Kotak Mahindra Bank Q2 FY07

Kotak Mahindra Bank
Q2 FY07
Conference Call
October 19, 2006
Readers are advised that the transcript appears in its unedited form. The vendor's transcriber may not be
familiar with the names of Kotak Mahindra Bank’s conference call participants, Kotak Mahindra Bank or
industry-specific terms. In order to post the transcripts quickly following the conference call, we have
not corrected misspellings of names or trade terms or made any other changes to the text.
This document contains certain forward-looking statements based on current expectations of Kotak
Mahindra management. Actual results may vary significantly from the forward-looking statements contained
in this document due to various risks and uncertainties. These risks and uncertainties include the effect of
economic and political conditions in India and outside India, volatility in interest rates and in the securities
market, new regulations and Government policies that may impact the businesses of Kotak Mahindra Group
as well as its ability to implement the strategy. Kotak Mahindra does not undertake to update these
statements.
This document does not constitute an offer or recommendation to buy or sell any securities of Kotak
Mahindra Bank or any of its subsidiaries and associate companies. This document also does not constitute an
offer or recommendation to buy or sell any financial products offered by Kotak Mahindra, including but not
limited to units of its mutual fund and life insurance policies.
This document is not an offer of securities for sale in the United States of America. Securities may not be
offered or sold in the United States of America unless they are registered or exempt from registration. Any
public offering of securities to be made in the United States of America will be made by means of a
prospectus that will contain detailed information about the Kotak Mahindra Group and management, as well
as financial statements.
All investments in mutual funds and securities are subject to market risks and the NAV of the schemes may
go up or down depending upon the factors and forces affecting the securities market. The performance of
the sponsor, Kotak Mahindra Bank Limited, has no bearing on the expected performance of Kotak Mahindra
Mutual Fund or any schemes thereunder.
Moderator
Good afternoon ladies and gentlemen, I am Sunil, the moderator for this conference. Welcome to
the Kotak Mahindra Bank conference call. For the duration of the presentation, all participants’
lines will be in the listen-only mode. I will be standing by for the question and answer session. I
would like to handover the proceedings to Mr. Uday Kotak. Thank you and over to the Mr. Kotak.
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Uday Kotak
Good afternoon friends. First of all I wish all of you a very happy Dhanteras and a very happy
Diwali and New Year. We just had our board meeting during the earlier part of the day and to
take you through some of the highlights of the performance, our consolidated total income is up
46% to about Rs. 9,035 million that is around Rs. 3,000 million up from Rs. 6,199 million as of last
year. Consolidated profit after tax is up to about Rs. 939 million against Rs. 833 million in last
year’s second quarter. Advances are up, 48% year on year on a consolidated basis and on the
bank standalone basis it is up about 79% year on year. Net interest margins on a consolidated
basis continue at about 5.1%. We have added in the last quarter about another 1,000 employees,
so the total strength is now 8,800 employees as of September 30 th 2006. The number as of
September 30 th
last year was 5,200. We have added 13 branches in this quarter and the total
number of full-fledged bank branches is now 78 branches across 49 towns and cities. We are on
track for our target of around 110 branches as of March this fiscal year. As I talk to you the branch
network addition is continuing and as of today we are at around 82 branches. Net interest income
on a standalone basis for the bank for Q2 is up 65% year on year. Profit after tax of the bank
standalone is at Rs. 348 million up from Rs. 312 million. But keep in mind this profit is after
considering additional standard provision consequent to change in RBI guidelines impact of which
is Rs. 42 million, Provision for employee benefit under AS15, which is Rs. 25 million, and the third
and this is also very significant is, last year in the same quarter the bank had received a royalty
income of about Rs. 111 million from its subsidiary Kotak Mahindra Prime, whereas this year there
is no flow of that royalty into the bank and therefore the PAT at the bank level is without
considering any of these items. When if you add these items on a pre-tax basis, the three of them
total to approximately about Rs. 175 million on a pre-tax basis. So therefore the growth of the
banks standalone 12% is after the fact that there has been impact of all these three. In other
words, when one looks at the overall picture for this current quarter in a quarter where the capital
market side of the business has been relatively slower, we have seen the traditional lending
businesses and more traditional banking businesses come to the fore for us in terms of our overall
business mix. Our capital adequacy continues to be pretty sound at the bank level, which is about
12.38% and Tier 1 nearly 10%. Deposits have grown 49% in this period and at the same time the
current and savings deposits also have shown a very healthy growth. We are up to Rs. 16.9 billion
from Rs. 12.2 billion as of last year. Total number of deposit accounts have more than doubled.
