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Kotak Mahindra Bank’s loan growth takes the sting out of profit miss

LiveMint logoLiveMint 21-07-2017 Aparna Iyer

A look at Kotak Mahindra Bank’s rising loan growth should be enough for investors to forgive the lender for missing Street estimates of net profit for the quarter ended June.

Kotak Mahindra Bank posted a net profit of Rs912.73 crore, a 23% growth from a year-ago period.

Six analysts polled by Bloomberg forecast a net profit of Rs963.40 crore. The miss caused the stock to close 1.44% down for the day. The private lender’s net interest income, or the core income a bank earns, grew at a sedate pace of 17% to Rs2,246 crore.

But the growth in its loan book was 18%, higher for a second consecutive quarter. This comes on the back of a strong growth of 21% in the corporate loan book, unlike most peer banks running after retail business. Not that the lender’s retail loan book growth is to be scoffed at.

At 20%, Kotak Mahindra Bank’s retail loans that consist of home loans, loan against property, loans to small businesses and other unsecured credit card and personal lending, too matched the speed of corporate disbursals.

The management’s comments on the outlook for loan growth and asset quality for the financial year are reassuring as well.

With its loan book expansion inching back to early 2016-17 levels, coupled with an enviable asset quality, picking out sore spots would be like splitting hairs for investors.

The stock still trades at a rich multiple of 5.67 of estimated book value for 2017-18, and to justify this, Kotak Mahindra Bank will have to sustain its stellar asset quality.

Gross non-performing assets ratio was marginally higher at 2.6% for the quarter.

A sliver of caution always works and in the case of this private lender, the sore spot is easily recognizable.

Much of the troubled assets emerge from the ING Vysya book and the Kotak Mahindra Bank management explained that the lender has exposure to four of the 12 large troubled accounts listed by the RBI for quick resolution.

While the exposure to these beleaguered accounts adds to just Rs305 crore or 0.66% of the corporate loan book, the bank needs to sustain its stellar record of keeping asset quality under check to justify its valuation. Also, its stock of special mention accounts (SMA-2), which are just a notch above non-performing assets and represent those borrowers that have delayed repayments by 60 days, has risen sharply to Rs 305 crore from Rs131 crore in the previous quarter.

The writer does not hold any positions in the companies mentioned above.

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