

Let me move to technology. This quarter, again, incredible amount of progress, a lot of hard work, a lot of significant progress on the risk and resilience front. We continue to work under the advice and guidance of the RBI and make strong progress on the matters highlighted in the April order. We are also working very closely with GT Bharat, our external auditor, so that they can validate the work that we have done. But more importantly, while we've greatly improved our risk and resilience, we've also used this period to begin to improve the experience for our customers and our colleagues. This through the beta launch of a new customer-facing mobile app. And if you haven't tried it, I would urge you to try it. It's available on the App Store as well as on the Android Store, and on the automation of processes. This is quite a significant rewiring. And of course, there's more to come on both these fronts, but I'm very excited to share with you the progress that we will be making on these 2 fronts.

Finally, this quarter, we saw the RBI issue a draft circular on 4th of October, and obviously, we are looking at that circular in great detail and trying to understand the implications of that circular for our businesses. We have time until November 20th to go back to the RBI with our comments, which is, of course, something that we will do. And once we get the final circular, obviously, we will implement the final circular as required. Needless to say that, it's a matter of where we do business as opposed to whether we do any kind of business, so it can get kind of sorted out and we are working through those kind of provisions, needless to say also that we will continue to keep you posted on the progress that we've made. But at INR 740 book value per share that is a true clear indication of a strong, strong fortress company and a strong fortress balance sheet.

With that, let me hand over to Devang to take you through the details of the financials.

[Devang Gheewalla, executive]

Thank you, Ashok, and good evening friends. Let me just take you through the quarter 2 numbers, which we disclosed earlier today. We will start with the consolidated numbers first. We ended this quarter with a consolidated profit of INR 5,044 crores, which is about 13% Y-o-Y up and 14% higher on a Q-o-Q basis. And by equating Q-o-Q, obviously, we have excluded the profit from the Kotak General Insurance transaction, which we booked in the last quarter. Also, it is important to note that this profit does not include MTM gain post-tax of INR 1,363 crores, which according to the investment circular and our classification has been accounted directly in the network, and it has not gone through the P&L. So this is INR 1,363 crore is for the quarter, MTM gain, which has not gone through the P&L and into net worth.

With this profit, the consolidated net worth of the group now is INR 147,000 crores, with a book value of share INR 740 as mentioned by Ashok, which grew 22% Y-o-Y. Our consolidated customer assets is about INR 510,000 crores, which is 19% higher than the last year. Our capital adequacy at the group level is at 22.6%, of which CET itself is 21.7%. ROE at the consolidated level is 13.88% and ROA is at 2.53%. Would like to clarify, if we remove the impact of the increase in the results, as I explained, the consolidated ROE will improve to 14.28%. The share of subsidiaries in the group profit at the Q2 stood at 33% on back of capital market growth.

Let me start with individual entity with the bank first, which this quarter contributed 67% of the group profit. The bank ended the quarter with a PAT of INR 3,344 crores with Y-o-Y growth of 5%. Q1 profit of the bank included dividend income of INR 380 crores as explained on Page 8 of the investors presentation. At the bank's stand-alone level too, we have a capital adequacy of 22.6%, of which CET1 itself is 21.5%. And for the quarter, the bank clocked an ROA of 2.17%. It is worthwhile to note this is the first quarter with full impact of embargo, which was applicable towards end of April last quarter. Bank's customer assets grew by 18% to INR 450,000 crores Y-o-Y and 3% Q-o-Q basis. With secured customer and consumer banking SME segment contributing significantly to asset growth during the quarter 2.

Unsecured retail mix reduced to 11.3% due to the embargo on the credit card and lower disbursement in the microcredit business. The mixed change in the asset growth towards secure assets resulted in reduction in the yield on advances and consequently, reduction in NIM for the quarter by about 11 bps to 4.91%. Our CASA ratio now at 43.6% in fact, improved marginally on a Q-o-Q contributed by SA growth of 5%. Our average total deposits for the year grew by 16% with average TD sweep growing over 50%. Bank continues to maintain healthy CD ratio of 86.6%. Our fees and services at the bank grew 14% Y-o-Y in the current year. There was also an impact of slowdown due to the credit card business income not being accounted due to the embargo in the current quarter.

Operating costs are stable at 2.2 with Q-o-Q growth with reduction in acquisition costs for 811 products, but higher IT spend to meet the remedial measures relating to embargo. Overall P&L impact estimated due to IT embargo is in line with the initial estimate as we have given as per the earlier guidance. The gross NPA of the bank at 30th September is 1.49%, net NPA at 0.43% with a credit cost 65 bps annualized, increased largely due to losses in unsecured retail book.

Let me now just shift to the subsidiaries performance. Kotak Securities and Kotak AMC continues to perform well with growth in capital market, increasing contribution to our group profits. Kotak Securities recorded Y-o-Y 37% growth in profit to INR 444 crores with increase in market volume. Kotak AMC made a profit of INR 197 crores, up 60% compared to last year, with increase in average AUM in equity to over INR 300,000 crores Y-o-Y growth of 63%.

