Kotak Mahindra Bank Ltd

NSE:KOTAKBANK

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, good day and welcome to the Kotak Mahindra Bank Limited Q4 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, MD and CEO, Kotak Mahindra Bank. Thank you and over to you Mr. Kotak.

[Uday Kotak, executive]

Good evening, friends and welcome to the conference call after the full-year accounts of Kotak Mahindra Bank have been declared by the Board of Directors earlier in the day. Let me first give a little bit of perspective at a time when we are seeing a lot more turbulence in many other parts of the world in the financial sector. The Indian financial sector, particularly the Indian banking sector is going through a phase of what I would call as Goldilocks. And the outlook as things stand today looks quite positive and promising, despite the fact that there are risks to Indian growth coming because of factors external to India, because of a global trade, economic slowdown leading to an impact on our exports of goods and services.Subject to that, the domestic situation is much better, our macroeconomic fundamentals look good. Our current account deficit is looking much more under control. And India seems to be at a reasonably good spot at this point of time. And that is reflected in terms of the numbers of Kotak Mahindra Bank for the full-year, as well as for quarter four. I'm happy to come back to you and report for the fourth quarter on a consolidated basis and ROE up close to 17% on overall capital adequacy in excess of 23%, the focus much higher capital. We have a decent ROE at that level of capital.We also see our credit cost as overall for the year at historic lows and that goes back to a very fundamental approach on risk-adjusted underwriting as the core to our culture and philosophy. We are ready to take the risks, but would always like to have fair returns for the risks in the interest of all our stakeholders. We are also very focused as a financial institution on our number one responsibility, which is sustainability and resilience of the financial institution over long periods of time.And therefore the approach is to build a very strong resilient progress like growth to the nature of our balance sheet, we can sustain shocks from various directions in times of turbulence. At the same time, we continue with our broad commitment to growth at 1.5 to two times, India's nominal GDP.If we look at the year ahead and if we take the RBI estimates, the growth expectation, real growth expectation is 6.5 and even if we take a range of 6% to 6.5% GDP growth and an average inflation of around 5%, we're talking about 11.5% nominal GDP and multiplied by 1.5 to 2 times that as what we think is our current estimate for sustainable growth as we go forward. I also believe that India is also getting significant advantage of it's geopolitical positioning leading to the economic benefit, particularly in the area of oil and energy and that is a benefit which is crucial for India because of a significant dependence of energy on external sources.In terms of domestic situation, the economy continues to show great resilience and I think that we are at a pretty good spot despite that. Having said that, we need to be aware about significant turbulence around the world as every day we get some news including the one last night about another banking institution in the developed world getting into trouble. Therefore, Indian financial institutions like Kotak would continue to be focused on financial stability as its core, even as it pursues growth. So from the point-of-view of all our stakeholders, including investors, on behalf of my seat and the Board, I'm happy to say that we believe in growth while keeping stability and risk management as the core to that future.We are also very focused on the transforming landscape in financial services with technology and digital becoming a bigger and bigger part and we continue to invest heavily in it. At the same time, we're also clear a significantly higher customer focus to our future is key. So, we look forward to this as a very significant goal for us in the days to come, which is managing stability, managing growth, continuing down the path of transformation of Kotak on the technology and digital platform and [indiscernible] on looking at the customer's interest.With that, I will now request my colleague, Jaimin to take you through all the aspects about Kotak performance for the current year.

[Jaimin Bhatt, executive]

Thank you, Uday. Let me start with the consolidated numbers which we disclosed earlier today. We ended the full financial year with a profit of INR14,925 crores, which is 23% higher than what we did in FY '22. Profit for the quarter at the consolidated level was INR4,566 crores, which is about 17% higher than last year. Our overall consolidated advances at about INR3,59,000 crores roughly 18% higher than last year. And as I mentioned, our capital adequacy at the group level 23.3% and this include CET 1 of 22.3%, largely equity and both these have gone down by just about 40 bps or what the numbers were a year-ago. And on that, we've got a ROE of 16.9% for the quarter and 14.5% for the full-year.For this quarter, the bank brought in INR3,496 crores of post-tax profit and for the full-year the bank had INR10,939 crores. Kotak Prime which is in the car finance business had a lower profit this year compared to last year, as we had explained in quarter one, we had upfronted the brokerage cost and that it is about INR163 crores this year compared to what it was in the previous period, plus there were COVID reversals last year, which is a very, very tiny number this year.The micro finance business correspondent entity which we had acquired in 2017, which is BSS has ended the year with a post tax profit of INR297 crores as against INR83 crores in the previous period. Kotak Investments bringing in INR100 crores versus INR86 crores in the previous year. Capital market had a slowdown this year resulting fee both Kotak Securities and for the capital have got lower profit in FY '23 versus FY '22.Kotak Life ended this year with a profit of over INR1,000 crores as against INR425 crores in the previous year. Kotak Life has -- continue to be having good solvency numbers with an overall solvency of 2.83 x as against the regulatory requirement of 1.5 x. Kotak Life has also seen rise in embedded value by 17% and we are now at INR12,500 crores of embedded value there. We've also seen the VNB margin at Kotak Life at 38.8% as against 31% in the previous year. The domestic mutual fund entities which is both the AMC and the Trustee Company bringing about INR555 crores of profit this year recognized by investment profits which we have booked in the current year.At the group level, FY '23 saw close to 30% contribution from the non-bank entities. Both our NBFC, Kotak Capital, Kotak Prime and Kotak Investments are fully event undercapitalized and capital adequacy in excess of 28% each. At the bank, we as I said we clubbed worth INR10,939 crore profit. The NII for quarter four at 35% over the same period last year. We had record NIM of 5.75% in this quarter, whereas if I look at for the full-year, we clocked 5.23%.Fees and services were contributed both from distribution and syndication income, as well as from banking fees and we saw growth of 25% in FY '23 versus what we did a year ago. Employee cost in the current year -- in the current quarter you see a small negative compared to the previous year -- previous quarter largely coming from a reversal or a benefit which we got from a drop in annuity rate and benefit from interest rate, reluctantly the retirement cost in this period is significantly lower than what we had in the previous quarter.For certain businesses which like [ pass ] or e-com or card transactions actually netted out some expenses and we've made adjustments on the similar basis for the previous period numbers. Our non-employee cost in quarter three had a large number of promotional expense, which had been much lower in this quarter is that simply the non-employee operating expenses are also lower in quarter four compared to quarter three.This quarter we added -- this year we added 8.5 million customers, 2.2 coming in the last quarter. Our operating profit at the bank for quarter four at INR4,647 crores which is about 39% higher than what we did in the previous year. This year, this quarter we also saw a favorable order which we got with respect to income tax and this enabled us to reverse some provisions which is about INR100 crores in this current quarter.At the bank, the asset quality remains keen, our GNPA has come down from 2.34 a year-ago to 1.78, in absolute terms too GNPA has gone down from INR6,470 crores in March '22 to INR5,768 crores now. Net NPA at 0.37% with a provision coverage now at 79.3%. Our slippages this quarter at about INR823 crores, about 0.26% of our advances. Of this, we already had INR218 crores getting upgraded during the quarter itself.Our fund based restructured advances, COVID and MSME resolutions currently at INR718 crores, which is about 0.22% of our advances. Our SMA2 as of March 31, which is fund based borrowers exposure of over INR5 crores is about INR204 crores. Our CASA now at 52.8% at the bank standalone level too, we have a capital adequacy now at 21.8% of which your equity CET1 is at 20.6%. And for the quarter, the bank locked an ROA of 3%, 2.5% for the full-year. That's what we -- the highlights of the current period.I'd request Manian to take through the consumers.

