Ladies and gentlemen, good day and welcome to the Q2 FY 2024 earnings conference call hosted by Karnataka Bank. 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 call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Srikrishnan H., MD and CEO from Karnataka Bank. Thank you, and over to you, sir.
Thank you, Rio. Good evening, everyone. Warm welcome to our Q2 H1 FY 2024 earnings call. It has been an excellent quarter from our perspective. The following is a quick update. As all of you are aware, the first and foremost, we have been able to raise capital, although it is not reflected in the September 30th quarterly results or half-yearly results that end September 30th, because the allotment process, which has now been completed, and the money has been received. This is the preferential allotment to five institutional investors. That is the good news overall, although those numbers have not been factored into our metrics in the results announced today, as well as into our quarterly investor presentation that is being uploaded into the website just now.
With that as a background, I want to also report to all of you that we have had an all-time high FY 2024 half-yearly profit, PAT INR 700.96 crores as against INR 525.8 crores for the previous corresponding half year in September 2022. This is an increase of over 33%. As regard to this specific quarter, this quarter we have made INR 330 crores and this is a decrease compared to the previous quarter. That is basically due to our treasury depreciation, which is there, and all of you are aware about a lot of volatility that is going on as far as the treasury debt market is concerned. However, our positions are insulated, and we want to also ensure that it is completely protected as far as the bank is concerned.
On the positive part, gross advances, which is a very key metric for the bank, has grown by 18.5% on an annualized basis. We closed September 2023 with INR 66,935 crores, and this is a significant increase from the last quarter, as well as the corresponding quarter last year or even the March end year quarter. This is a very good sign in terms of growth in the advances book and all of our balance sheet growth is an advances-led growth. On the deposit side, we have grown, compared to the market, which is growing about 10%-12%, we have grown about 10% on an annualized basis. Our total deposit stands at INR 89,531 crores, and this is again, on an average, grown closer to 10%, as I said earlier.
We are also happy to report that the business turnover of the bank crossed INR 150,000 crore mark, and this is a very important milestone for Karnataka Bank. Our CD ratio has been continuously improving. When we started this financial year, we were somewhere in the 60s, and as we close out the September quarter, we have gone up to 73%. That is really a very clear reflection of the stretch that we are having as far as advances-led growth is concerned, and as I reported earlier about the capital raise. With the capital raise and the liquidity that we will have related to one more churn, which I will also talk about, which is the tier two capital, we believe that we are well-positioned for further growth in gross advances.
As far as the deposit growth is concerned, I think we are well-positioned in terms of the overall progress made during the quarter because we have converted ourselves into a sales organization and we have liability sales teams which have been deployed all over the country, Karnataka as well as outside of Karnataka. We have currently 250 sales officers who have been pulled out of the branches to be dedicated to sales and 400- odd feet on street who have been recruited from our subsidiary company as well as some agencies who are DSA or DSPs. With this, an all-round growth in terms of both CASA as well as retail assets is something that we are preparing ourselves for, and this is the kind of capacity building that we will cater to when it comes to increase in volumes on both sides.
On the health of the portfolio, as far as our stressed assets are concerned, there is a net reduction by over 7 basis points on the net NPA, and compared to the same time last quarter, it has come down drastically from 1.72% to 1.36%. On the gross, despite the increase in the gross advances figure, the gross NPA has decreased, and that is again because the slippages have come down and it is about 0.5% right now. The good news is about also PCR, the provision coverage ratio, where we have improved to 83%. It was at 83% earlier also, so we are maintaining that as of the last quarter. But compared to last year, September 2022 corresponding quarter, we have significantly improved there.
Core provisions remain at 62%, and here again, it is pretty healthy when it is compared to the rest of the peer groups in the market. As far as our NII is concerned, NII, because of the fact that we have grown our advances book and the fact that the new advances because of the interest rate regime which is happening, the growth has not been much. It is only in the region of about 2.45%. On the other side, I think we are well-positioned to kind of grow our book, given the fact that the focus is more on retail, MSME, and the rural businesses. I will talk about the strategy of the bank in terms of what kind of asset acquisitions and how the liability part will also be catered to as I complete the rest of the other metrics.
ROE stands at 16.47 for the half year, and ROA stands at 1.37, well within the guidance that we have provided already. On the overall cost-to-income ratio, while I had already mentioned in the last quarterly call that there would be a spurt because of certain investments that we are making, for the quarter, it would show that we have actually crossed the 50% mark. But on an overall half-yearly basis, we are still at about 49.18%. We believe that as we grow our revenue and as we make sure that our income is accruing from these investments come in the following couple of quarters, we will bring it back to our original guidance of 47%-50%. Cost of funds, the bank has got a very strong retail franchise.
Despite the pressure on the interest rates, because there are a lot of other market players on the deposits where there is a significant increase which is being provided. Having said that, we do have certain very interesting offerings, which is bundled with salary, corporate payroll, and also the flexible CASA, which is basically a sweep out product. All that put together, we believe that we are in the right track. The other one, big opportunity that the bank is chasing is that of the government business. We are empaneled already for customs duty and GST collection. We have gone live, and we are in the last stages of going live with CBDT for direct and indirect taxes payment.
As far as The Karnataka government collections are concerned, we believe that we will become one of the top collection banks in Karnataka and otherwise, because our technology integration with Khajane, which is the state treasury, that has also been completed. I mentioned about the cost, which will also have a very positive impact in this quarter because we have received RBI approval for a call option of INR 400 crores for tier two, which is available for redemption on November 16th.
