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Home >Market >Mark-to-market >Lending business remains sluggish for Kotak Mahindra Bank

Kotak Mahindra Bank Ltd’s capital markets business has done pretty well in the March quarter as equity markets rallied, but a weakening economy continued to take a toll on its lending business.

Net profit of the broking business doubled to 44 crore although that increase is partly due to a low base. Indian equity markets have been hovering at an all-time high and turnover, particularly from retail investors, has increased, boosting broking profits. Other fee-based businesses have done well, too. The life insurance business continued to maintain a 12% year-on-year growth rate in profit while the investments business profits also doubled to 16 crore in the March quarter.

The financing business—Kotak Mahindra Bank (stand-alone) and Kotak Mahindra Prime Ltd—continued to struggle because of low economic growth. While consolidated loan growth at 8% over a year ago was better than the 6% pace seen in the December quarter, it was still lower than industry growth.

The slowdown in credit growth, however, can be construed as a prudential measure. It is mostly owing to a 30% decline in the commercial vehicle and construction equipment loan book, a segment particularly susceptible to bad loans. Excluding this, advances growth was a decent 17%. Auto loans grew at 4%, while the corporate book saw a pick-up in growth to 19% from 6% in the previous quarter.

The bank was able to boost its net interest income thanks to 20 basis points year-on-year increase in net interest margins (NIMs) to 4.9%. However, operating and net profits remained little changed from a year ago because of an increase in operating expenses.

One basis point is one-hundredth of a percentage point.

The bank’s asset quality improved slightly. Gross bad loans as a proportion of the loan book stood at 1.63%. Restructured loans also fell to 10 crore at the end of March compared with 42 crore three months ago.

While asset quality and NIMs are positives, the bank has to improve loan and earnings growth. The management has guided for a 15-20% loan growth in the current fiscal year, but fell short of a similar target in 2013-14.

Kotak shares have lagged S&P BSE Bankex returns since the start of 2014. Given that they trade at an expensive 4.4 times estimated book value for 2014-15, earnings have to grow faster for the bank to have a chance of outperforming the Bankex.

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