We have 255,000 deposit accounts up from 113,000. Kotak Securities topped the Asiamoney
2006 Broker’s Poll as the best local broker. It was also awarded the best broker in India by Finance
Asia. Asset management company and mutual fund got the best mutual fund house from NDTV a
few months ago at the hands of the Prime Minister of India. Total assets under management
managed by the group stand at about Rs. 210 billion up from Rs. 130 billion same time last year.
The impact of AS15 on consolidated financials is about Rs. 64 million.
If you move towards the split of revenue, obviously the financing business has shown the most
growth and Q2 this year is Rs. 3,403 million versus Rs. 2,371 million last year and Rs. 3,043 million
in the first quarter. The fee income primarily driven by the brokerage business has had a sharp
drop which is Rs. 1,914 million mainly because, we will have my colleague Narayan speak to you
later on the call, mainly because of a significant drop in market volumes and the mix particularly in
the month of July and August in the last quarter.
Premium incomes of life insurance is about Rs. 1,616 million up from Rs. 756 million last year same
quarter and up from the previous quarter of Rs. 1,214 million.
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In Treasury, we have seen some bounce back in this quarter and that has helped the overall
revenue and the P&L at the firm and the group levels.
If you look at profits and the profit before tax excluding retail liabilities and branch banking, we are
at Rs 1,571 million against Rs 1,690 million last year and this drop again is mainly on account of
the capital market side of the business which has shown a very significant drop in the last quarter.
Despite that, on an overall basis profit after tax, we are at Rs. 939 million up from Rs. 833 million in
last year.
On the mix of advances, we have had very significant growth in our wholesale banking business
which is corporate and SME lending, and we have seen more than doubling of the balance sheet
on mid market companies and the corporate lending business. This business again is coming at
pretty reasonable terms and commercial basis. So we are now beginning to grow our balance
sheet across the board. Home loans, of course of a small base, has grown 110%, personal loans
83%, commercial vehicles 20%, and auto loans 11%. Others, which also include stressed assets
business, have grown at 77% over last year. So all in all, year on year growth in advances on a
consolidated basis is 48% and total asset growth is about 53%.
Deposits have grown at about 40% over last year, as of September to Rs 68,756 million up from Rs
49,315 million.
Net worth is about Rs. 29 billion, book value just touching or close to Rs. 90 per share, Net interest
margin at 5.1%, Net NPAs without considering the stressed asset portfolio are at 0.2% versus
0.32% last year. As far as the stressed asset portfolio is concerned, the RBI has come out with new
guidelines during the current year, which requires some provisioning which are based on RBI
norms, as distinct from what we believe is the fundamental underlying nature of the business. And
even if you include that on the basis of RBI norms, the net NPA would be at about 0.44%.
Drop in the return on average net worth because of the GDR issue which we did in end of April,
which is why ROE is about 15.4%, but as we sweat our capital better, we hope to see that getting
a positive kick up particularly from the lending and advances businesses.
Item by item, in terms of entity wise profit after tax, bank standalone is about Rs 348 million up
from Rs 311 million, and below that we have got Kotak Mahindra Prime, which is Rs 109 million up
from Rs 14 million, and one of the reasons here as I mentioned earlier is the transfer of royalty
which used to happen earlier from Kotak Prime into the Bank and therefore I would encourage you
to look at the first and the second number together which is the Bank and Prime, and on a
combined basis you can see the total number is about Rs. 460 million up from Rs. 325 million in
the last year same quarter, which is reflecting a growth of about 45% on a combined basis over
last year same quarter.
KMCC, Kotak Mahindra Capital Company , Rs 154 million against Rs 81 million, also helped by the
primary dealership business, which as of the last quarter was in KMCC, is in the process as you may
be aware of being restructured and being moved into the Bank which will happen in the second
half of this financial year.
