Up until Tuesday, Kotak Mahindra Bank Ltd’s stock was down 23% year to date, while bigger peer HDFC Bank Ltd’s fell 32%. But a conference call with analysts on Tuesday has pulled down Kotak Mahindra Bank’s shares on a par with HDFC Bank’s.

What seems to have changed in a day?

In the call, the Kotak management said it was working on three scenarios of the covid-19 impact, one of which it believes would play out. The scenarios entail a surge in slippages, a sharp hit on profits and a long-drawn recovery that could take six-nine months. This commentary was not just for its own balance sheet, but the entire banking system, say analysts.

“They were pessimistic about everyone in general. We cannot blame them as the scenarios are realistic, but it is a hard truth that investors will have to digest now,” said an analyst, requesting anonymity. Investors hate it when managements sound pessimistic because it makes their worst fears come true.

Shedding the gains.
Shedding the gains.

In a note dated 31 March, analysts at Edelweiss Securities Ltd flagged exposure of banks to auto, microfinance, agriculture, small and medium enterprises, and real estate as having the highest risk from the lockdown. “We argue that balance of probabilities favour the downside as the second and third-order effects of the dislocation unfold,” said the note.

To be sure, analysts have been warning about a big hit on revenue and growth for all banks. Even so, having these expectations endorsed by a bank’s management seems to have shaken investors.

Contrast Kotak Mahindra Bank’s commentary with what HDFC Bank chief Aditya Puri said a few weeks ago. Puri sounded very reassuring about the lender’s prospects and said that the bank has begun monitoring every loan to assess the impact. To be fair, at the time, the lockdown was yet to be extended by three more weeks.

Investors now have two versions of the likely impact of covid-19. One of HDFC Bank’s cautious optimism and another of Kotak Mahindra Bank’s conservative pessimism. What may eventually play out is a toss-up, especially when the regulator’s request to defer instalments for loan repayments is being considered by all lenders.

As for Kotak Mahindra Bank, the toughest task is to protect its balance sheet, which stood at 3.23 trillion as of December. Its exposure to real estate is higher than peers, analysts said, adding that the management sounded very worried over unsecured personal loans. Loans to commercial realty were 2.1% of its total loan book as of December, and lease rental discounting was another 1.6%. Secured home loans and loan against property were 21% of total advances.

The covid-19 outbreak and the subsequent lockdown to contain its spread will no doubt hit every sector of the economy. Banks, by default, will also suffer through their exposures. Ergo, banks’ stocks are unlikely to get any investor love for some time to come.

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