Kotak is back in the lending game, and investors are excited

The private sector lender reported 14.7% year-on-year growth in its loan book for the September quarter, more than double the growth in the previous quarter. Recall that in the June quarter, the bank had shrunk its loan book by 2.7% sequentially on concerns that credit risks outweigh the benefits of lending amid the impact of the second wave of the pandemic.

The loan book expanded by a stellar 8% sequentially for the September quarter. Kotak Mahindra Bank’s loan growth was broad-based, although retail loans showed a faster growth rate of 20%. Analysts at Jefferies India Pvt. Ltd pointed out in their first cut on the bank that traction in home loans has been a big help for retail loan growth. Home loans, the safest credit class, grew by 10.5% sequentially. The bank was one of the first movers in bringing a festive-focused loan scheme wherein it brought down mortgage rates to the lowest in the industry.

The management said that this has indeed helped the home loan portfolio growth. Unsecured personal loans and credit cards which are the riskier retail loans also grew at a decent 12%. This shows that Kotak Mahindra Bank is now comfortable taking risk, although Dipak Gupta, joint managing director of the bank said that the lender has not shed its conservative approach.

“We see the environment favourable for lending now. Up until last quarter, we were waiting and watching to get this comfort," he said in a media call after results.

The growth in corporate loans at 10.5% for the quarter was no chump change. In fact, it is much higher than peers such as HDFC Bank and ICICI Bank. Gupta said that much of this is working capital although some of it is term loans taken for capital expenditure. “But big capex is still 6-12 months away," he said.

Interestingly, loans to small businesses grew 8.2% on a year-on-year basis, which also shows the bank’s increasing comfort on credit risk now. Of course, how these lending decisions pan out depends on the impact of a potential third covid wave. For the September quarter though, the bank witnessed a reduction in stress sequentially. Gross bad loans fell to 3.19% of the book from 3.56% in the June quarter. Restructured loans formed less than 1% of the loan book, much lower than 1.5% of peer HDFC Bank and 1% of ICICI Bank.

The lender also managed to recover more as recoveries and upgrades were more than double those of the previous quarter. Even so, true to its conservative approach, the bank has kept its pandemic-focused provisions unchanged at ₹495 crore.

Kotak Mahindra Bank’s investors have appreciated the bank’s restraint on lending given that the conservative approach stemmed from an increase in stress. Indeed, the lender’s asset quality has weathered the pandemic’s impact, thanks to its reticence to lend. But its shares have grossly underperformed the broad Nifty and its peers, which was entirely due to the lack of growth.

HDFC Bank, ICICI Bank and Axis Bank have reported higher loan growth compared to Kotak Mahindra Bank in the past quarters. The lender’s shares have gained a little over 10% year-to-date which compares with the stellar 30% increase in the Nifty. Shares of HDFC Bank and ICICI Bank have clocked 16% and 58% rise, respectively. Analysts believe that the overhang of lacklustre balance sheet growth on the Kotak Mahindra Bank stock is now gone and valuations should benefit.

That said, the bank’s core income growth was a mere 3% despite strong loan disbursements and improving asset quality. The management explained that much of the loan growth has been towards the end of the quarter and therefore the net interest income does not reflect the same.

The subdued core income growth meant that net profit for the quarter was down 7% from the year-ago period. That said, it still beats Street estimates comfortably.