Good day, ladies and gentlemen, and a very warm welcome to the Kotak Mahindra Bank Q1 FY 2020 earnings conference call. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I'll now like to hand the conference over to Mr. Uday Kotak. Thank you, and over to you, sir.
Good evening, friends, and welcome to our quarterly conference call at the end of the June quarter. This is a good time for us to first sit back and evaluate the situation in the financial sector in India and how we see it, and also thereafter talk a little bit on the bank and how we have seen our current quarter's performance and the road ahead. First, I think we are going through a very important and interesting phase in the Indian economy. The fundamental fall in terms of government policy has been reflected in our budget, which essentially continues down the path of fiscal prudence and discipline, which is 3.3% of budget deficits, and this is consistent with this government's approach to fiscal discipline over the last five odd years.
And the government has continued down that path of fiscal discipline. I do believe, therefore, with the government demonstrating that and also taking some of the load of borrowing, including from offshore sources, it creates a significant opportunity and room for the central bank to consider a further reduction in interest rates as we go forward. We can debate how much will the interest rate drop be, but I do believe there is room between now and March for anywhere between 50 - 75 basis points drop in interest rates between now and March 2020 . And, we think that's an extremely positive step at a time when we need monetary policies to be taking some of the load, when the fiscal discipline is continuing to be maintained.
This is, of course, my view that between now and March, we should be seeing 50-75 basis points drop in the interest rates. In terms of what it does to the financial sector, I think the financial sector continues to be extremely fragile, but we have seen a significant reduction in bond yields, and the markets, of course, are pricing in a certain level of drop in the policy rates, and that some of that may have been factored in and some more maybe to go. But as banks are able to see a significant increase in its fixed income and bond portfolio, it also gives the banks room to be.
And I'm talking about the banking system as a whole, room to be more aggressive in terms of its ability to provision with a significant de facto increase in the capital bases of many banks coming out of the fixed income gains. However, I also see the marketplace, particularly the financial sector marketplace, getting to be extremely discerning, and therefore, availability of credit will be linked much more to the comfort of the market on solvency and governance of financial institutions, which will play a disproportionate role in availability of liquidity, deposits, or loans to any financial institution than ever before.
This choice of being so much more differentiated between institutions which get the funding and institutions which find it more difficult to get the funding would inevitably, over time, lead to primarily a combination of some level of mortality and some level of consolidation happening in the financial sector over the next year or so. This is also consistent with what we have seen happen in the past, and it takes me back to my own experiences in 1998-2002 . I still recollect, of course, prudential regulation was relatively in early days then. We used to be more than 4000 non-bank financial companies in 1997, 1998, and post the events of 1998-2001 , very few financial NBFCs actually sustained themselves through this period.
So and therefore, between banking, NBFCs, and different segments of the financial sector, we are moving towards a time where consolidation and some amount of mortality is inevitable. However, I do believe that with appropriate policy approach, we should be doing our best to ensure that there is no potential systemic outcome out of this mortality risk, which is more real than what we have seen in the past. Moving from there, specifically to our Kotak Bank, Kotak Mahindra Bank, our results which have come out, and my colleague, Jaimin Bhatt, will take you more through it. But as I see it, the key to financial institution building, which is something we have deeply cared about, is the approach of through thick and thin, having certain aspects of philosophy which are consistent.
Therefore, fundamental philosophy of having higher returns relative to the levels of risk you take, which is what we, in our terminology, call as “Risk Adjusted Return” . Ability to be disciplined in taking risks through good times and bad, and that means we should not be scared of taking risks, but take risks for the returns we can make, and take risks commensurate with the returns we can make is the core to our philosophy, and therefore, as I think about it, while the economy certainly is slowing down and there are many sectors which are going through tough times. If you recollect, I had talked about the real estate sector and the non-bank financial sector going through its challenges, in my earlier calls.
I do believe that taking appropriate risks for better returns is the core to banking and lending. And therefore, we are beginning to see that strategy play out, and that is reflected in Kotak Mahindra Bank's NIMs getting better. The second consistent philosophy, which we have cared about, is low cost and stable liability as a core to our banking and financial franchise, and that is something which we continue to play with. We have seen that reflected in our relentless focus on low-cost deposits, which is CA and SA. And in terms of stable liability, a very significant continuing growth in our deposit base below INR 1 crore. Therefore, low cost and stable liability as core of our franchise is something which we have continued to believe in it.
In terms of loan growth, for the risk which we have been comfortable with, we have seen about an 18% growth in loans in the bank. We continue to believe, of course, we will watch the situation closely over the next quarter or so, but we continue to believe that loan growth, we will be able to gain some market share as we go forward for sectors we are comfortable with. And therefore, around a 20% loan growth is something which we, at this stage, feel we can work towards, but we have to watch the space closely.
Therefore, a continuing focus on low cost and stable liability, focus on, lending for or any sort of investment for which we get our commensurate returns, which we are beginning to see in the marketplace, reflecting, in our NIMs, and also, therefore, getting some market share as well. We actually feel quietly confident in this particular, cycle. Are there sectors which we need to watch closer? Of course, and that is something which we have very significantly kept our, Arjuna's eye on segments which we have concerns with, and we will take the tough calls wherever we need. But I would like to, reiterate that through this, turbulence which the financial sector is seeing, we see a quiet, consistent, medium-term opportunity, which we are actually continuing to be excited about as we go into the future.
