Kotak Mahindra Bank Limited (500247) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Kotak Mahindra Bank Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Uday Kotak. Thank you, and over to you, sir.

Good evening, friends. Happy New Year, and welcome to our quarterly con call in connection with the December 2019 results. On the bigger picture, I do believe that the Darwinian theory of survival of the fittest is currently playing out across a number of sectors. And I do believe in due course, it is also having an impact on the financial sector, which is going through its turbulencies. At this point of time, therefore, in terms of strategy, 2 important points are relevant for any player in the risk-based financial sector. #1, a need to do shopper risk underwriting in choosing not just the sector, but also specific borrowers, because we are seeing significant mortality within the sector in terms of who survives and who doesn't. So that is 1 important issue, which makes it absolutely necessary for sharper risk underwriting, which we need to undertake. And #2, at a time like this, we believe that the compass is more important than the speedometer. In this context, as we look at our overall economic situation, the economy currently is growing at or below 5% GDP growth rate. And we believe that this is gradually stabilizing and would move to a real run rate of around 6% in the next 12 to 24-month time frame. The nominal growth of the economy, which is relevant for our business, which is currently in the range of 6% to 7% nominal growth, we believe, will move and stabilize to a 10% to 11% nominal GDP growth. As you may recollect, I have said from time to time, we believe we have an ability to grow at 1.5 to 2x nominal GDP, depending on the situation of the economy. We also feel that we are going to see a little bit of inflation coming back. And if repo rates are not increased, we will see a reduction in real interest rates in the economy, which will aid growth. Having said that, at this point of time, we do see a few financial entities going through stress and challenges but believe it is controllable through right policy action. Therefore, at Kotak, our focus for this quarter has been to keep the ship steady and focused and be consistent with our sustainable strategy. For this quarter, we had a onetime hit on employee cost of INR 200 crores, which was linked to the defined benefit scheme of the IBA employees, which have become a part of Kotak post-merger with ING Vysya Bank. There are currently now about 2,000 employees. And this INR 200 crore hit is coming primarily on account of revision in the annuity tables for buying of annuities, which have been changed by Life Insurance Corporation effective October 1, 2019. This change in annuities is applicable to all annuities -- fresh annuities, which are being bought at LIC and would be obviously similar rates with other players. As a result of which any defined pensions or annuity commitment, which a bank or any party has, the value which you have to -- amount of money which you put in for the same level of annuity goes up. And this is 1 of the main reasons why we recognizing the cost of this change coming out of a present value change, which was made effective October 1 have taken note of that and provided fully that differential in the quarter ended December. Our credit cost for 9 months are 67 basis points, which is consistent with our view on credit costs for the year of being in the 60s. We maintained this view of credit cost for the full year to be in the 60s. Our core strategy, which is what we have discussed with you over time of low-cost and stable liability, to focus on risk-adjusted returns, building franchise and knowledge businesses, digital drive and customer and value focus continues. We are happy to also state that our asset management, life insurance, investment, banking and securities businesses continue building the strongest franchise and sustainable growth and, in fact, have grown quite well in this quarter. If you look at our numbers, the bank stand-alone PAT is 23%, consolidated is 27% and nonbank company's profit after tax growth is 36%. In terms of how do we see growth from here, yes, we have seen some moderation in growth compared to what we felt at the end of the September quarter. And at this stage, if we have to give a guidance for the year, we would say that it would be less than the mid-teens, but in double digit. So where that ends, whether it's 12%, 13%, difficult for us to say at this stage, but this is how we feel about the situation at this point of time. And as we go further into the year, I think this is a year where we do believe that the basic theory of moving towards the system, which is cleansing, consolidating and getting fitter is the game, which will play out, and we will play the game accordingly. With that, I will hand it over to my colleague, Jaimin Bhatt.