[KVS Manian, executive]

Thank you, Jaimin. My first commentary first on the asset growth in the wholesale business. Due to the asset sell-down of the DCM book that I had alluded to my in my previous quarter call and exit from some of the low-yielding short-term assets to optimize quarter in CSL cost, the book has been shown an EOP growth, but based on average the assets have grown in the mid-teens for the year, also driven by our intra-quarter assets.We continue to focus on credit substitutes to come back irrational pricing pressures and optimize our [ PFL ] cost. The spread compression continues to do competitive pricing pressures in this business. SME and NBFC segments have both grown in the high-teens on a Y-o-Y basis. We are also seeing good offtake from conglomerates, the large and mid-corporate segment and CRE segment have seen challenges in growth.In SME, the credit quality remains excellent, the number of entities acquired in the year have grown even faster than the asset growth that you see. In the Group capitalization, demand pickup and collection efficiencies, NBFC sector also seems in good shape and we remain focused on this opportunity. We kicked-off our new initiative on mid market by forming a separate focus team on this segment, effective beginning of this year.We have had a great track record in the CRE business with minimal losses over the year, strong sales in collections of projects financed by us have resulted in significantly accelerated repayment, suppressing the growth of the book. Lending rates on vanilla product such as largely remain extremely competitive and we remain very choosy on that. We are beginning to see good traction on the structured finance side, we have built a strong team with requisite skills in this area.Our fee income continue to grow well. The fee growth is well distributed across processing fee, FX, trade and CMS. The DCM business performed well, even though it came off marginally from the peak seen in FY '22. We have continued to build a very strong franchise in the DCM business having done some unique and marquee LBO structured loans, bond and infrastructure transactions.Credit cost continues to be very low, ECGS portfolio continues to remain stable, strong recovery from our old NPAs amounting to close to INR300 crores, especially in our SME business and LC business, further suppress our elite cost for the year.On the liability side, we see healthy growth in the non-custody current account balances, significantly out setting the asset growth. While we continue to add new clients in the custody business, the balances were impacted due to challenging capital market condition. On the digital front, our corporate portal, Fyn has scaled up really well. Fyn has an integrated, even integrated corporate portal with single login up and it has received very positive response from our clients. Post receiving agency license, we have also started offering our statutory tax payment as a product and have seen a good uptake from our corporate clients on this.I'll now hand over to Shanti for taking you through the rest of the presentation.

[Shanti Ekambaram, executive]

Thank you, Mani. I'll take you through the highlights of our commercial banking business, which showed strong growth trends during quarter four. To start with commercial banking, the CV industry volumes continued to grow at a healthy pace with FY '23 Y-o-Y growth of 34%. Freight demand and availability of return load continue to show improving trends, signifying stable operator economics. However, some segments that depend upon exit traffic and e-commerce businesses have showed some slowdown.Within commercial vehicles, demand for all passenger bus segment has more than doubled Y-o-Y and all vertical suggest [ tour and travels ] are displaying increasingly. Collection efficiency continues to be stable and back to pre pandemic levels, resulting in significant recovery. Kotak has grown the commercial vehicle business quite strongly during the year and our disbursements continue to outperform the pace of the industry with a 68% Y-o-Y growth, that helped us improve our market share.We will continue to build our book and market share in this segment and focus on risk-adjusted returns and deepening our presence across the geography. Construction equipment has seen a strong and consistent Y-o-Y growth of 29% at the industry level. Our disbursement grew in line with the industry and overall collections at this segment has been stable, which helps improve delinquency level. Given the healthy allocation of capital spending by the government, we expect the demand in this segment to continue [indiscernible].The tractor industry grew at 12% Y-o-Y backed by industry tailwinds such as healthy monsoon and labor shortage, collection efficiencies improved significantly in RFP COVID level. We grew our disbursements quite strongly across both new and used tractors and have grown faster than in industry with a disbursement growth of 42% Y-o-Y, leading to a step up in our market share which is now close to 11%. We will remain focused in this segment as we look to deepen our distribution and improve our market share.Micro finance business, our micro finance business continued its strong growth momentum in Q4, with disbursements tuning at 70% Y-o-Y. The overall FY '23 advances for this segment grew almost 100% vis-a-vis industry growth of 20%. We expanded our presence from five states in last 22% states in March '23 and added 252 BC branches. Collection efficiencies in this segment continue to be strong and have reached pre-COVID level. We see good credit demand in the rural economy and our micro finance business is well poised to leverage us in the current quarter.Agri SME, during the year most of the prices of essential agri-commodities like Basmati, rice, wheat continue to increase to their highest level due to lower stock. Farmers in India have shown capacity to hold on to their harvest. I think demand for traders and processors remain positive. Overall strategy of credit in this segment showed improvement with past default recoveries and reduced pressuring presence, it will continue to be a focus area for us.I will now request Virat to take you through the Consumer Banking highlights.

