Be calm, conservative and cautious: that was Kotak Mahindra Bank’s mantra for navigating the Covid-19 pandemic in FY21. This continues into the June 2021 quarter. While Q1FY22 results were in line with analyst estimates, the street was unhappy with Kotak Mahindra Bank’s (KMB) loan book growth. The stock price is down 5% post its June 2021 quarter results as the fourth largest private sector lender reported muted loan book growth, moderate increase in net interest income (NII) and asset quality deterioration due to Covid-19 second wave stress. 

Quick Takes:

• Kotak Mahindra Bank reported lower loan growth rate than the top three private banks at 6.6% YoY in Q1FY22

• Retail and commercial banking accounted for the majority of slippages while corporate book remained pristine in June 2021 quarter

• The bank’s unsecured loans are low, just 4.8% of total loan book in Q1FY22

• Provisions & contingencies fell 21% QoQ and 3% YoY in Q1FY22 

Muted Performance in June 2021 Quarter

Lower provisions and higher net interest margin (NIM) supported Kotak Mahindra Bank’s June 2021 quarter performance. Net interest income (NII) came in at Rs 3,942 crore in Q1FY22 compared to Rs 3,724 crore, a 6% YoY rise. NII growth was impacted by muted loan book growth of 6.6% YoY. NIM at 4.6% expanded 20 basis points (bps) both YoY and sequentially.

Provisions & contingencies at Rs 935 crore fell 3% YoY and 21% QoQ. The sequential decline was mainly due to writebacks (Rs 21.8 crore) and fall in provisions on investments by 48% QoQ in Q1FY22. Lower provisions aided net profit growth of 32% YoY to Rs 1,642 crore in the June 2021 quarter. 

Loan book for the quarter stood at Rs 2,17,465 crore as on June 30, 2021, against Rs 2,03,998 crore as on June 30, 2020. While home finance and consumer banking grew, corporate banking, credit cards and personal loans dragged loan book growth to a single digit 6.6% YoY in Q1FY22, its highest over the past five quarters.   

Deposits increased 10% YoY to Rs 2,86,560 crore in the June 2021 quarter driven by higher current accounts (up 28% YoY) and time deposits (up 24%YoY) with CASA ratio coming in at 60.2%. Capital adequacy continues to be strong at 23.7% and Tier 1 was at 22.8% as on June 30, 2021. 

Covid-19 second wave recedes - slippages decline and demand trends improve 

Slippages for FY21 were around Rs 5,500 crore and Q4FY21 accounted for 80% of it. In Q1FY22, slippages have declined to Rs 1,500 crore. Slippages are new bad loans or fresh accretion of NPAs. A collection slowdown due to lockdowns in the months of April and May was the culprit, but the trend improved in June and July 2021. Uday Kotak, Managing Director and CEO at Kotak Mahindra Bank said that slippages during April-May 2021 period were linked to two main factors - one, the ability to pay and two, the physical ability to collect. He further added that heavy slippages occurred in tractor and commercial vehicles (CV) segment as the majority of customers pay in cash and thus collection ability was hampered in April-May 2021. Postponement of EMI payments by customers due to fear of medical emergencies also led to higher slippages during this period.

From the second half of June 2021, collections improved and the company saw strong demand trends across markets and products. Mortgages, a key focus area for the bank, is back to 80% of pre-Covid levels. According to the management, right pricing and higher penetration in the salaried segment helped grow market share in this segment. In the micro, small & medium enterprises (MSME) segment, which is a mainly working capital business, new business acquisitions in June were better than pre-COVID levels.

On the secured lending side, the bank started reaping benefits of significant investments in their risk models and analytics over the past two quarters. Personal loan volumes in June were around 80% of March 2021 levels and the bank also saw significant QoQ increase in card acquisition numbers. Card acquisition growth was also aided by four new products launched in the last two quarters. 

Uday Kotak said that though collections were hampered mainly in May due to strict lockdowns, with strong pull back in June, bounce rates were stable. Demand for construction equipment improved in the months of June and July mainly driven by government projects.

Rural cash flows improved, demand for credit in the agri-small & medium enterprises (SME) segment is strong and demand for tractors and tractor finance continues to be good. On the other hand, commercial vehicle and passenger vehicle business was down due to lockdown restrictions, closure of dealerships and severe Covid-19 second wave impact on both metro and non metro markets.  

 Waiting for growth catalysts

Kotak Mahindra Bank's June 2021 quarter numbers were stable, but it is ICICI Bank that impressed with its high double-digit growth in advances in the June 2021 quarter. Kotak Mahindra Bank reported lower loan growth rate than the top three private banks at 6.6% YoY in Q1FY22.

Leaving HDFC Bank behind, KMB has turned out to be more conservative and cautious than the banking industry benchmark. KMB is ahead of HDFC Bank in another very significant parameter in Q1FY22, net interest margin (NIM), an efficiency and profitability indicator. The bank has one of the best NIMs at 4.6% compared to HDFC Bank’s NIMs which have been moving in the 4.1-4.4% range for the past ten years.

The bank’s CASA ratio, at 60.2%, is also the highest in the industry. High CASA ratio helps in raising lower cost of funds, which in turn aids net interest margin expansion.

Lowest restructured loan book in the industry, asset quality deteriorates marginally

KMB’s gross NPA ratios are better than both ICICI Bank and Axis Bank. KMB reported provisions at Rs 935 crore, a 21% sequential decline in provisions, HDFC Bank and Axis Bank’s provisions rose 3% and 7% QoQ, in the June 2021 quarter. ICICI Bank dipped into its Covid-19 provisions, reducing provision charge on the P&L and increasing its net profit growth in Q1FY22. Without utilization of Covid provisions, ICICI Bank’s provisions would have increased 35% QoQ. On the slippages front, Kotak said that slippages were mainly from retail and commercial banking and the corporate book was amazingly pristine.

The emergency credit line guarantee scheme (ECLGS) extended to the SME and MSME segment, is also not witnessing stress. Jamim Bhatt, Group CFO at Kotak Mahindra Bank said that total disbursement was around Rs. 11,400 crore in March 2021 quarter, which increased by only Rs 500 crore in Q1FY22. 

KMB also has the lowest restructured loan book in the industry at Rs 552 crore as on June 30, 2021 compared to Rs 4,860 crore for ICICI Bank, Rs 2,192 crore for Axis Bank, and Rs 9,181 crore for HDFC Bank. Uday Kotak said that the bank follows its conservative restructuring policy based on the ability to improve cash collection and not just forbearance. He further said that Kotak Mahindra Bank also does not believe in selling its loans to asset reconstruction companies, nor advancing popular flexi loans.

Flexi loans are personal loans with pre-approved cash limits. Kotak Mahindra Bank has the lowest percentage of unsecured loans (mainly personal loans and credit cards) at around 4.8% of total loan book. ICICI Bank and HDFC Bank have 9% and 15%, respectively, of their total advances as unsecured loans. 

Though these parameters are best in class and will stand in good stead in the long term, investors and analysts alike, await for the loan book growth to gather pace. On the retail side, the bank is trying to ramp up volumes but on the corporate side, KMB prefers the mid-market (falling between small enterprises and large companies) and SME segments rather than the top end corporates or PSUs. Kotak said that lending to these corporate clients is like riding a tiger at poor ROEs. It will be interesting to see if KMB will use its growth accelerator or if ICICI Bank fumbles in FY22. The next few quarters will give investors a clearer picture.