Somewhere in this mid-course of this quarter, we are doing a churn whereby because of a comfortable CRAR position and the fact that the cost of this tier two bond that we have raised are about 12% and it is expensive, we believe that this INR 400 crore retirement at 12% and augmenting that with further capital, which has been tier one and also the strong liability franchise, we will be in a better position because we have no pressure on the CRAR part due to this. There is also a second tranche, which is due for a call option in February, and this is also at 12%. The quantum of that would be INR 320 crores. As you are aware, we have an approval from the Board for a INR 1,500 crore capital issue, and out of that, INR 800 crore preferential allotment has been completed.
And we do have a follow-up round, which will definitely have to be done for INR 700 crore to make us comfortable on the overall basis so that the next 18- 24 months we are on the right trajectory as far as the growth is concerned. The other two parts, which are also very relevant for our discussion today is one, the credit cost decreased by about 0.67% in the half year ended September 2023. There is also a reduction in the standard restructured advances, which at some point of time for a bank of our size was higher, but it has come down to INR 1,861 crore. It is a decrease from the June figure of INR 2,060 crore.
I believe that we have done a complete review of our position in the last one quarter, and this is the first quarter that I have completed in this bank in full, along with our Executive Director, Sekhar Rao, who also joined in February. We believe that the bank is positioned right for growth. One is that capital for growth is something that we have achieved, and we will continue on that path. The second is that in terms of creating a sales organization within Karnataka Bank, which otherwise was not existing, we have created a team of over 400 plus the 250 sales officers that I talked about. So we have feet on street plus sales teams of about 650 deployed in the market about a month already now. The productivity of these teams will start kicking in by the end of this quarter.
We believe that we are on the right track in terms of customer acquisition. There is also a digital acquisition, which I talked about in the last call, but that we have accelerated. One is a direct digital acquisition. The second is a data-driven, analytics-based digital acquisition. What happens here is that self-onboarding and making sure that the customers are able to onboard into the bank with video or eKYC as something which has been enabled as far as Karnataka Bank is concerned for most products on the loan side. Likewise, even opening accounts on the liability side has also been enabled. In addition to that, we are working on analytics center of excellence, which has been created in Bengaluru, along with the technology digital and the hub that we have created.
It is a 40,000 sq ft of space that we have, and almost 300-plus employees are there right now covering technology, digital, and analytics. In the analytics space, we have created the data lake, and the data lake essentially provides various cuts of data based on transactional history of customers within each branch, and giving the data back to the customer base for branches to do cross-sell and upsell. This is essentially where, examples, where let us say that there is a customer of ours who is paying an EMI but has not availed a loan, we would be pushing a loan into them. This is something which is a data and a lead generation mechanism for digital as well as for the sales team targeting to acquire such customers. This is existing customers of the bank, ETB, and the digital part of it will be new to bank customers, NTB.
We are embarking on a digital first journey related to the overall data analytics as well as the social media impact that is getting created. On partnering with FinTechs and technology companies, we have already gone live with two co-lending partnerships, and we are going live with a couple of more partnerships on the digital distribution side. We also have launched during the quarter, doorstep gold banking, which is basically with a company called Sahibbandhu. This is again, fully digital in terms of the process, and gold loan will be delivered at the doorsteps. This is a complete partnership with a BC arrangement with Sahibbandhu, which is part of the Manipal Technologies group.
Now, as far as the bank is concerned, in terms of the target segments, the target segments that we had originally been chasing continues to be focused right now with about 570 branches in Karnataka and outside of Karnataka, more than about 330 branches are there. We want to kind of make sure that this is not just a regional story, but also a national story. With this in mind, we have been focusing a lot on retail. The growth in advances, we have carefully kept it in a way where almost close to 50% of our loan book still remains to be in retail. This is something which is very granular so that we do not have any chunky exposures and we do not have any associated risk related to that.
The balance of the growth, we have also deployed over 100 agricultural field officers into the market, who have been attached to agri focus or rural focus branches. This is not only to service the agri customers, but also to acquire new customers based on the supply chain flows of each of those agri-processing or farmer-based crop and non-crop based loans. Here, it is basically through the knowledge that has been acquired by these agricultural field officers who are in a better position to serve the customer, and Karnataka Bank is known for its exemplary and superior customer service at branches. We continue to do that for not only the agri, but also for the rest of the customer segment that we are having. MSME is a very big area.
We are in the process during the quarter, which is currently running, where we will be launching our new corporate website and making sure that there is a lot of these partnerships with MSME-based portals, for engagement as well as for life cycle management of couple of the MSME, not just merely lending to them, but also looking at what other requirements they are looking for from a banking or from an overall digital perspective. With this, I want to close out the commentary from the management side based on this. We have had a good quarter. There is just one clarity that I wanted to bring. There is some questions that have been asked from the time that we uploaded the stock exchange notification and now, where the quarter ended, Q2 FY 2023 and the Q2, why is there a reduction?
There was an abnormal one-time increase as far as The Karnataka Bank was concerned, in the quarter ended September 2022, where we had one-time recovery from a corporate client, MMTC in this case, where to the tune of almost like INR 156 crores was the impact on the P&L. If you actually take out that abnormal part out, we have grown from that corresponding quarter to more than 30%. That's just a clarity that I wanted to bring to the investors upfront before any questions are asked because there have been some of the investor community, which have already called between the time that we uploaded and now. Last but not the least, we have also uploaded the quarterly investor presentation on our website. The link is available readily for you.
Those of you who are on the call, you'll be able to access this and also understand our commentary, both in terms of strategy, in terms of the milestones achieved, as well as the roadmap for the future. With this, Rio, I would like to close out on the commentary from the management side and pass it back to you for any questions that any of the participants would like to have. Thank you so much for your time, ladies and gentlemen.
Sure. Thank you very much. We will now begin with the question- and- answer session. Anyone who wishes to ask questions may press star and one on their touch-tone 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.
Rio, I just wanted to add that from our side, Sekhar Rao, who's the Executive Director, as well as the management team, the CFO, and a few others are part of this call right now. In case of any queries that any one of them need to answer, they'll participate in the call along with me.
