Ladies and gentlemen, good day, and welcome to the Kotak Mahindra Bank Q2 FY 2020 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing star, then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Uday Kotak. Thank you, and over to you, sir.
Good evening, friends. Happy to do the call at the end of the second quarter, and midpoint of the financial year 2019-2020. As you are all aware, this is a very interesting and challenging time in the Indian economy, for particularly in the first half of the current fiscal, which is April to September, when we did see a slowing economy, and a reasonable gradient of that slowdown in the first quarter and also in the second quarter. At the end of the first quarter, when we discussed in early July or in July, we were all concerned about where the monsoons would end, including a most projections were talking about a less than normal monsoon.
Contrary to expectations, we actually had a situation where the monsoons went ahead of normal and actually went on the positive side. In fact, to a certain extent, little late monsoons as well, leading to, in many areas, also the flooding, so the other side of what the expectation was. This is the beauty of variables, which we have all of us have dealt with, leading to some amount of slowing down of the economy in the second quarter by excessive rain in many parts of the country and the flooding. The monsoons have also further pushed into the month of October, and therefore have had certain level of challenges for the economy and delayed what would have been otherwise a quicker turnaround of the economy.
Therefore, if I look at the gradient of the economy in the first half and ask the question about where do we see that gradient from here, I do believe that in the second half, we should see a flattening of this gradient happening through the second half and towards a more normalized sort of situation compared to the steep gradient we saw in the first half of the year. Of course, whenever the economy slows down, it is driven by a few sectors which have a disproportionate impact on this slowdown.
So in the first half, among the various sectors, clearly, three segments saw a significant slowdown, which is commercial vehicles, passenger cars, and also the residential real estate side, which saw a significant slowdown in the economy, and have, obviously, multiplier effects on the different players across these different segments. So, when we are looking at the numbers of the first half, we have to factor in the fact that there was a slowing manufacturing in the auto sector, a slowing real estate sector, having impact on the growth of the economy. The question then is, how does a financial institution like Kotak handle these facts, and how do we, as a management, respond to the reality and the challenges and the opportunities in the Indian economy?
And the way we have responded is, first of all, focused on something we have always deeply believed, which is, number one, focus on low-cost, stable, and sustainable liability franchise as a core of the long-term building of a sustained financial institution. And number two, have a relentless focus on risk-adjusted returns. And I think it's extremely important to keep in mind the concept of risk-adjusted returns at times like these, because you do see a situation where, in the current state, there is a pockets of the economy which have stress in the economy itself and inevitably reflect in the numbers of the financial sector and therefore banks. We have also seen some implications of this in different forms.
Number one, on the point number one, which is our focus on low cost and stable liability, we have grown our CASA deposits now to a ratio of 53.6%, and our total deposit base, less than five crores, that is CASA plus deposit base, less than five crores, now accounts for 85% of the liability base of the bank. That is total CASA plus deposits less than five crores, now are 85% of the deposit base of the bank. Therefore, our continuing journey on low cost and stable liability is something which we have continued to do. The second point is with reference to the slowdown in the economy. We have faced...
This more in the context of actually pockets of rural and semi-urban India, where the impact has been greater on the consumer and the retail side than in urban India. And this is reflected in two ways. One is in our historical agri crop loan portfolio, which we inherited post our merger with ING Vysya, where we have seen a higher impact of some of those agri crop loans seeing the same. And second is also in our commercial vehicle business, where also we have seen the levels of delinquency go up compared to earlier times. On the wholesale book, we have not had any major hit other than one, which is around a hundred plus crores single account. But other than that, there has been no major single hit in terms of individual accounts.
And in terms of how we see our response to this is that if we believe that the risks are going up, we would like to also counter it by ensuring that there is enough margin for the incremental risks in the economy. And that's something which it reflects in our approach to net interest income and NIM, which have been pretty healthy in our context. Therefore, as I look at the situation with reference to credit costs, we do believe that the credit costs are going to be a little higher than what we had bargained for in the beginning of the year. And at this stage, we do believe the credit costs, our expectation for credit costs for this year is around the 60 basis points mark.
Our expectation at this stage for the loan growth is in the mid-teens plus kind of range, supported by better NII and NIMs compared to what we had originally estimated. We would be therefore happy to believe that we will get higher NII and NIM versus higher credit costs of around sixty basis points. At the same time, a loan growth on a mix which we are comfortable with of mid-teens plus. With that, I will now request my colleague, Jaimin, to take you through the specifics of our results for the second quarter. Of course, we have been benefited by the reduction in tax rates, which are reflected in our numbers as well. Over to Jaimin.
Thanks, Uday. Let me just take the standalone numbers first. This quarter, post-tax, the bank closed with a profit of INR 1,724 crores, which is 51% above the same number last year, which is INR 1,142 crores. As Uday explained, we've had a healthy NII growth. This quarter, we saw an NII on a YoY basis grow up by 25%, and we closed the period at INR 3,350 crores. NIM, we closed this quarter at 4.61%, as against the immediately preceding quarter, where we were at 4.48. Fees and other services income, again, has seen a good growth. We finished the quarter with INR 1,162 crores, which is 13% higher than the same period last year.