[Virat Diwanji, executive]

Thanks, Shanti. I'll begin with consumer effect. Our strategy to gradually build our market share in unsecured business continues. Our unsecured product in consumer bank are moving at a faster pace and we have shown growth of about 65% Y-o-Y and 1% Q-on-Q. Our numbers reflect our continued focus on growing unsecured portfolio. Our mortgages lending business continues to grow well at 22% on a Y-o-Y basis and we see good traction both in home loans and loan against property segments. This book continues to hold well on all parameters of collections in spite of increasing EMI linked to repo rate hikes.We continue to invest in our card franchise with our overall credit card advances growing by 81% on Y-o-Y basis. Our market share has been steadily growing both on spends and cards in force. We are strengthening our co-brand product suite and have gone live with Indian Oil for fuel centric cards. We have also launched our [ NTB-DIY ] journey, which is gaining traction. With focus on SME segment, we have also relaunched our Metro co-brand card that would enable us deepen our penetration in various segments of customers. Our story on digital acquisition continues and significant proportion of personal loans and credit cards continue to be sourced end-to-end digital. And I'll move to business banking.Bank continues to focus on growing business banking franchise, both on assets and liabilities. Our strategy to create a dedicated team for sourcing small-ticket secured working capital loans across our branch network has shown good traction and going forward, it would help us garner higher market share in this segment. The demand for unsecured loans by business customer showed robust demand. However, the working capital limit utilization remains subdued in certain segments.Digital current account opening assisted for small businesses has improved resource level productivity and customer NPS. The traction on active money current accounts saw encouraging adoption by the customers. We believe this will not only help us in acquiring newer customers, but will also assist in building balances of our existing customer base. With the aim of supporting SMEs in managing day-to-day needs of the business, we have curated offers for their non-banking needs across various categories under our offers beyond banking on our website for our customers. We launched instant settlement on UPI, which helps current account customers to get instant credit, this will ensure traction in current account book.Now I'll move to liabilities. The total deposits have grown 16% Y-o-Y with major contribution coming from fixed deposit. However, [ SAR ] deposit growth still remains subdued in quarter four as we saw some customers moving SAAR balances to debt mutual fund and life insurance to capitalize on tax benefit. A traction on granular retail savings book that is with balances less than 10 lakh continued to grow and it grew by about 10% on a year-on-year basis and 3% on quarter-on-quarter.This denotes the core strength of the saving franchise in the bank. In Q4, we launched couple of initiatives aimed at building our SAR franchise. The first one was floating rate saw product aimed at stemming the outflows from the interest-sensitive relationships. Our new do-it-yourself journey that allows customers to open all SAR variants covering mass, premium and salary segments and an all-new self savings program, which was launched for women customers, which comes with a host of features and exclusive benefits. We were successful in building our term deposit book, which showed a growth of around 40% on a Y-o-Y basis.Now I will pass on to Dipak to take it forward.

[Dipak Gupta, executive]

Thank you, Virat. On the tech side, the transformation on the digital and the IT landscape continues, as we mentioned earlier, we have two key talents here, Milind, our CTO and Bhavnish, our Chief of Customer Experience and they've been driving the entire tech charge. From a strategy point of view, they are basically driving what we call the 6 Ss' in technology; satisfaction, speed, skills, security, stability and scalability. And as a first step towards each of these 6 Ss', what we are really in the process is investing significantly in upgrading the technology backbone. So that's really on the architecture side, the infrastructure side, very significant movement on the balance side. We've gone out and recruited very interesting senior talents on various aspects of infrastructure and architecture now, on the security side and of course on the data analytics and journey automation side there.And each of these has had a very significant impact and we can see progress on the entire digital and IV landscape. In sourcing of platform work is a very significant activity, which we are driving and all this new high skilled engineering talent, which we are recruiting will help us achieve that faster and gain control of our platforms and businesses in a bigger way.On the digital side, most of the metrics are up there. They are looking good, I particularly likely to see the lending ones, each of the lending ones has been inching up significantly now and we've seen a reasonably high share of digital now in most of the new product offerings. The transaction volume on the SAR side continues to be practically 100% now through digital, we are at 98%.Our digital channels, again, Virat mentioned the activity which we were seeing really on the do-it-yourself channels and assisted channels, both on the asset side, as well as the liability side. Reminder, this is beyond what we are doing on the 811 side. On the commercial and business banking side, Manian touched upon the activity on Fyn as a platform, a single login over there. We've gone live with Phase 2 now, where we have import export data processing. We have inward modeling and end-to-end field mapping now in place. And again, similarly on the commercial merchant side, a lot of activity and a lot of developments on the digital side.With that, I hand it over to Jaimin now to take you through securities.

