Kotak Mahindra Bank’s Q3 Earnings Disappoint

Kotak Mahindra Bank’s

Billionaire Uday Kotak-led private sector lender Kotak Mahindra Bank (KMB) fiscal third-quarter earnings failed to investors’ and analysts’ expectations.
The lender’s net profit and net interest income growth missed analysts’ expectations. The weakening of asset quality has promoted investors to take a negative view on its future earnings. KMB shares slipped near 2.5% post-earnings release.

The lender registered a 23.62% on-year growth in Q3FY20 profit at Rs 1,595.9 crore but asset quality weakened sequentially and on a year loan growth was at a multi-quarter low.

The profit growth was driven by higher other income (up 37.34%), operating income (up 23.20%) and lower tax cost (down 48.78%) but was limited due to higher employee cost.

During this quarter, employee cost included a non-recurring charge towards pension obligation of around Rs 200 crore mainly due to change in annuity rate, DA, etc, the lender said.

Net interest income, the difference between interest earned and interest expended, grew by 7% on year to Rs 3,430 crore with net interest margin at 4.69% (against 4.31% and 4.61%).

Loan growth at 10% on year was at a multi-quarter low due to commercial vehicle and construction equipment.

Asset quality weakened with gross non-performing assets (NPA) as a percentage of gross advances rising 14bps on quarter to 2.46% and net NPA climbing 4bps on quarter to 0.89% in Q3FY20.

Provisions and contingencies for the quarter at Rs 444 crore increased by 8.8% compared to Rs 408 crore in the previous quarter. The bank had reported provisions write-back of Rs 32.30 crore in December quarter 2018.

The provision coverage ratio (ex-technical write-off) improved to 64.4% during the quarter, from 64% in the previous quarter.

The bank’s consolidated profit increased by 27% on year to Rs 2,349 crore and net interest income rose by 17.6% to Rs 4,441.6 crore in the quarter ended December 2019.

The management has reiterated in the concall that it expects loan growth to continue in mid-teens around 16-17% as compared to 18-20% earlier targeted by the company. Also, NIMs are expected to be softer at 3.1% from as compared to 3.15% earlier estimated by the company.

The Bank management has also hinted that it will look at fresh capital raising in early CY2021

All in all the Q3 FY20 results are below street expectations and have followed the trend seen in other large banks like HDFC Bank, Indus Ind Bank where provisions have increased sharply.

For Kotak, the increase in slippages has come in from corporate slippages from two HFC accounts.

In the short term the stock will continue to remain under pressure but longer-term we believe the Bank has considerable bandwidth to bounce back, hence any significant weakness will be a good opportunity to add on declines here.

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