Should you buy or sell Kotak Mahindra Bank shares as net profit falls? Check what brokerages say

Moratorium declined to 9.65% in the second phase, against 26% in the phase 1.

Kotak Mahindra Bank stocks were seen trading higher by 1.7% on Tuesday morning, despite a slip in standalone net profit of the private sector lender. The Uday Kotak-led bank reported a net profit of Rs 1,244 crore in the April-June quarter, against Rs 1,360 crore in the same period last year. The slip was aided by higher provisions as the bank kept aside Rs 616 crore to tackle any headwinds that the coronavirus pandemic brings with itself. Kotak Mahindra Bank shares were trading at Rs 1,345 per share on Tuesday morning. 

Moratorium, the biggest overhang that has concerned investors while looking at the financial sector, brought some respite for Kotak Mahindra Bank. Moratorium declined to 9.65% in the second phase, against 26% in the phase 1. Net interest income of the bank grew 17% on-year basis, while other incomes 41% from the previous year. On a consolidated basis, Kotak Securities and Kotak Life Insurance were the two businesses that were profitable in the first quarter of this fiscal. Although there is a flight to safety and investors are being advised to hold on to the better placed lenders while investing in financials, brokerage firms are mixed when it comes to Kotak Mahindra Bank shares. 

Fresh slippages rose for Kotak Mahindra Bank to Rs 800 crore while gross non-performing asset ratio increased to 2.7%. “We expect KMB to report subdued RoEs around 10-11% over FY21- 23E as we factor in additional capital raise of Rs 7,400 crore and cut our estimates due to lower growth assumptions,” said analysts at Emkay Global. The brokerage firm is underweight in the stock in their model portfolio and has a hold rating with a target price of Rs 1,360 per share. 

Uday Kotak had warned that the bank would turn cautious while giving out loans and evidently the loan growth shrunk by 1.9% in the first quarter, while despot growth was at 12.3%. “We estimate KMB to maintain a cautious stance in lending though reduction in SA/TD rates should aid margins to a certain extent,” said brokerage and research firm Motilal Oswal. It expects non performing loans of Kotak Mahindra Bank to increase in the near term, hence maintaining a NEUTRAL rating on the stock. The bank disbursed Rs 3,500 crore through the MSME credit guarantee scheme in July 2020.

Although, Kotak Mahindra Bank has proven to be a strong franchise and ICICI Securities is banking on the lender’s ability to maintain earnings stability. “Contingency buffer, unrealised treasury gains, cost agility and low-cost deposit base will ensure earnings stability, but high capitalisation (tier-1 at >20%) might depress RoEs,” said ICICI Securities in a note. The brokerage firm added that Kotak Mahindra Bank has all the necessary ammunition to accelerate growth as the environment stabilises while maintaining a BUY call with a target price of Rs 1,663 apiece. Similarly, Yes Securities too is optimistic hoping that earnings will get an upgrade from likely large treasury gains.