And this is reflected in our business and execution strategy, some of it which is in the first quarter numbers, but you'll see it play out through the year as we go forward. With that, I will now ask my colleague, Jaimin, to take you through the specifics on our financials. We, and then, of course, look forward to Q&A. Thank you.
Thanks, Uday. We circulated the numbers some time ago, so I'll keep it short and just talk about the highlights. Our post-tax profit at the bank standalone level for the quarter at INR 1,360 crore, which is about 33% higher than the same period last year. As Uday mentioned, our NIMs continue to be healthy. We are at 4.49% for the quarter, as against 4.28% last year, same period. Gross NPAs at 2.19%, and the net at 0.73%, which is against the 0.86% last year. Capital adequacy again continuing to be healthy at an overall level 17.8%, with a Tier 1 itself of 17.3%.
Uday talked about the CASA focus and the low deposit focus. Our CASA at the end of June at 50.7%, which doesn't include TD sweeps, which is another 7%. Average current account growth this quarter versus same period last year has been 23%, whereas the savings growth has been at 21%. Our focus on the low cost, which is low low ticket size deposits of less than INR 1 crore, that too, has grown 25% year-on-year. Today, the the CASA plus the INR 5 crore and lower deposits constitute now 82% of our total deposit base. Advances, our growth for the quarter, for the year on a YoY basis is about 18% on a YoY basis.
We've seen growth coming in various segments. The corporate book has seen a lower growth on a YoY basis, corporate and business banking. That's been about 8% on growth, whereas we the consumer and the commercial side, as we call, as we look at it internally, have both grown 20%+ . Our SMA-2 number as of June at 0.16% of our overall advances. On the P&L side, the only item I touch upon is our employee cost for this quarter compared to the same period last year, which looks a little high, thanks to the fact that this year, thanks to interest rates falling, our provision on retirement benefits has been significantly higher.
Last year, at the end of quarter one, in fact, I touched upon the fact that, with interest rates going up, the retirement benefits were much lower, and that caused a decent difference between last year to this year. So other than that, the P&L is with you. I'll request Shanti to take the Digital one, and I'll come back on the consolidated numbers.
Thank you, Jaimin. Digital continues to be focused and mobile first at Kotak, and our digital app continues to be highly rated. I would just focus on one or two key things. With the passing of Aadhaar regulation in the Parliament, customers can now open 811 account through eKYC, which is our digital savings account, with voluntary consent on Aadhaar, as well as biometric authentication, which is paperless opening of accounts at the time of eKYC. We relaunched this in June, and this hopefully should give us traction on both accounts and values as we go through the rest of the quarters. The rest of the numbers are there for you to see. Suffice to say that the growth in volumes through net and mobile continue to increase across a variety of products for us.
On the payment side, UPI continues to see continued traction in terms of volumes, and our new initiative on open banking has begun to see results. We have about 34 API relationships across lending, payments, and cash management, and we will continue to grow this platform, and that's providing a lot more product services, convenience and experience for our customers. In our subsidiaries, again, digital, whether it's in securities, life insurance or general insurance, focus continue to be digital first, aimed at both customer experience as well as internal efficiency. Jaimin, back to you.
Sure. If I take the consolidated numbers for this quarter, the consolidated profit is INR 1,932 crore, which is about 23% higher than the same period last year. Apart from the bank, big contributions coming from Kotak Mahindra Prime at INR 153 crore, Kotak Life Insurance at INR 134 crore, the broking company, Kotak Securities, at INR 110 crore, which is, in addition, that is, the Investment Bank, KMCC, at INR 45 crore. The mutual fund and the trustee, the AMC and the trustee companies, bringing in INR 73 crore, whereas Kotak Mahindra Investments getting INR 63 crore for the quarter. Our net worth at the consolidated level at INR 60,231 crore, giving us a book value of around INR 313 per share. Advances, while the cons.
The standalone growth has seen an 18% growth, at the consolidated level, advances is about 15%, largely coming from the fact that Auto, which is in the subsidiaries, has had a negative growth, both year-on-year and quarter-on-quarter. Kotak Life has seen new business premiums grow, 42% on a year-on-year basis. Kotak Securities seen cash volumes grow, a market share of, 10% for this quarter. The investment bank has been, in the middle of several transactions, both on the equity and the advisory side. The assets under management across the group grew 19% on a YoY basis. We are now at, we manage about INR 2,37,000 crore. And the, relationship value of, wealth and trade customers, which we advise, is, about INR 2,80,000 crore across the group. So those are the broad highlights. I would be open to taking questions.
Thank you very much. Ladies and gentlemen, we will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on the attached phone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to limit their questions to two per participant. Time permitting, you may come back in the queue for a follow-up. First question is from the line of Prashant Poddar from Abu Dhabi Investment Authority. Please go ahead.
Good afternoon. Good evening, Kotak team. Thank you for giving me a chance to question. Quickly, on the agri segment, if we see there is some difference in the way you have grown your book vis-à-vis some of the other well-run banks as well. The book has grown as well as the asset quality. We don't know the internals of agri specifically, but if you could highlight that, how agri has performed for you, and how is the outlook going ahead?
Yeah, I'll have my colleague, Kannan, answer in more specifics, but I think one of the things within agri, which we have, is also tractor segment, where we have a significant improvement in our market share, and we have actually found that segment doing well. But Kannan, can you give the overall picture on agri?
Yes.
How have we thought about it differently?
