Kotak Mahindra Bank - Low Cost Liability Banking Franchise

lingalarahul7 · October 28, 2019, 7:39am

Kotak is a well known bank across the country. Since there is no existing thread, I would like to take the opportunity to create one.

Key banking numbers in FY19:

PAT Margins: 17%
RoA: 1.7%
CASA Deposits Ratio: 52.4%
Govt Securities in Investments: 81.6%
Unsecured Loans: 23.8%
Priority Sector Loans: 35.1%
NIM: 4.48%
GNPA: 2.14%
NNPA: 0.75%

For more numbers, please allow me to quote screener: Kotak Mahindra Bank Ltd financial results and price chart - Screener

Management:

Uday Kotak who owns about 30% of the bank is leading the bank full on. His wording in ARs and Conf calls suggest he is fully committed to its long-term prosperity. A step further is to notice that he bought out the minority shareholders in Life Insurance business and all the non-banking subsidiaries are now 100% owned by the bank. He is also fighting with RBI in court to retain his ownership in the bank. If one goes through the conf calls, it is easy to observe that Uday Kotak is quite cautious in nature, going slowly when trying out something new (like ARC, Consumer durable) and slowly increasing their growth in that as they learn that segment.

Another important point to notice is most of the senior management professionals have been with the bank since 1990s which demonstrates their commitment to the bank, its leader, culture and prosperity.

Liabilities:

Regular customers - These customers typically belong to mass affluent segment and have high balances and most of them were acquired during the pre-demonetisation era.

811 customers - 811 campaign was launched after the demonetisation incident to acquire customers digitally. After launching the campaign the company set itself a target to double its customer franchise from 8 million to 16 million in 18 months (from March17 to September18) which it did achieve successfully.

Kotak’s CASA Deposit ratio is industry best at 52.5% and they don’t have a number in mind and would like to achieve as best as possible for that. Important to remember that Kotak also offered higher interest rate for savings deposits till FY19 which is hitting the bottomline by 1000 crores. Uday Kotak says this is the cost they would like to take for building long-term stable liability franchise. Starting FY20, they seem to be decreasing the interest rate here. In Q1FY20, they decreased for savings accounts with balance less than 1 lakh.

According to Uday Kotak, building a stable low cost franchise is the toughest part of building a financial services firm. He clearly stated that this is his top priority over everything else and his team is fully committed to go as far as possible in this aspect.

Deposits	2019	2018	2017	2016	2015	2014
Demand Deposits - From Banks	3685.3	4031.4	3839.9	3951.4	2551.4	1710
Demand Deposits - From Others	385324.3	318426.2	273768	228865.3	129262	85698.2
Demand Deposits - Total	389009.6	322457.6	277607.9	232816.7	131813.4	87408.2
Savings Bank Deposits	796847.1	655292	415039.3	294947.2	140361.1	100870.5
Term Deposits - From Banks	630.8	13446.9	5776.8	7476.2	10575.5	6103.6
Term Deposits - From Others	1072316.1	935236	875834.7	851190	465853.1	396341.1
Term Deposits - Total	1072946.9	948682.9	881611.5	858666.2	476428.6	402444.7
Total Deposits	2258803.6	1926432.5	1574258.7	1386430.1	748603.1	590723.4
CASA Deposits Ratio	0.5249	0.5075	0.4399	0.3806	0.3635	0.3187

Assets:

Corporate Banking - 30% of Assets (stable across years)

Kotak is growing at 20% in this area and would like to keep it that way. Based on management commentary, it sounds like they can grow at faster rate than this if they want to but however would like to limit themselves to 20%. Important to remember that banks with heavy exposure to corporate / wholesale banking are those with highest NPAs. There is a study by PwC on this area. Please find that attached here: banking_profitability.pdf (629.6 KB)

Corporate loan book contains about 60% working capital, 40% term out of which around 25% will be what we call the long term about 3 year plus loans. So it is largely medium term and short term oriented book.