On a pre-tax basis, the bank's standalone had a profit of INR 2,101 crores, 21% higher than last year. The rest of the benefit coming from the tax rate change, which Uday talked about. At the bank, our loan book now stands at INR 213,000 crores, which is about 13.3% higher than a year ago. The corporate book, which accounts for a large part of the book, which is the corporate SME, grew at 7.5% on a year-on-year basis. The agri book grew at 21%. The small businesses, personal loans, credit card book had a growth of 20%, whereas the home loan and the LAP book grew at 23%.
Commercial Vehicles and Construction Equipment grew 15.5% for the year, though it had a negative growth, small number for the quarter as such. The gross non-performing asset at 2.32% as of September, which is against 2.15% a year ago. At the net level, we close at 0.85%, as against 0.81% a year ago. SMA-2 at 0.2% of our advances, INR 431 crores. We continue to have a healthy capital adequacy ratio, with a CA of 18.2%, with a Tier- I itself of 17.6%. Our return on assets, if I take the half year profits, is just short of 2% for the year.
CASA, as Uday mentioned, 53.6% at the end of the period. In addition, there is the sweep deposit of 7.1%. Both CA and SA has seen decent growth. Our average CA numbers for this quarter, for the half year versus the same period last year, is up 22%, whereas the savings numbers are up to 20%. Cost of savings account, which was 5.65 a year ago, has dropped to 5.37. CASA plus TD, as Uday mentioned, TD less than INR 5 crores, plus CASA is now, a healthy 86% of our total deposit base, as well as the focus on low cost deposits, has seen TDs less than 1 crore grow by 25% on a year-on-year basis. That's broadly the bank highlights.
I'll request Shanti to take additional initiatives and come back for the consolidated numbers.
Thank you, Jaimin. Very briefly, digital as a way of life for our customers continues, and, seventy-three percent of our active customers are digitally active, with most of them being on the, mobile. And you can see that mobile banking has shown a YoY growth of 74% . For recurring deposits and fixed deposits, digital seems to be, the way for customers to come in. We introduced a lot of, features aimed at, customer convenience. Some key mentions, you can book an Ola, cab through our app, cardless cash withdrawal, tracking of deliverables, which is aimed for ease and convenience of customers. Including on the asset side, we have seen an increase through digital platforms. Payments. I think customers continue to use more and more, migrate to digital platforms, for payments.
This is across UPI, from IMPS . UPI, both PSC as well as P2M, have seen a growth, and we believe that this will continue as we go into the future. We embarked on API banking many quarters ago, and we have enabled ordinary relationships across payments, lending, and cash management, and we believe that this is the way we will go in terms of collaboration and opening up and scaling for ourselves. For our subsidiaries, digital continues to be a way of life, but securities, insurance, and both life insurance and general insurance, where incrementally business is really coming through both net and mobile. Jeremy, back to you.
Thanks, Shanti. For the consolidated number, we closed this quarter at post-tax INR 2,407 crore, about 38% higher than INR 1,747 crore last year. Apart from the bank, we had profits coming from Kotak Prime, INR 172 crore against INR 157 crore last year. Our Kotak Securities at INR 149 crore versus INR 112 crore last year. The Mutual Fund and the Trustee coming together, bringing in INR 85 crore versus INR 52 crore last year, whereas the other NBFC, INR 67 crore versus INR 45 crore last year. The life insurance company getting a post-tax profit of INR 144 crore versus INR 127 crore last year. Of course, some of them benefited from the lower tax regime also. Kotak Life, the first-year premiums this quarter versus same period last year, grew by 34%.
Kotak Securities cash market share for the half year basis at 9.4%. The assets under management across the group at INR 242,000 crores, which is about 21% higher than the same period last year. Relationship value of advisory assets under wealth and priority is about INR 295,000 crores. The total asset, the total balance sheet size at the consolidated level is now crossing INR 400,000 crores. Loan growth at the consolidated level at 12%, we now are just short of two lakh fifty thousand crores in advances book. The other segment, which is sitting in the NBFC, has had a negative growth on a year-on-year basis.
Capital adequacy again, continuing to be healthy, 19.2% overall and 18.7% Tier- 1, with return on assets at the group level for the half year at 2.2%. And we close with a book value of INR 335 per share. So that's - those are the broad highlights for this quarter. Open to taking questions.
Sure. Thank you very much. We will now begin with the question- and- answer session. If you wish to ask questions, you may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Also, before we begin, we'd like to inform participants that in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. Should you have a follow-up question, we request you to rejoin the queue. To ask questions, please press star and one on your touchtone telephone. We will wait for a moment while the question queue assembles.
Maybe about-
A reminder to participants, to ask questions, please press star and one. Participants who wish to ask questions may press star and one. Please wait for a moment while the question queue assembles. We take the first question from the line of Deepak Shinde from SBICAP Securities. Please go ahead.
Hello. Good evening, sir. Can I get the slippages number for the quarter, gross slippages?
Yeah, it's like this. If I look at the half year, we are at about INR 1,800 crores, which if I look at the total advances book, would be on an annualized basis, that would amount to about 1.7% of the advances book. For the quarter, the number would be just about INR 1,000 crores.