Sure, sir. The first question is from the line of Sushil Choksey from Indus Equity Advisors. Please go ahead.
Yes, good evening, Sushil.
Good evening. Congratulations to Team Karnataka on stable number, and you have already explained why there was a provision this year, and there was a write-back last year of MMTC. Let us come to a fundraise. It was a successful fundraise for that 800 crore.
Thank you.
And you are planning this INR 700 crores. Any visibility whether you will do it now, or you will do it a quarter later, or you will spill over to next year?
Sir, we are very clear that we want to complete it before the financial year end, which is March. But obviously, the way that we had exercised and we had gone through this whole exercise for the first tranche. It took us about almost close to 70-90 days from the time that we started doing the rounds in June and completed it in September. So the same process is something that we need to begin now, so that the closure will happen hopefully in the same time frame or maybe a lesser time frame this time because of the experience that the bank has had. Secondly, we also believe that this is the right time to raise the money because, one, we have proved our credentials.
Second is that we have also kind of consistently delivered on the results for two quarters in a stretch, and we believe that we are rightly poised as we go forward. So this is basically kind of a credential that we have established, and we believe that the investor interest will lead us to doing this as early as possible.
You have articulated a lot of initiatives since Sekhar Rao started his journey with Karnataka Bank and yourself from June 9th.
Yeah.
So February and June now, both of you have spent almost five months together. In the roadmap which you've showcased over television or in the con call last time and even today, if I have to ask you, what percentage of journey would be considered as initiated and over and what part would be left? Percentage-wise, I am just asking. I am not asking a broader question.
Sure. There are three parts to our journey. One is building operational and technology capacity, and that part, I would say that we are almost 50% through because we know what to build for and what to build on top of what we have already, and for which we were waiting for certain capital to be raised so that the growth capital that we have would be coming in handy. I would say that we are about 50%, and we would be able to build on top all the digital integration as well as the products that will directly acquire clients. That's step number one. Step number two was that the branches were not sales-oriented, and we have created a sales organization of over 600 people as I reported earlier. This is something which, including training that we have inducted them into.
We have completed that and unleashed them into the market. Now, for them to perform, it will take another about 50- 60 days to start contributing in a big way. We believe that here again, the first round of our deployment has already happened, and that would be again 50% of the deployment that we want because over the next two quarters, which is the balance of this quarter and the next quarter, that's by March, we believe that our target is to have about 1,000 ft on straight on the ground. That is the second part of the execution.
The third part is the strategic part, which is in terms of what lines of business do we focus, where do we get the right kind of margins, where do we make sure that we stay competitive, and, in this connection, how do we make sure that our product, process, people, and technology blend together in order to deliver value to customers? Here, we have recruited the chief product officer for the bank. He's coming in less than a month's time. This is the first lateral hiring, which will be followed by at least two, three that we have already mentioned during our various investor calls.
By the end of this financial year, including the lead time that they take, I think all the lateral leadership positions will be filled up, which would enable the bank to be more aggressive and more market benchmarked as far as the products are concerned. As far as the processes are concerned, there are at least three or four agencies who are working with us. One is doing a process review for the entire credit policy, credit scoring, credit exposure management, and also the branch to approval and back and forth. This is exactly to minimize how much of it can be digitized, how much of it can be turned around faster in order to get this. This is one such example of a process improvisation and efficiency improvisation that we are working on. Likewise, there is a lot of centralization projects which we have taken up.
We are centralizing trade processing, we are centralizing forex processing, we are centralizing clearing. We are basically removing a lot of this bandwidth from the branches to make them all sales-oriented branches and creating the back offices in Mangalore, and where we have a lot of space and the people. We believe that with the use of our subsidiary company, which we already have, called KBL Services Ltd., we would be able to make sure that deployment of staff for data entry or for front-end sales is something that we will be able to do it through the deployment from the subsidiary company. This, in short, will be a definition, Sushil, as to what is the various measures and in terms of percentage completions.
In fact, to sum up your answer, you have raised equity, you are enabling full technology stack for deployment for growth, and human resource churning or training should be over by the current quarter. The Q4 should start showing some benefits and fruits where Karnataka's growth, as per what you have planned, should be visible. Am I, to sum it up, right?
I think you have summarized it perfectly, sir.
Okay. Now, all these enablers, you may launch multiple products, whether it is housing, education, MSME. Do you see which area you would grow from the current branches or centralized process, whatever you do? Are you going to change mix? Because currently, I think Karnataka is almost 40% of our business, and the rest is PAN India. Do you see any particular part from growth engine which you would like to move towards?
The strength of the bank in terms of underwriting capabilities as well as our exposure management, etc, remains in retail, rural, and MSME. Those three will continue. We have actually got agri, also as part of the overall retail part, the reason being the size of the loans as defined by RBI. Agri-focused geographies would also include the agri. Given this, you are right about the fact that 40% of our business comes from Karnataka. But the fact is that we have less than 30% of our branches outside of Karnataka. That is something that we believe that will contribute, will kick in. We would definitely want to see that there is a very fine kind of a distribution across all locations. We have just opened, during the quarter, one corporate finance branch.
This is the third corporate finance branch in Chennai, and that is in addition to the ones that already are there in Mumbai and Delhi. All this is a reflection of our focus in terms of whether it is emerging corporate, mid-size corporates, or even some large corporates that we will be looking at, including the products that are associated alongside. That kind of gives you a sense on the focus areas and how we will be able to grow.
My last question is current around how do you see your TAT on most, whether it is corporate or retail product in quarters to come by, 20% more efficient, 30% more efficient? Second thing on government business between Karnataka and central government, how much do you see that as contributing partner for the business?
