Kotak Mahindra Bank's Q1 profits drop more than expected on higher provisions

Mumbai: Kotak Mahindra Bank , India's third-largest private lender by market capitalisation, reported a drop in first-quarter profit on Saturday, as it set aside more funds for potential bad loans and saw a contraction in lending margins.

The bank's standalone net profit fell 47.5% to 32.81 billion indian rupees ($379.42 million) for the quarter ended June 30, down from year-earlier 62.5 billion rupees ($722.75 million), which included a 27.3 billion rupee gain on a stake sale of its insurance subsidiary to Zurich Insurance last year.

On average, analysts had expected a profit of 35.82 billion rupees, according to data compiled by LSEG.

The lender's net interest margin, a key gauge of profitability, fell to 4.65%, from 5.02% a year earlier, reflecting the impact of the Reserve Bank of India's recent interest rate cuts.

When rates are lowered, banks typically pass on the benefits to borrowers first and only later reduce deposit rates, which can temporarily squeeze margins.

Meanwhile, Kotak Mahindra Bank's asset quality deteriorated, with the gross non-performing assets ratio at 1.48% at the end of June, versus 1.39% a year earlier.

Indian lenders have kept a tight lid on unsecured lending after grappling with higher bad loans in that segment, a move that has helped support asset quality.

The bank's provisions for bad loans more than doubled year-on-year to 12.08 billion rupees.

Net interest income grew 6% to 72.59 billion rupees in the first quarter.

While credit growth has slowed across the industry, Kotak Mahindra Bank's loan book expanded 13%, driven mainly by a 16% rise in loans to retail consumers.

($1 = 86.4750 Indian rupees)