[Jaimin Bhatt, executive]

Thank you, Dipak. Kotak Securities reported a total income of INR581 crores for Q4 of '23. This is against INR661 crores for the same period last year. The total income for FY '23 is at INR2,474 crores versus INR2,502 crores. PBT for Q4 is at INR242 crores, which was against INR335 crores of the same period last year and INR319 crores in the preceding quarter. The full year PBT is at INR1,150 crores versus INR1,334 crores.The PAT reported for this quarter is INR182 crores versus INR252 crores for the same period last year. The PAT for FY '23 is INR865 crores versus INR1,001 crores. The cash market share for Kotak Securities for FY '23 is at 10.5% versus 10.6% in FY '22. And the option market share closed at 5.6% for FY '23 versus 3% in FY '22. The low profits have predominantly been because of a sharp fall of close to 30% in the average daily cash market volume, which one has seen.On the digital front, a couple of points worth mentioning. 64% of cash market volume and 97% of auction volume is actually done by the customer himself for our self. 78% of customer service requests are now processed with 0 human intervention. And close to 30% of accounts opened are without again any kind of intervention happening at the DIY journey end.I'll now hand over to Nilesh to take you through the AMC.

[Nilesh Shah, executive]

Thanks, Jaimin. Let me take you through our asset management business. Our total average AUM grew 5.2% in FY '23 to reach INR2.87 trillion. Our equity average AUM grew 17.6% to INR1.53 trillion. Our active equity AUM market share grew to 6.47% in fourth quarter FY '23. Our [indiscernible] for March '23 grew 21% year-on-year to INR8.7 billion. Our retail AUM stands at 55% of total AUM. We continue to serve investor requirements across active, as well as passive fronts, focused on local as well as offshore markets, across debt, equity and commodities for retail and institutional investors.Our profit after tax was up 88.2% in fourth quarter FY '23 to INR192 crore, led by profit on investments. Our total AUM across mutual fund PMS, offshore insurance and alternate assets grew 10% Y-o-Y to INR4.21 trillion, led by 127% growth in alternate assets.I'll hand it over to Dipak Gupta.

[Dipak Gupta, executive]

Yeah, so Nilesh has touched upon the growth in alternate assets, that's been very significant one in the last one year. We've grown from AUM of about INR20,000 crores to practically now about INR46,000 crores across multiple strategies, the strategic fund really, the real estate fund, the private equity fund, the data center fund, a lot of new funds. So this figure is not of funds already outlaid but includes committed funds.Moving on to Prime, FY '23 has -- you'll recall been a pretty good year all over. Overall, car demand grew practically by about 25%, of course, this was aided a lot by the previous year quarter one being a poor year post COVID really. March also was very good because -- not just because of March ending, but it was helped significantly by the change in emission norms, which fall in place from 1st April on to Euro 6. But -- and all segments have done well in the month of March.However, this month is pretty flat actually and it doesn't seem as if it will pick up very quickly. Primarily, one is seeing inventory levels go up across most of our segments and the expectation at this point of time, of course, is that FY '24 may just be marginally up in numbers and maybe marginally up in value terms. We've grown across the year really including in the last quarter not just in line with the car segment, but also the two-wheeler financing piece has practically doubled in size during the year and the last business, which we do out of Kotak Prime has grown.Overall, if you see from a quarter-on-quarter basis, profits have been flat and on a year-on-year basis, profits are down because remember, Jaimin explained earlier that we took a hit of about close to INR166 crores on account of one-time booking of brokerage income, net of that it seems pretty good.Moving on to Kotak Life. Again, Jaimin took you through most of the financial metrics. The solvency is 2.83, that's now significantly higher than the minimum required. Our margins are pretty strong amongst probably the best in the industry, significantly aided by our share in non-participating products really. The last quarter, of course, like it has been for everyone else has been pretty good, aided by the expected change in tax loss. Overall from a profit point of view, FY '23 life gen is about INR1,000 crores, significantly higher than the INR425 crores, which we saw in FY '22, but FY '22 was a lot of hit on account of COVID modalities.With that, I'll hand over to -- back to Jaimin...

[Jaimin Bhatt, executive]

Thanks, Dipak. Before I open for Q&A, just thank you to our analysts on the call. Last year, we had an analyst meet on the 811 branch and which is at the 5-year launch of 811. We had talked about the fact at time that we provide an annual update with the current earnings update, we have attached the update for 811 for [indiscernible].So with that, I'd just request opening up for Q&A, please.

[Operator]

Thank you very much. [Operator Instructions] First question is from the line of Mahrukh Adajania from Nuvama. Please go ahead.

[Mahrukh Adajania, analyst]

My first question is to Uday sir. So you again pointed out to Goldilocks and that does suggest a good growth outlook benign credit cost? But how does that translate into earnings given where rates are, given that rates have to increase to -- would Kotak be confident about a high teens growth? And then how do margins play out, right, because your EBLR book is very high. So what are the downside offsets to margin? That's my first question.

[Uday Kotak, executive]

Mahrukh, last time it was Cindrella, this time he has changed it to Goldilocks by the way.

[Mahrukh Adajania, analyst]

Yes, yes, yes. Sorry, my bad.