My colleague, Mr. [indiscernible] Shah will dwell into AMC performance during this call later. International subsidiaries also benefited from the growth in capital market and increased inflow contributing INR 76 crore profit as compared to INR 41 crores previous year, clocking a growth of 84% Y-o-Y. Kotak Mahindra Capital profit INR 90 crores for the quarter as against INR 27 crores last year on back of large IPO mandates. Kotak Prime customer assets grew to INR 37,000 crores with a Y-o-Y growth of 19% and PAT for the Q2 at INR 269 crores, clocking a growth of 29% Y-o-Y with some one-offs in quarter 2 performance.

BSS Microfinance business correspondent entity ended the quarter with a lower post-tax profit of INR 16 crores due to lower disbursements and increase in delinquencies in select states. BSS net worth is INR 1,076 crores, at 30th September 2024. Kotak Life ended the quarter with a PAT of INR 360 crores as against INR 247 crores same quarter last year, Y-o-Y growth at 46%, primarily due to higher investment income and realized equity gains. Kotak Life continues to maintain higher solvency ratio of 2.57x as against regulatory requirement of 1.5x.

With this, wishing you all the best wishes for the festivities ahead and look forward to interact with you. I hand over to Shanti for the business updates.

[Shanti Ekambaram, executive]

Thank you, Devang. As has been stated, the bank's customer assets grew to INR 450,000 crores which is up 18% Y-o-Y and 3% Q-o-Q. I'd like to get into the highlights of each of the segments of assets, and I will start with the consumer segment. The Consumer Bank advances was primarily led by secured businesses, which grew 6% Q-o-Q. This includes the mortgage business, both home loan and LAP as well as the Business Banking segment, which grew 21% Y-o-Y. Portfolio of the secured book continues to be robust, reflecting strong quality. The unsecured retail business showed a muted Q-on-Q growth of 1% largely because of the embargo on credit cards and some amount on the personal loan. In the credit card business, we do see some buildup of stress, particularly in the vintage segment. We had calibrated our risk framework last year to align to the macro and the recent vintages continue to perform well.

Personal loans showing a slightly better stable trend. Let's move to commercial assets. The CV industry saw a 10% degrowth in Q2, largely due to the goods segment, although the passenger segment continues to grow. At Kotak, we managed to gain market share marginally, but growth was relatively muted. This segment of commercial vehicles has been disruptions in the last 2 quarters largely due to heat, rain and climatic risks. This impacted overall economics for the truck operator to some effect, including a lower load factor. So due to this, we have seen some delinquencies, particularly in the retail segment. We've tightened our credit underwriting and strengthened our collections to ensure that we continue to underwrite well.

With the ongoing festival season and the anticipation of increased government spend, we expect H2 for the sector to be much better on demand. The construction equipment showed a modest growth. Our disbursements grew along in line with the industry and the portfolio is reasonably robust, and we plan to retain our growth momentum in this segment in line with the industry. The Tractor Finance business was largely flat in the first half of the year. This is on the back of 8% degrowth in the last financial year. There is a seasonal impact on the tractor business in Q2, including due to certain erratic climate existing and the slower rural economy. Our disbursements have grown largely in line with industry, and we continue to be a key player in the industry.

We continue to focus on our used tractor financing business. With the above normal monsoon and expectation of the government's push on rural infra, we expect a revival of the tractor demand in H2. We also expect the cash flow in the rural and semi-urban areas improve and hope to see better collection efficiencies in tractor in H2. The agri business utilization was very flat, but the portfolio continues to do stable. Microcredit after a consistent 20%, 25% growth in the last 2 years, the micro sector degrew by 4% and expect it to degrow in this quarter as well. The segment saw certain stress because overleveraging of certain borrower segments. This, along with a slowdown in the rural household incomes saw some increase in delinquency. This is likely to play out over the next 2 to 3 quarters. Our micro credit business actually de-grew. We pulled back a bit, and we'll be watchful of the trend as we look at this important business.

We are optimistic of the medium and long-term prospects of the business and are building a quality franchise with the right reward metrics. With the acquisition of Sonata, our footprint has increased and we are currently in 16 states with 27 lakh customers.

I'll now take you through the highlights of the wholesale business. In the last quarter, I've spoken about the medium- to long-term strategy laid out by the wholesale bank of increasing market share holistically with sensible and profitable growth. A key component was to grow the granular book at a much faster rate. And in line with this, the corporate SME and the mid-market businesses saw a healthy growth. The corporate SME grew at about 31% Y-o-Y, and the mid-market saw a number of new acquisitions.

New acquisition has been a main focus and we have been able to achieve a 56% Y-o-Y growth in the SME businesses, corporate SME businesses of new customers. Among the larger corporates, the growth was a little more muted. Growth came more in the form of credit substitutes. This space continues to face challenges of irrational pricing. And our strategy in this continues to be initiatives such as increasing product holdings, capturing a higher share of transaction banking businesses. The credit substitute actually grew 18% Y-o-Y this quarter. Trade assets continue to be a focus and show the growth. There has been a 2.2% increase in new customers on our flagship digital offering Kotak Fin and the number of trade transactions on our digital platform has grown significantly. We will continue to invest in enriching our digital propositions for trade.

GIFT City has been another important initiative on the wholesale side. And our GIFT City business actually grew 80% Y-o-Y in both trade and nontrade advances this quarter. Our asset quality across the customer segments on the wholesale side continues to be robust, and we continue to bolster our growth through higher cross-sell and deeper penetration of income. One of the highlights of this quarter has also been our debt syndication business, and we were able to close a number of mandates in a diverse set of sectors like infrastructure, data centers, real estate, auto, retail. We will continue to focus on this business. Overall, the franchise and business remain healthy.

