Kotak Mahindra Bank's earnings may reflect the pain in India’s auto sector as well as the rising job losses and pay cuts

• Kotak Mahindra Bank is scheduled to post its earnings today, but analysts fear that its already slowing credit growth may hamper the bank’s profitability.
  
• The bank has exposure to troubled sectors like auto and unsecured personal loans.
  
• Kotak Mahindra Bank’s largely steady deposit base could be one factor that may provide a safe harbour.
  

The coronavirus lockdown in India has had a severe impact on banks and Kotak Mahindra Bank is no exception. Its credit growth was already slowing down before the lockdown came into effect.

However, its steady deposit base and lack of dependence on funds from the government could put it at an advantage against its peers. “Amid a slowing economy and asset quality risks, we believe Kotak's valuation premium to peer banks is at risk,” said UBS Research.


Kotak Mahindra Bank’s share price has managed to recover over 15% of its loss after hitting a 52-week low of ₹1001 on March 19 but amid the volatility, it isn’t clear whether the bank will be able to recover to its past glory. “The share price has outperformed most banks under our coverage in the past 1-3 years, and after the recent price outperformance the current valuation leaves limited room for upside,” said UBS.


“Kotak Bank continues to trade at a significant premium to private banks. We believe the market is not factoring in the impact on asset quality of the bank's exposure to potentially vulnerable sectors,” it added.

Credit growth poses a risk
The bank has managed to navigate around troubled sectors in recent history. “Amidst the deposit run-down seen in mid-sized private banks post the Yes Bank saga, Kotak Mahindra Bank has not seen any disruption, given its lower dependence on government deposits,” said Emkay Securities.

However, this time around it has exposure in vulnerable sectors like auto and unsecured personal loans, which are some of the worst affected in the current situation with factories closed and unemployment on the rise. Together, they account for nearly 24% of Kotak’s total loans, according to UBS. “Asset quality is likely to deteriorate more than expected as cash flows in most customer segments should be impacted by the lockdown,” it said.

These are the target prices set for Kotak Bank by different brokerages:


Kotak Mahindra Bank’s largely steady deposit base could provide safe harbour especially since, over the past few years, it has managed to increase its branches. “It has benefited a bit from the flight of safety in deposits. Post the GFC, the bank has accelerated its branch expansion and hopefully, should continue to further strengthen its deposit franchise,” said Emkay.

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