Thanks, Uday. As we sent in our presentation, the -- we closed the bank stand-alone with a post-tax profit of INR 1,596 crores, which is 23.6% higher than the same period last year. We've seen an NII growth in the bank of 17%, which is on the back of advances growth of 10.4%, which results in the NIM has gone up to 4.69% for this quarter. The other income has seen a growth of 37% on a year-on-year basis, while fees have come in at a growth of 8% during the period. We've seen general banking fees continuing to go up. Slight drop in the distribution fees, mainly coming from mutual fund being lower and some amount of -- we had some spiky DCM lease last year. The employee cost has seen a sharp rise in this quarter, as Uday touched upon. This is a nonrecurring charge coming from -- 1 of the major regions has been the LIC revision of the pension tables or the annuity tables and changes in DA rates. And this not only impacts the 2,000 current employees, but we have another 3,000 plus retired employees who will also get benefit. And to that extent, we've taken the charge on all of that this quarter. OpEx this quarter has seen a rise coming in from -- on a year-on-year basis what we spent on reviving the 811. Last year, we had a slowdown, thanks to Supreme Court decision. We've seen rise in some of the business related expenses relating to cards and whatnot. Our provision for the year looks different because last year, in this quarter, we had seen actually a reversal of provisions on the treasury side, which kind of had an overall net number, which was negative on the provision side. To that extent, we have seen us rising the NPA provisions this quarter. The credit cost, as Uday mentioned, 67 bps for the 9-month period. The GNPA at the end of the period now at 2.46% and the NNPA at 0.89%. SMA2, which was INR 431 crores 3 months ago, has now gone down to INR 274 crores, which is about 0.13% of the overall asset book. While our profit before tax at INR 1,944 crores and we closed the period with INR 1,596 crores of post tax profit, to some extent, also helped by some favorable tax orders we got during this period. Our CASA story continues to be good, as Uday mentioned, the CASA percentage at 53.7%. If we take the average 9-month numbers for CAR, we've seen a growth of 19% on a year-on-year basis and savings showing a 20% growth on a year-on-year basis. In addition to CASA, we also have seen a rise in the TD sweep number. That's now about 7.4% of the overall deposit base. The CASA plus the deposits, which are less than INR 5 crores, now comprising as much as 87% of our total deposit base. Cost of SA has come down, and now it's 5.27%. This period, we end with 1,539 branches at the bank level. On advances, as we spoke, a total growth of advances year-on-year is at 10.4%. We've seen growth coming in the agri space, the home loan space and the small business space, though the corporate book as well as the CV/CE has seen a lower growth for the year as well as for the quarter. If I look at the subsidiaries right now, we've taken the overall consolidated profit post-tax at INR 2,349 crores, which is 27.4% rise on a year-on-year basis. Our capital and reserve at INR 65,000 crore plus, and we closed the period with a book value of INR 337.6 crores. Kotak Prime showing a profit of INR 187 crores for quarter and Kotak Investments at INR 64 crores. Both of them have seen a slight drop in their book size, though the margins have improved. And capital adequacy at both those entities continues to be healthy between 23% and 25%. The capital market subsidiaries, Kotak Securities and KMCC, showed a profit of INR 40 crores this quarter and has been in the middle of deals, closed the QIP issuances of Bajaj Finance and PVR, was involved with the IPO of Ujjivan and advisory side we had deals from ArcelorMittal and Fabindia. Kotak Securities maintaining a 9.2% market share on the cash segment, has seen the profit post-tax for this quarter at INR 128 crores versus INR 99 crores for the same period last year. For the other 2 entities, Life and Mutual Fund, I request Gaurang to talk about the Life Insurance piece.

Thank you, Jaimin. Life Insurance, we had a strong performance this quarter. Our gross written premium has grown by 44%, and our individual premium has grown by 29.3% on a very strong renewal premium. Our group business continues to be -- on the back of more risk premiums have gone up by 89%. Our AUM has gone up to INR 32,670 crores, which show the growth of 29%. Our 13th month persistency to 61 month persistency, which are on 5 data point it is managed, across the industry we are either #1 or 2 on each of these 5 data points. Our profitability has been good. We grew from INR 125 crore PAT this quarter to INR 166 crore PAT this quarter. Our solvency ratio continues to be above 3. Our mix of product between ULIP and traditional continues to be favorable in terms of our margin. If I take you to the AUM, the AUM growth across different verticals has gone up by 29% from INR 203 lakh crore to INR 263 lakh crore. If I look at offshore to AMC, I'll hand it over to Nilesh. On the other verticals, offshore fund, we have grown up from INR 31,000 crores -- we are more or less steady, but our overall percentage has gone down because the domestic AUM on both debt and equity has been strong. Our growth in Life Insurance has been from INR 25,000 crores to INR 32,000 crores. Our alternate asset, which has been a strong story, we have grown up from INR 5,800 crore to INR 14,900 crore. And PMS stayed steady. For domestic mutual fund, I hand it over to Nilesh.

Thanks, Gaurang. On the domestic mutual fund side, our total assets under management has grown by 27% year-on-year from INR 139,562 crores to INR 177,114 crores. Within that, our equity assets have grown at 31% from INR 55,945 crores to INR 76,356 crores. This has put us into 1 brink above in terms of ranking from 7th largest mutual fund last year to 6th largest mutual fund this year. This growth has been reflected into our profitability, which has grown 20% year-on-year to reach INR 91 crore.

We would be open to taking questions now, please.

[Operator Instructions] The first question is from the line of Nishant Shah from Macquarie.

Sir, could you just give an update on any traction in cross-sells from the 811 account? So I think [ in the past ] you had mentioned that 70% of the profile of the 811 account customers has been similar to your [ fixed ] customers. So is this like finally an appropriate time to start disclosing probably what kind of cross-sells we've achieved with these 811 accounts?

