For 3QFY21, KOTAKB’S profit of Rs 18.5bn, up 16%YOY, was under estimate due to greater credit expenses. High slippages & rise in SMA2 loans had been disappointing- coupled with interest-reversal, this pushed up credit price. We are encouraged to see 22% rise in Casa to 59% of deposit and enhanced lending appetite & demand (loans up 5% QoQ ). While we watch out for asset high-quality, we think enhanced lending is a superior barometer of mgt.’s threat assessment. MaintainInvest in.
Higher slippages from unsecured loans a tad disappointing. Kotak bank saw comparatively greater slippages throughout 3Q, mainly emanating from unsecured loans. Slippages rose by 88% YoY (which includes standstill loans) and this lifted proforma gross NPLs to 3.3% of loans-highest because 1QFY11. Even SMA-2 loans rose from .06% of loans in 2Qto .3% in 3Q .At the similar time, the extent of restructuring was low at .3% of loans and management reiterated that the high-quality of ECLG loans/borrowers (4.4% of loans linked to+20% of loans) is very good and therefore really should not show weak credit practical experience. NPL coverage ratio (post standstill) at 63% appears decrease, but the bank’s contingent provisions at .6% of loans and26% of gross NPLs look enough. During 3Q, credit expenses rose to 1.2% of avg. loans (incl. reversal of interest revenue)& was a crucial driver of the earnings miss.
Casa strength and uptick in economy driving loan development. Kotak Bank continues to see improvement in deposit franchise with 22% development in Casa deposits to an sector-top level of 59% of deposits. Even the price of savings deposits has declined to 3.8% from 5.2% in March. This along with management’s view of the enhancing economy (and implicit view on asset high-quality) reflects an uptick in loan development to 5% QoQ(-1%YoY). We think that development can continue to strengthen and a fall in funding expenses will aid. Mortgage loans are a crucial segment of lending and bank also highlighted close to normalcy in disbursements in segments like corporate, SME working capital and secured retail (mortgages). Inline operating profit of bank & mixed-bag for subs. Operating earnings rose by 29%YoY and even adjusted for revenue reversal it rose by 22%. Assets grew by 20% YoY with investments developing more rapidly vs. loans, reflecting management’s conservative stance more than the previous handful of quarters.