[Uday Kotak, executive]

I think we've got to watch the situation on inflation and interest rates. And the key question is, there are two competing forces. One is a significant global slowdown and on the other hand, in the Indian situation, inflation trajectory post the monsoons. And on that -- on the monsoons, again, El Nino is an issue and we would -- I was talking to one of our directors today. And the view at this stage is there are counter wind forces which can ensure that El Nino -- let me put it this way, this is what he said very interestingly.In every time, India has had a drought, it has -- there has been an El Nino. But every time there has been El Nino, India has not had a drought. So we have to wait how the El Nino impact plays out and whether India gets impacted or not impacted. So we will get a clearer picture on inflation post clarity on the monsoon outlook. So mainly by some time in August, we will get a sense of how the inflation trajectory is playing out.Just if you think about it, we have been in one of the most significant interest rate increase cycles and the increase in interest rates is not just from repo rate of 4% to a repo rate of 6.5% now. The increase in interest rate effectively has been from 3.35% because we were operating at the lower end, which is the reverse repo rate, all the way to 6.5%. So you had a 315 basis point increase in interest rates between May 2022 all the way through March 2023. So we are at a rate where we look -- currently, it looks like we are at a real interest rate of give or take around 1 percentage point.So sustainably, where does Indian inflation stop and what is the real interest rate India would live with? And I think the trajectory on interest rates depends on that. If the monsoons go well, I think there is a probability in my view towards the second half or later part of the second half of the year to see some moderation in repo rates. If the monsoons do not go as well, then I would be surprised if you saw any reduction in repo rates. There was a trajectory of the interest rate curve is very much dependent on that.Having said that, at Kotak, we are very focused on having a well-balanced book between fixed and floating and between EBLR, which is the repo rate linked and the MCLR linked. So we are also having a reasonable book in addition to what is linked to repo on the MCLR side. And our view, the bank is depending on the nature of the assets, we will have a mix of that. And at the same time, some of our assets like tractors, unsecured retail, commercial vehicles are all the fixed rate book, which is -- or even micro finance, which are all growing reasonably well as well. So we are well balanced and we are not taking any extreme position in one direction.But I mean, we do see this about FY '22 - FY '23 as an extraordinary year for our margins in banking, which are reflected in our numbers.

[Mahrukh Adajania, analyst]

Got it.

[Uday Kotak, executive]

Sorry and let me add one other point, assuming the repo rate trajectory is not dramatically lower, our average NIM last year was 5.3%, while fourth quarter is 4.75%, sorry, 5.75%. So average NIM was 5.3% end of last quarter was 5.75%. At this stage, there is nothing which tells us that at this stage and therefore I'm not making any commitment, there's nothing which tells us that our NIMs need to be lower than 5%. Now whether it's 5.2%, 5.3%, 5.4%, I'm not in a position to give you an exact number. But currently, we -- our margin numbers look reasonably healthy. And as I've always said, at every call and that Kotak is very focused on risk-adjusted return for the levels of risk we take, we must make fair returns for all our stakeholders.

[Mahrukh Adajania, analyst]

Got it. And sir, just in terms of credit cost, the sector is sustaining at historically lower credit cost? So would it be fair to assume that 20 basis or below 20 basis points credit cost can sustain at least for the next three to four quarters? Is that what we should be building in?

[Uday Kotak, executive]

Dipak?

[Dipak Gupta, executive]

I will -- at this stage, Mahrukh, right now, the book is looking good. We are not seeing anything which is dangerously spotty, but the bank will give you update every quarter on how we -- how the bank sees the macroeconomic and the micro situation. But currently, the book is -- the balance sheet is -- Kotak balance sheet, I can say, is quickly and looking pretty good.

[Operator]

Thank you. Ms. Adajania, may we request that you return to the question queue for follow-up questions. We'll take the next question from the line of Adarsh from CLSA. Please go ahead.

[Adarsh Parasrampuria, analyst]

On the deposit side, right, our deposits accreted by about INR2,000 crores. A large part of it was bulk, right, even within the term deposits you mentioned. From a more sustainable perspective and we've seen some bigger brands and bigger banks really getting a lot of retail deposits at least on [Technical Difficulty] difficult and how should one look at that because that's probably going to be a fuel for sustainable growth as you build the balance sheet in the next couple of years?

[Uday Kotak, executive]

I think I'll give it to Virat, but I just must mention to you that between second half of March and now, there has been a little bit of softening in the wholesale deposit rates as well by about 30 to 40 basis points as reflected in the one-year CD market. With that background, I'll request Virat to take.

[Virat Diwanji, executive]

Yes, look in terms of the deposits, just now as the interest rates turnout retail which we call less than INR2 crores have also shown growth. But with this kind of interest rate, the high net worth individuals also want to lock in for their money in the term deposit as what we call variation to their investment strategy. And hence, you find a lot of them coming between INR2 crores to INR5 crores as well. We have seen good traction in that sense on the retail side and it's what we call the customer -- retail customers means who were earlier not getting engaged on the fixed deposit side, with the current -- in the last year have seen bringing in money into the fixed deposit.

[Uday Kotak, executive]

Manian, wholesale dependence of the balance sheet, your thoughts please.

[KVS Manian, executive]

So like Uday just mentioned, I think wholesale rates through last year were high, but we are also seeing softening of that. So there is just now an opportunity to optimize cost by sourcing wholesale, but our strategy to grow granular and increase the retail content in the deposits will continue. And in fact, like Virat said, on the -- even in the savings side are zero to 1, 1 to 5, 5 to 10, all those buckets in amount continue to grow, granular deposits continue to grow well.

[Uday Kotak, executive]

And let me just add one other point. For the scale of our balance sheet, we see no problems in funding the manager.

[Adarsh Parasrampuria, analyst]

No -- and on the incremental basis also as far as the Consumer Bank is concerned, we are 50-50 on wholesale versus retail.

[Uday Kotak, executive]

So again, no concerns on funding the balance sheet.

[Adarsh Parasrampuria, analyst]

Got it, Uday. And just not related to this, but there have been news reports about Kotak's expression of interest to acquire IDBI Bank. Any rationale there would actually be more getting a fairly strong liability and granular liability base. So just on a stand-alone basis, could you comment about whether you would ever consider looking at a PSU bank, given that there can be cultural gaps? Or is that okay if it adds to the liabilities of the bank?