Kotak Securities is where you are seeing a significant drop in the P&L for the second quarter. It is
down to Rs. 314 million from Rs. 521 million in the last year same quarter and Rs. 688 million in
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the first quarter. We will have our Managing Director of Kotak Securities Mr. Narayan take you
through some of that.
The mutual fund continues to grow. The rest of the numbers are there for you and on a
consolidated basis we are about 30% higher.
I will now hand it over to Jayaram, my colleague who will take you through our wealth
management business as well as some of the progress we have made on private equity and real
estate fund, as also on our scaling up of our international subsidiaries from the current small base.
Over to Jayaram.
Jayaram
Good afternoon friends. Let me first start with the domestic wealth management business, which
has seen a fair amount of traction during the current quarter as well. The difference however is
that while historically most of the assets used to go into equity mutual fund or into equity portfolio
management scheme, we are now seeing some change in asset allocation from our wealth
investors. On account of this we also have various products which are a little different, structured
products which offer capital guarantee and which give upsides to the market etc. We have
introduced a number of these products and we are seeing a fair amount of throughput through
this.
Client acquisition also continues to be strong and we are well in line for achieving internal target
for client acquisition during the year. At this point of time if we were to look at equity assets under
management, if we included both the mutual fund as well as the portfolio management piece, we
believe that we would be the largest in the country in terms of assets under management from our
wealth management perspective.
As far as the international step up which Uday is talking about, currently we have close to about
USD $1.3 billion coming into our FII international subsidiary, which is Kotak Mahindra UK, and
these are assets essentially which we either manage or advice. Now this is again something where
in spite of turbulent markets we have seen reasonable progress on this and we believe that over
the next few months we will be able to raise this amount significantly because we are seeing
interest in a lot of geographies, and to cater some of these we are also introducing specialized
products, for example, for the Middle East we have shariyat fund and we hope to raise a fair
amount of money through these. We have also applied to open an office in Singapore for our
international subsidiary Kotak Mahindra UK So over the next coupe of months we will have our Far
East operations to our Singapore office kicking off.
The real estate fund which we had raised a few months back, the domestic tranche closed at
around Rs 470 crore. Currently we have already made three investments in these, one is an IT Park
in Bombay, another one is a golf course in Bangalore, and the third one is a Hotel chain, Lemon
Trees, where we have invested along with Warburg Pincus. We are seeing a fair amount of
movement in that, in fact getting a lot of deal flow as well, and currently we are in the process of
raising an international fund where we have mandated Deutsche Bank as our investment banker
and we believe that over the next three to four months we will be in a position to raise this
international fund which will be upwards of US $300 million.
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The private equity fund is moving along well. We have completed seven transactions. We have
invested close to about 35-40% of our fund and again we are seeing a lot of deals flow here and
we believe that over the next few months we will be able to step up the investments here as well.
Dipak Gupta
Well on the asset side, Uday has covered most of the figures. All I would like to mention is that
from a demand point of view the market place looks very, very buoyant, and you know actually all
segments, whether it is on the personal side or on the auto side or on the SME side, one expects
the growth to really continue. Margins also are reasonably healthy at this point of time and are
improving in businesses like car finance and commercial vehicles. NPAs again seem reasonably well
under control and no real signs of any worry on that front. Uday did mention that on a net basis
you would see our NPAs higher essentially because of the stressed asset portfolio and the revised
accounting norm on that front. On the liability side, we have 78 full-fledged retail liability branches
as of 30 th September. Currently, we are running at about 82 branches and hopefully by the end of
the financial year we will reasonably past the hundred branch number. CASA growth also has been
reasonably good as against about 22% which we had last year about this quarter, we are running
at about 21% now and I think we will see growth on that front. Account acquisition is running on
track and we are doing a lot more cross selling across businesses now. I think that is really all from
my side. I will hand it over to Narayan to talk about Kotak Securities.
