Kotak Mahindra Bank Ltd Q4 FY2025 Concall Summary

Key Takeaways

• Embargo lifted, engines restarting: The RBI technology embargo was lifted, allowing Kotak to resume credit card and 811 digital acquisition. The restart cost hit the P&L immediately via a brand campaign and rehiring, while the revenue benefit is still to come.
• Unsecured book deliberately shrunk: The share of unsecured loans fell from 11.8% to 10.5% as Kotak tightened underwriting in response to over-leverage stress. Management calls the episode a painful but vital lesson and is committed not to repeat the mistakes.
• NIM improved sequentially to 4.97%: A savings account rate cut and higher current account balances helped, but the full-year NIM still fell 36 bps YoY to 4.96% due to higher cost of funds and a lower mix of high-yielding retail unsecured advances.
• Credit cost remains elevated at 64 bps: Slippages are reducing in personal loans and secured books, but microfinance stress stays high and management expects elevated credit costs for at least two more quarters in that segment.
• What to watch next quarter: Whether the post-embargo card and 811 acquisition restart translates into fee income growth, the trajectory of microfinance slippages, and any signal on SA deposit growth after the rate cuts.

Unsecured Portfolio: Stress, Lessons & the Path Back

• Stress concentrated in over-leveraged segments: Higher delinquencies in unsecured personal loans and credit cards stemmed from customer over-leverage, not a broad deterioration. Early corrective tightening of underwriting standards is now showing a reducing trend in personal loan stress, while credit card stress is plateauing.
• Microfinance remains the open wound: The retail microfinance book was cut 33% YoY to just 1.6% of total advances. Credit cost and slippages remain elevated, and management expects this to persist for at least two more quarters. The business was still profitable on a full-year basis despite the strain.
• Credit card vintage, not underwriting, explains the pain: Kotak's credit card portfolio is much newer, built post-COVID and post-embargo, so it naturally carries higher delinquencies that reflect vintage and mix rather than poor underwriting quality. Smaller ticket-size credit card limits were flagged as carrying disproportionately larger risk.
• The core identity lesson: Management acknowledged that Kotak is fundamentally an SME bank, different from peers who are more corporate-salary oriented. The unsecured cross-sell test to the existing base was, in hindsight, too large, and the bank is committed not to repeating those mistakes.

Ashok Vaswani: "We recognise that we are different from our competition in the sense that we are more SME and less a Corp-Sal kind of bank. And therefore, what are we going to do about that? So, I think we have learned some very, very, very important lessons from this painful episode. And we are committed not to making those mistakes again."

• Desired unsecured mix is mid-teens, not immediately: The unsecured share fell to 10.5% partly due to the technology embargo hitting cards and 811, and partly due to the Standard Chartered personal loan portfolio acquisition helping hold up the share. The target is to return to mid-teens as a percentage of total advances, but over a period of time, not in one year.

Margins, Deposits & the Cost-of-Funds Battle

• NIM improved 4 bps QoQ to 4.97%: The sequential lift came from a savings account rate cut and higher average current account balances. The 1% QoQ NII growth looks muted relative to the NIM and loan growth because March quarters always have fewer days, a recurring calendar effect.
• SA rate cuts are in motion: Fixed-rate savings account rates were reduced to 2.75% for balances below ₹50 lakhs and 3.25% above. Sweep term deposit rates were also rationalised: current account sweep TD down to 5% with a 150-day bucket, and savings account sweep TD from 7% to 6.5%.
• SA book stagnation has structural causes: The SA book has been stuck at ₹1.2-1.3 lakh crore because of tight system liquidity in the first three quarters, the 811 proposition being on hold due to the embargo, and ActivMoney sweeps dampening reported SA growth. Management argues the real metric is cost of funds, which remains best in industry.
• Rate elasticity at the lower end is very low: Management demonstrated over the last 4-5 months that SA growth does not move materially with rate changes at this end of the market, so SA growth should not be equated to rate actions.
• Margin outlook tied to repricing speed: The SA rate cuts, faster sweep TD repricing due to shorter tenures, and broader TD rate rationalisation should help navigate any repo rate cuts. Further repo cuts remain "anyone's guess."

Post-Embargo Restart: Digital, Brand & the Growth Rebuild

• Embargo lifted, engines turned back on: The RBI technology embargo was lifted, and Kotak immediately restarted credit card and 811 acquisition engines. New mobile banking and 811 apps were launched as part of a redefined go-to-market digital strategy.
• Brand spend was a deliberate choice: Kotak launched the group brand campaign "Hausla Hai Toh Ho Jayega" post-embargo, pulling together the power of the entire group. The Q4 operating cost includes this campaign cost, and management explicitly chose to spend rather than optimize the quarter's expense ratio, prioritizing long-term franchise building.

