Kotak Mahindra Bank Q2 preview | Robust profitability amid mixed margin view

Kotak Mahindra Bank Ltd is expected to report a 15 percent rise in net profit powered by healthy core earnings growth and broad based loan growth.

The private sector lender is expected to report net profit of Rs 2332 crore for the July-September quarter, according to the average of estimates of seven brokerages polled by Moneycontrol. Net interest income is expected to be Rs 4875 crore, an increase of 21 percent year-on-year (YoY).

Analysts expect the bank’s loan book to show a healthy growth of 23-25 percent led by a jump in mortgages and small business loans. The bank has shed some of its conservativeness in lending over the past two quarters and this would reflect in the quickening of loan growth. That said, Kotak Bank continues to avoid high-risk segments for lending and is cautious in giving out small business loans. Analysts therefore see the bank’s performance modest, relative to its larger peers.

Another boost to profitability would be from the absence of large mark-to-market hit on its bond portfolio. In Q1, the lender had suffered Rs 857 crore treasury loss owing to mark-to-market hit on its bonds. In Q2FY23, bond yields were benign and therefore treasury income is likely to improve for lenders.

Mixed margin outlook

Analysts expect net interest margin for Kotak Bank to show a sequential improvement given the transmission of policy rate hikes onto lending rates. Analysts at Nuvama Research (formerly Edelweiss Securities) expect margins to expand by 12 basis points for the quarter. One basis point is one-hundredth of a percentage point.

Kotak Bank’s current and savings account (CASA) share in total deposits is healthy at 58.1 percent as of last quarter and is one of the highest in the industry. Even so, CASA ratio has slipped and could come under further pressure as liquidity tightens progressively. “We believe it is difficult to strengthen liability franchise in a tight liquidity environment,” a Nuvama Research note said. “We also believe, unlike other banks, Kotak has used up all its levers of margin expansion and credit cost normalisation,” the note added.

Asset quality

Kotak Mahindra Bank will show further improvement in asset quality metrics for July-September quarter. Analysts expect slippages to trend lower again for the reported quarter. Slippages had fallen to Rs 654 crore in April-June quarter from Rs 736 crore in the preceding three months.

Investors should watch for the performance of the small business loans, especially those disbursed under the emergency credit line guarantee scheme. Analysts, though expect this segment too to show resilience in terms of asset quality. The cushion from a comfortable 70 percent provision cover would be an added comfort for investors.