Narayan
Post the steep fall in the market in May 06 the volumes in the market substantially dipped as we all
know. The overall volumes in the second quarter were down by about 30% compared to the first
quarter. This definitely had an effect on the top line and bottom line of Kotak Securities. Having
said that we definitely see a better traction in middle of September. You will see the volumes
definitely going up and the participation from both the retail and HNI picking up. For the quarter,
we ended with a profit after tax of Rs 314.3 million with the average volume of about Rs 26.3
billion per day. The volume on the net during this period was about Rs 3.2 billion a day. The assets
under management as of 30 th September is Rs 23.4 billion. The total offices across the country of
Kotak Securities in the retail side is about 762 offices and spreads across about 267 cities and
towns. We have got now 269,000 secondary market customers. We were rated the best local
broker by Asiamoney and again Finance Asia has rated us as the best broker. On institutional side,
we clearly see the increase in institutional client base. Our reach and covering has improved and
we are further consolidating our market share in the fund segment.
I will now spend some time on the asset management side of the business. During this period for
the quarter, our profit after tax was Rs 11.2 billion and the total assets under management as on
September 30 th 2006 was Rs 117 billion. We have now about 52 branches with about 472,000
investors. Kotak Mutual Fund was judged the best mutual fund house by NDTV business
Leadership Awards 2006. During this period we had two NFOs. One was Kotak Twin advantage
which was a structured product, where we garnered about Rs 3.2 billion. Further we had one Flexi
series, where we garnered about Rs 3.4 billion.
Uday Kotak
Okay. We will also have Narayan for Q&A. The investment banking business had a reasonable
quarter, but we are seeing a very significant pipeline and number of transactions in the bag, which
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we will be bringing to the market. You would have seen the QIP business where we are beginning
to get a very significant traction. We have completed two transactions as global coordinators and
book runners. One of them is Kalpataru Power & Transmission, which was about Rs. 3.5 billion
and the second one was Mahindra Gesco, which was Rs. 4.8 billion. We also were advisors to
Mahindra & Mahindra for their acquisition of 68% stake in JECO Holding AG of Germany, the
largest outbound auto component acquisition by an Indian company. We also acted as sole
financial advisors to Raymond for setting up a transnational joint venture denim company with
UCO textiles of Belgium in this period. We will see reasonable closures happening over the next
two quarters. So overall, the investment banking outlook at this point of time subject to market is
looking fairly reasonable and positive.
In Life insurance, our premium income as you know grew by about 165% YoY. We, as of 30 th
September have 218,000 individual policies on book representing a basic sum assured of Rs 99.4
billion. We also have a significant presence in the group phase now, 161 group policies covering
231,000 lives. We continue to invest heavily in the life insurance business. We think we are
adding value. We are not deterred by the current losses because they are accounting losses and our
two major engines at the group level is the bank branch network and the second is the life
insurance is continuing at full steam. At some level, we are in a mode for significant scaling up,
which as you would go through our numbers, you will see significant investments through cost and
people, which we are investing and a lot of it is going through our current P&L and we believe the
results of this will come over the next 12 to 18 months. With that I think I will now open it up for
Q&A to all of you. Thank you.
Moderator
Thank you very much Sir. We will now begin the Q&A interactive session. Participants who wish to
ask questions please press *1 on telephone keypad. On pressing *1, participants will get a chance
to present their questions on a first-in-line basis. Participants are requested to use only handsets
while asking a question. To ask a question, please press *1 now. First in line we have Mr. Anand
Gupta from SBI Mutual Fund.
Anand Gupta
Hi. My question is on the securities business, the profit decline close to 54% to Rs 31 crore vis-à-vis
Rs 69 crore in Q1, is more than the decline in the market volume. What would be the key reason
for this?
Narayan
If you see on a QoQ basis, the volumes have substantially come down in the market, and on a same
proportionate basis we have seen our volumes coming down. And if you look at the broking
business what happens is after the first initial volumes, the initial volumes marginal revenues are
much higher than the later volumes, the reason if you see is that when volumes comes down
substantially, you will see a decline in profit which is more than a decline in the volumes.
Anand Gupta
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Yeah. But correct me if I am wrong, the decline in the cash volume market is 20%, whereas the
decline in the profit in the securities business is close to 50%. So is the variation so large and this is
normal?
Narayan
You have to look at both cash and futures market together, overall volumes have come down
about 30%.
Anand Gupta
Okay. So that would be a normal thing, 30% and 50% the ratio would be a normal ratio?