I'll hand it over to Shanti. But I'm just -- as far as the distinction between our -- finally every one of the customers, whether it's 811 or other customers, they're all customer of the bank. And we would like to consider it as 1 single broad bank level strategy. But I'll ask Shanti to give some flavor and color on how the 811 cross-sell is going.

Thanks, Uday. This quarter actually has been pretty strong on the cross-sell on 811. And this is across typically all banking product whether it's term deposits, recurring deposits, credit cards, insurance and the like. So the trend actually has -- is going pretty well and pretty strong this quarter across the various banking products, very similar to what we do in our regular channel.

Okay. And perhaps could you quantify like what kind of like average balances are there in 811 accounts versus others? Like versus the ones acquired earlier.

They're not ready.

Yes. So as Uday had just outlined that this is a broader strategy on average balances across the bank and not just for any segment, and that's the same strategy we follow across.

The next question is from the line of Monika Agarwal from Bernstein.

My question is on the gross NPA. I understand that the increase in the gross NPA is slightly on account of the agricultural loan book and the CV/CE segment. I was just looking forward, if you could share some color on how gross NPA would be like excluding both of these segment, like some numbers, what was the number this quarter versus what would be the number in the previous quarter?

Okay. First of all, if you look at our gross NPA, when your denominator on the advances grows slower, the percentage goes up faster. So if you look at the absolute increase in gross NPA, it is about INR 400 crores. Okay, from INR 5,000 crores to INR 5,400 crores. So that's just below INR 400 crores is the total increase in gross NPA. Let me tell you that we have not seen any significant increase in agricultural advances' NPA. We have -- the reason why this INR 400 crore increase has happened is you go back to our disclosure on SMA2, which we did in the September quarter, which was INR 430 crores, which is now down to INR 274 crores as of 31st December. So SMA2, as you are aware, is for accounts which are more than 60 days overdue and less than 90 days and essentially more than INR 5 crores. So you have a INR 160 crore reduction in SMA2 between September quarter and December quarter. And the increase in NPAs on account of 1 or 2 chunky corporate accounts. And that is 1 of the important reasons in increase in GNPA. And we have seen some increase in -- on a relative basis in our unsecured loan book, including credit cards. So we are clearly seeing inching up of NPL on -- and I think wholesale is much more chunky, if I keep that aside, in the unsecured book, particularly personal loans and credit cards, which are seeing a clear increase in the NPAs.

Actually, the segments which you mentioned, actually, the NPAs have actually come down.

Yes. Dipak is here. Dipak, just why don't you...

The 2 segments which you mentioned, actually, the NPAs have really come down rather than gone up.

Okay. So you're saying the NPAs are -- okay. So actually for Kotak Bank though NPAs in agriculture and the CV segment is -- CV/CE segment is going down. Then --

We're not saying -- we are saying it has not gone up.

Okay. Okay. All right. So just -- and another thing, I think, which is like connected to this one, that why was there the contraction in the CV/CE segment and the advances front? I mean, that obviously, we understand that the entire economy is going to the downturn and there's a slowdown. So is it because of that, that we are seeing the slowdown in the CV/CE segment?

Apart from that, I think 1 of the reasons why our disbursements have gone down is also because of the sales of CVs and across the segment, both HCVs and LCVs have gone down in the quarter. In fact, while year on -- Y-o-Y, HCVs are down more than 40% in terms of sales. So lower sales numbers have led to lower disbursements.

Okay. And sir, is the lower sales, which is leading to a lower disbursement and not like a bad book or a bad asset qualities, what taking us -- letting us take some conservative step on that book, right?

That's correct.

That's right.

All right. Just last one I have on the other income front. I'm not sure if I missed that part. What exactly has led to the higher other income? Like the -- apart from the fee income, there's a chunky other income we have. What exactly that has lead to that increase this quarter?

Okay. Great. If you look at -- I explained last year, if you look at this year -- I presume you're comparing year-on-year. If you look at that year-on-year, last year, we had item, which was a negative number in our provisions. That's a very peculiar accounting which we have been asked to --

Other -- I'm asking on the other income side.

Yes. I'm coming to that. I'm coming to that. The right way of putting that instead of reducing from the provisions would have been to add to the other income. We are doing it because we've been told to do this by the RBI. So if I adjust for that, the other income on that count will actually go up for last year by about INR 200 crores.

The next question is from the line of Rahul Jain from Goldman Sachs.

Yes. Again, on this question on slippages, is it possible to get the breakdown of slippages -- gross slippages between retail and nonretail for the stand-alone bank in this quarter?