INR 1,000 crores? Okay, right. And my second question is, like, how do you see the impact of the external benchmarking of loans? Like, what percentage of our book is currently on floating rate, and how do you see the impact going forward? Thank you.
No, on the question of floating rate loans, I think, we believe that this will lead to better transmission. And which is good, because at a time when you really want the demand to pick up. However, as we have indicated, we would like to our NIM risk-adjusted returns are good, and we would like to therefore guide that we do believe our NIMs should be... Our current guidance on NIMs is that we should be higher than 4.3%.
What percentage of our loan book will be floating for this?
About 70%, 70 %+ will turn to the floating situation. Yeah, so for overall advances book, 70%+ would be floating.
Okay. Thank you.
Thank you. The next question is from the line of Jinesh Gopani from Axis Mutual Fund. Please go ahead.
Yeah, hi, sir. Very good evening. So sorry, I missed the opening remarks on the credit cost guidance and, if you can just help understand on that, more in detail. And generally, on the gross NPA side, sir, are you seeing any, big, big slippages, in your portfolio as well, given the deterioration in the economic environment?
Yeah, I think we did guide that our GNPA, as you know, has moved a little bit up from the previous quarter. And we have given a guidance that for the year, we do believe that the credit cost would be in the range of around 60 basis points, give or take.
Okay.
And-
Okay.
We actually do believe that, of course, the slowdown in the first half would have an impact on the overall credit environment, and that is being reflected in our numbers for the September quarter. We do not see any big gorillas out there at this stage, which are likely to hit us in the near term.
Okay. But sir, generally speaking, do you see things improving maybe after six months, given-
That's what, guidance when in my initial talk, I did-
Sorry, I missed out. Yeah, sorry.
So against the steep gradient, which we have seen in the slowdown in the economy in the first half, we do believe that the gradient is flattening.
Sir, I know you might not answer this question, but I just wanted to ask you, given the government, what they have done on the corporate tax side, do you expect them to give some stimulus on the personal income tax side as well, to prop up demand or it's a wishful thinking?
Jinesh, I will be very supportive of it.
Okay. Thanks, thanks, thanks a lot. Thank you. Thank you.
Thank you. The next question is from the line of Birla Sun Life Insurance. It's Pranav Gupta from Birla Sun Life Insurance. Please go ahead.
Hello?
Yes.
Good evening, sir. Just a couple of questions. So firstly, on the asset quality side, like others have also mentioned, you said that the CV portfolio is seeing some stress. So if you could give us some color on whether it's coming more from the used side or the new side, any specific geographies where you're seeing stress, some color on the CV portfolio.
Yeah, I'll have my colleague, Kannan, who manages this portfolio day to day, to give some perspective.
There is, there's no specific color in terms of saying specific geographies. It is across. Doesn't have anything between new and used. It's again, it's in both, both the segments. Broadly, it's got to do with non-availability of loads, very low capacity utilization and freight rates not going up.
... and an extended monsoon also has caused some amount of disruption. So it's just all this cumulative factors which are leading to elongation of the receivable cycle. If these factors, when load factors improve, rates improve, then you might see an improvement in the collection situation.
All right. So is it fair to assume that the quality would be similar across FTU, FTBs and say smaller fleet operators and so on? Is it fair to assume that?
No, FT, FTU, FTBs might be slightly worse off than the larger operators.
Right.
The smaller MLOs will be slightly better off than the FTU, FTBs, but worse off than the larger operators.
Okay, okay.
And other operators will be better off.
Right. The second question is on the liability side. So we've seen a reduction in the CASA rate in a couple of buckets over the last six, nine months. So is it a function of you know, you seeing more customer stickiness? Or I mean, what is the thought process there? If you help us understand that, that'd be helpful.
No, I think on the SA strategy, our view is that we would like to ensure that our customers continue to have a superior outcome banking with Kotak Mahindra Bank, so that is the core of what we believe. As the rates in the economy soften, we have also responded to them appropriately, and which is reflected in our SA costs YoY going down from 5.67% to 5.35%. Therefore, our fundamental philosophy is sticky customers, growing customers, a superior value proposition from Kotak Mahindra Bank in terms of where they should... where they can bank with.
At the same time, being able to communicate to the customer that we, while we continue to be a superior proposition, we are also sensitive to what's happening in the market interest rate.
Right. Right. Great, great, sir. Thank you so much.
Thank you. The next question is from the line of Vishal Goyal from UBS Securities. Please go ahead.
Hi, thanks for taking my question. My first question is on your earlier remark in the last quarter on the Swachh Bharat Abhiyan. So where do you think we are in that process? Because we are seeing a lot of companies, you know, getting downgraded, et cetera. So how long, you know, you think this would take?
Yeah, I think my view on this is something which I have been quoted as well, as I do believe that there have been pockets of business in India, which needed to clean the shirt. We needed a more clean white shirt, and I think there is sensitivity in the system to ensure that while we clean the white shirt, we take all the efforts not to tear the white shirt. So, I would like to believe that we are moving forward in a manner towards a cleaner white shirt, hopefully not a torn white shirt.
Yeah, I mean, so that is clearly the risk, you know, at least playing out right now. The second question, which is related to the same, is which are like and you've been clearly very, very early in picking, you know, stressed buckets. So what are the leftovers, you know, in terms of stress? Where is the incremental stress which can come from?