Narayan
You know that is the case, because what happens is once you cross the initial breakeven point,
your additional revenues on additional volumes, i.e the marginal revenues are much higher than
what is the initial volume.
Dipak Gupta
You see Q1 if you look at it, our average daily turnover was about Rs 4,700 crore. In Q2 it was
about Rs 2,500 crore. So you know it is a straight reflection on the top line revenues.
Uday Kotak
And you know at the same time, I also want to highlight to you that we are continuing to build all
our businesses including the securities business. We are not slowing down any of our investments
just because a quarterly cyclical drop happened, because we believe that every such correction is an
opportunity for us in the medium term to consolidate our position in market share, and that is also
something which is a very conscious decision we are taking because we see there is an opportunity
for gaining share over the long term.
Anand Gupta
Your market share within the market, the Kotak Securities market share has it declined in Q2
because of Q1?
Narayan
Q2 has slightly declined compared to Q1.
Uday Kotak
We got to keep in mind that you know if you look at the overall market volume, there is a base
market volume which is what brokers do on their proprietary book. Now if the market volumes
drop, we find that the client drop normally is a little higher than the core volume drop, and that
has been our experience both on the way down and on the way up. Therefore when the market
volumes move up, in fact the gain at times is probably disproportionate because there is a base
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level of volume because there are certain arbitrages and others in the market place who continue
to do that irrespective of what is the level of volume, and that volume really reflect in the overall
market share but does not necessarily represent the true size of the market.
Anand Gupta
Got it. Okay. Another thing was just on the financials, there were some write back of Rs 4.59
crore & Rs 4.36 crore in equity affiliate and minority interest this time in the Q2 numbers. What
exactly is this write back?
Jaimin Bhatt
First one represents the equity affiliates. We, the bank together with its subsidiaries, through the
subsidiaries have investments in an associate and the Rs 4.5 crore what you see there is our share
of the profit of that associate. That is number one. The second item there is minority interest,
which is the 26% share of the losses of Old Mutual in the company called Kotak Mahindra Life
Insurance. The 26% share of the losses which is attributed to Old Mutual is added back. It is not a
write back, therefore it is an adjustment when you are talking about each of the individual
companies, those reflect the profits of those companies before any adjustment. And the last
figure, which I talked about, is effective adjustment to get the Kotak Mahindra Bank shareholder
number.
Anand Gupta
This was not happening in the earlier quarter, if you look at Q1 and Q4, I mean is there any change
in the accounting policy for this number to surface now in Q2?
Jaimin Bhatt
No there is no change in the policy as regards the first item on the equity affiliates, the associate
which I talked about has made profits in this quarter, last year this quarter it had not made profits
and to that extent this number was not there. But if you look at the immediately preceding
quarter, Q1 of this financial year, you had a similar number.
Anand Gupta
Okay. And which are these affiliates?
Jaimin Bhatt
There is a company called Multifaced Finstock Ltd which made profits on its stake in Hutchison
Essar and today it is earning money thanks to having invested that profit into 54EC bond.
Anand Gupta
Okay. Thanks a lot.
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Uday Kotak
And just one another point, if the earlier item which is minority interest, the reason why that
number was negative earlier was because of the 25% share of Goldman Sachs in the earlier period
which now as you know we own 100% of that.
Anand Gupta
Right. Thank you.
Moderator
Thank you very much sir. Participants who wish to ask questions, please press *1 now. The next
question comes from the line of Mr. Aditya Narayan of Citigroup.
Aditya Narayan
Hi. I just wanted to check on the institutional broking business. How that has fared and more
importantly you know what your take is in terms of the Goldman Sachs relationship not being
there any longer?
Uday Kotak
Aditya, in fact, as I talk to you we have seen our market share more or less hold itself in that
business and impact on relative positioning we believe that our relative positioning in terms of the
overall ranking may have actually marginally improved in the last six months, and overall market
share under control so far we believe that not only have we not seen any significant impacts but in
fact we have found clients to be very positive in terms of wanting to continue and grow their
business with us, and therefore overall response of clients is quite positive. We are very focused on
adding and building to this business, even as we look at the future we are building relationships.