Home Loans and LAP - 20% of Assets (used to be ~25% few years back)

Though home loans is considered to be one of the safest loan asset, there are some evil practices going on in the LAP area. The collateral valuers of LAP (or any other collateral) are not regulated / monitored and typically quoting very high value of what they actually should. The bank is cautious in this area and has developed relying on internal mechanisms to judge about the same.

Agriculture Division - 13% of Assets (used to be ~20% few years back)

The bank slowed down in this area too and again due to some bad practices. Apparently farmers don’t have to pay any amount to the bank for the first year after they receive a crop loan. Lots of people, especially in Punjab, are exploiting this law by just taking loan on land by claiming it as crop loan. And that too in big ticket size. Essentially, it is LAP disguised as crop loans to avail its benefits. So the bank has slowed down quite a bit here too and decreased its exposure. Actually, most of the existing exposure has come from ING Vysya bank when they were merged.

Another thing the bank has done is to increase its market share in tractor financing. Kotak bank is the best in tractor financing and have been increasing their share significantly to meet the Agri target.

CVs & CEs - 10% of Assets (stable across years)

This was slowed down during the period of 2011-12 due to some bad practices which were openly called out by the management. Once it is resolved after the slowdown in 2013-14, the company seems to be growing this portfolio at 20%

Business Banking - 10% of Assets (used to be ~20% few years back)

This portfolio is also slowed down due to bad practices. Again the same story of collateral valuation mismanagement. The NPA probability of SMEs is a bit higher as compared to other loans. But when the bankers go to collect the collateral, it is typically observed that the defaulter is vanished, his equipment also sometimes and the value of the factory is a fraction of what the independent collateral valuer valued it for. So this portfolio is also intentionally slowed down by the management.

Small Business, Personal Loans & CCs - 16% of Assets (used to be almost 0% few years back)

This is fast increasing as this segment is highly underpenetrated. Analysts did ask that the income levels of people is not growing at this rate and how are we comfortable growing this segment at such rates and the answer was underpenetration.

Other Loans - 2% of Assets

Advances	2019	2018	2017	2016	2015	2014
Corporate Banking	618887	521333	417031	346965	202995	143773
Home Loans and LAP	407216	324294	261209	230094	147087	120994
Agriculture Division	269915	229156	189687	179929	121058	104681
CVs & CEs	197058	152017	108270	74633	52040	54412
Business Banking	182154	182690	178841	233181	64216	53879
Small Business, Personal loans & CCs	331642	251292	173865	96268	62628	4320
Other Loans	50076	36397	31918	22853	11583	6217
Total Advances	2056948	1697179	1360821	1183923	661607	488276

Asset Liability Mismatch:

Reasonable amount of mismatch during the periods of 3 months to 6 months; 6 months to 1 year and 1 year to 3 years. I’m not sure if this is a big concern. Request experienced people to guide on that.

ALM (crores)
	2019	2018	2017	2016
1 day - Assets	11561.86	14093.59	17535.32	13314.5
1 day - Liabilities	6604.18	5795.79	4993.39	1478.91
Cum Diff	4957.68	8297.8	12541.93	11835.59
2 to 7 days - Assets	15393.87	9484.21	6052.64	8249.24
2 to 7 days - Liabilities	17712.73	11501.91	13218.02	11403.61
Cum Diff	2638.82	6280.1	5376.55	8681.22
8 to 14 days - Assets	3766.22	4630.57	4128.86	4840.51
8 to 14 days - Liabilities	4743.57	4526.37	3296.55	10007.56
Cum Diff	1661.47	6384.3	6208.86	3514.17
15 to 28 days - Assets	8113.85	8402.84	5310.05	6778.39
15 to 28 days - Liabilities	4551.87	6914.95	6017.64	5480.13
Cum Diff	5223.45	7872.19	5501.27	4812.43
29 days to 3 months - Assets	27451.79	23450.52	20518.54	21089.26
29 days to 3 months - Liabilities	35230.54	32005.44	26403.64	30254.4
Cum Diff	-2555.3	-682.73	-383.83	-4352.71
3 to 6 months - Assets	23774.75	17740.54	15457.5	13501.25
3 to 6 months - Liabilities	38008.35	33584.26	30937.76	30338.5
Cum Diff	-16788.9	-16526.45	-15864.09	-21189.96
6 months to 1 year - Assets	22997.73	20459.17	12472.42	15893.62
6 months to 1 year - Liabilities	38483.56	29938.59	22618.66	25229.8
Cum Diff	-32274.73	-26005.87	-26010.33	-30526.14
1 year to 3 years - Assets	118425.33	98397.76	73888.59	61929.7
1 year to 3 years - Liabilities	127012.12	101434.67	77771.76	47126.85
Cum Diff	-40861.52	-29042.78	-29893.5	-15723.29
3 years to 5 years - Assets	27546.99	23668.19	14736.43	14084.42
3 years to 5 years - Liabilities	4073.05	4430.1	2577.12	9705.03
Cum Diff	-17387.58	-9804.69	-17734.19	-11343.9
> 5 years - Assets	33786.81	25527.66	19921.14	18858.86
> 5 years - Liabilities	480.56	378.83	971.77	2739.47
Cum Diff	15918.67	15344.14	1215.18	4775.49

