Standard & Poor's (S&P) ratings services assign 'BBB-' long-term and 'A-3' short-term counterparty credit ratings to Kotak Mahindra Bank. The outlook on the long-term rating is negative.
Our assessment of Kotak Mahindra Bank's risk position reflects the bank's acceptable credit costs through the cycle and cautious growth strategy in a challenging operating environment. The negative outlook on Kotak Mahindra Bank reflects the negative outlook on the sovereign ratings on India, the agency said in a report.
“We expect earnings to be under pressure over the next two years. This is because of high credit costs in the commercial vehicle, commercial equipment, and commercial real estate businesses, and marked-to-market losses on bonds because of rising interest rates. Nevertheless, we expect earnings to remain strong,” said Amit Pandey, credit analyst at S&P.
S&P also expects Kotak Mahindra Bank to maintain its risk-adjusted capital ratio (before diversification adjustments) at above 10 per cent by March 2015, the strong quality of its capital, which comprises only core equity, and its ability to raise capital from the capital markets. “These factors underpin our assessment of the bank's capital and earnings,” S&P said.
The bank faces the additional challenge of high exposure to commercial real estate (about 13 per cent of loans as of March 2013), which could undergo severe stress if real estate prices crash. But the bank's losses are likely to be limited because the loans have high collateral, Pandey said.
“We assess Kotak Mahindra Bank's funding as ‘below average’ and liquidity as ‘adequate.’ The bank's ratio of loans to customer deposits of 137 per cent as of March 31, 2013, is weaker than the industry's. Even though the bank's funding profile has been improving over the years, we believe it will still take a few years for it to come in line with the industry,” the report mentioned.
beena.parmar@thehindu.co.in