Weak lending, credit stress hit Kotak Mahindra Bank

With the financing business making up for more than 75% of Kotak’s consolidated profit after tax in recent times, it is imperative for the bank to grow its advances. Photo: Ramesh Pathania/Mint

Ravi Krishnan : Live mint  22 jan 2014

The weak economy and perhaps, a larger base, has caught up with the bank’s lending business

In the past many quarters, Kotak Mahindra Bank Ltd’s financing business—the stand-alone banking operations and auto loan company Kotak Mahindra Prime Ltd–boosted profits when the asset management and capital markets segments weren’t doing so well. Now, the weak economy and perhaps, a larger base, has caught up with the lending business even while the other segments haven’t gained much traction.

Consolidated loan growth for Kotak slipped to 6% from a year ago in the December quarter, worse than even the 11.38% pace seen in the previous three months. Growth was dragged down because the commercial vehicle and construction equipment loan book contracted 26% from a year ago. Auto loans also grew at a tepid pace of 6%, while corporate loans did not do much better at 7%. These sectors are closely related to the economy and it is not much of a surprise that growth has slowed.

The slow pace of loan growth also affected the gain in net interest income which was the slowest in at least three years. One positive was that it was able to hold on to its net interest margins, thanks to the money raised from the central bank’s special window for dollar deposits and an improvement in low-cost current and savings account deposits. Kotak’s net interest margin remained at 4.9%, the same level as the September quarter.

Asset quality continued to worsen, while Kotak also had to set aside a larger amount of money against investment depreciation. That ate into profit. While the stand-alone banking operations reported a decline in net profit, consolidated profit grew 2.4%.

With the financing business making up for more than 75% of Kotak’s consolidated profit after tax in recent times, it is imperative for the bank to grow its advances. At the beginning of the year, the management said it was targeting a loan book growth of around 20% in the current fiscal year. For the loan book to reach that target by the end of March, Kotak would have to add Rs.8,468 crore loans, or 11.92% sequential growth, during January to March.

That looks tough given the current environment, but it is something investors would expect from Kotak, given that it is the most expensively valued bank.