Kotak Mahindra Bank Shares Tank 5% As Q4 Earnings Miss Sparks Downgrades

Shares of Kotak Mahindra Bank came under the heat of selling pressure on May 5 as the company’s weak Q4 earnings triggered a slew of brokerages to downgrade the stock. The series of ratings downgrades soured investor sentiment, dragging the stock over 5% lower in trade.

The lender reported a 14% fall in its net profit for the March quarter at Rs 3,552 crore, dragged largely by a sharp spike in provisions for bad loans. The bank's provisions for bad loans surged nearly 2.5 times to Rs 909 crore in the quarter gone by, sharply up from Rs 264 crore in the year-ago period.

Net interest income, however, rose 10% on year to Rs 13,529.77 crore in the quarter under review, compared to Rs 12,307.06 crore in the year ago period.

Also Read: Kotak Mahindra Bank's Complex Relations With RBI

Meanwhile, the bank’s asset quality improvement also failed to spark enthusiasm among investors. That was because gross non-performing assets (NPAs) inched up by 3 basis points to 1.42 percent, compared to 1.39 percent a year earlier. In addition, there was a mere 3 basis points decline in net NPAs to 0.31 percent, down from 0.34 percent in the same quarter last year.

With its Q4 numbers, the private bank missed expectations on key performance metrics, and the woes were further deepened by a weakness in asset quality. To that effect, brokerages rushed to put fingers towards the lender’s hot valuations in the face of its weak earnings, with some even downgrading the stock.

Global brokerage firm CLSA downgraded the stock to ‘hold’ from its previous ‘outperform,’ even as it raised the target price marginally to Rs 2,225. The brokerage highlighted a spike in credit costs due to an increase in the lender’s provision coverage ratio. Meanwhile, moderation in loan growth to the low-teens further prompted CLSA to cut profit estimates by 3–5 percent, factoring in lower NII and higher cost assumptions.

Kotak Mahindra’s management also noted that in Q4, slippages in personal loans eased and stabilised for credit cards, however, it expects slippages in the microfinance (MFI) segment to remain elevated for a few more quarters. Baking that along with expectations of moderation in NIMs amid a rate cut cycle, another brokerage—Nomura, also downgraded the stock to a ‘neutral.’ The brokerage also sees limited upside scope for the stock based on its current valuations.

Analysts at Nuvama Institutional Equities echoed similar sentiments, arguing that the 20% rally in the stock since its Q3 earnings has turned valuations lofty. Anticipating limited upside due to its hot valuations, Nuvama also downgraded the stock to a ‘hold.’ However, the firm has not yet lost confidence on Kotak Mahindra Bank’s future growth trajectory.

The brokerage still believes Kotak Mahindra Bank stands better placed on growth and NIMs than its peers.