Kotak Mahindra Bank Ltd’s March quarter earnings repeats a familiar tale seen across the industry this season: that of a weak macroeconomic environment and poor investment climate putting pressure on the loan book. Moreover, whatever traction the capital markets and related businesses had shown in the previous couple of quarters is no longer evident.
Yes, the bank’s profit number has cheered investors who pushed the stock to a new high on Thursday. The bank’s loan book grew 25% from a year ago. Its net interest margin of 4.7%—one of the highest in the industry—was just 10 basis points down from a year ago. One basis point is 0.01%.
Thus, net interest income gained 25.8%, the best again in nine quarters. A hefty decline in non-interest income was balanced out by a decrease in operating expenses, something which is not sustainable. But it was enough for net profits at the consolidated level to grow 28% from a year ago, the best in seven straight quarters.
How have Kotak’s various businesses contributed to this profit? Kotak’s financing business, which includes the stand-alone number of the bank and the auto loan company Kotak Mahindra Prime Ltd, together contributed 83.3% of profit after tax. That compares with 80.9% a quarter ago and 75.6% a year ago. Even as the financing division becomes more prominent, the loan book is showing some strain. Although it did grow 25% from a year ago, advances have shrunk 1.1% since the end of December. That was owing to primarily two sectors—commercial vehicle and construction equipment, and corporate banking—that are closely related to the economy and the investment climate.
The market-related businesses continue to suffer. Premiums from the insurance segment were little changed from a year ago and so were profits. Kotak’s investment banking and broking businesses also reported a decline in profits, with the latter seeing a drop in market share. The mutual fund division also reported a decline in profits consistent with the erosion in its equity assets under management. At a time when economic indicators are not robust enough to sustain a strong rally in the markets, this division’s bounce back is some time away.
At a press conference, the management said it was targeting loan book growth in the 20s (in percentage terms) in the current fiscal year. Given Kotak’s rich valuations, that target has to be exceeded to continue its outperformance versus the Bankex.