Kotak Mahindra Bank kept to its conservative approach amid a pandemic, choosing to shrink its loan book to stave off risk in the September quarter.
The private sector lender’s loan book shrank by a deeper 4% year-on-year in the September quarter, compared with the 1.9% decline in the June quarter. The pattern of reduction was visibly towards more riskier credit. The lender’s loans to small businesses shrank 17%, a sharp drop for the second straight quarter. Unsecured personal loans and consumer durable loans dropped 15% year-on-year. The two segments that saw growth were tractor financing and agriculture loans, symptomatic of a sharp recovery in the rural economy. Home loans too grew at 4%, given the relatively safe nature of them due to high collateral.
The management said that it is beginning to see green shoots with regards to lending opportunities. But the reluctance to lend was apparent. “We are not overly pessimistic. We just want to wait and watch, and that does not mean wait endlessly,” said Dipak Gupta, joint managing director, Kotak Bank, at a conference call with the media.
Given its conservative approach towards risk, reports of a mergers and acquisition led approach to growth are interesting. Late Sunday, Mint reported that the private sector lender is in talks with IndusInd Bank for a possible merger. IndusInd Bank has denied the deal while Kotak Mahindra Bank has refused to comment. While the merger may bring growth, it remains to be seen whether Kotak Mahindra Bank will go down the road given its conservative outlook.
Meanwhile, the bank did seem more optimistic than it was in the previous quarter. The lender continued to keep its asset quality intact. Gross bad loans formed just 2.7% of its loan book, including those loans that were not labelled as bad due to regulatory forbearance. Provisions made were ₹368.6 crore, down 62% from the previous quarter. Specific covid-19 provisions stood at ₹1,579 crore. Analysts at Jefferies India Pvt. Ltd noted that this indicates the lender’s asset quality is holding up well. Its provision coverage ratio shot up to 75.6% from 68.4% in the previous quarter, a comfort. Given the relatively muted provisioning need, net profit grew by a healthy 27% to ₹2,184 crore, beating market estimate. The bottomline growth was also helped by a healthy 31% increase in core interest income.
The lender’s stock gained 2% after the release of the quarterly earnings. Even so, the bank’s shares are still down 18% from its pre-covid highs and have underperformed HDFC Bank Ltd shares, which are down just 5%. This shows that the loss of growth that the lender had to witness to preserve asset quality may not be sitting well with the market.