Obviously we would like to see a continuing relationship with Goldman Sachs to the extent it
makes sense for both of us, but we are also broad basing the number of relationships we have
across a wide variety of products including P-Note products and other access products with a
number of providers. At the same time we have got an alternate P-Note and other products in
place in the market place. Therefore we believe that we are fully gearing ourselves not only not to
lose share but actually grow share as we look at the future. And our view is that and obviously
there are no official numbers to this, but if you look at the top five institutional FIIs brokers, we are
probably the only Indian firm in the top five.
Moderator
Mr. Aditya?
Aditya Narayan
Yeah. I am done. Thanks.
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Moderator
Thank you very much sir. Participants who wish to ask questions please press *1 now. Next we
have a follow up question from Mr. Aditya Narayan of Citi Group.
Aditya Narayan
Yeah. I just wanted to get some sense on the margins we have held, but you know there is
support from capital that has come in and in the last two quarters, going forward do you see this
current balance of margins and the level of growth you are getting sustaining or do you think one
will have to gear or one can accelerate?
Uday Kotak
Aditya, I will hand it over to Dipak, but before that one other point is that remember one thing that
the quarter ended September had virtually very little earnings coming from the stressed asset
business in this quarter. So I just wanted to put that for the information of all of you, but we
believe that there is value there and which we will obviously realize in due course. So the margins
which we are looking there are virtually without any benefits of the stressed asset business as of
date and with that over to Dipak for rest of the businesses.
Dipak Gupta
Margin is looking okay, though not necessarily very attractive; significantly better than what they
were 6-9 months back. Currently it is sort of holding on despite significant increase in volumes and
one does not think that one will lose margin at least if you look forward for the next 3 or 6
months.
Uday Kotak
And at some level I think there is also beginning of scarcity value of how much balance sheet the
bank will be able to take for the size of the growth and the availability of capital and I think at
some time it is beginning to going to put pressure on corporates, therefore there will be a scarcity
value for getting money and I am not saying it is going to be a famine but we think we can
particularly on the mid market space and the commercial lending space, I think we will be in a
position to squeeze a little more margin out of customers.
Aditya Narayan
Why don’t I just ask a question on the liability side, there in terms of growth, you know scarcity
runs both way. So to that extent would you believe you might need to pair down you know some
of the growth you have been achieving on the liability side or you know the current 45-50% levels
can be sustained?
Uday Kotak
Really it is a two or three point strategy. Strategy number one is “jor se lage raho” in terms of
setting our branch network ASAP. So that is strategy part one in terms of quicker faster execution
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on branch network, and therefore one of the things we have seen scale up people everything else,
it is back to the fact that we want our branches to be kicking and running yesterday. So that is
strategy number one.
Strategy number two is a very significant focus on transaction banking which we have increased.
We have had a number of hires in that space in recent times and we learn from many other banks
that the transaction flows are the key to getting lower cost liability and we are beginning to see
early traction on that. And this was virtually at a very low level or nonexistent over the last three
years in our overall bank model. So we see transaction flows as a very significant focus for building
our liability base particularly in terms of cost of funds.
And number three is building alignments between different businesses, whether it is retail
brokerage, institutional brokerage, and other connections which can give us customers with
significant flows. So that work is also on going, so that we use internal cross synergies for building
low cost liability base and we think there is a lot of low cost liability out there arising out of this
customer scenario as well.
Therefore roll out the branch network, get kicking, add people, quality, and scale up execution for
branch and retail liabilities, significant focus on transactional flows, and third is customer cross sell
and ability to use that for getting low cost liability at a significantly faster pace. So these are the
three key strategies for building liability faster and we don’t see a problem in getting funds, the
problem is at the end of the day the cost of funds, the price at which we lend and what is the
spread we can make, and we are very focused on making sure that the spread remains.
Dipak Gupta
And like in the past if the spread is not there I think we will relook at growth.
Uday Kotak
But so far at this point of time the spread is there and we are seeing these numbers in and we have
the capital, we have the balance sheet, we are moving more capital into the bank as you are
aware, from our subsidiaries, and we see no reason why if the spread is there and we have got
reasonable capital for us to be able to do this business as long as credit is under control. And
simultaneously work pretty aggressively and furiously on reducing the cost of liability through low
cost liability.
Aditya Narayan
Thanks.