You know, it's a... See, if you go back, if you take the last ten years of history, post-two thousand and eight financial crisis, when India believed that India was immune compared to the rest of the world, and therefore, carried on its merry expansionist pro, process, both in project finance and in infrastructure financing, which I think obviously had significant ramifications in the period two thousand and eleven to two thousand and sixteen, when we saw the real sector pain coming to the financial sector. So between two thousand and eleven and two thousand and sixteen, we saw the real sector pain to the financial sector.
I think post-2016, particularly since last year, and post -IL&FS, and then of course, some of our other financial sector players, who have had the stress coming in, we have seen the pains of the financial sector reflecting on the real sector. And therefore, now you have seen a two-way traffic between real sector pain transmitting to the financial sector and the financial sector pain, transmitting to the real sector. That is one.
Second, I think is that, we are also seeing, one of the other big challenges, as you know, historically, I always used to feel that in the rest of the world, whenever there was a pain, I normally would hear, "Oh, there is a pain in the real estate sector in some country, which led to a slowdown in the economy of those countries." But that never used to happen in India.
Yeah.
For the first time, we are seeing the pain in the real estate sector in India. And I do believe that, historically, India never had that issue because India had higher inflation, and therefore, real interest rates were not that high. In this cycle over the last many years, India has had high real interest rates, and that has had an implication on the real estate sector as well. And I've got my full management team here with me, and I'm going to ask one person who's now also going to be, who is a part of the Prime Minister Economic Advisory Council, Nilesh Shah; he's here with us. So Nilesh, your view on this question on the economy?
I think from an economic point of view, we have seen banking liquidity getting destroyed. We have seen interest rates being cut and more are in the offing. We have seen transmission of credit coming under stress, but with PSU bank capitalization and NBFC liquidity cases, like, capitalization should improve in the second half compared to first half. So all these steps should result into better growth in the days to come. We believe second half will be better than first half.
Okay, back to you.
Yeah. Thank you, sir. So I think I just, like, if you permit one more question related to the same, and since we talked about macro. So we've first time we are seeing, you know, all the three or four legs of economy being weak, which is consumption, CapEx, and even real estate, for that matter. So what are the policy choices, you know, like, even the government has, except real estate? You know, like, some similar to real estate. What are the other choices they may have?
I think we are getting very macro. I think we should have a separate discussion on this, where we will certainly take up this, matter. But at this point of time, my view is that, and I agree with Nilesh on this, I do believe the second half will be better than the first half. As I said in my initial comments as well, April to September was a sharp gradient, in terms of the slowing of the economy. We underestimate what delayed monsoons and floodings in some part of the country did to slowing this economy further, particularly in September and October. We do believe that, the gradient is clearly flattening, and, we have to right this.
Our view is that it will need a combination of monetary policy and fiscal policy in terms of handling this situation, and we are quite hopeful about it.
Thanks. Thanks a lot for your thoughts, sir. Thank you. All the best.
Thank you. The next question is from the line of Sumeet Kariwala from Morgan Stanley. Please go ahead.
Yeah, hi. Hi there, team. I had a quick question on retail asset quality. If I go back a year, there were very, very small concerns, some early warning indicators going for a toss, on the retail book, and since then, the economy has worsened quite a bit. Just want to check, how is retail panning out now? And what has surprised you positively or negatively, if any, from a trend perspective in this portfolio?
Shanti?
Yeah. So from the retail part, the unsecured retail, we mentioned it, I think, even in the last quarter, is beginning to show a little bit signs of, you know, uptick in stress, and I think that trend continues. The secured retail is stable and, while, you know, we may see one or two here or there, the secured retail continues to be stable. But the unsecured retail, which is largely credit cards, maybe to a small extent, personal loans, continues to see some, you know, stress. Uptick in stress, I'd say.
Got it. And any comments on the story that was carried by The Economic Times today with respect to potential banning of DSAs to originate loans? Anything that you've heard or gathered on that?
Yeah. So we are also getting clarification, but it's not banning of DSAs. It's actually KYC of the customers that we are talking about, that the KYC needs to be done for the bank. So most of our products, you know, the bank does KYC. We are just getting clarification as well, and all the banks are speaking to the regulator, because we also read it in the papers only, so.
Got it. Thank you. That's all from my side.
Thank you. The next question is from the line of Prakhar from CLSA. Please go ahead.
Just a couple of things. One, how do you plan to utilize the tax benefit in terms of either there is a spending or there is a provisioning coverage that you would like to improve? And probably, you know, what would be the normalized cost growth?
I think our view on tax benefit is pretty simple. It reduces our cost of capital. Because whenever we look at loans as well as growth in any new initiatives, our risk, I mean, our post-tax cost of capital has come down. It certainly reduces the hurdle at which we take our investment or lending decisions, and this will certainly help in us being able to take bolder calls, because our cost of capital has come down, which is a structurally positive step taken by the government, and we do believe this, therefore, effectively enables us to take risks at a lower hurdle rate than what we've taken in past, and we will obviously use the lower hurdle rate in our lending and investment decisions going forward.
You know, a related question to that, based on, you know, the risk-adjusted returns and, you know, the new, probably a lower hurdle rate, where do you think, like, a couple of segments where things have improved and where you are sensing that it's gotten worse and you would rather, you know, become more cautious?
