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Kotak Bank: Lower cost of funds prevents margin slide
Summary
- Slippages, the lead indicator of asset quality, has dropped sequentially to ₹1,657 crore from ₹1,875 crore.
Kotak Mahindra Bank Ltd’s standalone cost of funds has fallen quarter-on-quarter (q-o-q) to 5.06% in the December quarter (Q3FY25) from 5.15% as it benefited from cutting the savings account deposit rate by 50 basis points (bps) to 3% for balances under ₹5 lakh in October. Hence, the bank could marginally increase its net interest margin (NIM) to 4.93% in Q3 from 4.91% in Q2 despite the pressure on yield on advances. Some part of reduction in yield on advances was due to the loan book tilting towards higher secured lending that fetches lower rate than unsecured loans.
Slippages, the lead indicator of asset quality, has dropped sequentially to ₹1,657 crore from ₹1,875 crore. Lower slippages mean lower credit cost--i.e. lower provisioning and write-off in future that augur well for future profitability. The only segment that saw q-o-q increase in slippages was microfinance loans.
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There could be some improvement in NIM as the bank’s acquisition of personal loan portfolio of ₹4,100 crore from Standard Chartered Bank is likely to be added to the books in Q4. However, the acquisition also carries risk of higher slippages in future as personal loans are unsecured. Considering that the bank could bring down the unsecured loans as a percentage of net advances q-o-q to 10.5% from 11.3%, the acquisition could at the most push up the overall unsecured loans as a percentage of net advances to the Q2 level, which is still relatively low versus some leading banks.
Advances and deposits grew almost equally by about 15% year-on-year (y-o-y), which ensured that the bank’s loan-to-deposit ratio (LDR) remained flat 87%. LDR between 80% to 90% is generally considered healthy. Any ratio below 80% would mean compromising on higher interest income from loans, and above 90% would mean increasing liquidity risk if withdrawal of deposits increases for any unforeseen reason.
A double-digit growth rate year-on-year (y-o-y) in net interest income (NII) and core other income or fee income led to core pre-provisioning operating profit (PPoP) rising by 11.5% y-o-y to ₹4,920 crore.
Annualized credit cost at 0.68%, though almost double on y-o-y, was flat q-o-q. Gross NPA and net NPA remained stable q-o-q at 1.5% and 0.41%. The bank’s management indicated in the earnings call post results that except for microfinance loans, they do not expect any sharp spike in NPAs from other loans.
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In terms of future outlook, Kotak Bank aims to grow its advances at 1.5-2x of nominal GDP growth, aiming for return on asset (RoA) of more than 2% for the banking operations. While the bank’s lending business performance could improve from hereon, the profitability of Kotak Securities, its stock broking subsidiary, might have peaked out in the short term.
Total income fell 2% q-o-q to ₹1,355 crore and net profit was flat at ₹448 crore. The flat performance of stock broking business might be largely attributed to the Sebi’s measures directed at curbing speculative activity in futures and options. As the measures were implemented with effect from late November; the full impact will be felt in Q4.
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Kotak Bank stock had hit an all-time high of ₹2,253 on in October 2021 and is still down by about 20% even after more than three years. Investors who bought three years back have to only blame themselves for buying at a high entry valuation rather than the bank’s financial performance.
Now after adjusting for value of subsidiaries at ₹500 per share, the lending business is quoting at price-to-adjusted book value of 1.8x FY26 estimates of Motilal Oswal Financial Services, which appears reasonable.
