Kotak Mahindra Bank Q2 results: Why the stock corrected post-results and key takeaways for investors

Kotak Mahindra Bank published financial results for the quarter ended September 2024 on Saturday. The bank reported a growth of 15 per cent each in advances and deposits. However, its shares lost 4.4 per cent on Monday. Here’s why:

Asset quality woes

The gross NPA ratio rose 10 bps q-o-q to 1.49 per cent. Fresh slippages jumped 38 per cent sequentially. Slippages were primarily from the credit card and micro finance portfolios. Stress in the credit card portfolio is something that the bank had reported in the first quarter as well. This is largely found in the sub-segment of vintage accounts. As far as the micro finance book is concerned, strain is observed in certain states due to factors such as lower rural household income and overleveraging by borrowers. The credit cost went up 10 bps q-o-q to 0.65 per cent on an annualised basis. The management expects the stress to sustain for two or three quarters to come.

• Also read: Kotak Mahindra Bank posts 5% rise in Q2FY25 net profit at ₹3,344 crore

NIM under pressure

The net interest margin (NIM) dropped by 11 bps q-o-q to 4.91 per cent. This translates to a 41-bps drop compared to the full year NIM of FY24. The drop is exacerbated by a couple of reasons. First, the growth in deposits was largely from term deposits, fuelled by the bank’s focus on mobilising deposits under the ‘Activ Money’ sweep facility. The growth in the low-cost CASA balances paled in comparison to that in term deposits. Term deposits during the quarter grew 25.4 per cent y-o-y, while CASA balances grew just 4 per cent.

Second, in the quarter gone by, the secured loans grew faster than the unsecured ones. Unsecured loans such as credit cards carry a higher yield on advances than that of secured loans, boosting the margin. Secured loans such as home loans and LAP (loan against property) (28 per cent of the loan book) grew 5 per cent q-o-q and the business banking product (9.5 per cent of the loan book) grew 6 per cent q-o-q. Credit card receivables, on the other hand degrew sequentially by a per cent, following the embargo imposed by RBI in late April, on fresh issue of cards by the bank. The bank has adopted a cautious approach to the micro finance segment, witnessing stress in the portfolio. Thus, retail microcredit book degrew 6 per cent sequentially. The personal loan and consumer durables portfolio saw a relatively slower growth of 3 per cent q-o-q.

As 60 per cent of the loan book is linked to EBLR (external benchmark lending rate), the drop in NIM can worsen, once the RBI slashes rates. However, this is not confined to Kotak alone and applies to the bank’s peers as well. The management expect to maintain NIM by repricing deposits. Also, a higher yield from the personal loan portfolio (₹4,100 crore) of Standard Chartered Bank when acquired, can help shore up the NIM.

Stellar show from subsidiaries

The group’s consolidated net profit grew 13 per cent y-o-y, while the standalone bank’s profit grew just 4.8 per cent. The subsidiaries (which account for around 25 per cent of the group net worth) posted handsome growth in net profit during the quarter. Key among them being, Kotak Mahindra Prime, Kotak Securities, Kotak Mahindra Capital, Kotak Mahindra Life Insurance and Kotak AMC reported y-o-y net profit growth of 29 per cent, 37 per cent, 226 per cent, 46 per cent and 60 per cent respectively.

Update on RBI’s supervisory action

On RBI’s supervisory action, the management report that the bank has made notable progress on core banking resilience and cyber security fronts. It is constantly engaging with external auditors and the RBI on the progress made.

Asset quality in the short-term and margins in the medium-term are key monitorables for investors. The bank’s shares were trading at a P/B (price to book) multiple (on a consolidated basis) of roundabout 5 times pre-covid. Since then, a time-wise correction has played out and the stock now trades at 2.4 times, which is at a discount to HDFC Bank’s P/B multiple of 2.7 times and Axis Bank’s 2.1 times. In our view, the risk and reward are fairly balanced at this valuation. In our bl.portfolio edition dated September 29, 2024 we had recommended investors holding the stock to continue to do so. We reiterate the same here.