Q3 COMMENT. Kotak delivers a steady performance; on track with merger integration

The Kotak Mahindra Bank’s December quarter results — which include the ING Vysya Bank earnings, post the merger effective April 2015 — while not comparable to last year’s, point to smooth transition. Steady loan growth across product lines and uptick in current and savings account (CASA) deposits in the quarter, indicates that revenue and productivity synergies are on track.

Kotak Mahindra Bank’s acquisition of ING Vysya Bank has taken it to the league of the top four private sector banks. The merger has helped Kotak Bank build its presence in segments such as small and medium enterprise (SME) segment. From less than 10 per cent of loans, SME now contributes about a fifth of Kotak’s loan portfolio.

For the December quarter, Kotak Bank’s total loan book stood at ₹115,345 crore against ₹64,641 crore during the same period last year.

On the deposits front, the merger, as expected, has helped the bank strengthen its deposit base. The combined entity has a CASA ratio of 35 per cent, up from 32 per cent for Kotak Bank in the previous year. Erstwhile ING Vysya’s healthy growth in CASA in past couple of years has been from current account deposits. Kotak, on the other hand, has built a strong CASA base led by growth in savings deposits. Differentiated rates, which Kotak Bank has been offering since the de-regulation of savings deposit rates from October 2011, have helped in building a strong savings deposits base.

In spite of the incremental outflow on account of paying the higher interest rate for ING Vysya’s account holders, the bank intends to keep the 6 per cent it offers on savings deposits of more than ₹1 lakh. This should keep the growth momentum in savings deposits healthy. The bank has incurred around ₹35 crore as a result of increase in savings deposit rate for ING Vysya’s account holders in the December quarter.

Kotak Bank has also incurred integration cost of ₹13 crore in the December quarter, totalling ₹142 crore till date. The management believes it is well on track to keep its integration costs within the ₹200 crore it anticipated at the time of merger.

In the June quarter, Kotak Bank had identified 2.5 per cent of the combined book as under stress. The provision for loans has gone up to ₹148 crore, from ₹84 crore during the same period last year. A significant portion of this is from ING Vysya.

Kotak Bank has maintained stable asset quality — gross non performing assets (GNPAs) flat at 2.3 per cent of loans (standalone) from last quarter. The bank’s restructured assets stood at ₹346 crore (0.3 per cent of loans), marginally lower than in the previous quarter. Of this, ₹202 crore is from the ING Vysya loan portfolio. The bank did not sell any assets to ARCs and did not restructure any loan under the 5:25 scheme.

While revenue and productivity synergies are visible from the steady growth in loans and traction in CASA deposits, cost synergies are likely to flow in from next year, when the integration is completed. Rationalisation of branch network, rental savings and disposal of non core premises should bring in cost synergies.

COMMENT NOW