As Uday mentioned, it's been across the area. You've had some coming in from the corporate book, maybe a couple of accounts there. You've had some coming in from the -- so you had a few corporate accounts, which went off. Then you would have some of the ones coming in the SME segment, CV segments and whatnot. So it's been across the board. The INR 1,000 crores, which we talked about, has gone in -- partly it's on the -- corporate book would have been the largest amount. But otherwise the other contributors there would have been the CV/CE and the small business. So it is not higher than the same number for the same -- for the previous quarter.

Okay. So just to clarify, Jaimin. So for the previous question, I guess, you mentioned that unsecured book has contributed to the stress, if I heard it correctly. And I guess now what you're saying is the largest amount of the slippage is coming from the corporate accounts followed by CV/CE. Is that understanding correct?

There is also the fact that if you look at the small business, unsecured as well as the credit cards, those have also seen a rise from a period-to-period basis, which is September to December.

Okay. And just for in terms of guidance, because, I guess, over the last few calls, you did warn about a potential increase in slippages in the unsecured portfolio, but that was more in the later part of this calendar year. But are you sort of seeing this getting advanced, and therefore, you're experiencing this slippage buildup in this portfolio now? And would this continue through this year? Or how do you see that trajectory play out?

I will ask Shanti who heads these consumer finance businesses to give her perspective.

We mentioned in the last quarter's call as well, that we are beginning to see an uptick in unsecured -- in credit cards and personal loans. So we continue to see that in certain parts of the vintage book. I'd say that these are normal trends, nothing that was enormous, but it is a fact that you are seeing an uptick in both CV as well as CE, which is credit cards and systems.

Sorry for belaboring on this one. But compared to the overall industry trends within these portfolios, how would our trends be? Is it better than the overall industry, in line or maybe slightly...

We are in line with the industry. Whatever data that gets put out by all the bureaus, et cetera, are -- whatever we are seeing is in line with the industry.

Got it. Just another question on the fee income growth. Over the last 2 quarters, we've seen moderation in fee income growth. That's broadly in line with our loan growth, too. But I guess, as the liability franchise has shaped up remarkably well over the last few quarters, at some stage, I guess, you would expect cross-sell income, et cetera, to pick up. But 9% to 10% kind of a fee income growth seems a bit off. When do you see cross-sell driven income be it on the payment side or on the liability franchise or third-party distribution sort of taken?

Shanti?

I think 1 of the things you saw is that the investment distribution income this year is down in keeping with the overall sentiment as compared to, let's say, the previous years. But that's what it is. Otherwise, if you see a transaction revenues, et cetera, they continue the same trend that we do too.

Okay. So TBD has been a bit of a drag. That's the reason why the overall growth is...

And you also know that in the mutual fund distribution business, there is a very significant change in the industry, which is -- mutual funds -- what was commissions, which were paid upfront, is now becoming annuity. So that change actually is what is extremely important, and that change is actually playing itself out.

Got it. Maybe 1 last question on the subsidiaries, the lending subsidiaries, Kotak Prime and KMIL. Last 2, 3 quarters, the book has been contracting. When do you see this stabilize? Or you think as a strategy, maybe if you've taken a call that will sort of bring more business to the bank? And is there any such thought out there or this is...

On Kotak Prime, the answer is pretty simple. Cars are selling less. Okay. So when absolute passenger cars are selling less, you are going to have some impact. And to a certain extent, I think we have changed the mix also. So there is a change in the mix, which is also helping us in profitability, may not be in absolute disbursements. But therefore, our profitability metrics looks good. Absolute car selling less is a reality.

Yes. So nothing unusual out there. It's broadly in line with what the industry is doing?

Yes, yes.

The next question is from the line of Mohit Surana from CLSA.

On the slippage -- one-off corporate slippages that you mentioned, is it possible to quantify what would be one-offs, so that we can look at more of what is the core slippage in this quarter?

I can tell you it's a 3 figure number, but it is not a very large 3 figure number.

Okay, okay. And would this be the reason why provisions have also gone up? Because -- and have you taken any accelerated provisions on these?

We will take provision on base of what we think is recoverable.

Okay. But normal provision, no acceleration on these?

No. Acceleration means if we believe on a particular loan we need to provide more, we'll take it. Our approach is very clear that we look at what is the recoverability of a loan and make the provisions accordingly. If we believe we can recover less, we will provide more irrespective of what regulatory requirements may be.

Okay, got it. And lastly, on telecom loans, is there any exposure to the stress player that is being talked about?

I can tell you on a percentage basis we must be amongst the very lower end of challenges, which I think the telecom sector is facing, okay? It's back to the point, which I mentioned at the beginning of my talk. And 1 of the most important aspects in risk underwriting today is not just sector exposure but also choosing within the sector. So of course, we would -- if there's -- and there's 1 strategy, which we have followed over a long period of time, which I've shared with you in my earlier calls, is we are very cautious on concentration. And therefore, we do feel that what is happening in the telecom sector is something which is unprecedented. But we don't see that as a -- anywhere near the kind of significant impact the financial sector will face on a relative basis by far.

