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The Kotak Mahindra Bank Ltd stock was punished after its June quarter results were announced. The stock plummeted nearly 4% intraday on the National Stock Exchange (NSE) and ended Thursday’s session down 3.8% in a flat market.

The reason: the private sector lender’s provisions for bad loans more than doubled in the June quarter compared to the year-ago period. This was apart from mark-to-market provisions of around 210 crore. The bank registered a 130.5% year-on-year spike in provisions, while sequentially they went up 53%.

Consequently, it missed Street expectations on the net profit front. Stand-alone net profit during the quarter increased 12% year-on-year to 1,024.94 crore, but was well below Bloomberg analysts’ estimates of 1,208.50 crore.

On the positive side, Kotak Mahindra Bank’s loan book saw a healthy year-on-year growth of 24%. This was led by the high-yielding corporate banking and commercial vehicles segment. However, loan growth in its small and medium enterprises segment was subdued. Net interest margin fell a bit to 4.3% from 4.35% in the previous quarter.

Asset quality was stable. Both gross and net non-performing assets declined both sequentially and from a year ago.

On a consolidated basis, the private sector lender’s net profit increased 17% year-on-year to 1,347 crore. However, some analysts expressed concerns over the performance of the bank’s NBFC (non-banking financial company) subsidiary, which continues to be subdued.

Despite the earnings miss, investors have little reason to feel dissatisfied. Earlier this week, the bank’s stock hit a 52-week high of 1,417 on NSE. On a year-to-date basis, the stock has outperformed the Nifty Bank Index by giving 33.5% returns. During the same span, the sector index was up 4.9%. Also, the lender has posted better returns than peers (see chart). No wonder then that out of the 38 broking houses tracking this stock, 30 have a “buy" and four have a “hold" rating.

The problem lies in Kotak Mahindra Bank’s valuation, which, at a one-year forward price-to-book multiple of 5.23 times (stand-alone), makes it one of the most expensive banking stocks. Valuations like that come with sky-high expectations, leaving the door wide open for disappointment.

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