The idea is that we are actually implementing some technologies which are on the document workflow, as well as making sure that all of this is directly related to efficiency measures. We believe that there will be very quickly a 20%-30% jump in terms of the TAT improvements and so on. The other is from Karnataka and non-Karnataka government collection.
All of the three agency bank licenses that we have, which is for GST, customs duty, as well as for CBDT, that is being certified right now on all India basis. That's got nothing to do with Karnataka. Rest of it, whatever that we are doing, integration with the treasury department and also working with lot of government departments in Karnataka, that is going to be Karnataka-based. But sooner than later, once we have the experience in Karnataka, we'll replicate the success in other states where we are.
Sorry, I should have asked one last question, that is, you are retiring two bond tranches in November and February.
Yeah.
Would you replace with a cheaper bond, or you'll utilize your current profits plus equity?
Depending on the interest rate forecast at that point of time and also the fact that we will get re-rated soon for this quarterly result. We believe that if there is an opportunity to replenish that with cheaper tier two bond, that is something the b ank will consider.
Thank you, and all the best to Team Karnataka for years to come.
Thank you so much. Thank you for all your questions. Over to you, Rio.
Thank you. The next question is from Sarvesh Gupta from Maximal Capital. Please go ahead.
Good evening, Sarvesh.
Good evening, sir. Sir, one question on the other income, which seems to have not grown this quarter. So there is a QOQ fall as well as even YoY. Can you explain that, sir?
Essentially, what has happened is that, from an overall product coverage perspective, the bank has not invested a lot into products. I must be upfront about this in terms of what we have done. The second is that the fee income for the first quarter has a locker rental, which is also pretty much high. As an overall percentage for the first quarter and the second quarter, because of the fact that the second quarter did not have a locker rental, you would see a little flat, although there is growth in some other areas, such as foreign exchange and so on.
Last but not the least, is on the treasury side, where if let's say that there are some kind of reversals that have happened due to the depreciation, etc, that part also comes in on the overall non-interest other income category. If that kind of gives you an explanation. But yes, we will make sure that the growth is all round and is reflected in the following few quarters.
Understood. And sir, this quarter we have done a good sort of a growth in terms of our advances.
Yeah.
But the impact is not visible on the NII line. Is it because of change in the mix or if you can throw some color on that, why it is not sort of leading us to improve our top line much faster?
Yes, you are right about the growth in advances from almost like INR 59,000 odd to INR 67,000 crores. That's a significant jump which has happened. But it is also that we've not repriced our assets or overall. Our overall asset return number is 9.9%. 9.9% for our total returns is not bad at all from an overall market perspective. I think there are two elements which have impacted this from an impact, which is, let's say, not being visible, as you rightly said. One is that our cost of deposits, where we do have some pressure, but we believe that the deposit rates which went high would get kind of plateaued as we go forward.
Second is that, as we are focusing a lot on the advances side, which is more on the retail, agri, and MSME, we believe that we will get the right kind of rates as we go forward for growth in the book. We believe that the growth in the book will be the same rate as we go into this quarter and the following quarter. Which means that the growth part from where we were at INR 59,000, we could close anywhere between INR 72,000 crores or so in terms of the gross advances exit March 2024. If we are able to maintain the growth and NII to a large extent, then the NIMs also get managed, and we have managed the NIM so far. 3.58% is our NIM right now, and our guidance has been 3.5%-3.7%.
I think, if we are able to maintain that, then in the book, which is grown, and the churn that we are doing on tier two and the fact that we have the tier one capital followed up with the second round, hopefully, I think The Karnataka Bank will be in a much better shape compared to what it was in the overall composition.
Understood. Basically, we are still guiding for our loan book growth of around 20% for the full year, right?
17%-18% for sure.
Okay, sir.
Yeah.
Congratulations and all the best.
Thank you. Thank you so much, Sarvesh.
Thank you. The next question is from the line of Prabal from Ambit. Please go ahead.
Hi, good evening.
Hi, am I audible? Yes, sir. Good evening to all. Sir, am I audible?
Yes, yes. We can hear you, sir.
Okay. Sir, you mentioned about having sales culture in the bank, which was a missing piece earlier. How have you changed your incentive structure of branches and employees versus what used to be the practice earlier in order to drive this vision?
Yeah. What we have done is that we are rolling out a variable pay plan for the entire set of sales teams. This includes both the in-house sales officers as well as for the feet on street. This is based on certain weightages that are given for different products that they acquire and over a period of time which is basically on a monthly basis and whatever retention that we need to do because we also do not want any gaming to happen here where they bring the accounts and then we pay the commission and within six months, the customer closes and goes away. This game we are used to. We have done this for our life in other banks. We have all those control measures in place. This variable pay plan is something that we will be rolling out to all the staff.
We are just waiting for the sales teams to be deployed and the training to be completed. This quarter, we will be able to roll out that variable plan. If that gives you a sense of the fact that the sales team will work on a variable incentive-based acquisition rather than just a fixed salary, which is not so exciting. That is the way that we will approach this.
This will be over and above the IBA salary that they used to get. Even-
Yes
IBA employees, if they do more sales, they can get
Yeah, it will be over and above, and this will be performance-based.
Okay. Sir, second question would be the lateral leadership hiring that we are doing for the bank. Are these on CTC basis or these are on the IBA model?
All the new leadership hires who are coming in are all on CTC base. Obviously, there are different scales within the bank, which you are aware. All the executives who are there in the bank above scale four are not part of the IBA mandate or the union mandate, so-called. This is something that we are very clear. We will make sure that there is a lot of equalization that happens between all the lateral hires and the existing executives of the bank, so that no disparity is being continued.
These people will be based out of Karnataka Bangalore head office, or they will be depending on the verticals that they are serving.