Kotak Mahindra Asset Management Company:

KMAMC is the asset management arm of the bank. It is well acknowledged that the asset management industry is highly underpenetrated. I think one can go through HDFC AMC thread to find out more details about this industry. I’m putting down some numbers for people to quickly get to speed.

KMAMC Financials	2019	2018	2017	2016	2015	2014
Income (crores)	655	518.9	291.2	240	125.4	166.1
PBT (crores)	337.1	124.5	58.6	71.9	-35.9	49.6
PAT (crores)	218.1	81.2	38.2	59.3	-36.2	33.4

KMAMC Other Numbers	2019	2018	2017	2016	2015	2014
Equity AUM (crores)	54830	44475	19922	13666	6450	3107
Debt AUM (crores)	83385	70924	57169	41079	32137	32582
Total AUM (crores)	138215	115399	77091	54745	38587	35689
Market share (Net Equity Inflows)				5.20%	5%
Market share (Total Equity)			3.70%	2.40%	1.80%	1.30%

Kotak Life Insurance:

This is the Life Insurance arm of the bank. Again, I would not like to clutter the first post with too much info on subsidiaries. So just putting some numbers and will come back on details of the subsidiary in later posts.

KLI Numbers (crores)	2019	2018	2017	2016	2015	2014
Gross Premium Income	8168.3	6598.7	5139.5	3971.7	3038.1	2700.8
First-year premium	3977.1	3404.2	2849.7	2209.7	1540.2	1271.8
PBT - Shareholders’ account	590.8	471.2	342.7	281.9	261.2	261.2
PAT - Shareholders’ account	507.2	413.4	303.3	250.7	228.9	239.1

KLI Premium Mix	2019	2018	2017	2016	2015
Individual regular premium	1616.2	1530.4	1176.2	925	602.3
Individual single premium	515.4	441.5	260.4	138.8	147.1
Group regular premium	1845.5	1432.4	1413.1	721.7	459.1
Group single premium	0	0	0	424.2	331.7
Total new business premium	3977.1	3404.3	2849.7	2209.7	1540.2
Renewal premium	4191.2	3194.5	2289.8	1762	1497.9
Gross premium	8168.3	6598.8	5139.5	3971.7	3038.1
New Business Premium Growth %	0.16825	0.19461	0.28963	0.43468	0.21103
Renewal Premium Growth %	0.31200	0.39510	0.29954	0.17631	0.04821

KLI Other Numbers	2019	2018	2017	2016	2015
Cost Analysis	16.30%	16.80%	18.10%	20%	22%
AUM (crores)	30310	25133	20940	16936	15219
Claims Settlement Ratio	99%	99.30%	99.50%	98.80%	98.30%
Market Share (of Private)	5.80%		6.20%	5.97%	4.40%
Solvency Ratio	3.02	3.05	3	3.11	3.13
AUM Growth Rate	0.2059	0.2002	0.2364	0.1128	0.2573

There are other subsidiaries which are owned by the bank too which are quite small. Kotak Mahindra Prime is a reasonably sized one which gives Auto loans and recently starting consumer durable loans. I will write follow up posts on the subsidiaries in the following months to come.