The next question is from the line of Saurabh from JP Morgan.

Just 1 question on your corporate banking business. So sir, the low growth here is essentially just a function of your conservatism? Or just there is no demand, which you're seeing or -- because your margins are at 4.7% now. So I was thinking we probably could do a lot more here.

Yes. I'll ask my colleague, Mr. Manian, who is in-charge of that business, to tell us what is happening.

So I would say that if I divide the corporate book into 2 parts, that is the SME side and the pure corporate side, the 2 are different. On the corporate side, as Uday was mentioning that the number of eligible under our cost of [indiscernible] corporate that you can lend to is also shrinking sector by sector. So we are cautious about that. So -- and over the last 2 years, there was not too much demand for long-term loans. Now we see actually underutilization of working capital limits as well. And also the better corporates are going to the CP market than the bond market and are able to raise money much cheaper. So obviously, the better corporates, even working capital utilization is lower. So that also puts pressure on the existing book to grow it. On the SME side, we are seeing some signs of the recovery back at our end. But of course, there also the utilization levels, which traditionally used to be 60%, 65%, are closer to 50%, 55% kind of utilization levels, puts again pressure on the existing book. So we do continue to want to be focused on getting new clients, which is happening. We are adding new clients. We are getting share of the right products in corporates. All that is happening. So we think that there's some turnaround, some demand increase that we'll get back. Having said that, we are trying our best to get into a double-digit kind of growth as the year progresses.

In other words, let me tell you for this quarter, on a Y-o-Y basis, while you've seen the overall growth at 10.5%, wholesale corporate banking growth is in single digit.

3%, 3%.

We've shared it? So it's 3% for the quarter Y-o-Y. So our retail, if you -- on the other one, if you look at our retail loan growth, it's about 18%.

Yes. Sir, what will be the breakup between large corporates and mid corporates in this corporate banking business?

Right now, 1 bucket.

And these definitions are...

Vary from bank to bank.

Vary from bank to bank and...

The next question is from the line of Ashish Sharma from ENAM Asset Management.

Sir, the question on the growth rate -- advances growth rate you have mentioned in your guidance. So is this the guidance for FY '20? Or do we see similar sort of endpoints for...

FY '20 full year. I said we are reducing the guidance from mid-teens to say in double digit, but below mid-teens.

Okay, okay. Do we see some sort of an improvement from an industry perspective and for Kotak in FY '21 or...

I think it goes back to the economy view. It is -- I mean we believe there's a gradual pickup in the economy. And as I said, that it's linked to nominal GDP. The current -- if you look at the October to December quarter on the basis of data out, nominal GDP was 6% to 7%, which is the reality. We see nominal GDP stabilizing back to 10% to 11%, partly because of inflation and partly because of better real growth, but gradual growth and real growth. Inflation is helping in bringing nominal GDP growth into double digit. And should that happen, we would see some amount of deflation and, therefore, a better view as we go forward.

Okay. Second question would be on the net interest margin. Do we see any further headroom for improvement? Or we see that this is the -- I mean -- or I mean, how do we see margins play out for the bank, both FY '20 and maybe in FY '21?

I think Jaimin always likes to be cautious on guidance about net interest margin. We normally guide -- Jaimin, what's your -- earlier last year guidance was 4.25%, point?

4.3%.

4.25%, 4.3%, therefore we don't like to give an aggressive estimate. But our view is clear. If we get the loan lending growth for the risks we take and we think at that level it protects and grows our ultimate sustainable ROE, we are very happy to grow. We are not obsessed with high margins, but we are certainly obsessed with risk for the returns we get.

The next question is from the line of Adarsh P. from Nomura.

A question on the SA improvement that we've seen, right, the last 2, 3 years. Can you just split it into, say, how much of it is 811 and then the -- which should be a small part and the rest of it? What was the account growth and what's the balances growth, some qualitative comments around that?

I have company's colleague, Virat, who runs that product or that retail and branch banking directly to give you his assessment of the SA development and how he sees.

Look, the SA development means in terms of the balanced growth, and if I split between the 811 and the others that -- say 811 has been steady. In terms of the -- we have got the growth from the new customers that we acquire. The biometric return has helped us to ramp up our 811 numbers as well. And hence, we get that growth in SA from 811 as well. But as far as the balance is concerned, it's an average, which is -- which we have been maintaining right from the beginning. But as far as the 811 is concerned, as far as the normal SA customer is concerned, yes, we do see some kind of an increase in the uptake, but here with the kind of growth that we would look at, perhaps it is not visible there. But customers do keep balances in the accounts and we are seeing some bit of size in the balances in the recent past.

Bottom line is we put Virat at a much higher target than what the percentage growth you're seeing. So Virat has to work towards the higher targets, which are set for him.

