Graphic by Santosh Sharma/Mint
Graphic by Santosh Sharma/Mint

Slowdown makes its presence felt in Kotak Mahindra Bank’s loan book

  • In times of rising risk, beefing provisions is what Kotak Mahindra Bank has been doing in the past quarters
  • What should worry investors is that special mention accounts, which are the first signs of stress, have risen for the third straight quarter

Kotak Mahindra Bank Ltd’s blockbuster net profit growth of 51% not only beat Street estimates, but seems to have vindicated the near 6% rise in the company’s stock in the past month.

The fact that it came on the back of a 25% increase in core interest income and an expansion in net interest margin should also boost sentiments.

But beyond that, the private sector lender’s performance had little to offer. Its loan growth decelerated year-on-year to 15.3% for the September quarter, a steady fall for the third straight quarter. The strongest growth came from mortgages, while commercial vehicle loans disappointed. Even disbursal to small businesses didn’t perk up much.

What’s more is that Kotak Mahindra Bank saw its delinquencies increase. Optically, its bad loan ratios passed muster, even though they rose from the year-ago period. What should worry investors is that special mention accounts, which are the first signs of stress, have risen for the third straight quarter. These accounts stood at 431 crore as of September end.

Of course, as a percentage of the total loan book, they are still a meagre 0.2%, a level most peer banks cannot boast about. Also, Kotak Mahindra Bank’s bad loan ratios are far superior to its peers.

The commentary from the management on asset quality didn’t offer much clarity. Dipak Gupta, joint managing director of the bank, said that in times of stress, the key is to get the pricing of the risk right. Further, the lender is willing to lend to good credit even in commercial real estate—a sector considered risky by banks and the banking regulator as well. In the September quarter, the exposure to commercial real estate comprised 2% of the bank’s loan book.

In times of rising risk, beefing provisions is what Kotak Mahindra Bank has been doing in the past quarters. The lender continued with the practice in the September quarter as well. But the provision coverage ratio fell from 67% in the June quarter to 64% in Q2 FY20. Clearly, provisioning was not enough in the wake of increase in bad loans.

Analysts say that deposit growth, too, had slowed in the September quarter. But the management has clarified that the bank wants to improve the granularity of deposits, and the increase in current account and savings account deposits should give some comfort.

The Kotak Mahindra Bank stock didn’t move much on Tuesday and trades at a multiple of five times its estimated book value for FY21, making it one of the most expensive private sector bank stocks.

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