Let me now turn to liabilities. The average deposits for the bank grew by 16%, and our CASA ratio this quarter actually improved marginally. Savings deposits, particularly the fixed rate savings grew sequentially and we saw growth across segments of affluent, core, nonresident and we're beginning to see some green shoots in the savings deposits in this quarter. We make sure that we will -- we are focusing on the premium end of the customer as far as new acquisitions are concerned, and have moved to co-originate bundled offerings across all our products.

On the current account side, we again have focused more on the proposition for customers, payments, current accounts and other products. We relaunched ActivMoney this quarter and saw a strong growth this quarter of 9% Q-o-Q and 41% Y-o-Y. Deposits will continue to be a focus, particularly granular deposits across savings, ActivMoney and term deposits.

Distribution. We made deep rooted changes in the distribution strategy within the consumer bank with a focus on customer centricity and have structured ourselves across product, proposition and distribution. Our distribution is across physical, digital as well as voice and video with the focus at a micro market level and provide best solutions to customers based on their persona. On the digital platform, focus has been in best-in-class experience across banking investments payments and also through our mobile banking app, which is the banking app, 811 and [indiscernible].

On the wholesale liability side, average custody flows were strong, driven by market buoyancy in both primary and secondary markets, and marquee acquisition in offshore and domestic market. We continue to strengthen our offering in this space and have launched global custody services at GIFT City this quarter.

Tax payments continued to show a strong growth, so also our collection payments on the cash management side. We've launched Kotak API developer portal, which enhances the visibility of our API offering facilitating new business acquisitions.

I will now request Nilesh to take you through the asset management business.

[Nilesh Shah, executive]

Thank you, Shanti. Let me talk about our Asset Management business. Kotak AMC's North Star is to be the most trustworthy Indian asset management company. By focusing on the 4 Cs of customer, company, colleague and community, we are building a bond of trust with our customers and have emerged as the fifth largest mutual fund in India. At the end of second quarter FY '25, our folio base grew 20% Y-o-Y to 1.2 crores [indiscernible] a growth of 2.4x in the last 5 years. Our unique customer base grew 31% year-on-year to 65 lakhs, a growth of 3.8x in the last 5 years. .

Our average assets under management grew 41% Y-o-Y to INR 4.7 trillion, a growth of 2.8x in the last 5 years. Our total AUM market share grew to 7.1%. Over the last 5 years, it has increased by 60 basis points from 6.5% to 7.1%. Our total equity AUM comprising of active, passive and arbitrage funds grew 61% Y-o-Y to INR 3.1 trillion, a growth of 4.6x in the last 5 years. Our pure equity AUM grew 58% Y-o-Y to INR 2.4 trillion, a growth of 5.3x in the last 5 years.

Our pure equity AUM market share grew to 6.5%. Over the last 5 years, it has increased by 2 percentage points from 4.5% to 6.5%. Our SIP inflows as of September '24 grew 23% Y-o-Y to INR 17.6 billion, a growth of 3.2x in the last 5 years. We continue to serve investor requirements across active and passive funds, focusing on local and global markets across debt, equities and commodities for retail as well as institutional investors. We maintained our focus on ESG investing as India's first signatory to the United Nations Principle of Responsible Investing. Since our adoption of UNPRI 6 years ago, our rating has consistently been above the median across emerging market peers. Digital transactions contributed 91% of our total transactions in second quarter FY '25. This restricted investor queries to just 312, which represents 0.0035 percentage of our folios.

Our digital properties had an uptime of 99.9% in the second quarter FY '25 demonstrating robustness of our technology platform. Our investor base remains well diversified. The top 10 investors contribute 7.3% of total AUM and the top 10 distributors contribute 22% of total AUM. Our disciplined investment management process continues to add value to our investors. 11 out of 16 equity and hybrid schemes are outperforming respective benchmark indices over the last 3 years.

We have embedded quantitatives in our investment process with the launch of Kotak Quant Fund last year. The alpha of this [indiscernible] last 12 months is 20%. Our account institutional AUM is 59% of the total AUM. Over the last 5 years, it has moved 14% in favor of noninstitutional investors as we have expanded our branch and digital network. All this is reflected in our profit after tax which grew 58.87% Y-o-Y to INR 197 crores in second quarter FY '25, a growth of 2.3x in the last 5 years.

Coming to our international asset management business, we managed INR 6.1 billion across debt and equity across funds and advisory for global investors. Kotak Asset Management Singapore manages the largest India dedicated Midcap offshore fund, while Kotak Funds India Midcap fund, which has an AUM of over $4.4 billion. With offices in Singapore, Dubai, London and New York, among other places, we are emerging as the preferred choice for inward investment in India for global investors.

Coming to our alternate investment management business, Kotak Alternate Assets has secured commitments of USD 352 million in second quarter FY '25, a growth of 88% taking its total commitments to USD 10 billion since its inception. Kotak Life Science Fund, which is part of the private equity strategy was launched in second quarter FY '25. Kotak Private Credit Fund raised USD 33 million in second quarter FY '25, a growth of 153% Y-o-Y, taking total commitments to USD 211 million as of 30th September '24. Discretionary portfolio solutions under Kotak Optimus and Kotak Iconic added USD 80 million in second quarter FY '25, a growth of 40% Y-o-Y, taking its total AUM to USD 809 million.

