Home / Market / Mark-to-market /  Kotak Mahindra Bank: The perils of being priced to perfection

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.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout