Kotak Mahindra Bank Q3 Results: Profit Meets Estimates, Asset Quality Weakens

Kotak Mahindra Bank Ltd.’s quarterly profit met estimates even as growth in advances slowed.

Net profit rose 23.6 percent year-on-year to Rs 1,595.9 crore in the quarter ended December, according to the exchange filing. That’s in line with the Rs 1,671-crore consensus estimate of analysts tracked by Bloomberg.

The bank’s advances grew 10 percent year-on-year to Rs 2.16 lakh crore, compared with an estimated 14 percent growth. “That has been a big miss and has impacted the numbers across the board,” Mona Khetan, senior analyst (banking) at Reliance Securities, told BloombergQuint.

Net interest income, or core income of the bank, rose 18 percent to Rs 3,429.53 crore, compared with a Rs 3,437-crore estimate. The private lender’s net interest margin grew to 4.69 percent from 4.61 percent in the previous quarter — one of the highest among Indian banks.

Kotak Mahindra Bank’s asset quality deteriorated for the fourth straight quarter. Gross non-performing assets ratio expanded to 2.46 percent from to 2.32 percent in the quarter ended September. Net NPA ratio stood at 0.89 percent versus 0.85 percent.

The weakness, however, was somewhat expected, according to Khetan. “While asset quality challenges were there to some extent even in the last quarter, that was partly factored in. In a weak environment there could be some blips on slippages.”

Provisions stood at Rs 444 crore versus a write-back of Rs 32 crore in the corresponding quarter last year. In the quarter ended September, provisions were Rs 408 crore.

Outlook On Risk And Credit Growth

Dipak Gupta, joint managing director at Kotak Mahindra Bank, said the number of “unknown unknowns” (credit events) rose compared to the past few years, posing a greater challenge to the banking system.

Compared to earlier instances of loan defaults by companies that was caused either due to bad governance, business cycles or regulatory issues of a specific sector, which are “known unknowns” events, the defaults and risk today is entity-specific and bulky, he said.

“On the wholesale lending side, the set of entities that are lendable [credit-worthy] has shrunk. So, the choice for the bank is to lend more to them. But these corporates require larger amounts of money, which from a risk standpoint restricts the amount a bank can lend and grow,” Gupta said. If banks were to lend more funds to these set of relatively “good” entities, according to him, it would soon run into issues of concentration and exposure risk.

Compared to corporate lending, where capital expenditure is low, and small-medium-enterprise lending, where loan requirement is weak, growth will come from the unsecured retail loan segment as demand for cars or homes is lower than before, he said.

About the bank’s outlook on credit growth, Gupta said it may not be in the high-teens in the current fiscal as real growth has “shrunk” significantly.

“Inflation has been very low for the last one to two years and nominal growth was low. So, from a bank’s perspective, you can lend at a multiple of the nominal growth with limited risk. When nominal growth is at 6-7 percent, you can only grow so much,” Gupta said. “But inflation is catching up, so once nominal growth goes back to 10-12 percent, then it is possible for banks to lend higher.”

But in the current environment, it’s a trade off between how much the bank can lend, to whom and at what spread, Gupta said.

Kotak Mahindra Bank Q3: Other Key Highlights

• Other income jumped to Rs 5,210 crore from Rs 4,120 crore sequentially.
• CASA ratio stood at 53.7 percent compared to 50.7 percent as on Dec. 31, 2018.
• Capital adequacy ratio of the bank, as per Basel III, as on Dec. 31, 2019 is 18.2 percent and tier-I ratio is 17.7 percent.

Shares of the private lender dropped as much as 4.1 percent, its biggest intra-day decline in seven months, after the earnings announcement. That compares with a 0.72 percent fall in the benchmark Nifty 50 Index. The stock has gained more than 32 percent over the last 12 months, outperforming the benchmark index.