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What are the implications of the Kotak salary cut?

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The stress in our stars - The Kotak salary cut implications Kotak and HDFC Bank are the two cleanest and brightest stars of the Indian Banking market. So when these start twinkling even a bit less bright, folks are bound to take notice. COVID 19, which has had far-reaching effects on the economy, is now making these stars prepare for the worst as well.

In today's post, we discuss the move that Kotak made and quantify its impact, look at the implication of the move not only for banking but the broad economy, and see the trends and patterns that emerge.

The 10% pay cut

In the last financial year, the bank had paid out ~10.5% of its topline as employee expense. That makes this a sizeable chunk of its cost base, and hence any material savings here important.

As a measure of safety against potential future expenses and provisions, the bank decided to go the cost-cutting way, slashing the salaries of employees above the Rs 25 lpa mark by 10%. The company's price was understandably down sharply on the announcement, expecting that the management would have enforced the pay cut expecting future stress on the earnings front. Kotak interestingly has one of the largest retail books in the country, with 14% unsecured loans, 15% auto loans, and 18% mortgage loans.

The themes that emerge

One key theme that is expected to emerge for the larger economy is the reduction of flab at the top. The organizational structures of firms will see higher pay cuts at top levels, with potential job cuts in industries under high stress. The employees that stay will be expected to cover more ground and improve their efficiency.

On the banking front, the resounding theme seems to be one of the start of a new NPA cycle, one that is being postponed by deferring payments but will come back to bite sooner rather than later. As banks head into these murky waters, the richness of multiples is bound to stay under stress as investors grapple with the uncertainty and try to price it in.

The new business as usual

As the lockdown gets lifted and businesses try to restart, the new norm will be a lot different that what we were used to. Organizations earlier focussed on growth will now be intensly focussed on costs, which would have implications not only on their own employees but also to the offerings they give their customers. In a market where firms are slashing their workforces by the thousands, folks would be hesitant to leave, which would increase the incentive of firms to underpay them (if survival wasn't incentive enough!).

And while fiscal and monetary support will serve as helpful bandages, the only thing that will help folks heal and move away from a constant "stress mode" is a vaccine - and it looks like it'll be a while until we have one.

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