So on the tractor segment, as Uday mentioned, even though the industry has not grown, we have grown our market share in the various markets in which we are present. And we find that even on our collection efficiency, nothing much has changed as compared to the previous few quarters. So while the market has regrown, we've gained market share, and that's how we've been able to grow our portfolio on the tractor side. So as the case with the agri lending on the SME side.
Sorry, if you can help us understand, I mean, could you, would you be able to highlight some reasons why, I mean, some of the other better run banks as well have not, and your performance is different in terms of asset quality. I understand growth could be higher or lower for one or the other company, but, if I look at DCB Bank or HDFC Bank, which are decent run banks, sorry, well-run banks, you, I mean, the performance in Agri is especially very, very challenging in these banks. So if you could highlight us what has happened really in that segment, and how are you doing differently from them?
Okay, let me actually, there's one segment within the Agri segment, which we have been very cautious about. There is a crop loan segment. We as a product manager of the bank, did not do crop loans till the merger of ING Vysya Bank with us. ING Vysya Bank was a reasonably aggressive lender in crop loans. One of the things when we acquired ING Vysya Bank, is we thought that there's a very big advantage of acquiring this bank because we have always been very circumspect about crop loans, while ING Vysya Bank was quite aggressive on it. And once we got ING Vysya Bank in, and when we started going into detail on the crop loan segment, where some of the other better loans, better run banks were also very aggressive.
It took us about 1.5 years to really figure out that portfolio. Essentially, it was lending against agricultural land. And in the desire to achieve the Agri targets, which is required for priority sector, as well as the ability to do larger ticket size, particularly in states like Punjab and some of these other Agri states, we found the ticket size of lending, which, including what ING Vysya Bank was doing, were extremely large. And when we started, and you know, the cycle for repayment, this is another strange thing which is allowed under the RBI requirements, that you don't need to ask for money for one year. Okay? So you can easily merely have a situation where for one year you're not asked a question.
That is even in tractors, but we from day zero at Kotak, were doing tractor financing and recognizing pain at the end of 90 days. So there was a discipline which we already had in our tractor business, but we were very surprised that in agri crop loan business, you could merely lend against so-called land, larger ticket sizes, particularly in states like Punjab, and for one year, nothing has to be paid by the farmer, when effectively it was real estate financing under the guise of crop loans. So we, when we saw that, we dramatically cut down our exposure to crop loans by design. And in fact, I'm actually happy to share with you that the size of our crop loan portfolio today is probably lower than it was at ING Vysya Bank on a much smaller balance sheet in absolute amounts carrying.
So one of the things in the entire Agri lending is, which I think, the banking sector has suffered, is crop loans and the ticket sizes of crop loans have been significantly large in the banking sector. So this is something which we, by choice, moved away from. On the other hand, over the years, since we are the largest lender amongst banks in tractor lending in India, larger than any other bank in terms of the tractor lending portfolio as a bank, it is a segment which we have understood. We have got a great level of efficiency into that, into managing the whole cycle end to end, and approach, which is recognizing pain early rather than waiting for a year before you start recognizing. Some of those practices actually have helped us.
And similarly, in agri and SME for a while, when we saw some of this come out, we actually cut down our lending. And what we are now finding is, as more and more people, including some of the NBFCs, moving away from the space, it is now possible to do underwriting and better spread than what we were getting earlier. And therefore, risk-adjusted return being something we are comfortable with, has enabled us to continue there. Having said that, we are obviously watching the monsoons. We are watching a number of factors, and therefore, we will take a view as we go forward.
But as things stand, for the portfolio which we are running, and considering that we have recognized this pain long, long ago and not allowed this one year and other things to really cloud our judgment, we are not seeing as much pain today as the system may be seeing.
One quick question on CV, CE, also similar trends. I mean, both these banks have, or some others also are probably likely to do the same. CV, CE also has been a pain point, while if I look at your numbers sequentially, the portfolio has been flat, but year-on-year, year-on-year, there has been a strong growth. From your slippage number, which looks like a net number of 0.5%, it looks like even slippage here has been decent. So, I mean, low. What has happened in this segment?
First of all, I mean, there is a slowdown quarter-on-quarter. So, and year-on-year, at times, you know, year is a long period. So we are obviously watching the situation.
Asset quality, is it fine? On asset quality, is it okay?
We are in good shape, and Kannan, again, back to you.
Yeah, asset quality has been good. As Uday mentioned, if you look at our growth as compared to the previous quarter, we slowed down, but we cautious, we are observing what's happening around, but our collection so far has been good, in spite of the fact that collection cycles for our customers have got elongated.
Okay, sure.
I think that what you also got to keep in mind is with the significant slowdown in the NBFC sector, we are able to get underwriting quality of the kind we want at a higher spread. And we are, as we have always said, we don't look at risk absolutely. We look at risks in relation to the returns we make, and we are beginning to get our spread for what we think are the risks. That does not mean we are getting into a higher risk portfolio, but we are seeing. But having said that, I do believe that one year ago versus one quarter, there is a difference in the market split. Market split is slower.
Sorry, one last one. Do you think the financial sector stress that we are seeing across the market, as well as a lot of smaller companies almost getting close to the verge of bankruptcy, a lot of companies will get delisted, it looks like, from stock exchanges, the smaller ones, but they have large loans if we put together all of that. If you look at these two things combined, NBFC in stress, as well as these small companies in stress, could this have an, I mean, a second order impact on the economy? Part of it is happening. Can it stretch further, and could that turn your stance on probably pricing of pricing getting better, risk-adjusted pricing getting better? Could that stance change, again?