... You know, we have, you know, we debate this internally, and I don't think there's any perfect answer. Obviously, you've got to look at sectors, segments, geographies, everything very carefully. But just to share with you how we as management think. We think, if you take the entire stock of lending in India, we would like to believe that there is a, give or take, and obviously, we can debate on the number, but just as an example, we think about this as a 70/30 world. We think 30% of the current stock of banking assets need to be examined closer from the point of view of bankability and under risk underwriting. We believe 70% of the banking assets or bankable assets are, which are what I would call as something which we are very comfortable with.
Therefore, we would obviously focus on the 70%, and be far more cautious on the 30%. The trouble is, how do you draw that line between what is 70 and what is 30? That is where our biggest focus is, to be able to identify more and more assets which fits into the 70% bucket, and grow that bucket through this downturn, while being careful about bullets hitting us from the 30% bucket. This is how we think about risk underwriting. We constantly examine segments, and we are not afraid of taking risk, but we believe that if we take more risk, we must get the price for it. If you're taking less risk, we must- we will be ready for a lower price for it.
This is the heart of our philosophy, something which we- it's not we are saying now, we've been saying it to and sharing with investors and analysts over the last many, many years. Risk-adjusted return is the core to underwriting, and fundamental issue for leveraged financial institutions like banks, is the margin for error is very small.
And, my last question is on the, you know, slippages. You know, we've seen whatever INR 1,000 crores in this quarter. You said there were, you know, one bulky account, which is just about 10% of, you know, this number, I believe, at INR 100 crores. But, do you sense this is sort of...
It's above INR 100 crores, but not dramatically. Okay? Yeah.
Yeah. So basically, just wanted to get a sense that, is, you think given where things are, this INR 1,000 crore is a more normalized run rate, right now, or this is sort of a kind of an unlikely repeatable level for the near term?
No, I think, you know, we are watching the situation very closely. As I've given you guidance, finally, slippages reflect in credit costs. We've guided that our credit costs we expect to be in the region of around sixty basis points, and that is something which we feel is our current view about going forward.
Got it. Thank you.
Thank you. The next question is from the line of Darpin Shah from HDFC Securities. Please go ahead.
Hello? Hello.
Yeah. Yes.
Yeah, thanks for the opportunity. Just wanted to check on the agri part, which you mentioned, you know, that there is some stress which was variable. So if you can throw some more light, and if you can also quantify how much pain you have seen in this quarter?
Yeah, I mean, as I said, it's more in the crop loans, otherwise in the portfolio of crop loans. The portfolio is not very large, and, it's not that we're not growing that portfolio, but we are maintaining that portfolio. So that's the portfolio where we have some issues. Other than that, on the agri term loans, tractor loans and all, in fact, we're better than the previous year.
How much pain have we seen in this quarter? Can you quantify?
No, I think, you know, on a small portfolio, it's a disproportionate percentage pain we have taken, and we have basically taken it through our recognition as GNPA and appropriate provisioning. Therefore, it's a large percentage of a small portfolio.
Okay, great. Thanks a lot.
Thank you. The next question is from the line of Bharat Sheth from Quest Investment Advisors. Please go ahead.
Thank you. Thanks for the opportunity. My all the questions have been answered. Thank you. Hello?
Thank you. We move to the next question. The next question is from the line of Karthik from Investec. Please go ahead. Karthik from Investec, you may go ahead with the question.
Yeah, thank you, sir. So, you've done some reclassification of your business banking and corporate banking for the last couple of quarters, and the combined growth rate there has dropped dramatically. So, is the continued decline in business banking portfolio leading to this, or has there been a drop in the corporate banking growth rate?
Manian?
There has been a drop in the corporate banking growth rate. The business banking has continued the trajectory where it was. It was flattish, the business banking side was flattish, but the lack of growth is in the corporate side.
All right, and you've actually qualified your corporate asset quality guidance, saying that so far there's been no major gorilla hiding. Are there any specific events that you envisage which could potentially dramatically change your guidance and credit costs, either on real estate or NBFCs?
I mean, at this stage, we do believe that we are broadly aware of where the spottiness is, which is within our radar. At this stage, we are not seeing anything which is dramatically different from what our current views on the portfolio are, therefore. But, you know, these things change, and therefore we're keeping a close watch. At this stage, we are not worried.
Thanks. And just a last bit from my end. The number of customer additions on the liability side during the quarter?
We are adding about more than what? 400,000 customers a month.
All right. So the run rate actually continues that we've had?
Yes, yes. Of course. Of course.
Great. Thank you so much.
Thank you. The next question is from the line of Kunal Shah from Edelweiss. Please go ahead.
Yeah. Again, coming on to this, risk-adjusted ratio number. So currently, when we see the margins, it's almost like four point six odd percent in terms of margin, and there is a tax benefit, which is also coming through, while capital adequacy is very, very comfortable with eighteen percent plus. So at what level of margins do you think it makes sense to maybe take some risk? Credit cost guidance, no doubt it's up, but nothing significantly. So any of these segments wherein we are getting comfortable, because I could see, particularly on the CRE side, there is a quarter on quarter increase of almost like INR 1,000 odd crores in this kind of environment, wherein everyone is moving away from CRE. So what is the reason for that as well?