Our total assets under management across mutual funds, portfolio management services, offshore insurance and alternate assets grew 37% Y-o-Y to INR 6.8 trillion, led by domestic equity mutual funds and offshore funds. It has grown by about 2.8x in the last 5 years.

I wish all of you a happy festive season. I will hand it over to the operator for initiating question-and-answer session.

[Operator]

[Operator Instructions] The first question is from the line of Chintan Joshi from Autonomous.

[Chintan Joshi, analyst]

Can I start with your recent interview where you had kind of expressed a desire to be the #3 private bank in India. If I look at kind of where consensus estimates are and extrapolate, it feels like you need to grow 8% to 9% faster than your peers? And the question I have is I'm talking about. [Technical Difficulty]

So my question was related to your objective of being #3 private sector bank in India. If I extrapolate kind of where consensus estimates are, it feels like you need to outgrow your peer by 8%, 9% per annum for the next 5 years. What I was interested in understanding was the products, the geographies and the subsidiaries in which you could grow, outgrow your peers to get to that -- to achieve your objectives?

And then the second question was on the margins. If you could highlight what kind of sensitivity we would be facing from the RBI rate cuts? And how much offset will there be from the StanC deal and the savings account rate cuts that you've announced. So if you could kind of give us a picture on margins, how they might evolve over the next year?

[Ashok Vaswani, executive]

Okay. So Chintan, I'll start, and then I'll ask Devang to also chip in. Look, I think on the vision, this is something that we've set as a team as a goal over the next kind of 5 years. So this is not like [indiscernible] kind of one quarter. And the way we've thought about it is that we have said that, look, this will happen both from an organic perspective and an inorganic perspective. Obviously, we will see a step-up. Inorganic is not in our control, depends when opportunities come up. We will step up the pace of organic growth. And we're going to do a whole bunch of stuff to kind of get that going.

Now you're not going to see the impact of that immediately in one quarter. Right now, our first priority, like I've been mentioning, over the last -- since April, at least, is that our first priority is to fix our technology estate and get out of jail. But as you would have heard Shanti talk, at the same time, we're also investing heavily in technology, not only from a risk and resilience purpose, but from a customer and a scale perspective, right? And that's the way to kind of get about. So you'll see more of those kinds of things happening.

As far as NIM is concerned, and margins are concerned, Chintan, as you know, we manage this very, very tightly. And we manage it on an ongoing basis. One of the things that we've been talking about is how do we at least align some of the rates that we charge, rates that we pay in the marketplace on, let's say, our savings book. The rate change that we made on 17th of October was really to bring our savings rate in line with that of the competition. Going forward, Chintan, it's obviously say, how do we monitor what pricing we can get on our loan book. Once we get out of under the embargo, obviously, we'll grow our unsecured retail book, and that will give you a higher-yielding asset. Obviously, we're looking to grow our rural kind of book, which is both CVC and then hopefully come back strongly on micro finance.

Again, those are high-yielding books. So over a period of time, we will manage the rate, the yield on our assets and then manage our deposit rates such that -- come out with proposition such that we maintain our CASA ratios and maintain our kind of cost of funds. So this is something that we kind of do, I mean, we like audit every week Chintan.

[Chintan Joshi, analyst]

That's fair enough, yes. But, just I'm trying to think about the near term in terms of the NIM impact from 3 factors, RBI rate cut, the StanC deal and the savings account reduction.

[Devang Gheewalla, executive]

So Chintan, RBI rate cut, it is everyone's guess when it will be and how much it will be. What is definitive today, which we have already declared is the saving account rate cut which will add roughly about 4 bps into the NIM margin. What we have already also announced is the Standard Chartered portfolio and unsecured book, which will also add about a couple of bps to the average yield on the assets, right? Plus what I think Ashok said, we will continue to take measures to improve the margin through change in the asset mix and maintaining the deposit ratio. So these are the things which we can clearly see now. And we'll see how the RBI rate cut as and when and how much it comes. And as you know, when the rates were higher, we took the benefit. Clearly, when the rate cuts will happen, it will have initial reaction, but it will stabilize the way it's stabilized when the rates went up.

[Operator]

We have Sumeet from Morgan with the next question.

[Sumeet Kariwala, analyst]

I had a question with respect to margins over the last 2 quarters. So margins have come down from 5.27 to 4.9 and I was looking for some waterfall on what has happened. So I see 3 or 4 factors. One is basically a change in loan mix. Second is higher liquidity as reflected in MCR. Third is IPO flows, okay? And fourth is Sonata, the way in which it was accounted in the fourth quarter and then first quarter. So if you can give me some breakup, that will be very helpful because your margins have come down by 35-odd basis points.

[Devang Gheewalla, executive]

So I think you've given me the answer in the question itself. But I can only conclude by saying, despite that fall in the margin at 4.91, we are still the leader in the sector with the highest margin. But you are right about your analysis. I think, I can only add saying that the -- in the current quarter, you saw the fall of about 11 bps that is purely because of the mix change more towards the secured book. So we have continue to grow our book at 18% but the proportion of growth is more towards secured book, housing loan, LAP, working capital, which are generally at a lower rate than a normal unsecured loan book. And as you know, we have a constraint, we cannot grow credit card book. And this being the first quarter where the full impact of the embargo in credit card is felt, so these are the reasons which contributed. So clearly, the reason is on the yield on the asset and not much on the cost of fund or the deposits fund, which seems to have stabilized. That's the reason for this quarter fall in the margin.