The head office of the bank continues to be in Bangalore and all the operating departments which are essentially including support plus credit risk monitoring, etc, all of that happens and the centralized processing job that I talked about earlier also will be based out of Bangalore. In Bengaluru, technology, digital, as well as some of the leadership lateral hires would be based out of Bangalore for better business reasons. We believe that model will work whereby the business leaders as well as the technology product teams will be based out of Bangalore and everyone else between the branches and Bangalore.
And sir, any tweaks on the asset repricing that we have undertaken because or maybe making it more dynamic, over a period of time, because now we are going digital, so our asset repricing could also see an improvement per product.
We are already on EBLR plus margin. This is something for various products which have already been defined. Also what happens is that this repricing because of EBLR based on market actually happens automatically. So we are probably one of those banks who have actually done this on an ongoing basis in terms of the reset on the asset pricing. As far as deposit pricing is concerned, it is purely ALCO decision and purely based on accretion that happens on the deposit side. We are not buying out deposits at a high cost at this juncture. We believe that the total overall cost of deposits, which you have already seen, is very much controllable. It's at
5.19%
5.19%. Also the CASA mix, as you are aware, we are still in the 32%+ or closer to 33% kind of of the overall deposits. So which means that we are sitting pretty. We just need to continue the same story rather than trying anything maverick.
All right. And sir, I just have one request. So, two quarters back, the presentation that we used to upload, it used to have a lot of data points across various sections, whether it's on business or whether it's on asset quality. I would just request if we can restore giving those data points because it just gives more clarity on how the trends are performing across various sections.
We heard you. The last two quarters, the last quarter and this quarter, we have actually changed the investor presentation format to reflect more the strategy milestone as well as to make sure that the growth part of the bank is reflected more. But noted down your point related to the fact that some data points you wanted. We will be able to incorporate that from the next quarter. I will note it also.
Awesome. Thank you and all the best.
Thank you so much. Rio, back to you, please.
Thank you. The next question is from Darshan Deora from Indvest Group . Please go ahead.
Thank you for the opportunity to ask this question. My main question was regarding the underwriting.
Darshan, I am sorry to interrupt, but your voice is not very clear. If you are on a hands-free, request you to use the handset.
Sure. Just give me one second. Hi, is this better?
Yes, much better. Please go ahead.
Sorry. Just wanted to understand what the changes we are making on the underwriting side, given that the bank has in the past been plagued with bad asset quality. What are the deficiencies that, given your past experience with HDFC Bank, you are observing at Karnataka Bank? What changes are we making to improve upon that in the future, whenever the cycle turns, we are better positioned?
I want to just correct your statement a little bit to say that we have had some problems or any health issues on the quality of the assets. I do not think so. Because it has been pretty healthy, I should say, in the past. There is always scope for improvement. The second part is that, yes, as we kind of embark into new avenues for growth, which are particularly related to digital as well as client acquisition on the consumer side. So far, the bank has been actually 95% of the loan book has been collateral-based. That will be a move that will happen as we go forward, which will be cashflow-based and a little bit of unsecured that will happen on the retail side.
Of course, taking into account a lot of credit scoring mechanisms, etc, which is what we are trying to put in place. We believe that the bank is appropriately placed for taking the risk related to growth and asset book on various new asset classes, which otherwise the bank has not gone into in the past. If that kind of gives you the sense. Last is, I had mentioned in the question to the first caller that we are undertaking a huge process review exercise on the credit part, not only for credit TATs, but also related to credit scoring mechanisms. Also, emanating from the co-lending and the digital kind of acquisition that we are doing.
We believe that a combination of the credit scoring reviews for existing physical branch-led underwriting as well as for the digital underwriting would be put in place as we go forward in terms of the book growth.
Okay, and just as a follow-up to that, and pardon my ignorance, is most of the underwriting happening today at the branch or has it moved to more of a centralized location, especially for sectors like MSMEs?
There is a structure that we have where we have five regional credit processing centers, which will go out to eight. We also empowered 38 clusters across the 900+ odd branches where they are empowered. It is not just the branch level. Above the branch, there is a cluster level. Above the cluster, there is a regional processing center, depending on the nature of the loan as well as the quantum. Then there is also for large corporate relationships or mid-size corporate relationships at the head office level, which is a credit sanction centralized group. It is in multiple forms in terms of the authority matrix and delegation matrix.
Got it. Thank you so much.
Just to clarify, no underwriting happens at the branch. It is at central locations, either at the regional offices up to a certain value, 14 regional offices are there, or at the regional credit hubs, which are at five locations. It is a hub and spoke model.
Got it.
Credit proposals are sent by the branch.
Got it. All right. Thank you. Thank you for answering this question.
All right. Good.
Thank you. The next question is from Chintan Shah, from ICICI Securities. Please go ahead.
Yeah. Hi, sir. Thank you for the opportunity. So, sir, firstly, I would just like to understand in terms of margins trajectory. So, sir, like we are just 10 days down for this quarter, and the cost of deposit has been, I would say, benign as compared to the competitors, what they have been reporting. But this also seems to be on the back of lower deposit growth. I think we had guided for roughly INR 1 trillion of deposits by FY 2024. So are we on track to achieve that? If yes, then how would the margins behave from here on for the remaining second half? Also, sir, on the deposit repricing. So are we done with the deposit repricing or are we yet to see some more pressure on the existing deposits? Yeah.
So as far as the deposit accretion is concerned and making sure that all of whatever that we are growing is within a particular affordable annualized rate. That is something which consciously we are looking at, and actually speaking, 75% of our FDs have already got repriced, and it is only the balance 25%, which hopefully this quarter itself, we have a larger quantum that will come in, one. Secondly, as far as maintaining that healthy NIM, the part related to pricing of assets is something that I had already told to the earlier caller. I believe that in terms of, let us say, overall deposit accretion and the rates, and making sure that the NIM is maintained is something that we will do. Sekhar has some point related to that. Shekhar, please.