Investment Case:

PSU Banks and NBFCs are struggling and this is to benefit well-run private banks. This will also help bring back appropriate pricing into the industry increasing the margins. High CASA deposit ratio of Kotak is going to help them give industry leading margins
Kotak has more than doubled its customer base over the past two years after demonetisation using 811 initiative. However, the new customers are of low balances. The management is now looking to cross-sell products to these customers and increase their revenues
Kotak’s savings deposits used to offer higher interest compared to other banks. This has helped them increase their CASA deposits by mind-boggling growth rates. Kotak is now decreasing this interest rate which is helping them increase their margins and this is coming while maintaining (in-fact increasing) their CASA deposit ratio. You can observe that PBT margins have improved in H2FY20
Non-banking financial businesses like Life Insurance and AMCs are doing very well. I believe the under-penetration of these industries well discussed across various threads now. No plans for management to spin them off and list them but still should help contribute to bottom-line of the consolidated company

Risks / Concerns / Questions:

Asset Liability Mismatch during the periods of 3 months to 6 months; 6 months to 1 year; and 1 year to 3 years. Bank might be borrowing some funds when those periods occur during the year and using those to clear the liabilities. But is this sustainable?
Very low (though increasing) penetration in credit cards. HDFC is bang-on in this area. People typically maintain higher balance in the bank of which you own the credit card. So wondering if that will hit the CASA deposit ratio of Kotak going forward
Why did the bank merge itself with ING Vysya Bank?
Tail risk, like for any financial company. You lend today but realize only few years later that it is a bad loan
High valuation

Discl: No holdings. Recently started looking up. Planning to follow the company closely. This is not a buy / sell recommendation. Investors are required to do their own due diligence before taking any decision. All of the above information is public and available on Kotak Mahindra Bank website.

shyamutty · October 29, 2019, 8:36am

Could you kindly comment upon the valuation part more?
The insurance wing is part of the bank, how much valuation is attributed to the insurance part? How much of the revenue and profit comes from insurance business?
How it stacks up with HDFC bank in product mix?
Why it has higher Price Earning ratio and Price to Book than HDFC bank?
Your thoughts on the RBI regulation on bringing the ownership of Uday Kotak, if it could affect the valuation?
In Technical front, how good are their apps and services?
Interested to know more.

gurjota · December 6, 2019, 2:21pm

I happened to chance upon some interesting data points on Kotak Mahindra Bank while doing research for my Coffee Can Portfolio and comparing different Banks/NBFCs.

I’m sharing the same here along with my observations:

Please note my observations are till FY19 only and sharing them here only to arouse discussion on the market fancy and valuation for this bank vis a vis peers. Personally, I find Kotak Mahindra Bank to be one of the best banks in India with top-notch management but it’s financial metrics do not reflect market leading characteristics:

The banks/NBFCs chosen for comparison are ones with loan book growth > 15% on a 10,5,3, last year basis and RoE > 15% each year for last 10 years (might have given benefit of doubt for one/two years here or there for a particular Bank/NBFC). Hence, the following make the cut

HDFC Bank
Bandhan Bank
Indusind Bank
Bajaj Finance

Prima facie, Kotak Mahindra Bank’s recent growth and financial metrics appear to be inferior when compared with any other leading Bank/NBFC.

Kotak’s loan book growth has slowed down considerably in the past 10 years from 30% CAGR to 17-18% levels which is currently the slowest amongst all peers
Kotak has the worst Return on Equity across all peers not only for last few years but also avg RoE for last 10 years is sub 15%

The management has mentioned this in their Annual Report 18-19 regarding low RoEs:

“The Group’s return on average networth was 13.34% for FY 2019 compared to 13.47% for FY 2018. One of the key reasons for low ROE of the group is low leverage (debt-to-equity) ratio. The Bank has been conservative and has been maintaining high capital adequacy
ratio which results in low return on equity.”