Moderator
Thank you very much sir. Next in line we have Ms Shree Vidya from Sundaram BNP.
Balaji
Hi. This is Balaji from Sundaram BNP Paribas. Just one question on your retail broking business,
there has been brokerage reduction happening across the market and volumes are also definitely
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off highs. So on this brokerage reduction part, how do you plan to tackle that? That is one. And
second is for the next three to six months suppose if there is U turn market scenario with low
volumes, what are the kind of investments that Kotak Securities is going to make, will you be like
rolling out new branches in smaller towns, if you could throw some light on that?
Narayan
On the first question, we see the overall brokerage margins have been coming down gradually over
the last one year and that has been the feature on the retail side especially, this has been
substantially made up by the growth in the volumes. This quarter has been an exception because
the volumes substantially dipped compared to what it was in the earlier quarter, but we think that,
we were always of the view that the margins will come down in a period of time and the best way
to ensure their growth on the top line and bottom line was there was through growing
aggressively and setting up distribution reach across the country and that is what we have been
doing over the last one year and we will continue to do that and invest on that. Besides we are
aggressively investing on the online platform, where we find the cost of delivery lower and the
same time ability to handle a larger client base better. We are completely focused on that and
these two strategies we will continually be rolling out. If the market were to continue flat on
volumes, despite that we will continue to invest in our both online and offline platform because we
think this will be a temporary phenomenon and if you are to take a reasonably medium term to
long term view, we think the best way to do this business is to garner market share and focus on
your online platform and build your distribution reach.
Balaji
And what will be your current market share?
Narayan
The current market share will be in the range of about 8.1%.
Dipak Gupta
Of the daily turnover.
Balaji
Yeah. And between online and offline what is the mix as of this quarter in terms of brokerage?
Dipak Gupta
We normally don’t disclose that distribution really, so you will excuse us on that.
Balaji
Oh, sure. Thanks. Hello. I am done. I am through.
Dipak Gupta
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Okay. Any other questions?
Moderator
Thank you very much. The next question comes from the line of Ms. Maruk from UBS.
Mahrukh
Yeah. Hi everyone. Just had a couple of questions. One is that I mean in general people are
seeing some slowdown in retail consumption. So what is your view on a sectoral basis? Of course
Kotak base is not that high, so growth should not be an issue, but going ahead what are your
thoughts on that? And could you give the breakup of savings and current, if you do have,
deposits?
Uday Kotak
First of all Mahrukh, I mean whether it is home loans, personal loans, on home loan we saw little
bit of a blip in the month of August, July-August, and may be early part of September, but it has
comeback with a bang and at some level I think this whole real estate space is beginning to create
serious anxiety for people, for people who don’t have a home, there is such a high level of anxiety
that they wait, wait, wait, wait, and capitulate. And that is actually beginning to you know
continue to keep the demand for it pretty strong, and I don’t see a slow down, in fact you know,
valuations of the real estate itself is creating the size of individual loans to be beginning to increase
which therefore in value terms we see the growth continuing. Yes there is a risk because you are
now seeing significantly higher value of the same assets compared to what they were six months
and one year ago and therefore the need to make sure that there is adequate security and margin
on the loan, which we are making at this point of time. The other thing is personal loans and no
let up, and so far we are not seeing any signals of any major problem on the portfolio. And
considering that again we are of the small base and you know personal loans again is a very
generic term, within that a lot of small businesses and others who take a long time to get loans, I
mean we are getting a fair share of that. I think the key in the entire personal loans business is
process and controls. And the challenge is not just the percentage growth but how well we
control our process and recovery and other control parameters in this business because it is very
easy to give lots of loans at very high rates, but these are unsecured and finally we got to collect
the money. So our focus is much more on making sure that despite the growth and we have been
in this business long enough to make sure that the controls concomitant with this growth are in
place and we are not in a sense going the wild west way in the personal loans business. And I will
request Jaimin on this current and savings account.
Jaimin Bhatt
Now the total CASA number as of September 30 th was about Rs. 17 billion and in line with the
trend in the previous quarters we have seen current at about 60% of that number.
Mahrukh
Thanks so much. Thank you.