Yeah, Kunal, I think you, the question which you asked, you know, it goes back to a very fundamental point to us. We are not afraid to take risks if we believe, if we have the conviction that the returns are good enough. And therefore, while CRE is a sector which is going through significant challenges in the economy, our principle, which again, I mentioned, of the seventy-thirty ratio, is in many ways something which we are very surgically monitoring in the CRE book. Therefore, we are not afraid to lend where we think the risk-adjusted returns are. We don't think real estate business in India is dead. It has certainly got concentrated and consolidated around fewer opportunities and fewer players, and we are ready to take the call where we think we can make risk-adjusted returns.
I must assure you that our CRE portfolio of what we have picked up is actually in very good shape.
So what would be the profile of this CRE, and would it be like very chunkier ones, which we would have taken? Because otherwise, maybe our corporate book is also very granular.
Yeah. Yeah, we continue to follow the concentration, lack of concentration philosophy that we have in our corporate book. Even in CRE, we don't take huge concentrated bets. We deal with A category builders in all the locations that we operate, and we make sure that we assess the project well, and the cash flows of the project in all our lending. Cash flows of the project are very, very tightly monitored and linked to our exposure. And we make sure that... In fact, most of our loans get paid much before the due dates of those loans, because the repayment is purely linked to cash flows of the project.
You know, I think, if I use a, cricketing terminology, it's always, a challenge for a batsman to decide which ball outside the off stump to leave and which ball to hit a square cut.
Yeah. So I think, CRE, overall, when you look at it, you said, like, one of the key parameter in the risk-adjusted return is again, the yields. So here, when we look at this CRE book, what would be the average yield on this incremental book, which we have built in one single quarter?
Although they are, it is higher than normal working capital loans. Significantly higher.
Yeah, that has to be the case. But, so I'm saying, is there sufficient pricing power available? And that's the reason, like, we are seeing the risk-adjusted return getting quite, quite comfortable, because there are not many lenders out there in this pocket now.
I would like to say that there is now an ability to price risk better. I would not use, like, to use wording like pricing power or anything. Finally, it's about all pricing the risk. We think for the risk we are taking, the pricing is appropriate.
Okay. Great. And finally, in terms of, again, so given that 4.6% margin, so when do we see that, maybe, no doubt we are better than the industry average, but, the strong foundation which we have based on CASA, plus the capital adequacy, the liability franchise, plus very, very low stress, when do we see ourselves growing much higher than the other, private banks?
You know, we are not scared about growth, therefore... And we are ready to have if we have conviction to go against what may be fashionable for financial institutions to share. And therefore, you can see that we have taken a contrarian call by increasing our exposure selectively to real estate.
Yeah. So have we started doing that? That's sort of maybe the question is, maybe slightly inching up the risk out there in terms of few of the segments.
If we get the return, certainly.
Okay. Good. Yeah. Thank you.
Thank you. The next question is from the line of Saikiran Pulavarthi from Haitong International. Please go ahead.
... Yeah, hi. Just extending the earlier question. In spite of select pockets, there is a growth which is coming up. Consolidated level, the growth has been pretty much lower than versus your some of your peer group. Understand that, is it because at the overall level, you are not finding enough opportunities to grow at maybe relatively higher rates, or what are your thoughts on it? Thanks.
You know, I just want to once again clarify that we are not obsessed with higher rates if the risks are lower. So we are ready to do at lower rates if the risks are commensurate with the rate. So our approach to lending is for the risk we take, is the price good enough should things go wrong at a portfolio level? And that's how we think about it, because finally, you and I know the simple equation. ROE is your borrowing co- your lending rate, minus your borrowing cost, minus your overhead. But the biggest factor in banking and finance in India is today that simple line, which is the risk cost. So for therefore, you take your lending rate, you take a cost of money.
Our cost of money, fortunately, is consistently improving, which gives us greater ability to be able to go out there and get appropriate business. Operating costs, our cost to income ratio is now at 45%, as you would see it, and then is the risk cost. And after that, if we can produce returns on that for overall ROE, we are happy to do business. We are continuing to be fundamentally of the view that India is, it may be going through a little bit of a slow patch right now, but we are fundamentally confident that over time, the Indian story is strong, and we will be happy to grow our market share in what I defined to you earlier, which is the 70% bucket. We want to be careful about the 30% bucket.
Now, we can debate whether the bucket is 70/30, 80/20, 60/40. That's a separate issue. But in what we have defined is the 70% bucket, we are happy to grow our market share while leaving the 30% bucket, where we think even at higher yields, the risk may not be worthwhile.
Thanks for your help.
Thank you. The next question is from the line of Gurpreet Arora from Aviva India. Please go ahead.
Yeah, hi, thank you for the opportunity. I'm referring to slide four, where you give the breakup of the advances. If you can help us with some granularity with respect to the home loan and LAP segment and small business personal loan and credit card segment, in terms of what the growth rates in these individual segments are and how the asset quality is panning out for you. That's one. My second question is with respect to the amortization of the mutual fund fee income, if you can quantify what sort of impact it has had on us during the quarter and during H1 of this year. And the last question is, if you can help us with the outlook number on the risk-weighted assets.