Whatever said and done about Kotak management approach, other leading Banks/NBFCs have been able to grow faster with better return profiles

Basant Maheshwari tweeted this about RoEs for a company - (definitely not infering Kotak falls in crooks category, but definitely infering it doesn’t fall in market leaders category)

As a fallout of maintaining high capital adequacy, the management does not like to distribute meaningful dividends and only gives token dividends 2-3% payout. Even the super fast growing Bajaj Finance has much higher payout
Asset Quality - This is where Kotak compares favorably with most lenders in terms of NPA ratios but still falls behind market leading book quality of HDFC Bank and is not a clear market leader in terms of asset quality as well. Both Bandhan Bank and Bajaj Finance have an equally good quality of book
Valuation - Now given all of the above, this is the final piece of the jigsaw which should help explain where and why Kotak’s stands compared to peers. However, when it comes to valuations Kotak appears to be the most expensive bank given it’s lower loan book growth, lower Return on Equity, lower Dividend when compared to other Banks/NBFCs.

I’ve used the P/E ratio for valuation here, but even if you use the P/B measure you’ll find it to be more expensive than likes of HDFC Bank, Indusind Bank which is extremely puzzling.

The only joker in the pack for Kotak I can think of is the AMC and Insurance business which the market has taken a lot of fancy for and can explain such high valuations with inferior growth / return metrics.

Views invited.

lingalarahul7 · December 6, 2019, 3:04pm

Nice post Gurjot.

This answers your question. Once you value KMAMC and KLI businesses by using HDFC group’s listed peers’ P/E ratios and remove them from consolidated business, Kotak Bank’s standalone valuation will be close to HDFC Bank’s.

Another important point to note about Kotak:

Kotak Mahindra Bank has high CASA Deposit ratios.
Kotak pays higher interest to customers on savings accounts to maintain the stickiness.
They are slowly decreasing this interest rate now.

Savings account interest is 5.37% now vs. 5.65% one year ago. (Source: Q2FY20 con-call)
Standalone business’ PBT margins rose to 31% from 29% in H1FY20 vs. H1FY19.
Interest expended / Total Income decreased to 51% from 53% in H1FY20 vs. H1FY19.
I believe this will only improve further.

Uday Kotak mentioned in Q4FY18 con-call that giving out high interest rate to customers for Savings Account costs him about 1200 crores in the bottomline, while Kotak’s standalone PAT in FY18 is 4100 crores. I think we are seeing those 1200 crores slowly flow into the bottomline and it makes sense to take it gradually.

Discl: Added to my portfolio in last 30 days. May buy more in next 30 days.

gurjota · December 6, 2019, 4:02pm

Thanks for the prompt response.

If this is true, I must say the market is being extremely forward looking as these subsidiaries are no where close to being listed and selective in terms of why only value Kotak Mahindra on SOTP.

We have HDFC Ltd where almost all the subsidiaries (Bank, Gruh/Bandhan, Life Insurance, AMC) are listed and if you remove the value of all listed subsidiaries - the core company i.e HDFC is currently trading at P/B of 1.5x book for the best / 2nd best NBFC (if Bajaj is no.1) in the country.

Even if you add back 1200 crore to bottomline - which will only flow in gradually over 2-3 years, its market cap is around 30 times earnings - still valued at a decent premium to HDFC Bank.

Again, can’t help but ask what’s so special about Kotak Mahindra Bank?

PS: Invested in both HDFC Bank and HDFC.

lingalarahul7 · December 6, 2019, 4:22pm

If you add 1200 crores to the bottomline of FY18, your ROE for FY18 would have jumped by 30%.
You would have 19% RoE instead of 14.7%, which is a bit higher than HDFC Bank’s 18%. This suggests Kotak doesn’t deserve to be poorly valued compared to HDFC Bank.

Though believe adding these 1200 crores to FY18 may not be the right thing to do, we are just doing it for comparison purposes.

Agree that there is no visibility of these being listed. But at the same time, market wouldn’t be fully ignoring them too as the listed company is benefiting from the growth of these subsidiaries.

Combining these two factors, I believe it more or less explains the valuation differential with HDFC Bank.