[Uday Kotak, executive]

So I can clearly not comment on a specific case as you have asked, but I'll make a more general point. We are sitting with consolidated capital of 23%. Our focus on any acquisition and you have to go back to our history is based on what will give us customers and customer segments where we think we will be able to add long-term sustainable value at appropriate valuations. You have seen our acquisition in the past of ING Vysya Bank in 2015. And we had a very specific logic of why we wanted to do it. We saw value in some of their businesses and we believe we have a great strength as management to integrate significant banks like we did in the case of ING Vysya Bank into our fold.For execution of such transactions is something which we are always quite confident as we have demonstrated in the case of ING Vysya Bank. And we were able to fully -- if you remember at that time, it was the bank to bank, it was almost the same size as us, ING Vysya Bank. So we and also, we had to deal with significant presence of unionized employees in ING Vysya Bank and we have successfully done that in that case in a manner which has been non-disruptive. And on culture, I believe culture is like a water off an portion. It has to evolve, it has to develop, it is about open mind, it has to be without bias. There has to be a sense of embrace, but surgicality of execution. So as long as we can do all that, we are open to appropriate acquisitions across the financial services space with a clear view on sustainable value creation.

[Adarsh Parasrampuria, analyst]

Got it, Uday. This has been and thanks a lot to you.

[Operator]

Thank you. The next question is from the line of Kunal Shah from Citigroup. Please go ahead.

[Kunal Shah, analyst]

Yeah. Hi. So first on the corporate banking side, in fact, you highlighted that there were some repayments as well as sell-down.

[Operator]

The audio is not clear from your line, please use the handset mode.

[Kunal Shah, analyst]

Yeah, I'm on handset, is it clear now?

[Operator]

Yeah.

[Kunal Shah, analyst]

Yeah, so I was just asking in terms of the corporate banking side, when we look at it, there have been sell-downs as well as chunky repayment. But in terms of the spread, so when we look at it in terms of maybe the choice between margins and the growth, has that also impacted the corporate credit growth during the quarter?

[Dipak Gupta, executive]

So, while there is always a trade-off, having said that, if I -- to illustrate my point, if I take you through a small map, at the time that CD rates for banks were close to 7.4%, 7.5%, banks were doing term transaction, that is 7 to 10-year term transactions on AAA assets at 7.8% to 8% and at BBB transactions were going at 8.2%. Any matter we tell you that if your one-year borrowing costs are at 7.4%, add on the SLR, CRR to that and add on the PSL cost to that, it doesn't make sense, but of course those these happened in the market. So it's not about the trade-off in margin all the time. It must make sense fundamentally, right, there must be a risk premium over the sovereign rate, there must be a tenure premium over one year. These are fundamental to how you price transactions. And if you see transactions, we do not need such fundamental requirements, we prefer to stay off. I can assure you one thing, that there are no transactions in the corporate that we cover that we do not get visibility to. We get visibility to every transaction that happens, but we choose to do some and don't choose to do other if they do not meet our fundamental requirement of risk return trade-off.So it's not only about -- you can argue that cost of funds is 5.5%, therefore lend below sovereign rates to corporates, you can still make a spread, but that is not fundamentally correct.

[Operator]

Mr. Shah, does that answer your question?

[Kunal Shah, analyst]

Yeah, yeah. That's clear. And secondly, in terms of the deposit, so again, last time you maybe you articulated that there would be a measured pace of branch expansion, but a few of the leading private banks have indicated to gather a significant pace in this particular fiscal. So any change in stance with respect to branch expansion? And when we even look at productivity, given that we have relatively high proportion in metros, but still in terms of -- from deposit for a branch perspective, we are still in line or lower than the other private bank. So how should we look at the productivity? And when should we expect it to maybe catch up with the peers, yeah?

[Dipak Gupta, executive]

Yeah, so conceptually, I don't think there is any change in the strategy, the way in which we have carried out our branch expansion. Our focus on metro continues, this is proportion would be higher. But in terms of other thing that we are seeing is, lot of transactions are happening outside the branches. So perhaps you need branches for -- basically for the business customers and keeping that factor in mind, we will lead our next round of expansion. We have done close to 100 branches in this last financial year and in the -- going forward, in '23-'24, we would do close to around 150 more branches. So our strategy to do measured expansion on the network continues, keeping in mind how the things are developing on the digital front, as well as the branch transactions and the customer needs are concerned.

[Uday Kotak, executive]

Kunal, I want to put another point to you and all of us. How many branches does Phone Pay and Google Pay have?

[Kunal Shah, analyst]

Yeah, so maybe our focus is clearly there in terms of 811 digital...

[Uday Kotak, executive]

What I'm saying is, therefore, all of us need to have a benchmark not only at what other horses are doing. We must also have benchmark on how the new cars are coming into the marketplace.

[Kunal Shah, analyst]

Sure. Got it. And secondly, in terms of productivity, if you can highlight, yeah? So based on this, when we say in terms of digital versus the physical branches and given our relatively higher exposure on the metros, that seems to suggest that eventually our productivity per branches should be relatively higher than where the other banks are, okay? But still, maybe it's at par or it's slightly at a discount to them. So how -- what are the initiatives to scale that up, yeah?

[Dipak Gupta, executive]

First of all, in terms of if you measure the way in which the practical method is CASA per branch, I think they're comparable to them, I mean, for the key competitors as we might call it. As we go more and more digital, obviously, the productivity will go up and we are using the analytics to a great degree to improve our process. So from that perspective, I think going forward, we will see good improvement in the productivity.

[Uday Kotak, executive]

Again, right now, if I can add, Kunal, we are [ Voltana ] we are in [indiscernible]. So we are in the process of making a very significant transition on a lot of areas on technology and digital, which is work under process. Therefore, which will lead to significant productivity gains, but in the short run, we run with significantly higher manpower compared to the long-term productivity areas, while the investment and technology happens in the next 12 months. But we will see significant gains as we go forward through this period and beyond.