These are lower, you can check.
Okay. Let me just take a few of them, Gurpreet. If you look at HL LAP, that's been reasonably broadly evenly split, and the quality there has been holding up. We may have some, and we as I mentioned earlier, we've had a growth of 20% on a YoY basis, and we are reasonably comfortable with that segment. Slippages or delinquencies pretty much contained in that area. While we talked earlier about the issues on unsecured, this bit is quite secured, and we don't really have issues around that at all. So that's the bit about this one.
On the mutual fund distribution, if you look at it, regulations changed by about this time last year, so we are about a year from there. And if I look at as a pure distributor, we would have made about INR 140 crores of distribution fees in the first half of the year, which ended up with the year at about INR 200 crores. So that slipped from about INR 70 or INR 72 crores a quarter to about INR 30-INR 35 crore a quarter. So that's the run rate which we're going at right now. And some of that will actually stand to benefit as we go forward, because we get more trails as for people who'd invested thereafter, we start getting more trails as we go forward. So we see some benefit actually coming in now.
Understood. And with respect to small business, personal loan, and credit cards, if you can help us with some broad granularity.
I think that breakup, I mean, that business also has grown by about 23% odd. So and that small businesses, personal loans and credit cards are all lumped in there. Credit cards would be about INR 5,000-odd crore . The balance is small business and personal loans there.
Oh, one small clarification. The small business line would be entirely unsecured here?
No, no, no, no, no. The personal loan line will be unsecured. The small businesses are typically small businesses, and they'll be with a working capital for their businesses, typically sole proprietors, and they'll be secured.
And last, the risk-weighted asset number, please.
The risk-weighted assets, you've seen our Basel III disclosure, which should have gone out at the bank level, would be about INR 243,000 crores, and at the group level, about INR 300,000 crores.
Sure. Thank you so much. Thank you.
Thank you. The next question is from the line of Ritesh Bumb from Prabhudas Lilladher. Please go ahead.
Hi, just wanted to know how much-
Ritesh, sorry to interrupt, but we can barely hear you. Request you to use the handset.
Hello? Can you hear me now?
Yeah.
Hello.
Yes.
So just wanted to check how much is the deposit cost saving from the rate cut, which we had done from last two quarters? Actually, this quarter will be the full effect, I think, of the cut.
... I think, we obviously are seeing a continuous improvement in our cost of funds, and that obviously reflects in our NII and margin, and all that I would like to say on the deposit side, and just to give you an example on savings deposit, even today at a 5.37% cost of savings, versus most banks who are at 3.5% or 4%, with an average cost of 3.6%, we currently are about 180 basis points higher than our competition, and that's the additional cost on our INR 80,000+ crores of-
INR 2,000 crores of savings.
Of savings. About 180 basis points cost, which we are taking, which is roughly about INR 1,400 - INR 1,500 crores a year, through our P&L, and our numbers are after that.
Sure, sir. Just, also, can we know that, how much would have been falling because of the rate cuts, how much would be falling in the mid-segment, where the rates are still untouched? So for example, we have seen a large improvement in buckets from lower or from upper sides to lower sides, so some granularity there, if we can share that.
We've actually maintained the rate of 6% for that INR 100,000-INR 1000,000 deposits. Bulk of the depositors and savings accounts are in that segment. That's protected, and even with the higher ones, we are offering 5.5% right now.
Right. So is it fair to assume that it will be 70% in that mid-segment, where there is 6%?
It's difficult to say that it keeps moving.
Okay. Fair, fair. And last is, how much would have been the 811 additions to the savings balances, if you can also share that? Because I think we started it last quarter in full scale.
Shanti, you want to talk a bit on 811?
Yeah. Just to say that, you know, after Aadhaar coming back, the biometric account opening and digital online account opening, we have come back to our original growth and run rate that we have been doing for 811. And both on balances, RD, TD and profile of other products, we continue to see a strong addition. So the numbers as relevant, some of these products are 811.
Okay, ma'am. Thank you so much.
Thank you. The next question is from the line of Venkatesh Sanjeevi from Pictet. Please go ahead.
Hi, thanks for taking this question, and this is one more question on, on the growth side, so if I look at the last, let's say, one to two years or so, you've done a great job on the CASA side. CASAs improved substantially, the cost of funds have come down, and, and going forward, the tax rates also come down, so I think the hurdle rate for new loans actually come down a lot, which means that, you know, you should ideally have been able to grow much faster or maybe, you know, the whole, especially the corporate book could have been at a much higher, growth rate, and also in context of competition, we have seen, you know, a much larger peer of yours with a much, maybe four times larger book growing so much faster.
So where is the disconnect in terms of, you know, this growth not having been translated?
I think it's a pretty relevant question, and I think what we need to do is, while obviously our hurdle rate, cost of funds, cost of capital is coming down, which emboldens us to have a lower hurdle rate of what will be acceptable from a risk-adjusted return point of view. I think it's a very fair point, but keep in mind that you have to balance with the speed at which the economy is flowing, and the first half of this year. I mean, let me go back to most experts, both in India and globally, without naming them, the experts. Most of them, if you went back to even June, were projecting the Indian economy growth at close to 7%. Okay?