If there's one thing, we have to be nimble on our feet, certainly. But, I think if you look at, the stress in the sector, there are two lenses which we need to constantly keep, and both of them at the same time. On the one hand is the opportunity of getting shares. On the other, the risk, because fewer and fewer people are getting funding, and what was weak underwriting in the past, whether we don't make the mistakes of getting some of that weak underwriting on our portfolio. Therefore, it requires a very close watch, and, I'm, I would like to tell you that our team, is looking at it with a hawk's eye. We are certainly aware of the fact that there is, challenges in the broader economy, which we need to be aware of.
But we are also, l et me give you the example of cars. I think the problem in the car financing industry is not availability of finance. Okay, there are a few NBFCs which are not financing, but there are many of us who would, for the right risk-adjusted pricing, love to lend more against the security of cars. But if the ultimate car demand is low, we can't push against a wall. We can't keep on hitting our head against the wall. Therefore, what we are focused on is for the risks we are taking, is number one, is the return commensurate, and do we need to take a view on some sectors where it is just not worthwhile taking the risk, irrespective of the return? And that is also something which we are watching. For example, lending against illiquid land, as many of the financial institutions have done.
We have been cautious on that for a long, long time. Therefore, irrespective of returns, some of that you have to be careful about. But you, at the same time, while keeping some areas where you will just not tread, there is a very significant flow of opportunity which is coming, which erstwhile there were five other lenders out there to take the opportunity and without distinguishing between good or bad. Therefore, if there were, say, five lending opportunities, out of which one is good.
Mm.
Okay. Earlier, all the five lending opportunities, lenders would lend at the same price.
Sure. Sure.
Now, we have the ability of choosing one or two, which we think we can lend and get our price.
Yeah. Excellent. Thank you very much, sir. All the best.
Thank you. Participants are requested to limit their questions to two per participant. Time permitting, you may come back in the queue for a follow-up. The next question is from the line of Anisha Khandelwal from Edelweiss Securities. Please go ahead.
Yeah, hi, sir. This is Prakhar. Sir, couple of data points to start with. One is in terms of your loan book breakup. So this time we have clubbed corporate and business banking together. Can I have a separate breakup for each of them?
Yeah, I think, let me first clarify. You know, mergers can be external and internal. So we have done an internal merger. So within the corporate bank, we had large corporates and mid-market corporates. Okay? Actually, we had three categories: very large corporates, large corporates, mid-market corporates. Then we had the SME segment, and then we had the small business segment in the consumer bank. In the interest of efficiency and getting tighter in terms of how we run, we decided to do an internal merger of mid-market and SME. So this internal merger was done in April 2019. So as we have done these two mergers, we have moved some of the mid-market customers into large corporates and some of the mid-market customers into SMEs.
At the very small end of SME, we have moved into the consumer bank along with small businesses. Therefore, there is a rehash which we have done in terms of managing our book better and reducing the number of overlaps and verticals. Therefore, the reason why we have combined the two and written it that way is that there is a mid-market piece. Some of it has gone to large corporates, some of it has got merged with business banking. There is a business banking piece which has been merged with the corporate bank, and there is a business banking, small business piece, which has moved to the consumer bank.
Therefore, what you are seeing is an outcome of that, and we have therefore tried to compare it in totality with last year. But individual breakup of this is much tougher for us to be able to give you in a precision which all of you love.
So, where I was coming from, sir, is the fact that probably we are adhering to 20% growth for the full year. So essentially, my point is, if I look at going forward basis, where do you think that probably
So, I mean, we have said around 20%, which can be plus or minus a bit, either way. But on this, if you look at for the quarter, wholesale banking with the business banking piece has had a growth of 7%. 7%-8%.
So I was coming from a perspective that, going forward, do you think some opportunistic pickup happening in corporate side, or do you think that this auto loan rate things that probably is currently witnessing a slowdown that will grow on overall basis?
I'll ask my colleague, Manian.
Just a clarification. So that clarified the corporate and business banking combination. The other one, if you just notice the last year June figure and the March figure, you will see that there is a base effect involved here. Our June number was INR 76,000 crore roughly, and the March figure was about INR 80,000 crore . So there were some DCM essentially carried at the end of June last year, and they have caused some base effect to the overall growth. While it is not 20%, but it is not. So, we are hopeful. You have to adjust the 8% for that. We are hopeful that the following quarters will have better growth figures than this in the corporate and business banking segment.
Sure. And sir, in terms of margin, so, what we are seeing is that we have been pretty much holding up our margin. So where this benefit is coming from, it's from better pricing that we have at a sector level, or probably because of funding cost benefit first? And any thoughts on rationalization of savings costs that occur to our mind as of now?
I think the benefits on margin are from both sides. More efficient liability management, and the second is, of course, on the asset side, risk-adjusted pricing. On the savings side, as you are aware, in the quarter April to June, on savings deposits below INR 1 lakh, we have dropped the savings deposit rate to 4% instead of 5%. So our current savings deposit rate, up to INR 1 lakh of deposits, is now 4% versus 5% earlier, and we have not, at this stage, changed between INR 1 lakh and INR 1 crore and above INR 1 crore. As we keep in mind a number of factors. Number one is the growth rate at which our savings is growing. Number two, what is the deposit rate in the market? Even now, one-year deposit rates offered by banks is at 7%.