[Operator]

Thank you Mr. Shah, may we request you to enter the question queue for follow-up questions. We'll take the next question from the line of Roshan Chutkey from ICICI Prudential Mutual Fund. Please go ahead.

[Roshan Chutkey, analyst]

Yeah, am I audible?

[Uday Kotak, executive]

Yeah, yeah.

[Operator]

Please go ahead with your question.

[Roshan Chutkey, analyst]

Yeah, so firstly, sir, I want to understand what your views are on -- see, we are seeing a broad-based slowdown in consumer -- anything consumer discretionary, right? If that is the case, why is it that there is a massive growth at a system level when it comes to consumer loan book? That's my first question. Second question is in the similar way. When you look at the corporate books, I mean, corporates have very strong balance sheet now. Why is it that the corporate credit growth is slowing down so sharply? And what are your views on the outlook on corporate CapEx. That's my, yeah, that will be the third and then I'll take the first, look at the first.

[Uday Kotak, executive]

So, Virat, you have to answer the consumer side, what is it the reason why we are growing faster and then Manian on the wholesale side.

[Virat Diwanji, executive]

Look, the demand still is significantly higher, means, normally, when -- with the interest rates going up, you see a slowdown on the demand, but that's not happening. We see what you call a huge demand for both unsecured lending and credit card. And hence, perhaps, we continue our focus on driving growth in that segment. Now from where it is -- the growth is coming in, I think it's difficult to pinpoint to a single reason, but perhaps the wage structure in the country has gone up, people's mindset to what we call today we have seen even people borrowing for holidays. So those change in behavior also is driving people to take more consumer loans and that's what we are seeing in the marketplace.

[KVS Manian, executive]

On the corporate side, credit, of course, even our RBI numbers, if you look at RBI numbers, credit growth, if you take away the segmental growth of NBFCs, the growth is in single digit for several quarters. And we are yet seeing significant turnaround in the corporate credit growth. I guess, as the private investment that is being talked about in terms of adding capacities happens over the next few quarters, one can see -- one could see growth there. Having said that, for a bank of our size, I do believe that -- like I said, even this year, if you look at the average growth, we have grown around 16%, quarter-end figures don't show that. That kind of growth is still possible to achieve.

[Roshan Chutkey, analyst]

And when it comes to the MSMEs, right, particularly the ones which are related to exports, right? If you look at the data, data used to submit that exports of MSME will industry collapse, how should one think about this sort of system? Should we think about any stress emerging because of this?

[Dipak Gupta, executive]

So SME, broadly, if you look at SME, that's not the way we look at the SME growth number. Overall, the SME, if you look at the credit data, CRISIL report, last CRISIL report on the SME sector, the average NPAs are 11%, but it's a huge segment, right? And the ability of institutions to pick up the right credit there because it's a very large market and we have a small market share. We believe we can still pick and choose our credit there and grow that segment. And that's why you can see that SME growth is at about 18% this year.Again, of course, there are some pricing pressures there, but I would say that segment is possible to grow irrespective of the secular growth of the sector.

[Roshan Chutkey, analyst]

Sir, my question was not pertaining to particularly Kotak Bank, Kotak Bank is in a great shape, very good risk-adjusted return assessment and fantastic credit evaluation. The question is more to do with the system and how should one think about the -- any pockets of stress emerging because of exports of MSME related industry slowing down?

[Uday Kotak, executive]

So I'm going to introduce one of my colleagues here, who is part of our top leadership and management team, who heads our risk function, Mr. Paul Parambi. May I request Paul and he's asking more from a system point of view, how do you see the risk outlook?

[Paul Parambi, executive]

Basically, when you see any risk in the sector, which is because of various external factors, whether it's global factors or local factors, two years back we had the pandemic, this sector which potentially can get more impacted or which is more vulnerable is the MSME sector because obviously, these are smaller companies, okay? Having said that, currently, at least, look, as Manian had said, if you're a player who's not a very large market share player, it is possible to actually play very well in this space without -- by actually avoiding the bullets and taking really good credit risks, okay?So one has to be watchful right now because as Uday had mentioned initially, the global situation is turbulent. There are challenges around. Interest rates are higher. Capital Markets, of course, anyway, this segment doesn't have too much access to capital market. So one has to be watchful and make ones way through this.

[Dipak Gupta, executive]

I'll just add something to that, through the last couple of years, I think the ECLG scheme that was done for SME and MSME was really very effective. It helps this sector see through the pandemic, unlike the big corporate which is capital either in the debt form of debt or equity, this segment require some inclusion of funds and that the ECLGS scheme was a great scheme. It actually helps sustain this sector well. So right now, we are not seeing any incremental stress coming in this sector per se, of course, on our portfolio and not at all.

[Operator]

Thank you, Mr. Roshan, may we request that you return to the question queue or follow-up questions. [Operator Instructions] The next question is from the line of Abhishek M from HSBC. Please go ahead.

[Unknown Analyst]

Sir, just getting back to the growth question, you gave a guidance of 1.5x to 2x nominal GDP growth. Shouldn't you be at the top end of that range somewhere around 22%, 23%, given that the base is still small in several segment and you've built this entire franchise and you're gaining so much market share. So just trying to think why you should not be at the top end of the segment of that growth range?

[Uday Kotak, executive]

I can assure you we will try very hard for that. That's something I can tell you. We will try very hard for that and we will work on that while keeping return and risk parameters in mind. And subject to that, we will certainly want to be ready as much as we can for our stakeholders and for creating long-term sustainable value. So that is something which is a deep ingrained commitment. We also found ourselves sort of refocusing on things which we can actually add value and growth. And that you have seen over the last couple of years, our outlook is certainly significantly more open to looking at growth opportunities across the board and we will be committed to growing as fast as possible within the parameters of risk and return.