[Sumeet Kariwala, analyst]

Okay. I was looking for some quantification, but that's fine Devang. And second is on asset quality. When do things stabilize. This quarter was slightly higher on slippages, and I also see coverage moving lower Q-o-Q. So I guess coverage moving lower Q-o-Q is because of fresh slippages, but I just wanted to get some idea as to how do you look at coverage and where are we on the slippages cycle?

[Ashok Vaswani, executive]

Yes. So let me have Paul step in and answer that question.

[Paul Parambi, executive]

Okay. So as was mentioned earlier, the main areas of -- there was some amount of delinquency pickup was two. One is significantly unsecured and within that credit cards. We've not onboarded any fresh credit cards, as you know, since April. So -- and we have already taken a lot of action probably for a year before that. And some of the impacts are also because of the older vintage clients who normally behave better in the industry seeing some amount of delinquencies. So the actions which we have taken, all this will take a few quarters, maybe 2 or 3 quarters to sort of play out. Our recent sourcing, which we had done before the embargo kicked in, those are behaving much better. So hopefully, that will hold up and some of the slippages in the older book will play themselves out. And similarly, on the microfinance, we have acted much earlier. And there, again, as you've seen, degrowth. So the fresh onboarding is -- will be better. And some of the pain in the older book will play out over the next 2 or 3 quarters. So that's how one sort of sees it.

[Operator]

The next question is from the line of Kunal Shah from Citi.

[Kunal Shah, analyst]

So firstly, with respect to the entire StanC portfolio, if you can indicate in terms of the profile in terms of the average ticket size, how it's panning out. And earlier also, we have seen Kotak doing not so sizable acquisition, be it in the MFI or the vehicle financing, and that's continued even on PL side. So should we assume that those inorganic opportunities would be relatively in few of the subsegments of a smaller size or maybe evaluate a slightly -- maybe a larger inorganic as well. Yes, so that's the first question.

[Shanti Ekambaram, executive]

Let me take that question. This was an opportunity that came up. And when we look at the portfolio, we thought that it was in keeping with our strategy of the affluent segment. We've done our due diligence, as you may know, before we signed up for the portfolio. And I think that what we saw in the portfolio [indiscernible] keeping with our affluent segment strategy, which is what is our sales strategy in the personal loan segment. So very much what Ashok has called the tuck-in acquisition strategy, which we will be looking for. And there is an opportunity. We get roughly 95,000 customers, which will help us on board, upsell and see what other opportunities we have with these customers.

[Kunal Shah, analyst]

Okay and wherein maybe RBI is slightly cautious with respect to growth in the unsecured side. Maybe does it maybe how would it be looked upon from the regulator side because that growth still continues from our end in this segment, yes?

[Ashok Vaswani, executive]

No, look, I think the 2 are completely different. RBI basically is saying, right, that you've got to get your technology stack, stack under control. And we are working very, very hard on that. I think they've said as part of that, but you can't do digital onboarding. And the portfolio acquisition is something -- these opportunities come along and when they come along, we will look at these opportunities. And this tuck-in portfolio acquisitions is what we really, really like because we just bring in the portfolio. We don't have to pay for cost of acquisition. It's an easy kind of switch across. It's a business we know. It's a risk we understand, and it's very accretive right from word go. So I just wish more of them came along.

We did Sonata, we did Standard Chartered. If others come along, we'll love to do these kind of things. Technology infrastructure build-out that continues and those 2 events are completely independent of each other.

[Shanti Ekambaram, executive]

I just want to highlight, even today, 89% of our book is secured, which you have seen has grown pretty well this quarter. And our earlier stated objective, which continues is that we will look at unsecured up to the mid-teens level. So as and when we see opportunities that show growth, which fits within our risk and strategy framework, we will look at it.

[Kunal Shah, analyst]

Sure, sure. And secondly, on this RBI's supervisory action given that we are very much like almost a quarter into it. And generally, the way we have seen the restrictions getting lifted for most of the other names in terms of the period that it generally takes. What is your assessment in terms of where we are, would RBI look at some kind of a [indiscernible] lifting of the restrictions? What could be the time line that you would want to assign given the progress which you are very confident about in terms of it's going very well on track. If you can just give some comments on that, yes.

[Ashok Vaswani, executive]

Yes, Kunal. Look, it's impossible for me to know how the RBI is thinking or on what date they're going to say the embargo is lifted, right? That is a question for the RBI. And obviously, the sooner the better from our perspective. What I do know is that we are working exceedingly hard and kind of systematically knocking out any kind of points of failure, any kinds of things that have been brought up in the RBI exam points, anything that we think can improve risk and resiliency. And, of course, the work that we are doing is also being validated by our external auditor. That should give the RBI greater comfort that what we are saying is validated by an independent kind of person.

Having said that, that's all I can do. After that, frankly, it is in the hands of the RBI. And at some stage, they will determine that we've made enough progress to lift the embargo of us.

