Following a guarded fiscal ’21, Kotak Mahindra says it’s ready for business

Even as the bank continues to hold insurance against risks, its asset quality is better than most

3 min read . Updated: 03 May 2021, 11:39 PM IST Aparna Iyer

Kotak Bank’s loan growth in Q4 mirrored that of the previous quarters and stressed the bank’s wariness

Kotak Mahindra Bank Ltd is merely crouching and not hunkering down when it comes to growth. Lending opportunities are right around the corner and the lender is keeping its powder dry to take advantage, both organic and inorganic.

That is the message from the managing director, Uday Kotak, who oversaw a challenging FY21 and chose to keep provisions high and loan growth low in the wake of covid. The second wave, Kotak hopes, will stabilize within two to three months and, thereby, alleviate the pain in the economy due to restricted mobility.

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“We are not hunkering down. But we will take (lending) opportunities on our terms," said Kotak during a media call post earnings. While the management commentary has been optimistic, the bank’s March quarter growth metrics didn’t excite investors. Shares of the lender dropped to end a little over 1% down on Monday following the announcement of the quarterly earnings.

Indeed, loan growth for the quarter mirrored that of the previous quarters and reflected the bank’s wariness. In FY21, Kotak Mahindra Bank’s loan book expanded by a mere 1.7% and much of this was led by secured loans such as housing in the retail book. The lender has consciously refrained from growing the unsecured retail loan segments such as credit cards, personal loans and consumer durable loans. Kotak believes that the impact of the pandemic will be disproportionate on individuals with weak earning capacity and growing unsecured loans will be unwise. “Unsecured consumer retail, whether it is consumer loans or credit cards, will always be at a much higher risk," he said.

The bank’s unsecured personal loan, business loan and consumer durable loan book shrank by 28%, while the credit card book contracted by 15% year-on-year. On the other hand, its home loan portfolio grew by 12.8%, one of the fastest growing segments. Corporate loan book growth was tepid.

The bank’s wariness was not just visible on the loan book. It has built a formidable provisioning pile in anticipation of further risks from the pandemic. In the March quarter, provisions nearly trebled sequentially to ₹1,179 crore. The bank has provided ₹1,279 crore specifically for pandemic-related risks.

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Higher provisions resulted in net profit missing Street estimates for the March quarter as well. Shares of the bank have suffered because of this cautiousness, underperforming the broad market in the past one year.

Even as the bank continues to hold insurance against risks, its asset quality is far better than most peers. Of course, bad loan ratios are one of the worst in its historic trend but that is true for all lenders due to the pandemic. Kotak Mahindra Bank’s restructured pile is the lowest among peers and this should give comfort to investors.

But investors take pristine asset quality as granted and they want the bank to grow its balance sheet. While peers, such as HDFC Bank and ICICI Bank, have been growing their loan books sharply, Kotak Mahindra Bank has chosen to remain cautious. But Kotak’s message this time around indicates that the lender is willing to take the plunge.

Meanwhile, an overhang for the share price was the Reserve Bank of India’s rule that caps the tenure of the head of private sector lenders at 15 years. Kotak’s term will end in 2023 and the lender will need to plan for succession. The bank has not provided any clarity on Kotak’s successor and this may weigh on investors. It also remains to be seen whether investors will share the hope that loan growth would pick up in the coming months.

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