And Uday, one question is, given the kind of granularity now, you have kind of caught on your liabilities. 87% is almost retail. Is it time that your SA cost is moving down, but you want to take more decisive steps in terms of getting down your SA rate to where some of the larger players are?

No, we are fully aware of the risk, the opportunity and strategy. And as I've said, we have a very well -- deep thought-through strategy of how we want to play this. And let me assure you. We do not think about ourselves as having pressure of any short-term tactical objectives. We like to ensure that our performance in the short-term also continues to be sustainable, but we will take much more strategic view about some of these and not be driven by what gives me the next quarter's profit. And it's not about trying to inflict pain on others or getting -- taking a significant cost for us. It is pure, pure hard surgical-driven strategy.

The next question is from the line of Manoj Bahety from Carnelian Capital.

Sir, I have a couple of questions. First is like given the state of economy right now, are you seeing some early signs of trouble in the retail book? And also given the fact like most of the banks and NBFCs, everybody is running after retail portfolio. So are you seeing some kind of risk-adjusted mispricing at the time of underwriting that book?

So again retail is a very large amorphous world. Within that, there is secured, unsecured. There is MFI that is unsecured consumer loans. On microfinance, we are all aware early danger signals have come out. There are at least a couple of states where the political class has advised borrowers not to repay microfinance companies. And it's playing out in at least 2 states as we talk. And we have to be careful and cautious to ensure that this does not become more viral. And I think it's -- for all of us to be responsible players and take the help of policymakers to ensure that we don't see a viral situation in the microfinance space. Unsecured, as we all know, the profits of an unsecured loan on an accounting basis or a quarterly basis come first. The real profits of an unsecured loan is only in the last 2 or 3 installments, which is -- and then if there is significant multiple borrowing by the same borrower from other lenders -- it affects all lenders, including the first lender, if there is any installment outstanding. So we do believe that we are not panicking, but we are certainly more alert than before, and which we have also highlighted that in our GNPA number increase, there is an increase in provisioning, which we have had in our unsecured credit card and personal and business loan book.

But sir, are you seeing some signs of that on that side, early signs?

No, we have given you the facts of our book. So now you are an analyst. It is for you to figure out what it means. And having said that, again, I want to repeat. We are not seeing a panic, okay? But we are seeing higher levels of delinquencies than before, that's for sure, in our book. As is there in the bureau, I think the bureau data is also showing the same thing. So it's not rocket science that we are saying.

I have 1 more question. In fact, it is just a follow-up on -- like when you said that the corporates, which you are targeting, like who -- and they are approaching customers directly through bonds, through CPs. So I just wanted to understand like the way the bond market is growing or CP market is growing or direct borrowing is growing, so over a long-term, are you seeing some kind of disintermediation risk, especially for a conservative bank like you, where like your target set of the customers -- approaching customers directly through bonds or CPs, and the other customers like who are not your target set of customers, they will go through a bank's balance sheet. So how do you see these scenarios evolving?

We see of ourselves as a financial services player. So there are parts of our business, which is a storage business, which is a lending business on the books. We are also very significant players in the disintermediation market, whether it's equity capital markets or debt markets or asset management business or life insurance business. So we, as a consolidated group, have an interest not only in the lending business, which is important, but also on a consolidated basis in disintermediation because that helps some of our other businesses. So in many ways, the holistic approach to financial services is what we see. We don't -- I mean, in that sense, yes, banking is a very large part of our total but we are a broader financial service player, and we will be very active participants even as disintermediation happens and benefit from it.

The next question is from the line of Manish Karwa from Axis Capital. The next question is from the line of Nitin Aggarwal from Motilal Oswal.

I have a few questions, sir. Now with successive decline in our funding cost and CASA mix growing well, do you think that this will open up new lending opportunities for the bank, which earlier were not available owing to profitability considerations? And if yes, then how do you think that loan mix at the margin will change during next 1 to 2 years?

I think, first of all, I agree with you. New opportunities are opening up as our cost of funds is improving, and therefore, even for lower risk cases where otherwise we would have a tougher time competing, we're finding ourselves much more competitive. I mean, 1 of the spaces where we are seeing this is, for example, in the home loan business, where we're seeing a continuing good growth, and we are finding actually risk-adjusted returns extremely positive. We also see an ability to be playing much more actively in the bond market and the CP market out of our wholesale treasury ability because of share ability for lower cost of money and with significant advantages of some of those assets for a liquidity coverage ratio. But we see ourselves, clearly, at a significant ability to play a game not only at higher risk, higher returns, but at lower risk but improved spread to lower cost of funds. So clearly, that's a space which we do see. But we are also very clear. We don't want to bang our head against the wall. What do I mean by that? If the truck industry -- heavy commercial vehicle industry is dropping 40%, yes, we may see an opportunity to increase our share a bit but we don't want to be [Foreign Language], go out there and say, listen, we will lend in irrespective of whether the volume has gone down or not. I mean, we would like to be playing the game keeping in mind that there is a significant headwind in many segments of the economy. And we just don't want to show loan growth for the sake of loan growth because that's what quarterly numbers make us look better. That's not the objective. We will do what you think is right for our business strategy.

Great. Second question is, sir, you have guided for the double-digit loan growth around low teens for the year, which implies around 7% sequential growth for 4Q. So -- which is higher than the trend we have seen in the past few quarters. So what are the segments you think will drive this growth?

We have said that -- I mean, to make it very simple, what we have said, if I would translate into simpler language, we are saying 10-plus, 15-minus. Now where in that range we come, we will share with you. But obviously some of the points which we discussed on this in response to your question is part of our strategy.

Right. And sir, last question, if I can squeeze in. You mentioned that the bank has seen higher slippages in the unsecured products, while CV/CE segment remains on track. Now this is different from what we hear from other banks. So can you give some color on the proportion of say internal sourcing for unsecured products, typical customer profile, regions, et cetera, wherein we are seeing this sort of stress building up?

You have 2 questions, okay. Your question number 1 is banks. Other banks have stress in other areas. I cannot comment on them. And how they saw that versus how we saw that is for them to be able to tell you. And as far as the sourcing for the consumer side is concerned, I will ask Shanti to share how much of internal cross-sell business and how is the strategy there.

Okay. So on the credit card business, close to 85% to 90% of the sourcing is through our own customers and internal channels. I want to repeat that the trend that we are seeing on uptick is in line with the industry and not outside of line of the industry in terms of what we are seeing in the unsecured portfolio. In terms of personal loans, close to more than 50% share is coming through our internal channels. And the balance we do look at external channels, partners, et cetera, aggregators, who we'll work with, very similar again to industry sourcing and industry trends. So I just need to emphasize that part of it for your reference.

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

So Uday, just on the strategy on growth, some of the products historically like, say, housing and corporate did not fall into your ROE profile because they were low-yielding products. Given the tax rate cuts, which have happened, does it make sense now to be a bit more aggressive in some of these -- aggressive as in bit more pushy on some of these products because it may now start falling into your ROE profile?

Manish, welcome to you in the new [ year ]. I just wanted to share with you that if you look at our retail growth, it's 18% Y-o-Y. And within that, both home loans and LAP have grown very well. And the reason for that is the fact that with the cost of fund reduction, we're getting the risk-adjusted returns, which we want. And of course, our ROE requirements on -- have come down -- have improved because of the tax rate cut. And we actually are finding that at this point of time, the level of delinquency in both home loan and LAP is very much under control compared to the unsecured segments. So your point is valid, and it's appropriate for us, and we are focused on that in terms of our strategy.

Sure. And second, I'm repeating, someone else has asked this question. So on the deposit front, look, the system is extremely liquid. Overall growth is weak. You have any which way softened your rates a bit, but still growth is very strong for you on deposits. So do you still want to keep maintaining that high growth? I understand your long-term thought process on this. But even if we were to reduce, I guess, the growth numbers may still be very strong for you, and you will still continue to gain decent market share there. Then why give such a great value proposition to a customer on the liability side?

Right. Manish, we hear you. We are fully aware of it. We are aware of the fact that compared to any other financial institution, our current operating and profit numbers include a differential on savings rate plus our 811 acquisition cost, which, together, even now, it's INR 2,000 crores a year of incremental costs compared to our competitors. Therefore, our numbers are after such a high level of cost, which we are absorbing in our current cost structure. We are fully aware of it. We are also very conscious about value. We also understand the tactical advantages. And we are also seeing how the external market both on inflation and interest rates is playing out. So we will take a very careful judgment call not on the basis of getting a benefit of few hundred crores in the next quarter, but more sustainably how does it strategically position us when we look at 12, 18, 24 months from now vis-à-vis the marketplace and how do we get sustainable competitive advantage. And therefore, if I were to use a cricketing analogy, we like the one day game. We don't like T20.

Sure, well said. Lastly, just a couple of data keeping questions. One, the tax rate benefit, does it conclude now in this quarter or we get more -- as in there is something more to accrue on the tax ton? As in should the tax rate normalize from next quarter onwards?

That's right. I mean, basically, we've opted for the new lower tax rate. So going forward, it will be at the new tax rate.

Okay, which is like 25%-plus on surcharge?

Just around 25%. We get some benefits. So it is around 25%. This quarter, as I mentioned, we had some relief on some favorable orders. That's why it's lower.

The next question is from the line of Kunal Shah from Edelweiss. The next question is from the line of Sachee Trivedi from Columbia Threadneedle.

