Kotak Bank enters Balance Sheet protection mode

Kotak Mahindra Bank sees higher slippages if the national lockdown announced by the government on the back of the novel coronavirus (Covid-19) outbreak extends beyond three months.

The private sector lender, in a conference call, said that it hasn’t seen a flight of government deposits and these comprise a only a small portion of its overall deposit base.

Deposits, in fact, rose following the government imposed a moratorium on its peer YES Bank. Yet, the lender believes next 10-15 days to be an indicator of the things to come.

Kotak Bank has adopted stringent norms towards the wholesale lending business over some time.

Also, with the advent of the Covid-19, the bank has stopped the growth of unsecured retail loan segment. Kotak Bank’s above perception is derived from the current crisis, which is based on three broad scenarios.

If the pandemic crisis is contained and the lock down is over in a month or so, there will hardly be much impact of it and normalcy would resume quickly (in 1-3 months).

If the crisis continues and the lock down extends from 1 month to 3 months, the effects will be seen for all spheres of business in the economy leading to very high slippages as most businesses don’t have liquidity to sustain that long.

Currently, the management expects this to be the more likely scenario in this crisis. Not just the businesses of banks and other financials, whole economic recovery could take at least 6-9 months

In the least expected pessimistic scenario where crisis continues for a year or even more, it will lead to overall chaos and future unpredictable at this time.

Overall, while the lender remained apprehensive of the extended moratorium, it expressed its worries in terms of increased cost of repayment collection, additional cost on resources deployed for collection and to top it all, the customer’s willingness to repay, which is inversely proportional to the moratorium it gets to repay, i.e. the longer the moratorium, the lesser will be the willingness to repay.

The lender has highlighted major worrisome areas which will lead to shift in focus from the Profit and Loss, and the protection of the Balance Sheet will be a an utmost priority.

It is not worried about the retail business loans as they are somehow partly/fully secured. It is the retail insecured segment that is the concern.

SMEs have been in trouble over last 1 year or so and will be most stressed in these times as they are the ones with least liquid cash in hand and vulnerable to defaults.

Even if the crisis ends soon, the damage already borne over till now along with the revival of the economy in a phase-wise and sector-wise manner to keep the opportunity lost cost high.

Also, the revival would be first for sectors like consumables, retail, etc. while the worst affected like transportation, hotels, airlines, etc. will revive slowly.

Overall, the extended moratorium will increase the risk for the bank, and thereby the cost as well.

We believe large private banks like Kotak are better than NBFCs as balance sheet management and lower growth concerns stay. Secured loan based entities are more preferable than unsecured in the current environment

Kotak Mahindra Bank which reported a loan book of Rs 216774 crs as on December 2019 has built a branch network of 1539 branches.

Added to this its increased focus towards retailisation of loans has enabled it to earn the best NIMs in industry at 4.7%.

The CASA ratio has also improved from 50.7% in Dec 18 to 53.7% in Dec 19, which is the best in industry.

Overall asset quality remained resilient with GNPA ratio at 2.46% and bank has no major exposure to IL&FS & other stressed assets.

Hence despite the current negative headwinds we believe that KMB is the best choice within the Indian private banks going ahead looking at its healthy business growth coupled with stable profit margins.

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