File photo of Kotak Mahindra Bank. Photo: Mint
File photo of Kotak Mahindra Bank. Photo: Mint

Bond bonanza helps Kotak Mahindra Bank in beefing up profits in Q3

  • Kotak Mahindra Bank reported an year-on-year increase of 23% in net profit growth because it wrote back provisions worth 287 crore
  • The private sector lender ’s gross bad loan ratio fell to 2.07% and its net bad loan ratio slipped to 0.71%.

The sharp fall in bond yields during the December quarter has reaped profits for Kotak Mahindra Bank Ltd literally. The private sector lender reported an year-on-year increase of 23% in net profit growth because it wrote back provisions worth 287 crore it had made previously towards mark-to-market losses.

Had this write-back opportunity not been available, Kotak Mahindra Bank’s profit would have shown a 1.4% year-on-year decline instead of the impressive 23% rise. Its operating profit grew by a modest 6.5%, and has sequentially dropped.

But the lender is not alone in write-backs. HDFC Bank Ltd too did write-backs and other lenders would also do because bond yields had eased 60 basis points during the third quarter. Fall in yields generates mark-to-market gains for banks. Investors rewarded Kotak Mahindra Bank for its net profit growth by driving up the shares 2.7% on Monday.

That said, its profit growth is not hollow because the bank’s core income grew 23% and its net interest margin improved to 4.33%. The lender’s loan book grew 23% and it was not driven mainly by retail as is the case with most banks. While the corporate loan book grew by a strong 26%, commercial vehicle loans grew 36% and even retail personal loans and credit cards grew at that same pace

Photo: Naveen Kumar Saini/ Mint
Photo: Naveen Kumar Saini/ Mint


A strong loan growth contributes in a big way to low bad loan ratios. This has been true for private sector lenders such as HDFC Bank, Kotak Mahindra Bank and even IndusInd Bank Ltd. Kotak Mahindra Bank’s gross bad loan ratio fell to 2.07% and its net bad loan ratio slipped to 0.71%. These are enviable ratios that show pristine asset quality, although there are some scratches visible.

One, provisions towards loan assets have risen by 50% from a year ago and the lender has beefed up the coverage ratio by a massive 12.7 percentage points to 66.2%. This shows that the bank is anticipating stress and has prudently provided for it.

Another concern for investors is that SMA-2 (special mention accounts) outstanding has more than doubled from the previous quarter to 344 crore for the lender. These are accounts where borrowers have not paid back for two months in a row. They are the most susceptible to turn bad and attract provisioning.

Having said that, investors seem to think the low bad loan ratios and a strong growth trajectory along with a comfortable liability profile are reason enough to back the premium that the Kotak Mahindra Bank stock commands. The stock trades at a multiple of nearly five times its estimated book value for FY20. That makes it the most expensive banking stock. Valuations may well have been higher but for the drag on earnings from subsidiaries such as Kotak Mahindra Prime, Kotak Capital and Kotak Securities. The group’s insurance arm has more than made up for this by generating 125 crore net profit in the quarter.

As far as the lender goes, an overhang on the stock is the ongoing shareholding issue wherein promoter Uday Kotak has missed the deadline to bring his stake down. The bank has dragged the regulator to court and investors are awaiting more clarity. This explains the 10% correction in the stock from its highs in July last year.

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