Thank you for taking my call -- my question. I do appreciate and thank you for keeping your eye on the compass rather than the speedometer at this point. So congratulations on that. The question I have for you is when I look at your loan growth, it is obviously quite low. But I want to understand if the underlying reason is that you don't see that much demand? Or do you think that you're not being paid to assume the risk? Or do you think you don't understand the risk itself in terms of -- you don't just trust the collateral or you don't trust the ratings or you don't trust accounting? How would you qualify that slowdown?

I think my first honest answer is a combination of all. But to be more specific, we do see for the quality of companies or quality of borrowers for whom we want to be able to lend or for -- as I said, we'd like to get a fair return for the risk we take. It's something which we have consistently said. So it's not something new which we are telling you this quarter. If we get the fair return for the risk we take with reference to any specific loan, we are very open to taking it, and we will certainly consider it. Is there a worry about auditors, rating agencies? Of course, I mean, we just had a situation where, in some of the accounts, I mean, we've seen audited numbers given in the month of May -- and were ratings for high investment-grade -- I'm talking about 2019, I'm not talking about the past. And within a month or 2 after that, it's becoming junk. So there is a very serious issue about reliability of audit numbers and rating numbers. And therefore, that increases our level of diligence in terms of how we look at it. We are also seeing significant issues in accounts which are group accounts where money moves between group companies as if the entire group is 1 single company. And we are always cautious about that because how do you analyze that risk versus the balance sheet of a single company where you've taken a risk. And again, there are many publicly known examples of how a fundamentally sound company has blown up because it had routed money to group companies through that sound company. So these are obviously serious concerns on the levels and practices, which are pretty widely prevalent in corporate India. And I would like to say, while situation has improved compared to what it was say a year or 2 ago, there's still a lot of stuff out there, which is not as transparent and which, therefore, makes us careful in terms of how we look at risk of an individual company within a larger group.

Which leaves me to sort of the next logical question, which is these problems are not going to go away. And so even if the economy picks up, if the GDP picks up or nominal picks up, how will or what will turn inflect your loan growth from here? Because everything that you've just said is probably still going to be true going forward.

Yes. So I had mentioned in my last call of Indian financial business being a 70-30 business. If the total loan availability -- underwriting availability out in the market is 100, we don't believe 30 is touchable. One of the big issues for us is to identify that and then find the loan growth in the balance 70, and that's exactly what we are doing. And we think as India -- if the Indian economy starts growing at nominal 10-plus, there is enough opportunity for us, out of the 70, which is our target, to get for us to be growing what I have said at, at least 1.5x nominal GDP. That is how we think about the business opportunity. And we think that is more sustainable kind of an approach. And we are not scared about lending. We just want to make sure that in a highly leveraged business, when you're out there lending money, you better get your money back. That's the most crucial aspect in 1 of the most highly leveraged businesses called banking.

Sure. Okay. And sorry, finally, if I might squeeze in just a final one. As you see stress in financial services, your peer banks and institutions are under stress. Do you see this as an opportunistic moment for you to actually acquire any other business either -- or any other book, I mean, if not the whole business? Is that something? Or do you think right now everything is so -- I guess so muddy that it's probably not worth the risk?

We always have an open mind but we just want to make sure that whatever we do is value accretive, and we do not like playing blind.

Assuming you will do due diligence, right? So it's -- you will have access. But I mean, I'm just thinking. Given -- so for example, it has been touted that, let's say, YES BANK is under a huge amount of stress, and that might be something -- that could make sense for yourselves. But I'm not sure if even worth considering, given we don't know what's there in those books.

I share the hesitation with which you asked the question. And all that I can say is that whatever we look at in any of these situations is after being fully convinced that it is value accretive. And let me assure you. At this point of time, we are in no discussions, which we need to report on any particular target as we talk.

We'll take that as the last question. I would now like to hand the conference back to Mr. Uday Kotak for closing comments.

Thank you very much, friends, and really appreciate you're spending time on this call. All that I would like to end by saying is we do believe that the nominal GDP growth, which, for the December quarter was 6% to 7%, will steadily move to more like a 10% to 11% nominal GDP over the next 12 to 24 months. We look at ourselves as active participants. We are constantly looking at opportunity for the risks we take, which we will continue to do. Our core strategy of low-cost and sustainable liability will continue to play, and we really like businesses, which are franchised, relatively low capital absorbing, and which are unusual businesses over long periods of time. And those are the businesses, which we will continue to grow. And in the backdrop of all this, our belief in digital transforming financial services is deeply embedded in our DNA. And we will continue to drive irrespective of the short-term challenges, which may come in terms of the current costs, whether it's out of 811 or a liability strategy, which we have -- believe that it is something which will pay for us. At the same time, we are commercial. We will not do something which does not make sense. And we will take a balanced view in terms of building this institution for the long-term. Thank you very much.

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