Just couple of points. One is we haven't seen CASA migration to the extent that other banks have seen from CASA to TD. That is an important point that you will recognize. Second point is, if you see that we have in fact seen two cycles of term deposit rates being bought down. So we have controlled our end, and 90% of the term deposit book or more is less than INR 2 crores. So we have a large retail deposit and CASA franchise. We have held on to it. We haven't played the price game. We have introduced a lot of interesting products in this space, the bundled salary proposition, the sweep-in accounts. We also pipeline for government business. So this will help us over the coming quarters to kind of grow our deposit book. We are watching how the pricing is panning out closely.
Hello, Leo?
Yes. We'll move to the next question.
Yeah.
The next question is from Yogesh Bhatia from Sequent Investment. Please go ahead.
Yes, is this Yogesh?
Yes. Sir, first of all, congratulations on the new initiatives and table set of earnings. I just wanted to understand, the other income you said is lower for two reasons. One is the treasury impact, and the second one is lower fees that has measured, they are much higher in Q1. Can you just quantify this? How much is the treasury impact?
I will take this. First is we collect all our locker rentals in quarter one.
Okay.
That was a significantly large, around INR 35, INR 39 crores of locker rentals. Okay?
Okay.
That was collected in quarter one. The treasury income difference is around to the extent between both quarters of INR 59 crores. This includes depreciation changes and, I mean, depreciation on investment between that two quarters, that difference, and the trading profit. The impact there is around INR 59 crores. We made INR 61 crores in the quarter. Sorry, 60 crores in the quarter one, and around a crore in Q2, which means the difference is 59. These two are the large contributing factors. If you nullify, I mean, negate this, then our other income actually will show a positive, good trajectory.
Correct. Yes, sir. Okay. I think that is the reason why that has led to a lower profitability. If you adjust for that, then I think the numbers are very healthy.
Thank you, sir.
Yes, absolutely.
Thank you, sir.
Thank you. The next question is from the line of Kirtan Desai, who is an individual investor. Please go ahead.
Yes, Mr. Desai. Good evening.
Yeah, good evening. Thank you a lot for the opportunity, sir. My first question is, sir, earlier we used to provide the provisional figures after quarter ending, which we have stopped now. Can you just let us know the reason for the same?
It is actually market practice. Some do, some don't do. We were wanting to kind of not get into a provisional number and also to make sure that there is no speculation on this. This is exactly the reason that we do not want to do it. But, from now, the predictability, as far as our results are concerned, are something that we will guarantee you because as we go forward, like any larger organization or bank, we will continue to do this directly on a quarter-on-quarter basis.
Sir, my second question is that now we have diluted our equity and raised the equity as bank is well-capitalized now. We always diluted equity by 15%. Are we able to grow our advances by more than 15% from now onwards? Because last quarter, advances grew by only 6.5% yearly it has grown by only 9%.
Yeah.
In my view, if we are not able to raise our advances by 15%, 20%, then the shareholder won't be benefited by this raise in equity.
On a YTD basis annualized, we are growing at 18%. If that is an indication on how we will go forward, I had already given the guidance that we will continue to grow at the same rate as far as the advances book is concerned. Yes, we are pretty much cognizant of the fact that tier one raise has an impact overall from a retail shareholder perspective. But it is all for long-term growth. You need to understand that as a bank, we need to raise on a continuous basis and make sure that we are able to service, as well as making sure that we get some cap table with institutional investors who also are very important from an overall bank perspective. That is a complete change to this bank that we have brought about in the last about 100, 120 days.
Sir, thanks a lot, sir, and best of luck for the future.
Thank you. Thank you so much.
Thank you. Thanks.
Thank you. The next question is from Yashwanth Tippeswamy, who is an individual investor. Please go ahead.
Yes, sir. Good evening.
Yeah, good evening. Good to see that the low-hanging fruits have been addressed. Like raising the capital to retire the debenture at 12%, that is a good sign. The first question that I have is with respect to the large corporate exposure, I mean, the advances. We have seen there is an increase on that front. However, that has not resulted much in terms of CASA ratio. Do you have any ideas behind raising the large corporate advances?
No, the large corporate advances, really speaking, we have not grown as much as what you are saying. Reason being that overall our composition of the book still remains even at this enhanced advances number of INR 67,000 crore is at 50%, which is still retail. I do not think that we have grown that substantially in any large corporate exposure. That is one. Secondly, your question related to CASA ratio and large corporate advances, these are two independent things.
Our CASA ratio is essentially a percentage of the overall deposits which are lying in the form of current and savings accounts. We have maintained it in the 32%-33% range always, and which we believe is a very healthy number as we go forward, and which in an enhanced basis as we grow our liability book also. If we continue to be at the same, I think it is a very good sign from an overall profitability perspective.
Okay. The second question that I have is with respect to the sales team that you were talking about.
Yes.
Is that the sales team is very focused towards MSME or corporate or retail, which would be the area that this sales team is going to focus on going forward?
It is definitely not corporate. It is predominantly retail and agri. MSME also forms a portion of that, not much, because MSME sales is to be done more from a banking perspective, understanding the business, and which can be done better by our own relationship and account management teams. Our branches are well-equipped to handle the MSME part. Lead generation on MSME is something that the sales teams will do, as well as the promotional activity that we are undertaking across all the branches by participating in MSME-related industry trade associations and so on, will continue. Predominantly, the deployment of our sales teams have been in the areas of retail liabilities and retail assets.
Okay. The last question from my side is with respect to the employee expense. I see that there is an increase of about INR 40 crores, and there is a provision also which has been made. Is this going to be a continuing effort to cover for the next two quarters, or are we done with provisioning?
