Kotak Mahindra Bank Ltd’s results tick all the boxes investors in a bank would like, except one. An increase in its loan book, better interest margins and higher fee income all contributed to better performance.

A decline in its asset quality could cause concern but should not, as non-performing asset (NPA) provisions were related to assets that came on its books subsequent to the merger of ING Vysya Bank.

Kotak Mahindra Bank’s other income rose by 47% year-on-year in the March quarter and was chiefly responsible for its net profit being higher than what analysts had estimated. In a post-results conference call, the management said mutual fund and insurance distribution growth was higher. Other income got a boost from fees and commissions. Recoveries from distressed assets also contributed to the increase.

The lending business brought good news too. Net interest income rose by 16% year-on-year and its loan book rose by 15%. The private sector lender’s loan disbursals continue to be driven by its corporate loan book that expanded by 22%.

Retail disbursals comprising loans to home buyers, small businesses, personal loans and loan against property, grew by 5% over a year ago. SME (small and medium enterprise) loan disbursements were subdued pre-demonetisation, but a pickup in growth was visible in the March quarter and is expected to continue, the management added.

Net interest margin expanded to 4.6% year-on-year helped by higher low-cost deposits. The lender’s current and savings account ratio surged to 44% as of 31 March 2017, driven by a 40% jump in savings account balances.

On the flip side, asset quality declined as bad loan ratios rose from the year-ago level and sequentially. Gross NPAs were 2.59% of the total loan book, higher than 2.42% a quarter ago, while the net NPA ratio stood at 1.26%, which was higher than 1.07% sequentially.

The Kotak Mahindra management clarified that nearly 75-80% of gross NPAs for the quarter came from ING Vysya’s books for which provisions were made. It clarified that none of the provisions were related to the Reserve Bank of India’s circular regarding higher provision for stressed accounts nor were any transfers made to an asset reconstruction company. Since the merger has concluded, the management said it has come to the end of the NPA recognition cycle and expects asset quality to improve from here on.

The management commentary and better-than-expected performance were welcomed by investors. The stock ended Thursday with a gain of 1.5% even as the benchmark Sensex was down 0.34%. Shares of Kotak Mahindra Bank trade at a rich multiple of 5.26 times expected book value for the current fiscal year.