The Hurdle of Higher Provisions for Potential Bad Loans Dents Kotak Mahindra Bank's Q4 Profits
Quarterly earnings at Kotak Mahindra Bank decreased beyond predictions, primarily due to increased provisions; Net Interest Income (NII) rose by 5.4%, although doesn't meet estimates.
Kotak Mahindra Bank's Q4FY25 earnings took a hit, plummeting 14% YoY to Rs 35,517 crore, despite a 5% surge in net interest income (NII). This tumble can be attributed to hefty provisions, fueled by a spike in potential bad loans.
The bank's NII, the difference between earnings on loans and the cost of deposits, rose to Rs 72,840 crore. However, Elara Securities noted that this growth was relatively sluggish compared to peers' Q4FY25 NII growth. The net interest margin (NIM) dipped to 4.97% from 5.28% a year ago, although it improved from the previous quarter's 4.93%.
As the multitude of bank shares keep a watchful eye on the effect of Kotak Mahindra Bank's elevated provisioning on its share price, the tale of Q4 earnings unveils the stake of margins under pressure for the private sector lender.
Examining deeper into the numbers, Kotak Mahindra Bank registered a 4 bps rise in Q4 NIMs QoQ to 4.97%. The bank boasted a deposit growth of 5.2% QoQ and 11% YoY, but the slippages mounted to Rs 14,880 crore. Although slightly better sequentially, these figures contributed to the bank's growing gross non-performing loans (GNPLs) and net non-performing loans (NNPLs).
In the current interest rate environment, lenders usually pass on central bank rate cuts to borrowers, making loans more appealing. However, deposit rate adjustments tend to lag, creating a temporary squeeze on margins until the correction is reflected across the balance sheet. Given that a majority of Kotak's loan book is linked to the external benchmark, its margins stayed under constant pressure.
Kotak Mahindra Bank's credit cost also surpassed estimates in Q4FY25, which included a provision of Rs 56 crore for AIF investment. While its AMC business shone, its life insurance and securities businesses showed signs of strain. The bank's loan growth of 3.2% QoQ and 13.5% YoY fell short of Elara Securities' projections, as the bank reported that average advance growth (ex- IBPC) was 18% YoY.
The wavy waters of India's banking industry showcase mixed sailings for bank stocks, with stock-specific undulations persisting despite common hurdles. While Kotak Mahindra Bank grapples with profitability issues, other banks like Indian Bank have reported robust earnings growth and resilient technical indicators 2[4].
[4]: https://www.moneycontrol.com/news/business/india/indian-bank- approves-record-rs-2-96-dividend-for-shareholders-5639111.html
- The failure of Kotak Mahindra Bank to meet estimated credit cost in Q4FY25 included a provision for an Alternative Investment Fund (AIF) investment.
- In the personal-finance sector, the interest rate environment typically allows lenders to lower loan interest rates, making them more appealing, but deposit rate adjustments tend to lag, putting pressure on margins.
- Despite a dip in net interest margin (NIM) and a surge in potential bad loans, Kotak Mahindra Bank's net interest income (NII) rose to Rs 72,840 crore in Q4FY25.
- As the banking industry faces challenges, Kotak Mahindra Bank's profitability issues stand out, while other banks like Indian Bank report robust earnings growth and resilient technical indicators.
- The Q4 earnings of Kotak Mahindra Bank underscore the pressure on margins felt by the private sector lender, with a 4 bps rise in NIMs QoQ and a deposit growth of 5.2% QoQ and 11% YoY, but mounting slippages and growing gross non-performing loans (GNPLs) and net non-performing loans (NNPLs).
- Elara Securities observed that Kotak Mahindra Bank's Q4FY25 NII growth was relatively sluggish when compared to peers' Q4FY25 NII growth.
- The banking-and-insurance sector is experiencing varied performances, with some institutions showing signs of strain, such as Kotak Mahindra Bank's life insurance and securities businesses.
- However, financial experts should keep an eye on the impact of Kotak Mahindra Bank's increased provisions for potential bad loans on its share price, as the bank's share price may be affected.
- In theDEFImarket, Kotak Mahindra Bank's loan growth of 3.2% QoQ and 13.5% YoY is less than Elara Securities' projections, as the bank reported that the average advance growth (ex- IBPC) was 18% YoY.
