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811 is driving an exciting transformation; sharp growth in value and volume terms

Digital contributes 71%/60% to incremental savings accounts/Credit Cards in 4QFY22

We attended ‘Kotak 811 Unveiled’ hosted by KMB to showcase the progress of Kotak 811 over the last five years. The management also touched upon its journey going forward. 811 began in Mar’17 as a digital customer acquisition source, with a target to double its customer base in 18 months. The proposition was unique, with an account opening turnaround time of three minutes and no minimum balance requirement. Like the rest of the industry, most services were unbundled in this product. The bank has made steady progress since then. In CY21, the management began to look at 811 as a semi-autonomous unit, with a focus on exponential growth, rather than just a customer acquisition tool. The idea is to leverage the bank’s strengths and develop 811 into a full service Digital Bank, with a focus on increasing user engagement and driving cross-sell.

Kotak 811 offers a unique customer proposition

Kotak 811 is built on the engines of customer obsession, agile technology, and data science. It offers a seamless onboarding experience, with an account opening turnaround time of three minutes and a video KYC in five minutes. It provides a self-help facility in various languages and sets up UPI almost instantly. The bank employs big data science to understand customer behavior and improve risk management by analyzing demographics, bureau insights, and past transactions of the user. There is no minimum balance requirement for an 811 savings account

811: Robust scale up over the last five years; client base stands at 12.3m

In the last five years, KMB opened 12.3m KYC-complaint savings accounts, spread over 1k cities and towns. Of these, 5.3m customers opted for a paid Debit Card, with an annual fee of INR200, a reflection of its a strong customer engagement. The bank has clocked strong growth rates in account openings, with a new account being opened every five seconds. The account holder’s profile is diverse, with 56% aged below 30. It is also well spread across various occupations, with 38% salaried, 31% self-employed, 20% students, and 11% from other walks of life.

Building 811 as a Digital Bank with a huge cross-sell potential

In CY21, the management realized the potential of 811 as a Digital Bank. Earlier, it was looking at it merely as a digital customer acquisition source. Since then, it has improved user engagement and build on the customer acquisition run-rate. 811’s contribution to the overall bank in UPI transactions, Credit Cards, Debit Cards, trading accounts, and non-Life Insurance products is well over 50% by volume and is in the 30-58% range in value terms. 811 stands head-to-head with leading FinTech/Credit Card players in terms of operating metrics. With a huge underpenetration, there exists a long growth runway going forward.

Unit economics improving with scale; the breakeven time has halved

As the bank achieves further scale in customer acquisition, unit economics of the channel have improved significantly. The breakeven time for KYC-compliant savings accounts has reduced to 5.2 years in FY22 from 9.4 years in FY19. In 4QFY22, the same touched 4.5 years. One time, the cost of customer acquisition stood at INR860, with an annual operating income (net of costs) of INR190. The all-inclusive cost takes into account allocated costs relating to physical, digital, marketing, and technology. While 811 has a breakeven time of 4.5 years, the same for a branch customer was slightly higher at five years.

Other highlights

* In Mar’22, 811 acquired 571k customers, of which 417k is KYC-compliant savings accounts. Around 50% of customers are KYC compliant within one month of their acquisition v/s the regulatory requirement of 12 months.

* The bank has launched a premium version of its Debit Card, with an annual fee of INR400. The same is seeing good traction.

* In 4QFY22, 811 accounted for 29% of incremental savings balances and 58% of UPI transactions.

* Through 811, the bank disbursed 71% of loans by value v/s India’s largest listed FinTech.

* The bank acquired 1.8m customers in the first year, of which 0.8m is still active and transacting. The total savings balance in 811 is INR75.28b, with a per customer balance of INR6,100.

* In FY22, it issued 736k Credit Cards to 811 customers, a growth of 4.6x YoY.

* The card has a 30-day purchase active rate of 51% (v/s 50% for leading players), while annualized spends are INR82k v/s INR161k for a leading listed card player. Net NPA is strong at 0.99%.

* Through 811, the bank sold 426k units of Personal and Consumer loans.

* It has a total team size of 104 in 811, with an average age of 32.8 years. Of this, 50% employees are in engineering, data science, and product design.

Valuation and view

KMB delivered a healthy core operating performance, along with broad-based loan growth. The bank has shown prowess in executing its digital strategy. It is wellpositioned to sustain its healthy growth in customer acquisition and the cross-sell rate. NIM has inched up on a sequential basis and is at the higher end of the range in recent years. The bank continues to demonstrate steady progress in building a strong liability franchise, with the CASA ratio ~61% (the highest in the industry). This favorably positions KMB in a rising rate environment, and will enable it to grow competitively in its chosen business segments. Asset quality remains robust, with a further decline in GNPA/NNPA and an improvement in PCR, while the restructured book remains under control (~0.44% of loans). KMB carries additional COVID-related provisions of INR5.5b (0.2% of loans). We estimate KMB to deliver 15% earnings CAGR over FY22-24E. We maintain our Neutral rating with a TP of INR2,000/share (3.1x FY24E ABV and INR587 per share for its subsidiaries).

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