Therefore, at our overall weighted average savings deposit cost, which has come down post this reduction to 4%, we still feel that at, say, 5.3% or 5.4% cost of savings versus term deposit cost at 7%, there is still a significant positive carry between savings deposit and term deposits. And the rate of growth of our savings deposit base and improving our franchise with CASA and TD overall is core to our retail equation overall is core to our franchise, and we will think very hard before we let go this space.
So, sir, and what were the margins impact because of this CASA change during this quarter, if at all we can contemplate?
It is in two stages, in part, and only for part of the quarter. The full benefit will come from the second quarter.
Okay. And, sir, lastly, your thoughts on unsecured business. So, we have been highlighting some concern in there. Anything that incrementally you would want to add into that?
No, I think we have made our point clear. We are not hostage to being in love or out of love with any segment. We are only hostage to our principle of risk-adjusted return. And if we believe the risks are worthwhile, we will do it. If we believe the risks are not worthwhile, we do not just change absolute return. And we will be, even within unsecured, there is a hell of a lot of work you can do. You need not be reckless. You can choose your segment, you can choose your CIBIL score, you can choose geographies, you can choose customers, or segments of customers, you can do a variety of cuts.
And as long as you maintain the discipline, you will always be better off than what I call [Foreign language] lending in unsecured.
Thank you so much, sir. That was all for now.
Thank you. The next question is from the line of Sachee from Columbia Threadneedle. Please go ahead.
Hello, can you hear me?
Yes. Yes, Sachee.
Hi, Uday. Hi. Congratulations on another fantastic quarter. My question, I wanted to pick your brains on the macro a little bit. Everything that you said in your prepared remarks and, response to questions subsequently. So you spoke of a slowdown, particularly in certain areas driven by real estate and BFSI, et cetera, and liquidity tightening. Contrary to that, or in contrast to that, the Honorable Prime Minister has laid out his vision for a $5 trillion economy by 2024-2025. And if assuming a 4% inflation, that equates to an 8% growth that is needed to achieve that target. So my question to you is, A, do you think, you know, things need to sort of get, things need to sort of get a bit worse before they sort of get better?
B, do you think there is, you know, political will and tools to actually drive the economy towards that target? Now, the National Economic Survey said that, you know, they need to do a massive reduction in cost of funding. So I'm wondering if that is the only tool they have and whether that will work? I'm just curious on your thoughts on the macro.
Okay, first of all, you know, I believe we are seeing Swachh Bharat in the financial sector. So we are going through that phase of Swachh Bharat in finance, and we are in the middle of it. I don't think it is good enough. And some of it is playing as we go forward, and we have all got to be very alert and paranoid to make sure that we take care of ourselves as we see this cleansing process going through our financial sector. If you notice the economic survey, the survey for this year predicts a 7% GDP growth. Therefore, the economic survey also recognizes that in this aspiration for the $5 trillion economy, we are starting slow, which is a fact, and we can debate what the level of inflation is.
The last inflation count was 3.1%, 3.2%. And therefore, as we go down this path, the climb of the hill gets steeper if we start slower. That is undoubtedly the fact. The key question we've got to ask is, we need to ensure in the financial sector, in particular, that as we go through this cleansing process, we need to ensure that this is not systemic, and is more specific rather than getting more across the board. I think that is the first thing we should see. And if we can get the act right, then you have a much stronger foundation and base to be able to accelerate the growth as you go forward. Getting the foundation right from some of the practices and issues which the financial sector has faced are extremely important.
Of course, there are a number of things, structural things, which the government has to think about. I think we should do it on a separate discussion altogether, including the role of different segments in the financial sector, long-term thinking on state-owned banking, especially when we are on the 50 years of nationalization. We need to ask the questions on measuring of outcomes, point number one, and point number two, with financial returns to taxpayers over 50 years, because finally, it's the taxpayers' money. Outcomes independent of financial returns and the financial returns, both we need to look at, to be looked at and weighed. We need to think structurally. We need to think of a fundamental improvement in the solvency, quality, and governance of the financial sector in this country.
And of course, lower interest rates additionally will also help. So a combination of lower interest rates to monetary policy, fundamental structural changes, how ready we as a country are, and third is, how good is our governance mechanism in the financial sector, are the factors which will have a major input into the growth of the economy. So I think we should have a separate discussion on this, but it is. I mean, most of us in India are very keen on ensuring that we work towards the 5 trillion dream, and if we don't dream with boldness, we won't even get close.
Oh, thank you. That's very kind of you. Just as a follow-up, as the government, you know, hopes to achieve this dream, obviously, financial sector, particularly private sector banks, are, or at least, you know, I would like to believe that they are deemed as key participants, key partners in achieving that dream. However, last year, one of the things, I mean, that I think we've been frustrated by is, you know, how, with how heavy a hand RBI has come down, whether it is the retirement age for, you know, the bank CEO, whether it is, you know, sort of your own, you know, bringing the stake down.
Do you see any sort of respite in that, or do you think that, you know, the RBI will just continue to kind of, you know, have a formulaic approach regarding this, particularly at a time when the sector itself is struggling on many other fronts?
I think, that the right people to ask this question is to the Reserve Bank of India. They would be in a better position to answer this question.
But you're lobbying for it, right? I want to believe you're lobbying for it.
I mean, I, I'm in no position to comment what the RBI does.
Okay. Thank you very much.