[Kunal Shah, analyst]

Sure. And one last question on incremental slippage. Would it be fair to assume that large part of incremental slippage would be from the credit card? Or are there other segments as well, including MFI and [indiscernible]?

[Ashok Vaswani, executive]

No, Kunal. As you know, as you know, the credit card business, generally speaking, has most of the credit losses. So if you look at our total credit cost. Credit cards is always going to constitute a very significant portion of that total, and that will kind of continue.

[Kunal Shah, analyst]

No, on slippage, slippage.

[Devang Gheewalla, executive]

Yes. So you are right. From the slippage, credit card does constitute about 30% to 35% of the share of that, the net slippage. I think we are very, very hopeful that in quarter 3 and 4, we will have recoveries from the rural and secured businesses which will sort of help us to reduce the slippage going forward further in the Q3, Q4.

[Operator]

The next question is from the line of Piran Engineer from CLSA.

[Piran Engineer, analyst]

Firstly, just wanted to understand the rationale for the SA deposit rate cut in an environment where SA deposit growth is weak and the benefit is nearly 4 bps.

[Ashok Vaswani, executive]

So look, the SA deposit card, first of all, it's restricted only to balances below 5 lakhs, and we were paying a rate of 3.5% which was more than what competition was paying. And really, the rate cut is to bring our deposit rates in line with competition. Based on everything that we've looked at and based on the analysis we've done, the impact from a volume perspective is going to be at best muted.

[Piran Engineer, analyst]

Okay. Fair enough. And just to clarify, if I back calculate it means that only about 1/3 of your SA book is less than 5 lakh ticket size?

[Devang Gheewalla, executive]

So I think it's not that simple because this is up to INR 5 lakh means across the buckets up to INR 5 lakh where, so that is not the way perhaps you will calculate. So that may not be the right way to calculate it.

[Piran Engineer, analyst]

No. I mean, why Devang because you've cut by 50 bps and if it's only a 4 bps impact, it means it's 1/10 of your deposits, less than 1/10. And if SA is 30%, and this is 9% or 10%, it means 1/3, right? Where am I wrong?

[Devang Gheewalla, executive]

I think we should separately take this. I will explain you. As I said, this is across the buckets, up to INR 5 lakhs.

[Shanti Ekambaram, executive]

It is the first leg of INR 5 lakhs across the entire portfolio.

[Devang Gheewalla, executive]

Yes, across the portfolio. I'll explain to you separately offline.

[Piran Engineer, analyst]

Fair enough, sir. And just secondly, I just wanted to confirm this in terms of our outlook on slippages in credit cards and microfinance, it remains elevated in the second half, but we also have some offsets from the secured loan book. Did I understand that correctly?

[Devang Gheewalla, executive]

So yes, you are right about the offset about the recovery. But I think the slippage itself, we expect with the measures what Paul has described to reduce going forward, especially in the micro credit book.

[Paul Parambi, executive]

Yes, but this can continue for a couple of quarters, but the measures have been taken such that -- each of these are -- so if you look at micro credit, it's a loan. So as the old legacy loans run down, what is left will be pressure underwriting and that, therefore, automatically means that -- the slippages come under control. So that's really how it will play out. And we've done this a few quarters back. It's not that we saw it this quarter. But it's something we saw a couple of quarters back, but this has to just play out.

[Operator]

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

[Manish Shukla, analyst]

I wanted to check what proportion of your loan book is linked to repo and external benchmark?

[Devang Gheewalla, executive]

About 60% of our book is linked to the external benchmark.

[Manish Shukla, analyst]

So the question here really is that we are at a margin level where we were in June '22 and May '22 is when we had the first rate hike. While I appreciate that timing and quantum of RBI rate hike is not known, but if we take a 6 to 12 months view rate hike -- rate cut, sorry, is inevitable. So what contingencies would you have in that scenario? Because the 60% is linked to repo and we get a 50 bps cut. That's a pretty decent yield on loans?

[Devang Gheewalla, executive]

So I think -- see, it's not just on the rate cut on the advances side. As you have seen, when the rates went up, there was a repricing of the deposits as well, with a lag. So similarly, as when the rate cut comes down, we also would expect the cost of deposits also to fall with a lag. And the 60% is something which is -- if I look at the peers, it is something across the board. And Kotak is no different from the others. So I think as we got the benefit when the rates grew up as the deposits reprice with a lag. Similarly, when the rates go down, the deposits also will reprice downward, and you will start seeing the inflow coming.

[Manish Shukla, analyst]

Sure. Lastly, in terms of credit cost, should one expect credit cost should remain in this 65 to 70 bps handle? Or do you expect it to go up before it comes down?

[Ashok Vaswani, executive]

So my sense is that credit cost will more or less stabilize. And then over the next 2 or 3 quarters actually come down. But of course, these things, you got to be -- this is like looking into the crystal ball, you got to be careful. Depends on how things kind of play out. Right now, the macroeconomic indicators look strong. Bit of stress on micro, but let's see how it plays out. But given everything that I'm seeing, I feel pretty comfortable that at least 2 quarters out, we will see loss rates come down.

[Devang Gheewalla, executive]

I think as I said, the secured book recovery from Q3, Q4 will ensure that the slippage comes down as we go forward.

[Operator]

The next question is from the line of Param Subramanian from Nomura.

