Kotak Mahindra Bank Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Embargo-hit quarter, fortress balance sheet intact: Group PAT rose 13% YoY to ₹5,044 crore, but the Bank grew at a lower rate as the full impact of the RBI tech embargo hit credit cards and unsecured retail.
• NIM compressed 11 bps to 4.91% as the embargo forced a mix shift toward lower-yielding secured assets; cost of funds stabilized and a savings account rate cut should add ~4 bps going forward.
• Asset quality stress concentrated in two pockets: unsecured retail (especially credit card vintages) and microfinance, both flagged early by management; credit cost rose to 65 bps annualized and is expected to stabilize before declining over 2–3 quarters.
• Technology remediation is the overriding priority: a beta mobile app launched, an external auditor is validating progress, and management is working systematically toward RBI sign-off, though the timeline for lifting the embargo remains unknown.
• What to watch next quarter: whether credit card and MFI slippages peak, the pace of secured-book recovery in Q3–Q4, and any signal from RBI on the tech embargo.

The Embargo: Impact, Remediation & Timeline

• Credit cards frozen since April: no new customer onboarding, so the denominator stopped growing while older vintages seasoned into stress; elevated loss percentages are partly a numerator-on-shrinking-denominator effect.
• Unsecured mix dipped: total retail unsecured share fell to just over 11%, down from the stated mid-teens ambition, purely because the embargo choked the highest-yielding growth engine.
• Fee income slowed: fees and services grew 14% YoY but would have been higher; credit card business income was not accounted because of the embargo.
• IT spend rose: operating costs held flat QoQ only because lower 811 acquisition costs offset higher IT spend on embargo remedial measures; the overall P&L impact stayed in line with initial estimates.
• Remediation underway: significant progress made on risk and resilience under RBI guidance; external auditor GT Bharat engaged for validation; a customer-facing mobile app launched in beta on App Store and Android Store.
• No timeline from RBI: management called it "impossible to know" when the embargo lifts; work continues systematically, and at some stage RBI will determine enough progress has been made.

Vaswani: "Look, it is impossible for me to know how the RBI is thinking or on what date they are going to say the embargo is lifted, right? That is the question for the RBI and obviously the sooner the better from our perspective."

Asset Quality: Where Stress Is Building & Why

• Credit card vintages: stress concentrated in older cohorts; the risk framework was recalibrated last year and recent vintages are performing well. Personal loans show a slightly better, stable trend.
• Microfinance strain: flagged two quarters ago; strain confined to certain states, with some recovering and others continuing; disbursements pulled back, portfolio degrew, and caution is expected to persist for another quarter or two.
• CV delinquencies: the CV industry degrew 10% in Q2 (goods segment weak, passenger growing); heat, rains and climatic risks hit truck operator economics and load factors; retail-segment delinquencies rose, prompting tighter underwriting and stronger collections.
• Over-leverage call validated: management called out systemic over-leverage 2–3 quarters ago; it showed up first in microfinance, then in credit cards; cross-sell to weaker segments was clamped down early, and linked-account stress percentages remain low.
• Coverage ratio dipped: when slippage rises in a quarter, the provision on fresh NPAs is not 100%, so the coverage ratio mechanically falls; management expects it to correct over the next quarter for unsecured loans.
• Write-off alignment: in March, the bank shifted unsecured retail write-off timing from 2 years to 270 DPD to align with industry; this was purely an accounting change with zero P&L impact, providing 100% at 180 days and writing off at 270 days.

Margin Walk & the Mix-Shift Story

• The 11 bps decline was purely mix-driven: growth concentrated in secured assets (home loans, LAP, working capital) that carry lower yields, while the highest-yielding unsecured engine was constrained by the embargo.
• Cost of funds stabilized: deposits grew 16% YoY, CASA held industry-leading at 43.6%, yet cost of funds rose only ~5 bps QoQ.
• SA rate cut adds ~4 bps: on 17 October, the bank cut savings account rates for balances below ₹5 lakhs, where it had been paying above competition; the volume impact is expected to be muted.
• Standard Chartered portfolio adds ~2 bps: the acquired unsecured personal loan book lifts average asset yields by a couple of basis points.
• IPO surge a minor drag: short-term deposit surges deployed in lower-yield assets impacted NIM by no more than 2 bps.
• Recovery path: once out of the embargo, management plans to grow the unsecured retail book back toward mid-teens share, expand high-yielding rural books (CV/CE, microfinance), and manage deposit rates to protect CASA and cost of funds.

Portfolio Acquisitions & the Inorganic Thread

• Standard Chartered personal loan book: an unsecured portfolio aligned with the affluent-segment strategy; roughly 95,000 customers to be onboarded after detailed due diligence that factored in over-leverage and risk trends; pricing undisclosed.
• Sonata integration: the earlier acquisition increased the microfinance footprint to 16 states with 27 lakh customers.
• Acquisition appetite intact: management called tuck-in portfolio acquisitions a lever for growth, independent of the technology infrastructure build-out and the RBI embargo.

Vaswani: "The technology infrastructure build out that continues and those two events are completely independent of each other."

Wholesale, Secured Consumer & Fee Engines

• Wholesale Bank drove asset growth: customer assets grew 18% YoY, led by wholesale and secured consumer advances; corporate SME grew 31% YoY, the credit substitute book grew 32% YoY, and mid-market saw new acquisitions. Larger corporates were more muted.
• Secured consumer momentum: mortgage, LAP and business banking grew 6% QoQ and 21% YoY; the portfolio is described as robust.
• CV and tractor headwinds: CV industry degrew 10% in Q2; tractor finance was flat in H1 after an 8% degrowth last fiscal, hit by erratic climate and a slower rural economy. Management expects H2 demand improvement from the festival season and anticipated government spend.
• Digital traction: Kotak fyn saw a 2.2x increase in new customers; ActivMoney grew 9% QoQ and 41% YoY; the bank launched Global Custody Services at GIFT City and a Kotak API Developer portal.

Subsidiary Performance

• Capital markets, AMC, insurance all grew over 50% YoY: the three non-bank engines fired strongly, lifting Group PAT to ₹5,044 crore.
• Kotak Life: PAT of ₹360 crore, up 46% YoY, driven by higher investment income and realized equity gains; solvency ratio at 2.57x.
• Kotak AMC: PAT grew 58.87% YoY to ₹197 crore; digital transactions were 91% of total, investor queries just 312 (0.0035% of folios), and digital uptime was 99.95%.
• BSS Microfinance: post-tax profit fell to ₹16 crore on lower disbursements and increased delinquencies in select states.

RBI Draft Circular: Knowns & Unknowns

• Circular issued 4 October: management is analyzing implications in detail; comments are due to RBI by 20 November, and the bank will implement the final circular as required.
• Framing, not a ban: described as "a matter of where we do business as opposed to whether we do any kind of business"; some elements of business may move to be done only in the bank.
• Options being evaluated: management is working through a couple of options to understand implications and get ahead of the final rules; greater clarity will come once the circular is finalized.

Vaswani: "Needless to say that it's a matter of where we do business as opposed to whether we do any kind of business."

Guidance & Commitments

Key Metrics