I have HDFC Bank too.
I haven’t spent much time on Bandhan and IndusInd banks. So won’t comment much on those.
And Bajaj Finance is at a different level, both business-wise and valuation-wise.

Worldlywiseinvestors · December 6, 2019, 4:30pm

Hey Gurjot. Good observations. Please also compare the Return on Assets for kotak and Hdfc Bank. Kotak is superior on this measure, markets have rewarded managements in banking who have grown prudently and conservatively. Apart from Hdfc and Kotak bank most of the banks have got into trouble recently. (Some might be recovering like Axis and Icici). I don’t like Bandhan Bank and other microfinance lenders at all, even though there’s a bull run in the sector. However, the inherent founding principle of these institutions is social in nature. We’ll get to see who survives when there’s another event like demonetisation in this field. (i might be wrong though, but staying away from Microfinance)

Disclosure- invested in Hdfc bank and Kotak Bank

sujay85 · December 7, 2019, 7:01pm

vikas_sinha · January 8, 2020, 9:37am

After being a happy ICICI customer since the golden days, about 20 years now, after sadly moving to Kotak these guys seem like bumbling idiots, seriously. Banking is fine, but I do not think they will have sticky relations. Given the effort in making complaints, they are like a magnet.

Source:

Hao-ming · January 8, 2020, 10:01am

Can anyone throw some light on dividend policy of kotak bank… For a bank which does a pat of 8000+ odd crores gives a meagre dividends of 150 odd crore for the year… Compared to this hdfc bank is more liberal in dividend policy… Around 18% of profits paid out as dividends…
Can anyone tell how the kotak bank has reploughed the profits back… Has it had an effect on equity dilution… If so how… My question may be naive as it is outside my circle of incompetence…
Going ahead what are the growth drivers…
If betting on the jockey is the thing…
Mr kotak has a decade of governance still left in him which is a big plus

harshmufc_patel · January 9, 2020, 2:26pm

Why don’t you perform a relative company valuation for all the banks. By doing that you’ll get a better picture.

lingalarahul7 · January 26, 2020, 11:23am

Q3FY20 results were out last week.

My quick takeaways:

Low loan growth
Higher provisions
Fall in asset quality
Operating profit margin (without provisions) expansion continues

Conf Call Q3FY20 Notes:

At this point of time, in terms of strategy, two important points relevant for any player in the risk based financial sector are: 1) A need for sharper risk underwriting in choosing not just the sector, but also specific borrowers because there is significant mortality within the sector in terms of who survives and who doesn’t. 2) At a time like this, we believe that the compass is more important than the speedometer.
As we look at our overall economic situation, the GDP is growing at or below 5% and we believe that this will gradually stabilize and would move to a real run rate of around 6% in the next 12 to 24 months timeframe. The nominal growth of the economy which is relevant for our business which is currently in the range of 6% to 7%, we believe will move and stabilize to a 10% to 11% nominal GDP growth.
We believe we have the ability to grow at 1.5x 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.
In Q3FY20, we had a one-time hit on our employee cost of Rs 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 about 2000 employees and this Rs 200 crores hit is primarily on account of revision in the annuity tables for buying annuities which has been changed by LIC effective Oct19.
Our credit cost for 9 months FY20 is 67 bps which is consistent with our view on credit cost for the year of being in the 60s and maintain this view of credit cost for the full year to be in this range.
Our core strategy which is what we have discussed with you over time of building low cost and stable liability, to focus on risk adjusted returns, building franchise and knowledge businesses, digital drive and customer and value creation continues.
OPEX this quater has seen rise coming from on a YoY basis, what we spent on reviving the 811, since last year we had a slowdown due to the Supreme Court decision. We have seen a rise in some of the business related expenses related to cards.
Our provision for the year looks different because last year in this quarter we had actually seen 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 a rise in the NPA provisions this quarter.
The GNPA at the end of the period now at 2.46% and the NNPA at 0.89%.
Our CASA story continues to be good as we have mentioned the CASA percentage at 53.7%.
In addition to CASA, we also have seen a rise in the TD sweep numbers that is now about 7.4% of the overall deposit base. The CASA plus the deposits which are less than 5 crores now forms as much as 87% of our total deposit base.
Cost of SA has come down and is now 5.27%. This period we end with 1539 branches at the Bank level.
KLI AUM has gone upto Rs 32670 crores which grew at 29% YoY. We grew from Rs 125 crores PAT in Q3FY19 to Rs 166 crores PAT this quarter. Our solvency ratio continues to be above 3. Our mix of product b/w ULIP and traditional continues to be favourable in terms of our margin.
This quarter has been pretty strong on the cross-sell on 811. This is across banking products whether it is term deposits, recurring deposits, credit cards, insurance and life. So the trend actually is going pretty well and pretty strong this quarter across the various banking products very similar to what we do in regular channel.
If you look at our GNPA, when your denominator on the advances grows slower, the percentage goes up faster. So if you look at the absolute increase in GNPA, it is about Rs 400 crores, from Rs 5000 crores to Rs 5400 crores.
Let me tell you that we have not seen any significant increase in agricultural advances NPA. The reason why this Rs 400 crores increase has happened is you go back to our disclosure on SMA-2 which we did in September quarter, which was Rs 430 crores, which is now down to Rs 274 crores as of 31st December 2019. So you have Rs 160 crores reduction in SMA-2 between September quarter and December quarter and the increase in NPAs on account of one or two chunky corporate accounts and that is one of the important reasons in increase in GNPA.
We have seen some increase on a relative basis in our unsecured loan book including credit cards. So we are clearly seeing NPL inching up and I think wholesale is much more chunky, therefore if I keep that aside, in the unsecured book particularly personal loans and credit cards which are seeing a clear increase in the NPAs.
Our approach is very clear, whatever is the recoverability of a loan, we make the provisions accordingly. If we believe we can recover less, we will provide more irrespective of what regulatory requirements may be.
On the corporate side as Uday mentioned that the number of “eligible” corporates that you can lend is also shrinking sector by sector. So we are cautious about that and over the last two years, there hasn’t been 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 markets and the bond market and are able to raise money much cheaper. So obviously for 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 is also utilization level which traditionally used to be 60-65% are closer to 50-55% kind of utilization levels, puts again pressure on the existing book.
We believe there is a gradual pickup in the economy and as I said that it is linked to nominal GDP. If you look at the October to December quarter, 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.
On MicroFinance, we are all aware early danger signals hve come out. There are at least a couple of states where the political class has advised borrowers not to repay microfinance companies and it is playing out in at least 2 states as we talk. We have to be careful and cautious to ensure that this doesn’t become more viral and I think it is for all of us to be responsible players and take the help of policy makers to ensure that we do not see a viral situation in the microfinance space.
Unsecured, as well know, the profits of an unsecured loan is only in the last two or three installments 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 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.
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 are finding ourselves much more competitive. One of the spaces where we have seen this is for example in the home loan business where we are seeing continuous good growth and we are finding actually risk adjusted returns extremely positive.
We are also seeing an ability to play much more actively in the bond market and the CP market out of our wholesale treasury ability because of sheer lower cost of money and the significant advantages of some of those assets for LCR.
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 the line of the industry, in terms of what we are seeing in the unsecured portfolio.
In terms of personal portfolio, close to more than 50% share is coming through our internal channel and the balance we do look at external channels, partners etc, aggregators whom we work with, again very similar to the industry sourcing and industry trends.
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 are getting the risk adjusted returns which we want and of course our ROE requirements have come down or 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.
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 is Rs 2000 crores a year of incremental cost compared to our competitors. We will take a very careful judgement call not on the basis of getting a benefit of Rs 200 crores in the next quarter but more sustainably how does it strategically position us when we look at 12-18-24 months from now vs. the market place and how do we get sustainable competitive advantage.

Discl: Kotak Mahindra Bank is my core holding. Have added more to my portfolio during last 30 days. Request investors to do their due diligence or contact their financial advisors before buying / selling Kotak Mahindra Bank. I’m not a SEBI registered advisor.

dj123 · January 30, 2020, 1:13pm

Surender · March 31, 2020, 12:15pm

KMB story In pictures, which are created using the data available in the public domain. See the attached for details.
It’s a work in progress to find the answer to below questions:
Why KMB is priced at such a premium by Mr. Market?
How KMB’s DNA different than the other banks?
What makes KMB ‘the BANK’ among the pack of banks?