[Parameswaran Subramanian, analyst]

Firstly, on -- again, on the credit cost. So in the fourth quarter -- a couple of quarters ago, we had taken a big write-off and we had explained that it was largely in the unsecured and credit card businesses. So that pertains to the longer vintage unsecured NPLs, right? So what we are seeing now in this quarter is more [indiscernible] delinquencies of more recent vintage. Is that the way to look at it?

[Ashok Vaswani, executive]

No, no, no, no. One second. What we did -- what we did in April -- for the quarter ended March was we changed the way we do the accounting, right? Throughout the period, what we've been doing on unsecured, we've been providing 100% at 180 days, right? But the actual write-off which we take, we were taking 2 years hence to make. So what was happening is our GNPA was showing elevated kind of numbers. To try and make it in line with the industry, we bought it -- we bought down the write-off from 2 years out to 270 days DPD, right? That was the big change that we did for the last quarter of last year, right? That is just an accounting change. It has nothing to do with -- frankly, it made no difference to the P&L or anything like that. That was just so that the numbers you could become -- it made your life easier because you could compare numbers across banks.

What we are saying separately is that separately, and we -- frankly, we called this out about 2, maybe 3 quarters ago, 2 or 3 quarters ago, we said that there is a certain amount of over leverage in the system. And that over leverage in the system is starting to show up. The initial place where it showed up was on the microfinance business. And then it showed up to some extent in the credit card business. And so you see the loss costs and the credit cost kind of following through.

What we are also saying now is that we expect -- that we expect post Diwali that we will see a certain amount of recoveries, particularly in the businesses that are linked to the rural parts of India, and improvement in credit costs in the next 3 to 6, 9 months in portfolios like credit cards. That is the entirety of what has happened, how we think things will happen and what you're referring to for the last quarter of last year was really just a big accounting change.

[Parameswaran Subramanian, analyst]

Yes. If I heard you correctly, Ashok, you said 270 days is when you write off unsecured retail, right? That is correct?

[Ashok Vaswani, executive]

Yes, 270 DPD. So other banks, look, there are banks who do it at 180 DPD. We've chosen to do it at 270 because providing at 100% at 180 and writing off at 180, we felt was not appropriate from an accounting point of view because from an accounting point of view when you provide at 100%, you expect to get some kind of recovery. Earlier on, we used to have that -- keep that recovery period open up for 2 years. Now we said we will keep the recovery open up for 90 days. It makes 0 difference from all perspectives, 0 difference because we will continue to -- we will continue to do recoveries irrespective of whether we write off at 270 or at 720 for that matter.

[Parameswaran Subramanian, analyst]

Fair enough. Very clear, Ashok. So my second question, again, this is just data. So how much of the slippage in this quarter was from the microfinance segment? Or is this something that -- where we expect slippages to come through in subsequent quarters?

[Devang Gheewalla, executive]

No. So this quarter also had slippages from microfinance business. So as I said, while the majority of that is from the credit card business, mico credit also had a share of -- it shares the slippage ratio.

[Parameswaran Subramanian, analyst]

Fair enough, Devang. I was looking for a number. But that's okay. And lastly, just on this quarter, there would have been some impact of the float from the capital markets on the margin, right? If you could call out that number for this quarter, that would be great, yes.

[Devang Gheewalla, executive]

So you're right. So we had a short-term surge in the deposits, which obviously you could deploy only in a lower-yield asset that did impacted the NIM. The impact is about, not more than 2 bps basically on account of this IPO [indiscernible].

[Ashok Vaswani, executive]

But I mean, I guess the bigger point is that -- is that the strength in 1 part of the business flowing through, you can see how it flows through so many other parts of the business, right? The fact that we get IPO mandates flows through on the deposit side, it flows through on the treasury side. It flows through on the corporate banking side. And therefore, the power of the financial conglomerate really, really comes through with these kind of deals.

[Shanti Ekambaram, executive]

Yes, [indiscernible].

[Ashok Vaswani, executive]

Yes.

[Operator]

We have the next question from the line of Saurabh from JPMorgan.

[Saurabh Kumar, analyst]

Just 2 questions. So one is on the RBI norms on investments, what are your thoughts if you had to consolidate both Kotak Prime and all the lending subsidiaries within the bank? And the second is just in terms of Kotak Prime specifically and also in the bank, I mean, how many of these customers will have -- like Kotak Bank customers will have an account from the bank as well?

[Ashok Vaswani, executive]

Yes. So look, Saurabh, obviously, the draft circular, we got it on October 4. We are looking at it in a great amount of detail and trying to analyze it trying to understand what the spirit is and what kind of makes sense. Now clearly, one aspect of the circular is that the business that you can do in the subs has to be businesses which you can do, which can be done in the bank, right? And there's nothing that we are doing in the subs that, frankly, we're not doing in the bank. And therefore, it's not a question of whether we have to shut down businesses, it's more a question of where we're going to do certain businesses. We have time till November 20 to kind of go back and actually talk to the RBI about the implications and what our suggestions would be in light of the spirit of the intended kind of regulation.