Sir, this provision primarily is for the IBA revision to bipartite settlements, which they announced in November last year. Ever since that time, we have been actually providing quarter- on- quarter, although it has not come into effect. In order not to kind of have any major impact on our P&L as we go forward, if we have not provided for that. As a very clear, prudent measure, we've been providing for this quarter- on- quarter. As and when the IBA mandates go live, this will move from provision into actual wages bill, the actual salary bill that we will incur. Essentially, this is going to stay, and this is cost of running the business.
Okay. Thanks very much.
Just one correction. You got the numbers of provision wrong. In fact, our quarterly total expenses on salary is INR 269.45 for the last quarter. This 440 crore provision on wages is incorrect. It is a much lower number. You can be guided by our-
The salary bill for the quarter is INR 269.45.
Okay.
Yeah.
Thanks for correcting. Thanks.
Thank you so much.
Thank you. The next question is from the line of Ketan Athavale from RoboCapital. Please go ahead.
Yes, Ketan.
Hello, sir.
Yeah.
Thank you for the opportunity. I wanted to know what will be the credit cost going ahead, and what will be a sustainable level of other income going ahead.
Credit costs from an overall projection, I think that we will be around hovering the same region of 0.5%. That is not going to change much. We believe that even on the enhanced growth basis, it will not change. That was your first question. Sorry, what was the second question?
Other income.
Other income.
Other income plateau.
Other income plateau.
See, what we have done is that, as a bank, if you look at the opportunity in the market, every account where we lend money, we need to also have some product income associated with that. This could be anything which is related to cash flows or foreign exchange or non-funded commission for a couple of exposures, etc. All of this is basically what we call in our banking parlance as a cross-sell opportunity for say, corporates or SMEs also.
Now, that part of the bank has not been activated fully, and we believe that we will introduce the right kind of products and also the right kind of sales mechanisms to promote this. With foreign exchange centralization, which is a project that we have undertaken now, and with all of whatever that we are looking at for the overall product push, we believe that the fee income would go up. Just a small correction. One second. Hold on.
On the credit cost, it will be more like in the range of 0.25. Last quarter was around 0.17.
Yeah, apologies on that. Yeah.
Yeah, just that.
Okay, got it. Thank you.
Yeah.
All right, good.
Thank you. The next question is from Nirvana Laha, who is an individual investor. Please go ahead.
Yes, Mr. Nirvana
Thank you for the opportunity. Am I audible?
Yes, very much sir.
Yeah. In your opening remarks, sir, you mentioned about a couple of co-lending partnerships. I wanted to explore that a little bit. What areas of loans are you considering under these partnerships? What kind of vision do you have for co-lending in terms of AUM that you want to target, and who are the partners you are working with?
Firstly, I will answer the question on the vision. Clearly, we have stated in our last quarter investor presentation that one of the vectors for growth will be through partnerships. In this regard, we have consolidated all our tech digital resources in Bangalore. We have created a tech and digital hub. We are creating our API hub, which will be public-facing, and we will launch it soon. So growth through partnership is an important vector, and we will continue to invest in the same. However, it is a little premature to quantify the same. The ones that we have gone, so the product categories that we are focusing on are Agri, including dairy, and micro MSME. We are also looking at, apart from co-lending, certain interesting opportunities in areas like credit on UPI. These are the three focus areas currently for us.
Okay. Who are the partners you have gone with, if you can tell us? What kind of dispersals are you at least starting to think of, if you can tell us about that?
The partners that we have gone live with are, just to name a couple, is Sahibbandhu.
Northern Arc.
Then Northern Arc.
Paisalo.
Paisalo. These are early days, and we are just about 15 days, a week or so in some of these relationships. We wouldn't want to give any number projections as of now. All the heavy lifting with respect to tech integrations has happened. Now, reaping the benefits of the platform is the next phase.
Got it. One thing I wanted to understand is what kind of ROAs, I am sure you must have done your homework, so what kind of ROAs is the bank hoping to earn through co-lending? Is it going to be at par with the ROAs of the on-book lending? Because what I understand is, under co-lending, a bank would actually take the loan on board at a lower interest rate than if the customer came directly to the bank. In terms of ROA, how does it work out for the bank overall?
In terms of, say, pricing, it is very important that you do not offer a differential pricing to the customer, irrespective of whether he walks into the branch or through the co-lending partner, clearly. We at least have gone ahead with a uniform pricing policy, and which is more competitive as against these gold loan NBFCs. Since there is relatively less infrastructure carry, we will have similar ROAs, and there won't be any negative impact on ROAs in this space.
Okay. But aren't operating cost going to be lower for you because the origination is supposed to be done by the MSME partners? Towards that extent, your operating costs are supposed to be lower, right? If your lending rates are same, shouldn't you ideally see your
I commented specifically on gold loans. On micro SME, there will be a different strategy. The product category itself will be unique, and the pricing will be different because the loss ratios could be a little different in those product categories. These are largely unsecured. So, different strategies. A micro SME product distributed through the branch and a micro SME product distributed through a partner are two different products for different product segments.
The entire, what do you call, customer proposition will also vary accordingly. The way we are approaching it could be quite different. Even in gold loans, where the same customer could walk into your branch, essentially. Because what happens is, gold loan partnership with Sahibbandhu will be in geographies where our branches are present, whereas in the MSME, it will be in geographies where we do not have branches. In gold loan sense, you cannot have competing strategies, you will have to have complementing strategies, whereas in MSME, you can have two different strategies for different markets.
Okay. Got it. Thanks for explaining that. Coming to your presentation, there is one slide that says, targeted performance improvement to boost returns." Various metrics are spelt out there. I can see that for the last three quarters, you have almost been hitting all those metrics. For example, NIM of 3.5%- 3.7%, ROA of 1.2%- 1.4%, cost of funds up around the high 0.1%, cost-to-income ratio up around 39%. Therefore, is this still the ambition or from a two, three-year point of view, is the ROA ambition, for example, going to go up?