Ashok Vaswani: "It could have been so easy not to spend on the brand campaign and improve the expense. But I really want to build a long-term sustainable franchise for our shareholders. And that's what we are going to do as we go about it."

• OpEx jump had multiple drivers beyond brand: The QoQ operating expense increase also reflected seasonal PSL purchases, restarting acquisition costs for cards and 811, higher actuarial provisioning for pension fund liability as G-Sec rates fell, and share-based incentive provisions rising because the share price performed well.
• Customer-centric proposition strategy launched: The "Solitaire" proposition for the truly affluent segment brings together products from Kotak Securities, Kotak AMC, Kotak Life, and Kotak Prime. The strengthened 811 proposition now offers payments, protection, investments, and borrowings on a new app. A new "Solitaire" credit card was also launched for affluent customers.
• Fee income still waiting for the restart dividend: Fee income growth for credit card and 811 products in FY25 was impacted by the embargo, with a corresponding reduction in acquisition and product cost. The revenue benefit of the restart is still to come.

Secured & Wholesale: Where the Growth Is Coming From

• Mortgages and secured business banking are the focus areas: Both will continue to receive investment and growth priority. The mortgage tech platform was upgraded for better transparency and customer experience.
• Commercial vehicles moderated by design: Disbursements were moderated over the last few months considering overall economic trends. The goods vehicles segment de-grew 3% due to low government spending, a heat wave, and liquidity tightness in the first half. Tractors grew 17% YoY on a lower base with better monsoon and reservoir levels.
• Wholesale large corporate shifted to credit substitutes: Short-term advances were deliberately de-grown at quarter-end due to very competitive pricing. The bank moved focus to credit substitutes in bonds and commercial paper, and debt capital markets clocked its ever-highest fees supported by record volumes and closure of large marquee deals.
• Capital market businesses had a stellar year: Approximately 75% PAT growth in asset management and 40% in capital market businesses, driven by business leadership and market buoyancy.
• KGI stake sale unlocked significant value: Kotak received consideration of Rs. 4,096 crore from the stake sale in KGI.

Subsidiaries & the Broader Group Picture

• Kotak Life PAT declined on actuarial provisions: Q4 PAT fell to Rs. 73 crore from Rs. 109 crore in the same quarter last year, primarily due to higher actuarial provision requirements from interest rate changes.
• BSS Microfinance swung to a loss: A loss of Rs. 91 crore was driven by lower disbursements and increasing collection-related costs owing to rising delinquency in select states.
• Group entities aligned on investment valuation: Group entities excluding insurance companies aligned with the RBI direction on valuation of investment portfolios in Q4, resulting in an MTM gain.
• Transaction banking investment continues: The cash and trade platform was significantly strengthened for corporate and SME customers, and investment in technology and digital for both segments is ongoing.

Capital, Strategy & the Fortress Balance Sheet

• Excess capital is a deliberate strategic asset: Management views excess capital as providing a fortress balance sheet that can absorb downturns and seize growth opportunities. M&A and inorganic activities remain an important part of strategy, but only acquisitions that make strategic and financial sense will be pursued.

Ashok Vaswani: "There is no doubt we have excess capital and the way we think about capital is that really it provides a fortress balance sheet. And when I say fortress balance sheet, it really means that it gives us the ability to kind of deal with any kind of downturns as well as gives us the ability to take advantage of any opportunities that come for growth."

• Capital deployment follows a three-tier hierarchy: Excess capital is deployed first to the core business, second to alternative asset businesses that generate high-teens post-tax returns but are lumpy, and third to financial market infrastructure investments like KFin and MCX. Management is looking at other areas to generate returns close to business returns.
• No specific CET1 target was given: When asked for an optimal capital level and CET1 target in 2-3 years, management stayed with the philosophical framework and did not provide a specific number or timeline.
• The strategy shift is product-to-customer: The essence of the new strategy is to bring together relevant products and services as propositions for defined customer segments, moving from a product-centric to a customer-centric approach. Several initiatives are underway to enhance customer experience through a customer 360 approach and improved grievance redressal systems.

Ashok Vaswani: "The essence of the strategy is to bring together relevant products and services in the form of propositions for defined customer segments. Thus, we are seeking to move from a product-centric approach to a customer-centric approach."

• Growth philosophy is steady, not spectacular: The bank will grow assets between 1.5x to 2x nominal GDP growth, a framework that will continue into FY26. Management emphasized this is about building a sustainable franchise, not a single quarter's performance.

Guidance & Commitments

Key Metrics