Thank you. The next question is from the line of Sanjay Parekh from Reliance Mutual Fund. Please go ahead.
Yeah. Congratulations to the entire team on a great set of numbers. So I have one question on this monetary transmission. We've seen reasonable liquidity provided by RBI, and 10-year G-Sec concern has significantly come down, and the regulator has clearly spelled out that the monetary transmission is not happening properly. So do you see this clampdown coming through the PSU banks and then impacting margins ahead? How do you see this thing?
See, on monetary transmission, let's first get the facts clear. The MCLR formula has been transparently laid down by our bank. I don't know the formula of other banks, which is transparent and available to everyone, to our regulator. Okay? So our regulator is aware of the MCLR formula, which has been approved and which has been in practice for quite some time. So it is out there transparently available to the regulator, and based on that, we just have to fill in as per that formula over a long period of time, which the numbers and which gives an output and an outcome. Okay?
Yes.
And based on that, we have to fix our MCLR. Therefore, I am actually surprised that any bank, including a PSU bank, can lodge a number higher or lower, different from the formula. And we are all, I mean, it's especially when we have a regulator who is certainly looking at what each of the bank does with reference to the formula. But as long as the formula is met, I think it has to go with that. In the absence of, there was a move earlier which has been dropped by the RBI, which was linking MCLR market benchmarks. Now, the regulator must have had good reason to not pursue with that. But if you ask me, if we believe that we really want to see transmission, maybe that is something which the regulator had in research.
And the regulator has always had the ability and opportunity to think, but for good reasons, the regulator decided to drop that, which was supposed to be implemented from April one. As far as we are concerned, we believe that transmission is a transparent process by which we have to manage this within a framework, and we will adhere to that framework, and there is no question of massaging or doing something which is dramatically different from what those numbers will throw up. And in that context, I know a lot of people have talked, but the fact of the matter is MCLR drops by banks have been larger than drops by the government on small savings rates.
Yes. Thanks. Thanks a lot.
Thank you. Next question is from the line of Prakhar Sharma from CLSA. Please go ahead.
Hi, good evening, everyone. Just had a couple of questions. One, you know, in the annual report where you discussed a bit of, you know, pressure that was evident in the portfolio for the SME book, and, you know, you've taken corrective measures around it. I just wanted to get a sense, like, have things stabilized? And from the reclassification perspective, does that book get, you know, reflected in the corporate book, or is it part of the small business and, you know, PL card sort of a book?
I'll hand it over to Manian, but bulk of the SME book has got merged with the mid-market corporate book to the extent that mid-market has been further split between large corporates and SMEs.
Okay.
Yeah, Manian.
Yeah. So, yes, it is part of the business banking and corporate portfolio. We have seen clear progress on that. There is a little slippage that has happened, additional slippage that has happened on the assets side here. So, clearly it seems to be under control. Now we are hoping that if the environment permits us, we are hoping to grow that book from here.
And I think, you know, let me also highlight. For last two years, when every call, I used to get a reverse question, which is: Why are you not growing your SME book faster? And we said that till we are comfortable for the risk, for the return, we will take a very circumspect view on that.
Have things changed since then, or you would still be a little cautious on that part?
No, I think we are right now. See, my point is back to, we are open. As I said, if there are-
Okay, got it.
In the past, if there were 5 loans and 10 banks jumping over it, we are now able to, out of the 5, pick up 1-2 loans with relatively much less number of banks or finance companies jumping into it.
Got it. On Kotak Mahindra Investments, the NPL ratios have moved from 0% last year and like 30 basis points to about 60 basis points. Probably an early sign, but is there an imminent stress here?
No, we don't see overall stress. It is one single account, and we are fairly confident that we'll not lose money in this account. It's very well secured. So it's just an isolated case. There is no stress in the portfolio otherwise.
Got it. In the Kotak Mahindra Prime, just to, you know, 2/3 of the book is outside cars. Could you just clarify what this is and if there is-
No, no, no. 2/3 is car.
Sorry, the other way. Sorry. Yeah, my mistake. Please leave this question. Last question. In the life insurance part, can you clarify what proportion of the new premiums have guaranteed returns?
No, I think, let me just step back. I'll ask Murali to speak, but roughly about 20%-25% of the book is guaranteed returns. Everything else is not guaranteed, or non-par, savings product.
That's right.
Between 20% and 25% is guaranteed returns, not in terms of age and in terms of new business .
Yes.
Oh, thank you.
Thank you. The next question is from the line of Susmit Patodia from Motilal Oswal Asset Management. Please go ahead.
Hi, good evening. [audio distortion]
We can't hear you.
Can you hear me now?
Yeah.
Okay. See, in your annual report, you had mentioned about getting into the consumer durable finance business, and that being an exciting opportunity. Could you give us a little more thoughts around that?
Yeah. I mean, first of all, we normally like to enter a sector when things are not at the best.
Yeah.
We like to do it slowly.
Yeah.
And we now see the opportunity coming, so we will do it in our own slow way, build it gradually and build it up. And we are also doing a lot of stuff which is very different on technology. I will ask my colleague, Shanti, to share with you how, on a differentiated basis, we are going about that opportunity.
Thank you, Uday. So, Uday mentioned three things. First, look for the opportunity within the space, which is both risk and price. Second, look at the process differential, which is largely digital, which is what we have, you know, we're probably the first one on the street to do that, with Aadhaar-based, end-to-end processing.