ROA ambition will be the same, 1.2%- 1.4%. That would be the guidance, or the range, I should say. The reason that why we reiterate about the four or five very key metrics as far as the bank is concerned, is because when we are growing, we should not lose sight of the basics.
Yes.
This is actually the basics for banking. Which is why we kind of reiterate that every investor presentation and every internal meeting that we have with the executives to make sure that we do not skip away from each of those on the pricing related to new business or even some of the existing business in terms of the churn. This is fundamentally the way that we conduct business here.
Okay, got it. One last question on the corporate banking segment in the segmental results. I think in your opening remarks you said that there was a one-time provision or hit, which was a YoY comparison. If I look at your segmental corporate banking profits, quarter-over-quarter also, there is a 40% drop from about INR 150 crore to about INR 90 crore. What does that pertain to?
I just want to clarify that what I was qualifying was that there was a write back, which was for a recovery of one of the large corporate loans in the same corresponding quarter last year. If you look at the last year, same corresponding quarter, and now, obviously because of this one abnormal positive impact the b ank had, we would actually see that there is a reduction wherein there was an increase of 30% from the last quarter growth. The corresponding quarter last year. That is the clarity. I just thought that I will tell you exactly what the position was. That was now almost to the tune of INR 155 crore, INR 156 crore. As far as your second question is concerned, sorry, I didn't understand. What was your question if I take away the abnormality part?
Yeah. If I look at QoQ, in the June quarter, your corporate banking profit segmental result was INR 155 crore, which has now dropped to INR 94 crore. This big hit has happened due to what reason?
Treasury profits, like I explained, are classified under. That could be one, but we will note this question down and write back to you on the specifics.
Yeah, because I think treasury is called out separately. That has dropped by around INR 60 crores.
We will just look at where you have picked this up from, and we will come back to you, sorry.
No, it is from basically your results, where you declare the segmental results. There if I look at corporate banking, so against INR 155 crores of profit last quarter, it has dropped to INR 93.5 crores now. So that was my question.
Okay. We will get back to you on this specific, yeah.
Okay. Should I write to you on investor relations or?
You can write to us.
Okay. All right. Thank you, and all the best.
Thank you so much.
Thank you. The next question is from Ram, who is an individual investor. Please go ahead.
Hello.
Yeah, good evening, sir.
Sir, good evening, sir. Am I audible, sir?
Very well, sir.
Sir, you have just explained regarding the CASA ratio. For the last three, four years, it is remaining stagnant around -32. Will there be any initiative to improve this to 35 or 40?
Sir, CASA ratio at 32, and for a bank which is growing, and whether the total deposit size was INR 60,000 crore or it has become INR 80,000 crore or now it has become INR 89,000 crore, that means that
Okay
...the ratio has been maintained, which is actually quite healthy. That is one. Secondly-
Okay
...as we go forward to kind of to answer your question, there are a couple of initiatives that we have taken on the government collections, which you are pretty aware of.
Yes, sir. Very true.
GST bank, and we are going to become a CBDT bank. This will increase to the float, and it will substantially improve as we go forward. We believe that this is the right kind of approach for a bank like us.
Okay. Sir, one more question. In the advances, about 48.9% is of retail advance.
Yes.
Is it fully secured, and what is the proportion of secured and unsecured? Can you please enlighten on that, sir?
On the retail advances, almost as I said, 95% are secure. Either this is housing or asset-based financing like vehicles and so on. The unsecured portion that we have is actually very insignificant in this regard.
Oh, very great. Very useful information.
Yeah.
One final question. As to the geographical thing, the top five states you have given, Karnataka is 577 branches and followed by Maharashtra, Tamil Nadu, Andhra, Telangana. Is there any efforts in the coming period, future, to make it a pan-India, this one? What is your plan for that?
Plan for what, sir?
The plan for the growth all over India-
Okay
...in the next two, three years.
Just to give you a sense, while 570 plus branches are in Karnataka, between the neighboring states, Maharashtra, Telangana, Andhra Pradesh, and Tamil Nadu, we have in each one of them over 50 branches. Then followed by other locations. We are present already in Gujarat, we are present in Madhya Pradesh, we are present in Delhi, N.C.R., Punjab, we are present in East, we are present in Orissa. That way we have a national presence already, and we are actually in 14.
22 states.
Yeah. 22 states and two union territories. That is the background to our distribution.
Okay. That is all from me then, sir. Thank you, sir.
Thank you so much. Yeah.
Thank you very much. We will take that as the last question. I would now like to hand the conference back to Mr. Srikrishnan H. for closing comments
I would like to thank the investor community for reposing confidence as far as the bank is concerned, the institutional investors, as well as the retail investors who have always been standing by our side. Based on the last couple of months that I've been here, we've been doing the round meeting up with all kinds of investor types in various locations. We believe that we are a very strong story with credentials which are unparalleled because this is the 100th year of the institution, and we are celebrating our centenary. Out of the 99 years that we've been existing, all the 99 years we have been profitable, and almost like 96 out of 99 years, we have actually paid dividends to investors also, other than some years when the regulator did not allow us to do so.
This is a track record, and here is an aspiring institution which wants to do a transformation in terms of change, want to become a national story from being a regional story, and also develop a lot on technology and digital banking. This is the way in terms of growth as far as The Karnataka Bank is concerned. I want to only thank you.
This is going to be a very focused attempt from the new management team as well as the existing management team who've been wonderful in terms of their contribution and cooperation to this transition and transformation journey. We believe that we will be a real force as we go forward. On that note, thank you all, and wish you all the very best for the festive season ahead and the festival season that has already commenced from our last, about almost 15, 20 days since Navratri. Good luck to you all, to your families, and many thanks again for all your support.
Thank you very much. On behalf of Karnataka Bank, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.