Kotak Mahindra Bank Ltd shares lost 3.5% on Thursday, almost thrice the drop in BSE’s Bankex, despite reporting a 27% gain in net profit. While the growth in profit looks healthy, it masks the weakness in the operations of the fee-based segments.
Over the past few quarters, the bank has increasingly become dependent on its loan book to generate profit. In the June quarter, financing activities made up 83% of its profit before tax compared with around 75% in the last fiscal. In other words, fee-based businesses such as securities, investment banking and insurance are contributing less to profit.
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Kotak Mahindra’s fee-based income and revenue from insurance premium fell from a year ago. Profits of most units—except insurance, which is reaping the fruit of policies sold in earlier years—also declined or were flat compared with the year-ago quarter.
That is not completely surprising because the woes of brokerages have been well-documented and fears of a slowdown have dulled capital market activity in recent times.
What saved the bank was the loan book growth. Yes, net interest margin has declined by 40 basis points from a year ago to 5%. But unlike the March quarter, loans rose strongly in the three months ended June. Total advances grew 33% from a year ago, and 8.3% from the end of March, significantly better than the overall industry. One basis point is one-hundredth of a percentage point.
More importantly, this growth has come without compromising on asset quality. Kotak Mahindra’s gross non-performing assets as a percentage of total advances fell 1.2 percentage points from a year ago to 1.59% in the June quarter.
With troubles on the fee-based side unlikely to disappear overnight, the key will be whether Kotak Mahindra can sustain the pace of its loan book growth. That may not prove to be easy in a morose macroeconomic environment with rising interest rates.
Graphic by Yogesh Kumar/Mint
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