Kotak Mahindra Bank Ltd Q3 FY2025 Concall Summary

Key Takeaways

• Embargo pain persists, but green shoots appear: The RBI embargo continues to hurt credit cards and 811, yet personal loan trends improved and credit card stress is plateauing. Management sees technology progress and expects results to show in coming quarters.
• Credit quality is a mixed bag: Slippages fell QoQ as secured businesses improved, but microfinance delinquencies are yet to peak and the previous two-quarter absorption timeline for credit card and microfinance stress has been abandoned.
• NIM held steady at 4.93%: Lower savings account rates and IPO-driven current account balances offset the drag from a shrinking unsecured mix, a dynamic that should improve once the embargo lifts.
• Subsidiaries delivered a split performance: Capital market arms had an exceptional quarter, while Kotak Prime took a hit from margin pressure, MTM losses, and two-wheeler delinquencies, and BSS Microfinance swung to a loss.
• What to watch next quarter: Whether the Standard Chartered portfolio migration completes on schedule, any signal from the RBI on the embargo timeline, and whether microfinance delinquencies actually peak as management hopes.

The Embargo: Impact, Progress & Unknowns

• Credit cards frozen: The bank could not issue new cards, causing the book to degrow QoQ. Stress increased in line with industry, but flow and resolution stabilized this quarter.
• Unsecured mix shrank: The unsecured retail book dropped from a 15% target to 10.5%, with personal loans and cards flattened. The 811 business, a source of granular low-cost deposits, was also impacted.
• Tech rebuild is the path out: Since the April 2024 RBI order, the bank has made notable progress on core banking resilience, business continuity, cybersecurity and digital payments. New Kotak and 811 apps have launched, complemented by Neo and Cherry, with customer journeys being digitized and automated.
• No timeline from the regulator: Management confirmed most work is done and submissions have been made, but the process is iterative: the RBI returns with observations, and the bank responds. There is no clarity on when the embargo will be lifted.

Ashok Vaswani: "It's very hard to predict at what stage the RBI will say we are going to lift out of jail. I honestly do not know, so I do not know what to say."

Credit Quality: Diverging Trajectories

• Secured book is clean: Secured businesses show negligible delinquencies, with improved recoveries. Mortgage risk metrics are stable alongside steady property prices.
• Personal loans improving: Trends on flows and collections were better this quarter. The bank tightened underwriting norms more than a year ago, and slippages are now tapering down.
• Credit cards plateauing: Stress is no longer rising; stabilization of flow and resolution was observed this quarter. Management expects a decline in the next couple of quarters.
• Microfinance is the open wound: Delinquencies continue to show an increasing trend in line with industry. The bank has pulled back disbursements in certain markets. Existing NPAs remain a collection challenge on the ground, and management now says delinquencies have yet to peak, walking back earlier guidance that they would be absorbed within two quarters.
• Commercial vehicles under watch: The goods segment is weak, impacting truck operator viability and causing some increase in delinquency. The bank has tightened collections and underwriting.
• Provisioning policy held firm: The bank provides 100% on unsecured exposures at 180 days and writes off credit cards at 270 days. When asked if it would tighten to match peers who provision earlier, management declined, calling its current policy already aggressive.

Devang Gheewalla: "The real issue I think Saurabh is the existing NPAs in those unsecured businesses where the collection continues to be a challenge on the ground."

Margin & Deposit Dynamics

• NIM stable at 4.93%: The benefit of a lower savings account rate and higher current account balances offset mix headwinds from the shrinking unsecured book.
• Current account surge tied to capital markets: IPO-related funds and large custody flows from FPI activity boosted current account growth. This is partly volatile; core customer franchise growth from payments, collections, and wholesale services is sustained.
• ActivMoney sweep helping cost of funds: The sweep TD rate is lower than a normal term deposit, providing incremental relief on the liability side.
• Margin tailwind post-embargo: Once the embargo lifts and the bank regains comfort with credit quality, a growing unsecured share should improve yield on earning assets, supporting margins.

Segment Performance

Strategic Ambitions & Capital Allocation

• Top-3 private bank by profitability by 2030: Management set a five-year ambition to be within the top three private sector banks in profitability, open to both organic and inorganic routes if they fit strategically and financially.
• Growth benchmark unchanged: The bank will continue to grow at 1.5x to 2x nominal GDP growth.
• Post-embargo growth ready: Once permitted, the bank will pursue growth aggressively in personal loans and credit cards, rebuilding the unsecured mix toward its earlier 15% target.
• Standard Chartered portfolio imminent: All approvals received; migration expected to complete during this quarter, hopefully in the front end.
• RBI subsidiary norms manageable: The October 4th circular on bank subsidiaries would require consolidation into the bank, but overlap across entities is low. Management sees it as an operational matter, not a dramatic impact.

Ashok Vaswani: "I want to be within the top three private sector banks in the country in terms of profitability and get there over a period of time in the next five years, which is like 2030 kind of timeframe."

Guidance & Commitments

Key Metrics