[Unknown Analyst]

Right. And just a sub-question to that. So specifically in corporate banking, what is the outlook on demand, possible substitution by the bond market as rates cool off and your participation in these?

[Dipak Gupta, executive]

Yeah, so we don't -- when we conduct our business, we don't see any difference between advances and traded substitutes. So we will play both of them as appropriate, depending on the pricing we get and optimizing like I said, optimizing our PSL costs and spread. So from our point of view, it doesn't matter whether the money -- the growth happens in the bond markets or the advances market.

[Unknown Analyst]

And any update on the succession issue? And when do we hear more about that?

[Uday Kotak, executive]

Look, what we have is the -- the terms are pretty much there, we need to apply to the RBI by no later than 31st of August and the board as well as the NRC is pretty much seized of it. There is a -- is now known, there's a global search firm which has been passed with getting that pretty much actively involved and we will be applying to the RBI well in time.

[Operator]

Thank you. Maybe request you to enter into the question queue for follow-up questions. [Operator Instructions] The next question is from the line of Jai Mundhra from ICICI Securities. Please go ahead.

[Jai Mundhra, analyst]

This quarter, we have continued to see strong growth in unsecured portfolio. But at the same time, the staff -- non-staff OpEx has reduced considerably. How would you look at both these things? I would have thought that both these things would go hand-in-hand, but there is a divergence in this quarter. So just wanted to get your views there?

[Uday Kotak, executive]

Yeah, let me just take that. As I mentioned earlier, in Q3, we had significant spend on promotion, both at an overall level and at product level that has been decently lower in Q4. The second one is, in Q3 we had some onetime expenses, which we had taken and we don't [Technical Difficulty]. So yes, Q4 costs are marginally lower than what we had in Q3.

[Jai Mundhra, analyst]

And just a data keeping question, sir. If you can give the RWA number for standalone bank? And do we continue to have these 81 loans of, I think, around 5 billion or odd number. So RWA and 81 bond for the stand-alone bank?

[Uday Kotak, executive]

81 bonds, we had issued preference shares quite content about five years ago. So that is the only amount of what we have there. The RWA, I don't have the overall number, but 76% of RWA is about 76% of our total asset book, it is about -- if I look at one quarter ago, it was 77%.

[Jai Mundhra, analyst]

Sure. Thanks, thanks.

[Operator]

Thank you. The next question is from the line of Manish Shukla from Axis Capital. Please go ahead.

[Manish Shukla, analyst]

So FY '23, most banks are likely to exit at historically high margins and historically low credit costs. So what Manian alluded to on the wholesale banking, what is the risk that the pricing gets extremely competitive in SME and retail as well and thus pressurizing either margin or growth for FY '24 and beyond.

[Uday Kotak, executive]

I think we gave a clarification that if you look at our NIMs, fourth quarter is 5.75%, full year is 5.33%, based on the current way the interest rates seem to be and are reasonable view currently. We would still like to believe that we would be at the five-plus handle average, last year was 5.33%, we should be at the 5-plus handle as if things look today and therefore this is not a guidance, but a judgment of how we see the situation currently, five-plus handle for '23, '24.

[Manish Shukla, analyst]

Sure. Now going back to the question on branches, right? We see that data across banks that average balances, liability balances and branches are significantly higher than our digital accounts. So in that context and given the pace of growth at which you have been growing and where you aspire it to, just wanted to circle back on the branch strategy there because the digital accounts don't necessarily get you the value, they definitely get to the volume.

[Uday Kotak, executive]

Virat?

[Virat Diwanji, executive]

Look, there are two aspects to this. One is when you acquire a customer digitally, yes, he may not have a value, but he is obviously available for us to do a cross-sell. And that's where we have been capitalizing it in the recent past. So we do see a value in acquiring a customer digitally because of course, it's significantly lower. And hence, the focus on acquiring customers digitally is there, whereas the physical branch because today, just keep in mind that customers before starting a banking relationship, he does look at whether there is any bank branch in his close vicinity or not. So to give them that kind of a confidence, we will need branches. And hence, we are doing a measured step in growing our network.

[Manish Shukla, analyst]

Got it. Thank you.

[Operator]

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

[Saurabh Kumar, analyst]

Just one question, you've given a range of metrics on 811. Will 811 as per your internal P&L be profitable right now? And will that disclosure correspond to the BSC disclosure you've given on the digital banking unit? Thank you.

[Uday Kotak, executive]

Yeah, as given on the 811 disclosures, [indiscernible] is not. But -- and if you look at the segmental dispose that, it includes the 811, it is not just 811.

[Saurabh Kumar, analyst]

Okay. So digital banking unit in that BSC will be 811 trust?

[Uday Kotak, executive]

Yes, the digital banking units which we are there -- the government has passed it, that's also part of the segment.

[Saurabh Kumar, analyst]

Okay. Got it. Thank you.

[Operator]

Thank you. Ladies and gentlemen, as we have reached the end of the call, I will now like to hand the conference over to Mr. Uday Kotak for closing comments.

[Uday Kotak, executive]

Thank you very much. We look forward to a good year ahead in terms of 2023, '24. I think Jaimin and all my colleagues have taken you through the full analyst report. And I will end this with just a quote which was made by Mr. Elon Musk to end this conference and I'll just repeat it, it's there in your presentation, "When Henry Ford made cheap, reliable cars, people said, 'Nah, what's wrong with a horse?' That was a huge bet he made and it worked." Thank you very much.

[Operator]

Thank you. [Technical Difficulty] behalf of Kotak Mahindra Bank Limited and that concludes this conference call. Thank you for joining us and you may now disconnect your lines.