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00:00 Pranav Gundapalli is with us, Senior Research Analyst at Bernstein and let's very quickly
00:04 get his take on Kotak Mahindra Bank. As expected, a weak start for Kotak in the street punishing
00:10 what the RBI action has done. Pranav, just a couple of things. Of course, you will talk about
00:16 the impact on revenues of the bank if you cannot onboard customers digitally. I think that is
00:22 a bigger hit even than the fresh credit card issue stopped. I just want to understand
00:28 reputationally, how do you have an IT problem for two years that you can't fix
00:32 even as your onboarding customers at this frenetic pace?
00:36 Good morning. See, I think RBI's action in a way is just getting the bank to focus more on
00:46 fixing these issues and I think the problem partly at least lies in what you said. When you have
00:52 growth at this pace, it often the IT security and IT infrastructure probably falls down in
00:59 terms of pecking order for the banks and therefore this action is more a way of forcing these banks
01:05 to focus on the more critical issues rather than get diverted by getting to the growth requirements.
01:12 What is the quantum of impact you expect on Kotak Mahindra Bank on their financials from this action?
01:20 I think it would be early to estimate the exact impact until we get some more clarity on
01:27 what exactly is the true digital sourcing for this bank because if you go by the numbers that
01:35 they put out in the presentation and take it at face value, then it would seem like a large part
01:40 of new customer acquisition is going to be stalled. That could pretty much wipe out growth until this
01:47 ban remains. But what you're seeing in reality is that a lot of these are based on stretched
01:54 definitions of what I would call digitally sourced customers. So in that case, they could be
01:59 replaced with say telecallers or some of the other channels which are still permitted. So
02:05 I think it would be early to put down a number on the final impact but it would be significant
02:11 because this is unlike say HTFC which had a similar action a few years ago. This is a cross
02:17 product segment. So this is not just for credit cards. Well, credit cards is a complete product
02:21 ban. Banning acquisition of all products through online and mobile channels does lead to a big
02:28 impact on the growth for this bank. Have you downgraded the stock after what happened last
02:34 evening? We would wait to hear more because I think the initial reaction is obviously expected.
02:43 We haven't downgraded yet. Pranav, the question that might come to mind is because Kotak trades
02:53 at about two times price to give or take, maybe now it trades slightly cheaper at 1.8 or what
02:59 have you. Is this the extent of the multiple derating that the bank would see in these
03:05 circumstances or do you believe it could trade at cheaper multiples? Yeah, I think the issue is that
03:12 this was not a bank that, see, even before these digital issues came in, I think there were other
03:18 issues which was primarily on deposit growth. I think the biggest complaint for investors looking
03:23 at this bank was that the deposit growth remains weak and has lagged peers. And with this restriction
03:31 on new acquisition, that problem gets even more acute. So yes, it gets a lot cheaper. But
03:37 once these problems go away, you still are going to look at a bank which has been struggling with
03:43 its deposit growth. So yeah, so it's not just this. There are other issues to deal with. So
03:51 yes, it gets cheaper, but the story doesn't change a lot even when these bans get lifted.
03:56 Sorry, I'm just trying to understand, Pranav. So therefore, would you give it a multiple of
04:01 1.8, 1.7, 1.6? I'm just trying to understand where it may not bounce back by your point,
04:07 but where is it that the multiples could settle for Kotak Bank?
04:11 See, okay. See, I think that, assuming before this, the multiples were fair and reflected
04:18 the expectations ahead. If all this means is, let's say, it takes about 15 to 18 months for
04:26 this to come back and growth is halted for that period, then you just adjust it for a year and a
04:33 half of lost growth. And that would translate to almost 20% plus impact to the multiple.
04:40 Pranav, I know you track HDFC Bank also very closely. We've talked about it extensively in
04:47 the past. Now, let's look at it. Kotak is clearly going to lose market share. Deposit growth has
04:53 been a big problem for them and this for the next, at least for the next year, is going to be tough
04:57 for Kotak. Do you feel like Kotak's loss could be HDFC's gain? Is it a feather in their hat? And
05:04 while you may consider re-rating Kotak, this might even help HDFC getting re-rated upward
05:11 or that's being a little far-fetched? I think it's far-fetched because it's small. At the end of
05:16 the day, I think we need to remember that this is probably about a 2% market share bank. So,
05:20 HDFC and ICICI are significantly larger and therefore, this might not really help them a
05:29 lot, number one. And number two, also remember that while digital channels have been important
05:34 for acquisition from a number of customers' perspective, surely from an amount of deposits
05:40 or the value of deposits, it's not the biggest chunk. So, even for Kotak itself, the average
05:47 SAR balances of 811 customers remain significantly below that of their normal banking channel
05:52 customers. So, in volume terms, yes, they could see a big impact, but does it translate to deposit
06:00 growth and especially an improvement for HDFC, ICICI, then that will be marginal at best.