Now at the end of the day, the RBI will obviously take the collective view of the industry, evaluate it. Some of it will make sense, some will not make sense for them, and they'll come out with the final circular. When they come with the final circular, we will have to abide by the final circular. There will be some elements of business, which will do only in the bank. We've got a couple of options that we're kind of looking through, working through, trying to understand what the implications of that are and get ahead. There are advantages, there are both pros and cons in terms of going there. We're evaluating that very, very carefully. And we should be able to provide a greater degree of clarity once we get a sense of what the final circular is. Also, finally, there's a sense of timing. Let's see, we've indicated on some elements, a certain level of timing, let's see what the timing is actually land up to be and we will work through it.

[Saurabh Kumar, analyst]

Okay. And just in terms of your slippages, what percentage will be coming from these linked accounts basically? And would you expect the stress in credit cards to also go up in your personal loan portfolio? I mean, is that how to.

[Ashok Vaswani, executive]

Sorry, Saurabh, could you just -- we missed the first part. What did you say?

[Saurabh Kumar, analyst]

So how much of your slippages will be coming from the linked accounts. So basically [indiscernible] default in the credit card business.

[Ashok Vaswani, executive]

So when you say linked accounts, [indiscernible].

[Devang Gheewalla, executive]

[indiscernible] customer who has got a personal loan.

[Ashok Vaswani, executive]

So look, I think one of the way to look at it, the real way to look at it is that these are usually customers who have also got a bank account and typically, bank account and usually have their salary coming through us. And those are actually our best customers. And obviously, we monitor total unsecured exposure across products, right? And particularly the salaried kind of customer usually gives you the best credit. So that area I'm a little less worried about.

[Paul Parambi, executive]

So Saurab while -- well, I don't have the exact percentages, but the percentages are low, okay? And we clearly identified this as a potential area of risk probably a few quarters back. And clearly, therefore, cross-sell to customers, weaker segments of one asset to the other, we've actually climbed down quite a bit some quarters back, yes. So that's how we are looking at it. But the percentages are low. That's not the major contributor.

[Saurabh Kumar, analyst]

Got it, sir. And you -- at this current point, you would not expect the credit losses in your card business to eventually go up to the PL portfolio. Will that be a fair statement?

[Ashok Vaswani, executive]

No, no, no, no, no. Definitely not.

[Operator]

[Operator Instructions] The next question is from the line of Rikin Shah from IIFL.

[Rikin Shah, analyst]

Just one basic question. The Stage 3, I mean, the provision coverage on NPAs has come off sharply in this quarter. Just wanted to understand what would be the comfort level that we would like to operate given that we are not carrying any buffer provisions.

[Devang Gheewalla, executive]

No. So I think what happens is when there is a slippage increase, in a quarter, you'll appreciate that the coverage ratio will come down because the provision on the fresh NPA will not be providing 100%, right? So the incremental slippage will always result in coverage reducing, which will get corrected if it's unsecured loan as we provide anyway, 100% over 180 days over next quarters, right? So I think it will depend upon the nature of business where the slippage is occurring and the quantum of it. But with the increase in slippage, you will see coverage sort of reducing. But to give -- to answer the second question, we are comfortable maintaining coverage ratio at about 70% on an average.

[Rikin Shah, analyst]

Perfect. And just one data keeping question, if I may.

[Operator]

Sorry to interrupt, sir. We request you to please rejoin the queue.

[Operator Instructions] The next question is from the line of Jai Mundra from ICICI Securities.

[Jai Prakash Mundhra, analyst]

Sir, on the StanC transaction, what is the price that we are paying? I mean, I hope because there is a bit of a risk for the rising stress in the personal loan portfolio, are you paying at par or this is subpar. And are there any risk mitigants in case the delinquency turns out to be higher than that may be the current level. The public disclosure says that their retail GNPA is 2.6%, which is at the retail level itself, INR 20,000 crores, not the personal loan portfolio. So I would like to get your comments there.

[Ashok Vaswani, executive]

Yes. So like Shanti mentioned, obviously, we've done very detailed due diligence on this portfolio. We've obviously compared it to our portfolio. We are obviously aware of the situation and the overleverage in the market. We are obviously aware of the trends of risk in personal loan portfolios. And all of those factors have been taken into account, taken into account in us determining whether we want to do this transaction. And if we want to do this transaction, do it at what pricing.

We obviously had those discussions with Standard Chartered and have agreed upon a deal. But we are not in a position to disclose the exact price that we paid for the portfolio. But obviously, we've taken factors like this into consideration.

[Operator]

We would need to end the Q&A session at this point, sir. Ladies and gentlemen, I would now like to hand the conference over to Mr. Ashok Vaswani for closing comments. Over to you, sir.

[Ashok Vaswani, executive]

Yes. So thank you very much. First of all, thank you so much for being with us on a Saturday evening, as usual. It's highly, highly, highly appreciated. As you can see, this has been a very, very busy quarter for us. And I think the power of being a financial conglomerate shown through very, very strongly. And some of our subsidiaries, as you saw, Nilesh bhai take you through the AMC have seen some kind of stellar kind of growth. And that's really the power of Kotak. That's a difference of owning Kotak of really bringing it all together to meet the needs of our customers. And I'm very confident that as we kind of grow, we'll see more such success stories where we bring all the power of Kotak together to meet the needs of our customers to deliver for our shareholders.

So with that, thank you very much. And let me take this opportunity to wish you a very, very Happy Diwali. And I look forward to meeting you, if not before, at the end of the third quarter. Thank you. Goodnight.

[Devang Gheewalla, executive]

Bye.

[Operator]

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