And we are finding spaces which are from a risk-adjusted return perspective we are looking at. And, you know, and you've got to build it slowly. You've got to be careful, given the business metrics, environment, and risk, and that's exactly what we are going about doing.
This would be in the bank and not in Prime, right?
This is in the bank.
Okay. And, second question was on your East India. The number of branches there are significantly lower than your national average. Any thoughts there?
The thoughts are we will increase it, but we are very clear, we must get more than normal bank bang for the buck. Because if we get more bang for the buck, we will open more branches.
Is that a reflection of the credit culture there or the kind of business that is going on there?
We also keep in mind that our overall strategy on branches, we will certainly grow branches.
Yeah.
But sorry, I didn't hear your second question. Sorry.
Sorry?
What if we have on the branches? No-
On East India, yeah. I mean, is that a reflection of the credit culture of that part of the country?
Our approach to any branch is both liabilities and assets. Therefore, on liabilities, East India continuously a good market share. On the asset side, obviously, it is something we are a little more cautious about. Therefore, when you're looking at a branch strategy, you look at both. But also even on the liability side, we are combining a significant physical and digital strategy, so we will certainly grow East India. And keep in mind, before the merger with ING Vysya Bank, we had a disproportionately large presence in North and West, and our South presence was relatively low, which is what we built up with the merger with ING Vysya Bank. Please don't read into that, that we're going to merge with a bank, which is on a large.
But we are quite open to growing our branch network in a measured manner and simply bang for the buck. Bang for the buck, not in six months or one year, but over 3-4 years.
Right. Thank you. That's all for me. Best of luck.
Thank you. The next question is from the line of Saurabh from JP Morgan. Please go ahead.
Sir, just on your operating costs. So you've spoken a lot about [audio distortion]
I'm sorry, you're not audible.
Hi, sir. Sir, just on this digital strategy, sir, on your operating cost, on OpEx to asset or cost to income, depending on however you want to guide it, what kind of reduction one should expect over a two-year view?
Yeah, I mean, we are both Aadhaar coming back-
Mm-hmm.
We are going full steam in terms of getting customers, both physical and digital. And I will ask my colleague, Mr. Virat Diwanji, who's responsible for the highest operating cost, how he sees it over two years and how he's going to improve it. Virat heads branch banking and retail liability.
Look, customer acquisition in that sense is the, what you call, a number game, with number of people that you have brought. But with this kind of technology help coming in, where you can acquire and the efficiencies goes up, we continuously drive to improve the productivity year-on-year. From that perspective, as the, what you call it, the number keeps going up, perhaps, and productivity going up, we would be able to bring down the cost, which we have attempted in the past. We were midway when this, Aadhaar, thing came up. But even without that, now we have the various methods of, relationship management also inbuilt, which brings in efficiency. Yeah, the virtual relationship management thing that we have set up, and we have seen the early results, it is yielding good results.
We will expand that base whereby customer is contacted regularly, he feels engaged with the bank, his value builds up, and hence, that will make him feel happy to be with the bank. Maybe around 10%-50% cost control can be impacted through the use of this technology as well as the differential relationship model that we're talking about.
Sir, and acquisition cost, for, I mean, for new customers, what will be the acquisition cost? Like, if you can help us quantify it, so.
Yeah, on that, just to give you a sense, between the physical world and the digital world, the 811 world, the acquisition cost is 15%-20% of what it is in the physical world.
Oh.
So it's very significantly lower. Of course, you got to keep in mind, the balances are lower.
Yeah.
The revenue per account is lower because you just got to keep that in mind. But in the digital world, we'll be just dramatically able to increase the size of our footprint at a much lower acquisition cost compared to the physical world, though the physical world, ticket size per account is larger.
Okay. Okay, sir. And sir, the second question is on your HFC portfolio, sir. Exposure have gone up sharply quarter-on-quarter, so I'm guessing you are now comfortable with that. So that's-
Housing finance, right?
Yeah.
Housing finance portfolio does not include real estate developers. That is housing finance.
Yeah, I know that.
Confused. And we don't, we don't, put any real estate developer portfolio in that number. Let's be sure on that.
Okay, thank you.
Thank you. The next question is from the line of Sameer Bhise from JM Financial. Please go ahead.
Yeah, hi, this is Sameer. My question has been answered. Thank you.
Thank you. The next question is from the line of Nishant Shah from Macquarie. Please go ahead.
Hi, sir. So around last year, this quarter, you had given some details about, you know, the amount of the number of customers you've acquired through the 811 . You also mentioned that roughly around 70% of them have the same kind of profile as your normal, branch banking customers. Would you now be able to, you know, give some more color about, what kind of like, you know, how have you been able to monetize these customers? Like, any gradient of like, you know, the average CASA balances that are maintained or, dormancy or frequency of transactions or any cross sales achieved? Any numbers here about this whole 811 experiment.
Okay. First of all, on the digital with Aadhaar coming back, you keep in mind Aadhaar was ordinance and it become law post-election and post the new government passing it through Rajya Sabha. We have banking business. We have made changes, including voluntary Aadhaar all in June. All the changes have been made, and we are quite confident of a very significant run rate, maybe at least equal to the run rates which we have achieved last year. And maybe if we find the going good, we could even accelerate it further because we see this as a very significant long-term acquisition strategy for us. I will ask Virat to take you through broad contours of how both the physical world and the digital world accounts are shaping up and give experience with that. Virat?
