When the valuable HDFC Bank’s shares dropped about 3% reacting to slowing loan growth, can the most expensive private bank stock be unaffected?

Kotak Mahindra Bank shares, too, dropped 3.6% on Monday, ahead of the release of its first-quarter results. Sure enough, the bank reported a deceleration in loan growth for the June quarter to 18%, lower than the 22% growth for the corresponding period in FY19. Sequentially, loans hardly grew at all.

Loans to companies grew just 7.4%, a far cry from double-digit growth the lender reported in previous quarters. While for any first quarter, a slowdown would be taken in stride, times are not good in terms of economic growth.

What should worry investors is the commentary from the management. The message that the management sent out to investors was that of caution. Dipak Gupta, joint managing director said that sectors such as automobiles, non-bank finance companies and even small businesses demanded greater caution, given the bumpy times ahead. “Corporate has been sluggish and will be sluggish,” he said in a media conference.

Indeed, carmakers aren’t selling as much as they used to, real estate is in a prolonged slowdown and non-bank lenders who nudged customers to borrow and buy cars and houses are under increased stress. For a bank lending to all these sectors, times are not looking good.

So, Kotak Mahindra Bank has fortified itself with provisions and its coverage ratio is a healthy 67%. Gupta said that the lender would focus on seeking “good pockets” and avoid huge risks. It should avoid risk, given that for the June quarter, there was a 76% surge in borrowers who haven’t repaid for more than 60 days. A delay of a month more would turn them bad.

For the June quarter, however, the lender reported an enviable gross bad-loan ratio of 2.19%. The bank has reduced its exposure to non-bank finance companies after troubles began intensifying for many of them in the aftermath of defaults triggered by Infrastructure Leasing and Financial Services (IL&FS) last year.

The intent to avoid troubled sectors is visible and the management said that loan growth will continue to come from retail. Even though it is cautious on automakers, non-bank lenders and developers, the lender is willing to chase retail borrowers seeking loans to buy homes and cars. Gupta said that despite the slowdown, repayments won’t be affected here.

Incipient signs of a slowdown aside, the bank’s valuations could borrow strength from its robust core income growth and margins. Both net-interest income and net-interest margins were above Street expectations for the June quarter. Even after the 3% fall on Monday, the stock quotes at a multiple of over 5 times its estimated book value for FY21.

If it guns for good pockets as indicated, perhaps investors would continue to favour the stock.

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