Kotak Mahindra Bank’s standalone loan book grew 19% year-on-year to ₹5.5 trillion, excluding the twin impact of the acquisition of Kotak Mahindra Investments’ loan portfolio and loans against FCNR(B) deposits worth ₹16,110 crore.
Kotak Bank took over Kotak Mahindra Investments’ loan portfolio of nearly ₹9,600 crore at the beginning of Q2 to comply with the Reserve Bank of India’s directions requiring the elimination of overlapping, non-specialized lending structures within a banking group. Since only the advances of Kotak Mahindra Investments were transferred to Kotak Bank, and not the liabilities, the bank is likely to have earned interest income of about ₹200 crore. Adjusting for this, net interest income (NII) growth would be about 13% year-on-year, versus 15.7%.
Kotak Bank’s net interest margin (NIM) for Q2 was 4.31%, down 22 basis points (bps) sequentially, with FCNR(B)-related funds accounting for the bulk of the decline at 15 bps. The balance was due to quarter-specific day-count variation, as Kotak Bank reports NIM based on the number of days rather than the number of months. Core pre-provisioning operating profit (PPoP) growth was robust at 20% year-on-year to ₹6,115 crore, attributable to a 21% increase in fee and service income to ₹2,926 crore.
The bank declined to provide guidance for NIM in Q3. However, the full impact of FCNR(B) deposits could exert significant downward pressure on margins, as nearly 45% of incremental deposits in Q2 came from this source. Reported deposit growth was 23% year-on-year, but would have been much lower, at 13%, excluding FCNR(B) deposits.
To be sure, some of the adverse impact on NIM may be eased, albeit to a smaller extent, by the recent 25 bps hike in the repo rate. Kotak Bank’s loan book is nearly 65-70% floating-rate, with most of it linked to the repo rate.