Yes. Look, especially on the 811, as we said, that the cost of acquisition is lower. The profile of the customer is extremely broad. Here we find, means people in the age group of 25-35 years, and that, that means that we are catching them early. The second thing is, majority of them, are salaried class, so that, that also gives us an opportunity to do a cross-sell. And the blessing in disguise is between this period of this down, downtime because of Aadhaar, we have developed strategies and the processes whereby we have been able to connect with 811 and our cross-sell of the personal finance products like credit card and the personal loans have seen significant, improvement.
As we mentioned earlier, as far as the upgrades of the customers from 811 to the normal banking type of accounts continues to be hovering between 12%-15%, and we see an opportunity there as well, so that's on the 811 customers. As far as the physical world is concerned, what you call the numbers with means we were doing the full KYC kind of a thing using Aadhaar in the physical world as well. With that opportunity not being available from September to now, I think it had impacted the productivity, but now with Aadhaar back in work, we will be able to get back to our productivity levels that we had got earlier.
And this time also gave us an opportunity to get our systems and processes whereby we would be more efficient in managing the customer relationship. So overall, opportunity to get more customers higher with this Aadhaar-backed. In terms of cross-selling products to them, we have seen some good results and we hope to even better it going forward.
Okay, I didn't quite understand this upgrade from 811 to normal of 12%-15%. What does that mean?
What it means is some of these customers want full-fledged branch banking facilities and all the services which the physical world customer wants and keeps much higher balances, so there is an upgrade program also, which is the choice of the customer, and that is also working well.
Okay. So, actually, I don't know if my answer, like, I understand completely. So the context of this question is like, you know, I am an 811 customer, I am a salaried employee. I already have a bank account, so the likelihood of you, of me banking with you now, it's limited. So like, what I'm trying to understand is, how many of these customers have you actually been able to monetize, or cross-sell a credit card to, or cross-sell a home loan or a personal loan to? Or, you know, even taken away some wallet share in terms of the CASA balances that are maintained by offering a higher rate. In implementation, what kind of progress have you achieved in the year or maybe a couple of years now since we've hired?
I think we've got a fair amount of cross-sell percentages. We are monitoring them every month. The ratios are improving month by month, and we believe the breakeven levels, including the acquisition cost of the digital customers, are coming down, and on a fully costed basis, the breakeven level of a digital customer is now faster than a normal branch banking acquisition customer.
Okay, fair enough. Just one more question, separately on the auto space. So how is your asset quality moving in, like, you know, some of the other spaces like dealer finance or loans to other auto ancillaries or something like that? Because it logically will affect the entire ecosystem. So how is the other ecosystem generally fared?
Please keep in mind on the auto sector, knowledge of which dealers have what situation. Our relation, our understanding of the dealership space started from mid-1990s, and in general, the broad dealership space has been around for a long, long time. Therefore, all our key dealerships, we have an inside out view about what's going right and what's going wrong. And if there's one thing which we are very clear about, that when we feel that there is a risk of losing money, we just make sure that we first protect ourselves. And, therefore, we have actually had a negative situation in our dealer finance business in terms of the growth of the book.
We have also found in the last one or two, last two years in particular, some of the newer banks have been pretty reckless in how they've lent to dealers without adequate security. In some cases, we hear that wherever we are there, just because we are there, some of the other banks and financial institutions have blindly lent on that basis. There are some times when we've actually quietly pulled out and let some of them carry the bank. One year-
On the auto component side, we are watching the situation on case-by-case basis. But let me just give you an assurance that we most of our limits on the auto component side are self-utilizing in nature, and they are not limits that the company can use irrespective of their volumes. So some of our volumes determine the utilization of our limits. So we manage that quite closely, and we will act suitably if we see reason to act.
Perfect. Thank you, sir.
Thank you. We will take the last question from the line of Kabir Gulati from HL Capital. Please go ahead.
Yeah, hi. So even as the YoY growth numbers still look quite decent at around 18%, but the sequential trend just around 1%, I think. So in that context, just two things. First, in the context where sequential growth is just around 1%, which are the segments which are offering you pricing, some kind of pricing bargain? And second, what are the downside risk in this sequential growth context to the overall year-end growth number?
My advice to you is, first, we should go back to history. In most of the situations between fourth quarter and first quarter. Fourth quarter, normally, I mean, there is some element of seasonality which happens. The fourth quarter to first quarter normally shows a sequential growth, which is lower. So be very careful not to misread it as a more sustainable trend quarter-on-quarter, because normally fourth quarter there is a certain level of peaking which happens, and therefore do not compare fourth quarter versus one quarter sequential as the basis for making a trend for the full year. That's my only advice to you.
Yeah. Okay. Yeah, thanks. That, that's it from me.
Thank you very much. That was the last question. I now hand the conference over to Mr. Uday Kotak for closing comments.
Yeah, I think, thank you very much. Really appreciate this. We are in a very interesting time, and as they say, once upon a time, as we say in politics, one week is a long time in politics. I can assure you one quarter is a long time in banking. Okay? So, we are now, of course, in. We are discussing the June quarter. Lots can and will happen in this quarter. We are very alert. We are focused on doing the right things. We are both making sure that we don't take undue risks. At the same time, we do see whenever we find that there is a sustainable opportunity to build, we are out there taking advantage of that opportunity through this turbulence.
Thank you very much for being on the call.
Thank you. Ladies and gentlemen, on behalf of Kotak Mahindra Bank, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.