Surender · April 3, 2020, 10:53am

This is what I infer:

Sharp acumen of the business leader-UK. His AR letters are a pleasure to read.
Keen focus on ROE Square instead of just ROE: Return of Capital matters more than Return on Capital in a high leverage business.
Practicing Prudence (avoiding excessive leverage- Least among HDFC Bank, Axis Bank, and ICICI Bank), Simplicity (Avoiding lending that has equity kind of risks but lending kind of returns as well as deals that do not have enough clarity or risk-adjusted returns) and humility (admitting mistakes publicly) in letter and spirit.
Ensuring that the culture of NBFC, which the bank used to be prior to 2003, is retained and applied under the umbrella of commercial banking while extending loans to sectors that results in low NPA’s relative to peers.
Outwitting the existing and new competition using competitive rates for SA in order to build a sustainable and low-cost liability.
Building a solid financial services franchise business that caters to the entire spectrum of Saving, Investing and Borrowing, keeping Customer-Centricity at its core.
Thinking long term. Deep focus on Digital evolution and aspiration to be the one among those financial institutions that survive the mortality and consolidation.

Disc: No investment.

Caution_Investor · April 3, 2020, 11:42am

Surender Singh Sir, Very nice insight into the bank. You have all the nice things to say about this bank and Leadership of UK. Also, Nilesh Shah has recently joined in Kotak AMC. But the last line of your research: Disc: No investment! That is somewhat amusing to me.

May be it is my immaturity about stocks as I am new to stock market. Do you think Kotak Bank valuation is not comfortable. Also, I am bit worried about their investment in a microfinance company which I was not aware of.

I thank you for this nice write-up. I definitely read his AR letters.

Surender · April 3, 2020, 12:29pm

As of now, I am in the process of learning about the banking industry. Hence, not in a rush to initiate a position on the basis of my preliminary research. In the last few days after dabbling across AR’s of Axis, ICICI and HDFC bank, simplicity of Kotak’s AR made me understand what banking is all about in the Indian context.

Few more positives that I missed in my earlier note:

The representation of data, both past, and present, is well presented and simplified in AR’s for an investor to analyze the business.
UK’s interactions in Concall’s are a gem.

Even though all may sound great for this bank, one should keep in mind that the reputation of any bank in the industry enhances gravity pull on the prices of one and all in the industry. As of now, few examples are very fresh in the mind of market participants.

Valuation is a tricky subject and the beauty lies in the eyes of the beholder. However, statistically speaking Kotak is available at the lowest P/B of last 5 and 1/2 yrs. UK is conservative and old fashioned in his approach. As and when he sees a upcoming trend, he experiments with the idea before goes with full focus. In my opinion, the microfinance company is a Laboratory experiment.

atul1082 · April 3, 2020, 12:32pm

It would be good if you could put NPA data of various banks and you may find that Kotak NPAs were not the lowest .
UK has blatantly violated the law of land by not diluting promotor’s holding rules, proposed a scheme of preference shares which was turned down. Subsequently filed case against regulators to get away from dilution.This , in my opinion , is highly unethical of a so called ethical promotor. Compared to that companies like Avenue supermarts and HDFC group has made all possible attempts to remain transparent and follow law of land by dilution.
We have recently seen what happened to a promotor run bank. Till about a year back, it was a darling of the market , producing excellent results quarter after quarter and it’s RS 2 /- FV share zooming to around RS 440/-.
I don’t wish to compare this bank to Kotak bank but management or promotor’s not following the time tested rules and regulations, challenging their regulating authority and looking for narrow lanes to slip away always creates doubts in their integrity and duty towards retail investors.

Inimitable_Investor · April 3, 2020, 12:39pm

GNPA comparison

PRSAUDAG · April 3, 2020, 12:43pm

Atul1082 has correctly put what I am thinking of UK. This is precisely the reason keep me away from KMB.