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Kotak Mahindra Bank had battened down the hatches in the March quarter itself, sensing that the covid-19 pandemic will be challenging for it. That conservatism seems to have been stretched to the June quarter as well.

The private sector lender set aside 616 crore specifically towards pandemic risks for the June quarter, over and above the 650 crore it had set aside in the March quarter. Ergo, the 9% year-on-year fall in net profit is likely to be overlooked by investors.

Provisions rose even as moratorium levels fell. As of June, 9.65% of its loan book was under moratorium, a drop from 26% in April.

Adding to the comfort, the lender’s core operating metrics have improved as well. Net interest income grew 18% and margins were healthy, with a lot of help from the growth in low-cost current account and saving account deposits.

Indeed, depositors have faith in Kotak Mahindra Bank more than it has faith in its borrowers. Deposit growth was 12%, with much of it as an improvement in CASA.

Add the fact that the bank’s capital adequacy ratio is at an enviable 22%, and it is clear that the lender has enough money to take risks.

But it is not doing so. The management’s comments were heavy on caution. The bank’s loan book shrank 1.9% year-on-year, and by a steeper 7.16%, sequentially. The loan book contraction is a sign that Kotak Mahindra Bank didn’t find borrowers fit enough to lend.

“We have not increased our book significantly. What we have done is a lot more of treasury investments, where yields are lower but they are safer," said Dipak Gupta, joint managing director of the bank.

The caution is visible from the steep fall of 11% in loans to small and medium enterprises, which have been hit the most by the covid-19 pandemic.

Gupta said that small businesses having strong balance sheets do not want to borrow more, given the uncertainties.

What’s more, the lender has disbursed 4,500 crore to the government’s credit guarantee scheme for small borrowers up to 23 July.

This shows that the bank is reluctant to lend to small business without a sovereign credit guarantee.

The loan book contraction has also affected bad loan ratios. Gross bad loans formed 2.7% of its loan book, higher than 2.19% in the year-ago period. In absolute terms, the bad loan stock increased by 22%.

The bank has been one of the most conservative lenders. It is unlikely to disappoint investors in capital or in its asset quality. What investors may need to watch out for is loan growth. Compared with peers, such as HDFC Bank, ICICI Bank and Axis Bank, the lender appears far more risk-averse.

Investors seem to think it has erred too much on the side of caution; its shares have underperformed those of HDFC Bank in the past three months.

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