Sometimes, saying no makes all the difference. This is true for Kotak Mahindra Bank, which is reaping the benefits of turning away borrowers who are now a matter of concern for most other lenders.
The richly valued private lender reported a 25% growth in net profit for the March quarter as it did not have to beef up provisions like some of its peers. The bank’s provisions, in fact, fell marginally compared with the previous quarter.
The bank’s gross bad loan ratios rose marginally. However, when future stress is expected to be low, investors are bound to ignore a paltry rise in the bad loan proportion of the loan book.
Kotak Mahindra Bank’s special mention accounts 2 (SMA-2) fell to ₹138 crore in the fourth quarter from ₹344 crore in the previous quarter.
SMA-2 accounts are those where the dues have not been cleared for up to 60 days. These are accounts that are most likely to turn bad, as borrowers have only a month to pay back.
What this means is that the lender managed to make some of these borrowers pay up. However, it should be noted that from a year-ago period, SMA-2 has almost doubled.
The private lender has negligible exposure to defaulter Infrastructure Leasing and Financial Services (IL&FS) as well.
The bank even escaped an exposure to Jet Airways, another pain point for many lenders.
Kotak Mahindra Bank has said no to even the Essel Group. Ironically, the Kotak group’s mutual fund was hit by giving out loans to the Essel Group.
In an interaction with the media after the announcement of results, the bank’s management sounded sanguine on future asset quality and said there is some worry on the bank’s exposure to auto industry given the slowdown there. Big automakers have seen sales drop sharply in fiscal year (FY) 2019 raising concerns over their earnings.
Why then were investors not very enthused about the lender’s performance, given that its stock hardly reacted to the numbers on Tuesday?
A key overhang on the stock is the ongoing legal battle between Kotak Mahindra Bank and the Reserve Bank of India regarding promoter shareholding rules. Both the private lender’s and Reserve Bank of India’s (RBI) counsels have made scathing arguments against each other.
Given the next hearing date is a year ahead, the issue is likely to nag investors.
In the light of this tussle with the regulator, analysts believe the stock is richly valued. The share price has gained 12% in the last two months and it now trades at a multiple of nearly five times its estimated book value for FY21.
That makes it the most expensive banking stock to own in town. Perhaps, it’s time now for investors to start saying no.