06:08 Okay. Pranav, the other question of course is non-Kotak and there have been some releases,
06:16 we've seen HDFC Bank, we've seen Axis. I don't know what all you have coverage and clearance
06:20 for, but I'm just trying my hand here. What did you make of some of those numbers, particularly
06:24 Axis, which is red hot post yesterday's release? I think going into the quarter, the big concern was
06:31 on a potential NIM compression because all the discussion was around tight liquidity,
06:36 increasing deposit prices, potential margin compression. I think what we have seen in the
06:41 few numbers that have come out so far, HDFC Axis included, is that the margins actually have held
06:48 up quite well. So, that's and secondly, the deposit growth has been quite fantastic. Now,
06:52 it might be a one-off seasonal, etc., but that plus NIM staying reasonably healthy,
06:58 I think has led to a positive read across the entire sector, I mean, saving Kotak. So, I think
07:04 that's the big relief, I would say, that we have seen in the quarter so far. And this has been
07:10 especially positive for the smaller banks, which were under pressure on both the LDR front as well
07:19 as cost of funds side. So, I think, therefore, it's almost a relief for the sector overall.
07:25 Pranav, in that case, we're already seeing a 3.5%, 4% uptick on Axis Bank. While the numbers
07:33 were very impressive, some of the brokerages, of course, have come out and upgraded the stock.
07:37 What is your target price on Axis Bank? I think we still see a healthy upside there. And to us,
07:46 the quality of deposits improving is the biggest positive. I think the next leg for us is just to
07:54 see when they catch up with ICICI and to a certain extent HDFC on the deposit growth. So, I think
08:00 that's the last missing piece. So, if they can deliver a few quarters with both the quality and
08:04 quantity of deposits in place, I think that's where that gap really closes. Otherwise, there's
08:09 still a gap versus the larger peers. I think that's the next step that remains. And what they've done
08:16 really well is, of course, maintain their ROEs, and with thanks to their optimal capital ratios,
08:23 I think that's really helped them so far. That's true. Pranav, the largest story of,
08:31 at least at the start of 2024, was that rate cuts will come in that will lead to
08:37 whatever changes in NIMS that they come, that they lead to for banks as well. And now that story gets
08:44 challenged a little bit in the mind, if not actually, till the end of this calendar year,
08:49 at least. Does that in any way alter whatever thesis you may have had earlier on banks versus
08:56 what you may have now? Earnings notwithstanding. Yes. So, I think two things. So, the impact of
09:03 a rate cut was always going to be marginal because I think even at the start of the year,
09:11 the expectation was for a shallow rate cut, 25, 50 basis points for the next 12 to 15 months.
09:20 So, I think the rate cut coming in was the secondary risk. The primary risk was the margin
09:28 compression as the deposit repricing happens. I think now with this improvement in deposit growth,
09:35 I think that's the bigger risk which is starting to look less likely to play out. The rate cut,
09:41 I think, just helps them keep their margins intact for a bit longer. But even when that comes in,
09:47 the impact would be quite limited. So, you're talking about less than probably five basis
09:54 points, even if you have a 25 basis points cut on rates, you might see a less than five basis
09:59 points this year. So, might not be a big factor as such. Pranav, your top three picks from the
10:05 banking pack across the financials actually, so the likes of a paytm still included in that list.
10:12 Pranav Prasad, CFO Alphabet and Google
10:13 Yeah, I would keep the two separate. I think for the larger banks, it would be HDFC,
10:17 Axis and then ICICI. We strongly prefer the private sector over the public sector banks.
10:23 We believe that the earnings growth for the private sector banks will once again
10:28 come out to be superior to the public sector banks after two to one half years gap. So,
10:33 that's our preference. On the payment side, paytm, I think, is still cheap.
10:40 If the regulatory uncertainty lifts, I think what we need to see is the regulatory action
10:50 seems to be done. We need to wait and see where the full impact of all these actions,
10:58 the loss of wallet, the shift to the third party, the other banks for payments,
11:03 the entire net impact of that is still uncertain. So, I think once there is clarity there,
11:09 we could see some upside, but remember, it's not the same type of risk or returns as you would
11:16 see with banks. So, I would almost classify it in a very different bucket altogether.
11:23 Okay. Pranav, you track banks closely. Do you also cover non-lending financials by any chance?
11:30 Yes, I do look at them. I don't track them, cover them officially.
11:35 But, okay, if you just have a broad view, and if you do, again, it's okay if you don't,
11:40 please tell us so, but if you broadly do, the capital marketplace in the non-lending pocket,
11:47 is that something that is looking attractive from, let's say, a longer term perspective?
11:53 There has been a sharp rally out there. People are pencilling in multiple years of growth. Do
11:57 you second that? See, I think, so there are two parts to it. So, the longer term, I think there
12:04 is clearly the space is attractive and could have multiple winners and therefore there is
12:10 this optimism which is set in. That is one on the longer term. I think the shorter term,
12:16 from my conversation, is a bit more interesting because there is an expectation of an earnings
12:22 reset for the banking space because the NIMS are higher, so everybody expects a rate cut,
12:27 some repricing. So, if you look at the consensus estimates for next year, the EPS growth is quite
12:33 moderate across banks, whereas for some of these capital market players in the non-lenders,
12:38 those expectations are a lot healthier. So, even from a short-term perspective,
12:42 there is therefore some interest to look at non-banks. So, that's something we hear across
12:49 conversations, but don't look at the individual schemes to make a strong comment there.
12:53 Thanks, Pranav. It's always good having you on the show. Your perspective is much appreciated
12:58 and valued for us and our viewers.
13:00 Thank you.