Kotak Mahindra Bank reduces loan portfolio to avoid pandemic risk

The private sector lender’s loan portfolio contracted a deeper 4% year-on-year in the September quarter, compared with a 1.9% drop in the June quarter. The downsizing pattern was visibly towards riskier credit. Lender loans to small businesses contracted 17%, a sharp drop for the second consecutive quarter. Unsecured personal loans and consumer durables were down 15% year-on-year. The two segments that experienced growth were tractor financing and agricultural loans, symptomatic of a strong recovery in the rural economy. Mortgage loans also grew 4%, given their relatively secure nature due to high collateral.

Management said it is beginning to see green shoots regarding loan opportunities. But the reluctance to lend was evident. “We are not too pessimistic. We just want to wait and watch, and that doesn’t mean waiting nonstop, “Dipak Gupta, deputy CEO of Kotak Bank, said in a media conference call.

Given its conservative approach to risk, reports of a M&A approach to growth are interesting. On Sunday night, 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 declined to comment. While the merger may generate growth, it remains to be seen whether Kotak Mahindra Bank will follow suit given its conservative outlook.

Meanwhile, the bank seemed more optimistic than in the previous quarter. The lender continued to keep the quality of its assets intact. Gross bad loans made up just 2.7% of its loan book, including loans that weren’t labeled bad due to regulatory leniency. The provisions made were ₹Rs 368.6 million, 62% less than in the previous quarter. The specific provisions of the covid-19 were placed in ₹1,579 crore. Analysts at Jefferies India Pvt. Ltd noted that this indicates that the quality of the lender’s assets is holding up well. Its provision coverage ratio soared to 75.6% from 68.4% in the previous quarter, a consolation. Given the relatively moderate supply need, net income grew by a healthy 27% to ₹Rs 2,184 crore, beating market estimates. Final growth was also helped by a healthy 31% increase in basic interest income.

The lender’s stock gained 2% after the release of quarterly earnings. Even so, the bank’s shares are still 18% below their pre-covid highs and have underperformed HDFC Bank Ltd shares, which are down just 5%. This shows that the loss of growth the lender had to witness to preserve asset quality may not be well matched to the market.