We have the advantage of being closer to the ground, to know what is happening on the ground, and we therefore did see some of the challenges coming a little earlier before the marketplace recognized the fact that the first quarter GDP growth, that is April to June, is going to be 5%. Therefore, we believe that, you know, finally, the equation is simple. We grow the loan book, we have our spread, we have our cost of capital, we have operating costs, but we are very focused that the risk line is what we need to have an assessment on. Even after the lower hurdle, if we get our risk line in control, we are very clear that we can grow faster. But we do measure the risk line closer, and our view is not short term.
We think about our lending book, not as something whether I'll be hit in the next quarter or the quarter after or in the next one year. We think about the lending book like a journey, and it's over a period of time, because the last thing we want is to come and suddenly have a big issue six months or twelve months from now, "Oh, we did some very aggressive lending, impact of which came to us later." Therefore, that is something which we are focused on. And as long as we get our returns based on that, we are not. We are obviously careful, but we are not so scared to lend. We want to lend if we can make money at the end of it.
Because finally, we owe it to produce returns for our shareholders, post the cost, which and yes, there are different equations. There is cost of funds, there's cost of capital, and there's cost of risk. So we balance all the three and then take the call. If you look at the slowdown in the economy in the first half, I think the loan growth in the banking industry is in single digits. Mm-hmm. Therefore, when we grow at 15.5% or 15.3%, in that, we are obviously growing 6% to 7% faster than the industry, while maintaining our risk-adjusted margin.
In this environment, let's say even a AAA-rated corporates are doing working capital loans or things like that, doesn't that qualify your cross-sell?
Yeah, I think the issue there you got to keep in mind. It's very easy. Number one, I think we must be far more focused on so-called AAA-rated corporates, because I think that itself is something which we do our own credit analysis before blindly accepting a rating agency who says it is AAA. Okay, so that is one important point which we would like to do our internal credit assessment before just accepting any external rating. That's point number one. Point number two is, we do believe one of the biggest problems in India has been concentration risk. And therefore, however good a corporate AAA corporate may look today, we have much tighter norms on concentration risk compared to probably many other players. And it is something which has stood us in good stead over a long period of time.
Because, you know, this is an environment, you just have to look at last twelve months, how many AAAs have become B?
True. So what, what is the hurdle rate for, let's say, the corporate loans? What, what is the post-tax ROE you would look for to- for it to make, qualify your, lending portfolio?
Mani?
So, obviously, we do an account-level profitability. It is not about a particular product. But having said that, we look for, when we deal with a corporate, we look for a 15% kind of, after-tax return on equity, as a benchmark. We, sometimes don't reach it, in some accounts we exceed it, but that's the kind of threshold we currently look for.
Right. And with this tax cut, the implied yields required to get this will also be-
Yeah, this is post-tax, post-tax return.
The tax rate is lower, but pre-tax is adjusted appropriately.
Yeah.
True, that's why I'm saying you could have lower yields to achieve the same.
That's right, yes. Because, we fix the after-tax, ROE, so if the taxes are lower, the return, with lower spreads, you can achieve the same ROE.
I think the big issue is today, impact on risk-adjusted returns, because if a borrower is rated AAA, your capital requirements are also much, much lower on risk-weighted assets basis. But what we are very focused on is to be sure that so-called AAA is AAA, and today, even that is an issue.
So I know, I take your point.
To be very frank, it's easy to just take some large bites and grow the corporate book, but we have been always focused on making sure that even our corporate side is reasonably granular, so that even if there is a risk hit, we don't get large hits at the point in time. So, you know, our philosophy has been to keep it granular and not take bulk deals and concentrated risk and grow that book.
I take your point. I mean, just, maybe as a feedback from what we're seeing as investor community is that, and maybe erring on the side of caution here, especially when a large part of PSU banks seem to be busy with integration, and that's the feedback we get as well, that there's a lot of opportunities to lend there.
Yes, I agree.
Yep.
It's a very good feedback. I think, it's something which we will certainly keep in mind and something which is our focus, but we have to manage it without doing disproportionate concentration. Because what is also happening is, that in many large corporates, many of the banks have reached their concentration norms. And just because we have limit in our concentration norms, we don't necessarily want to reach those limits, if we believe fundamentally we want a philosophy of no excessive concentration.
Great. Thanks a lot.
Thank you very much. Due to time constraints, we'll take that as the last question. I would now like to hand the conference back to Mr. Kotak for closing comments.
Thank you very much, friends and colleagues. This has been a very important two-way debate and discussion at a very crucial time in the Indian financial sector and the Indian economy. We do believe that this is one of the interesting challenges in the Indian financial sector. I do believe I hope that India and Indian financial sector navigates out of this, without having too much of sort of moves which then... Without having any disruption, we hope. We would like to believe that a stable financial sector is crucial for the growth of the Indian economy. We at Kotak do see this as a significant opportunity and challenge.
Yes, there is some amount of mud in the water coming out of the challenges in the financial sector, and we are working towards making sure we swim well, while ensuring that not too much mud sticks with us, but certainly open to swimming faster and growing in this environment while managing our risks carefully. Thank you.
Thank you very much. On behalf of Kotak Mahindra Bank, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.