Moderator
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Thank you very much ma’am. Next in line we have Mr. Anil Agarwal of JM Morgan Stanley.
Anil Agarwal
Yeah. Hi. Couple of things, I came in late, so I don’t know whether I missed it. What is the
outlook on the securities business in the current quarter? That is one. And second is there is a big
profit on sale of investments number of about Rs 660 crore. What exactly is that? It is about Rs.
661.8 crore, sorry Rs. 66 crore, sorry, Rs. 661 million, so Rs. 66 crore, what exactly is that and
where is it housed, which subsidiary?
Uday Kotak
First on the securities business, Narayan.
Narayan
The security side especially from the second half of September and the first two weeks of October,
we clearly see the overall volumes in the market have gone up and we see better participation from
both the HNI and retail, and if it was to continue at these or higher levels, we think we will be able
to substantially catch up from where we are in this quarter. It will substantially depend on the way
the volumes in the market behave and the general underlying tone of the market.
Uday Kotak
Yeah and I think it is back to Anil a question which everyone on this call and everyone around this
table in this room would want to ask a question about outlook for the securities business and I am
sure you have got a lot of analysts out there on this call who have a view about where the markets
are, and to a certain extent if the market remains healthy I think the volumes will tend to rise, I
mean though we have seen some of the increase in markets over the last sixty days happen on
relatively lower volumes because of investors sitting on a wall of worry, so depends on how it goes,
if you see some capitulation happen in the market place and thereafter consolidation happens, you
could actually see volumes grow even in that scenario. Therefore outlook on the market volume is
much more a function about how the broader securities market behaves and I am sure there are
pretty diverse views on what one feels about market at this point of time. Having said that we are
clearly seeing more traction through the second half of September and in the first half, not only in
retail but also in the institutional side, and volumes are looking good, we are seeing pretty
reasonable market share and everything is looking pretty good right now. Yes, markets may be in
a correction mode in the last couple of days, but that’s I think part of the course and with that over
to Jaimin on the numbers. Jaimin.
Jaimin Bhatt
Yeah. Anil that Rs 66 crore which you are talking about is part of the press table which is coming
from the insurance business and these are sale on realizations of profits on policyholder’s money.
To that extent, it does not impact the bottom line because the policyholder’s reserves go up to that
extent. It is definitely accounting system requires you to capture that as the income and then book
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the policyholder’s reserving as part of the operating expense. So if you notice the tables, the
policyholder’s reserves for the quarter has also shown a sharp rise.
Uday Kotak
So there is no one-time income in the P&L. It is not that case.
Jaimin Bhatt
It does not impact the bottom line at all.
Anil Agarwal
Thanks.
Moderator
Thank you very much sir. Next in line we have Mr. Vishal from Crisil Research.
Vishal
Hello. Hi. I just wanted to enquire, can you share your disbursements in car and CV industry per se
for H1 06-07 and for whole of 05-06?
Uday Kotak
Yeah. Sure. We don’t have disbursements but we give you the size of our advances which we
have presented in the table. As on 30 th September 2006 our advances in commercial vehicles were
Rs 2,170 crore up from Rs 1,800 crore same time last year, so about a 20% growth there. And on
car loans, we have a growth of about 11% over last year.
Vishal
Can you share the disbursing plan any rough estimate as well, broader number.
Dipak Gupta
Well rough number, I can give you, commercial vehicles would be about Rs 1,500 odd crore, and
cars would also be about Rs1,500 crore.
Vishal
Cars will be around?
Dipak Gupta
Same Rs 1,500 odd crore.
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Vishal
And what the numbers for 05-06 would be?
Dipak Gupta
You see just go by the broad stock on higher growth, the disbursement figures would also be
comparatively similar.
Vishal
Okay. Thanks a lot. Thank you.
Moderator
Thank you very much sir. Participants who wish to ask questions please press *1 now. At this
moment there are no further questions from participants. I would like to hand over the floor back
to Mr. Uday Kotak for final remarks.
Uday Kotak
Well friends, thank you very much for being on the call. Lets talk again in end of next quarter.
Thank you.
Moderator
Ladies and gentlemen, thank you for choosing WebEx conferencing service. That concludes this
conference call. Thank you for your participation. You may now disconnect your lines. Thank you.
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