Kotak Mahindra Bank Q1 net slips to Rs 1,853 cr; turns cautious on lending amid COVID-19

Kotak Mahindra Bank on Monday reported a four per cent decline in consolidated net profit at Rs 1,853 crore for the June quarter, mainly due to reduced advances amid the coronavirus pandemic and marginal rise in non-performing assets.

Kotak Mahindra Bank on Monday reported a four per cent decline in consolidated net profit at Rs 1,853 crore for the June quarter, mainly due to reduced advances amid the coronavirus pandemic and marginal rise in non-performing assets. In the year-ago period, the bank had a consolidated net profit of Rs 1,932 crore.

On a standalone basis, net profit declined over 8 per cent to Rs 1,244 crore in the first quarter of the current fiscal. The same stood at Rs 1,360 crore in the same period a year ago, according to a regulatory filing. Rather than writing loans for customers, the bank chose to deploy customer deposits -- which grew 12 per cent in the June quarter -- in the safer credit substitutes like government bonds and state development loans which give lower returns.

The bank's consolidated total income went up to Rs 12,323.15 crore in the three months ended June from Rs 12,129.56 crore in the year-ago period. However, on a standalone basis, total income declined to Rs 7,685.40 crore in the April-June quarter from Rs 7,944.61 crore in the same period of last fiscal. In the June quarter, total advances reduced by 1.93 per cent to Rs 2.03 lakh crore as compared to the year-ago period. The amount is down 7.16 per cent since March. The size of the credit substitutes increased to Rs 12,821 crore at the end of June compared to Rs 9,222 crore in March.

The bank will wait for the pandemic to peak and an end to the "COVID phobia" before it goes back to lending again, its Joint Managing Director Dipak Gupta told reporters over a conference call. Till that happens, the bank will prefer to be more cautious and conservative, he stressed.

The lender's net interest margin declined to 4.40 per cent in the latest June quarter as against 4.48 per cent in the year-ago period. Gupta also said that the bank will continue to maintain the spread between the traditional levels of 4.2-4.5 per cent.

Retail deposits are a long term asset for the bank, Gupta said, hinting that it will keep accruing the deposits despite the dip in advances. The core net interest income grew 17 per cent to Rs 3,724 crore for the quarter, and the non-interest income nearly halved to Rs 774 crore. Gupta said the credit substitutes keep delivering interest income albeit at a slower clip.

Proportion of loans where moratoriums have been taken reduced sharply to 9.6 per cent at the end of June from the 26 per cent-level at the end of April. A large part of the contribution came from the retail segment and within that, the unsecured loans were the highest. Despite the RBI-approved moratorium being in force, the bank had over Rs 790 crore in fresh slippages during the latest quarter, which took its overall gross Non-Performing Assets (NPAs) ratio to 2.70 per cent from 2.19 per cent.

The bank's Chief Financial Officer Jaimin Bhatt said the slippages included an exposure of over Rs 100 crore which the bank decided to classify as a NPA despite the moratorium and added that other banks also have exposure to it. He, however, declined to specify if the borrower had made a request for moratorium.

Gupta said that about half of the small businesses who are eligible for working capital loans under a government guarantee scheme are not willing to borrow because they do not see the need for money because of a lack of demand. The few loan segments that have grown include agriculture, tractors and home loans. From a provisions perspective, it has set aside an additional Rs 616 crore as COVID-19 provisions taking the overall such provisions to Rs 1,266 crore if one were to include the Rs 650 crore set aside in the quarter-ago period. The overall provisions came at Rs 962 crore in the June quarter from Rs 317 crore in the year-ago period.

This slowdown may impact customer defaults and consequently increase in provisions at the group level. There is a high level of uncertainty regarding the time required for life and business to get normal, the bank said. "The extent to which COVID-19 pandemic will impact the bank's operations and financial results is dependent on the future developments, which are highly uncertain, including among many other things, any new information concerning the severity of the pandemic and any action to contain its spread or mitigate its impact," it said.

The pandemic and the ensuing dip in the flagship lender's profitability have resulted in an increase in the share of profits from other subsidiaries in the consolidated profit to 25 per cent as against 20 per cent in the year-ago period. In the latest quarter, Kotak Securities' profit after tax rose to Rs 169 crore from Rs 110 crore while life insurance arm had Rs 161 crore profit after tax compared to Rs 134 crore. International subsidiaries delivered profit of Rs 54 crore in the three months ended June as against Rs 29 crore in the same period a year ago.

Shares of the bank shed 2.03 per cent to close at Rs 1,322.45 a piece on the BSE.