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Kotak Mahindra Bank’s impeccable asset quality track record wobbled in the December quarter, a potential threat to the bank’s valuations. Investors seem to have taken note of it, as shares slipped nearly 2% on Monday after the release of the lender’s quarterly results.

The private sector lender’s gross bad loans, without the benefit of the judicial standstill on bad loan recognition, stood at 3.27% of its loan book, sharply higher than 2.46% a year ago and 2.55% in the September quarter. A large part of this slippage was from unsecured retail loans, the bank said.

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To be sure, Kotak Mahindra Bank’s management had sounded cautious in previous instances about slippages. Further, the bank has made provisions towards loans that need not be declared as bad due to the judicial standstill. Ergo, its provisions doubled from a year ago to 640 crore.

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The fact that the lender has provided 1,279 crore specifically towards pandemic-related risks as of December should comfort investors. The fact that its provision coverage ratio stood at 78.4% is another source of comfort for investors.

That said, stress is palpable in the book since the bank reported a rise in its special mention accounts (SMA-2) as well. These accounts rose to 654 crore, from just 133 crore in the September quarter.

To be sure, as a percentage of the loan book, SMA-2 accounts are still low at 0.31%.

In a call with the media after the results, the management said the provisions would take care of the risks that the bank anticipates right now.

“We are seeing recoveries happening, but it is still slow. The unsecured pieces (repayment) are taking time to come back," said Jaimin Bhatt, group chief financial officer.

Kotak Mahindra Bank’s valuations are buttressed by its pristine asset quality compared with its peers. However, the bank’s stock has come under pressure in the past year after the lender warned about the pandemic’s hit on the bank’s balance sheet.

Even so, investors preferred the bank’s shares to its peers, which made it outperform the sectoral index in the past three months.

On the back of the 15% gain in the past three months, the stock trades at a multiple of 5.2 times its estimated book value for FY22. This compares with 3.5 times for HDFC Bank, and 2.4 times for ICICI Bank. Most analysts have a buy rating on the stock.

The bank may be at the receiving end of stress, but its operating metrics lend support to valuations.

Operating profit grew by a healthy 29%, backed by a quick sequential recovery in loan disbursements.

To be sure, the loan book continued to shrink year-on-year.

Kotak Mahindra Bank’s biggest strength is its large pile of low-cost deposits, which ensured that its margins were boosted as also its core interest income.

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