Private sector lender Kotak Mahindra Bank Ltd, on Tuesday (26th October), came out with their results which defeated all the street estimates. They declared a 26.3% year-on-year (YoY) rise in standalone net profit for the September quarter 2021. Their Net Interest Income (NII) also gained 17% YoY for this quarter.

These are spectacular numbers. The previous week, HDFC Bank came out with 18% year-on-year (YoY) rise in net profits which gave birth to a lot of positive sentiments in the market. But, Kotak has left the number one bank behind and reported even better performance this quarter. Let’s have a closer look at their quarterly performance.

Robust Revenue Generation

NII is the difference between the interest income a bank earns from its lending activities and the interest it pays to depositors. Higher the spread between the two interest rates, more profitable it is for the banks.

In the same quarter previous year, Kotak declared a net interest income of Rs 3,350 crore. This quarter, it increased by 17% to Rs 3,913 crore. This 17% increase is constant for the bank since the previous three quarters. NII for the bank has increased by 18%, 17% and 17% in the previous three quarters. This shows that even amidst the pandemic, the bank has done really well to maintain its revenue growth.

Digitally Advanced

We have discussed several times how being digital is pivotal for any company in any industry, let alone the banks. Kotak has put consistent efforts to digitally transform itself. They have stressed on a paperless transaction for Home Loans and Loans Against Property (LAP) for some time now. And now this has given the bank good business, as paperless transactions became a necessity during the times of Covid-19.

Other than this, tractor, retail commercial vehicle/infrastructure loans were also available on Kotak Mobile App. As we know, tractor sales have been booming over the last few months. They have one of the most user-friendly mobile applications in the industry. Transaction volume and value of mobile banking went 81% and 56% above annually during the quarter. Also, Kotak became the 1st Bank in the country to launch Video KYC for Account Opening.

85% of the total Fixed Deposits were booked through Digital channels in Q2. 86% of all Credit Cards and 30% of the total personal loans were again carried with the help of digital channels in this quarter. All of this cumulated to 73% (YoY) growth in Digital Payments volumes.

So this digital push by Kotak Bank helped them maintain good business when most customers were staying at home.

A glance at their Asset Quality

Kotak Bank’s gross non-performing asset ratio (GNPA) fell to 2.55% this quarter. This ratio was reported as 2.7% in the preceding quarter. Also, their Net NPA ratio fell to 0.64% from 0.84% during the same period.

Due to the interim order of the Supreme Court, they didn’t recognise any NPAs since August 31, 2020. This could have given a false image of non-performing assets. But the bank was quick to discard this concern. Even if they had not considered the Supreme Court’s decision, the gross NPA would have been 2.70% and NNPA 0.74%. This is only a marginal increase from the reported values. Thus, one can conclude that Kotak has a very stable asset quality.

Market Reaction

The market sentiments were negative on the day Kotak Bank was due to announce the results. Nifty 50 and Bank Nifty closed 1.36% and 1.65% down. Yet, Kotak Bank emerged as one of the top gainers to close at Rs 1410.90, up by 2.01%. The day after the results were announced, the share price of Kotak Bank rocketed up even in the presence of the bearish global sentiments. It closed 11.70% higher at Rs 1582.70 to become the top gainer of the day. There were also reports that America’s Morgan Stanley was going to pump in funds to the stock, as covered here.

The Way Forward

The banking sector has been in the news ever since the lockdown. The 6-month moratorium on repayment of loans ended on 31st August. On 3rd October, the government of India announced that interest-on-interest for loans up to Rs 2 crore will be waived off for the borrowers. At the same time, to prevent banks from facing huge losses, the amount waived off will be paid to the banks by the government. This news was welcomed by the market as there is huge pressure on banks to maintain their asset quality. To read more on the interest waiver scheme, click here

The Q2 results of the banks have been great so far! Especially big banks like HDFC Bank and Kotak Mahindra Bank which operate all over India. Will this trend continue? Will all the banks come out with positive results? Where are the high NPA rates predicted by The Reserve Bank? Will Public-Sector Banks be the worst affected? Let’s wait and watch.

The upcoming quarter will be very important for the banks. This will be the quarter in which the government will implement its strategies to aid banks. The moratorium was lifted less than 30 days before the September quarter-end. The loans being defaulted and turning into sub-standard assets will be only seen in the October-December financial results. Thus, a more clear picture of NPAs will be seen in the third quarterly reports of banks and NBFCs. Keep tracking all the updates with marketfeed to follow more of this story.

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