Kotak Mahindra Bank...

Kotak Mahindra Bank Ltd.

RESULT UPDATE 23rd July, 2019

2 Page

Kotak Mahindra Bank Ltd. CMP

INR 1,494 Target

INR 1,620 Potential Upside

8.4% Market Cap (INR Mn)

INR 2,856,762 Recommendation

ACCUMULATE Sector

Banking

Shares outs (Mn) 1,909

Equity Cap (INR Mn) 442,900

Mkt Cap (INR Mn) 2,856,762

52 Wk H/L (INR) 1002/1556

Volume Avg (3m K) 2,585

Face Value (INR) 5

Bloomberg Code KMB IN

MARKET DATA

SHARE PRICE PERFORMANCE

SENSEX 37,983

NIFTY 11,331

MARKET INFO

KEY FINANCIALS

Source: Company, KRChoksey Research

Result Highlights of Q1 FY20

• Advances grew 17.6% YoY/1.1% QoQ despite an overall consumption slowdown in the economy. Vehicle financing saw muted growth largely due to decline in auto sales across the sector (ex-CV).

• Deposit mobilization remained buoyant with growth of 22.8% YoY/3.1% QoQ. CASA at 50.7% increased by 45 bps YoY and down by 179 bps QoQ.

• NII at INR 3,173 Cr. is up 22.8% YoY/4.1% QoQ while Non-Interest Income was up 2.7% on sequential basis (+12.0% YoY).

• PPOP at INR 2,399 Cr. is up 18.0% YoY/ 5.1% QoQ on back of NIM expansion. Total Income at INR 4,478 Cr. is up 19.5% YoY/3.7% QoQ.

• The bank has provided for INR 317 Cr. as provisions during the quarter, down 32.6% YoY, but higher by 85% QoQ.

• Asset quality fell with GNPAs at 2.19%, increasing by 2bps YoY / 5bps QoQ while NNPAs at 0.73% went down by 13bps YoY / 2 bps QoQ. PCR stood at 67.0%.

• Standalone PAT at INR 1,360 Cr. was up 32.7% YoY while consolidated PAT increased 23% YoY to INR 1,932 Cr.

SHARE HOLDING PATTERN (%)

NII CAGR between FY19 and FY21E

19.9%

PAT CAGR between FY19 and FY21E

21.9%

Strong balance sheet growth in a challenging macro environment; industry leading CASA levels

Kotak Mahindra Bank’s loan book grew by 17.6% YoY driven by home loans & loans against property (+24.2% YoY), small businesses, personal loans and credit cards (+28.6% YoY), agriculture & related activities (+22.2% YoY). The bank’s auto loan segment grew moderately by 8.3% YoY as the industry is undergoing several structural changes and declining auto volumes. The corporate lending & business banking loans grew by 7.4% YoY largely due to a cautious approach towards corporate lending. We expect the auto sector to remain muted in the current quarter as well and pick-up from Q3 FY20 as the festive seasons arrive. Alongside loan growth, the bank’s deposits mobilization (+22.8% YoY) has shown stability despite the slowdown in the overall economy. This was driven by high growth in current accounts (+23% YoY) and savings account (+21% YoY), while term deposits also grew 21% YoY in Q1 FY20. Overall, the CASA ratio stood at an industry leading levels of 50.7% increasing by 45 bps YoY.

NIMs to sustain current levels while costs remain under control

Q1 FY20 NII at INR 3,173 Cr. was up 22.8% YoY/+4.1% QoQ. NIMs at 4.49% expanded by 21 bps YoY/ 1 bps QoQ with asset yield expansion partly offset by slightly higher CoF against last year. Fee income remained strong on back of strong growth in the credit cards and personal loan segment and increased 16.2% YoY while overall non-interest income was up 12.0% YoY. Overall, the bank’s total income at INR 4,477 Cr. increased 19.5% YoY (+3.7% QoQ). While other banks struggled, KMB operating profits grew by 18.0% YoY/ 5.1% QoQ to INR 2,399 Cr. due to NIM expansion and growth in the core business well supported by control over costs (C/I at 46.4% as of 1QFY20 compared to 47.1% in 4QFY19).

Asset Quality remains one of the best in Industry

Kotak Bank continues to impress on the asset quality management front. The bank’s GNPA and NNPA have been hovering around the same levels in the last few quarters. In fact, GNPAs stood at 2.19% (+, +2bps YoY/ +5bps QoQ) while NNPAs improved to 0.73% (down 13bps YoY/down 2 bps QoQ). Management expressed willingness to increase their corporate and auto loan growth in the coming quarters. Going forward, we expect the core business of the bank to continue growing and outperform its peers.

Clean books and soaring core business amid consumption slowdown

India Equity Institutional Research II Result Update – Q1FY20 II 23rd July, 2019

Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 www.krchoksey.com

KRChoksey Research is also available on Bloomberg KRCS<GO>

Thomson Reuters, Factset and Capital IQ

ANALYST Parvati Rai, [email protected], +91-22-6696 5413

Particulars Jun-19 Mar-19 Dec-18

Promoters 29.98 29.99 30.01

FIIs 40.52 40.27 39.36

DIIs 11.75 11.51 9.63

Others 17.75 18.23 21.00

Total 100 100 100

50

100

150

200

250

Jul-1

6

Oct

-16

Jan

-17

Ap

r-17

Jul-1

7

Oct

-17

Jan

-18

Ap

r-18

Jul-1

8

Oct

-18

Jan

-19

Ap

r-19

Kotak Mahindra Bank Nifty 50

Particulars (INR Crores) FY17 FY18 FY19 FY20E FY21E

NII 8,126 9,532 11,259 13,530 16,197

PPOP 5,985 7,158 8,348 9,633 11,493

PAT 3,412 4,084 4,865 5,828 7,225

EPS 18.53 21.43 25.49 30.53 37.85

NIM 4.2% 4.2% 4.1% 4.2% 4.2%

Advances Growth 14.7% 24.7% 21.2% 22.0% 23.0%

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Valuation and view

We expect Kotak Mahindra Bank to deliver NII growth of average ~20% YoY in FY20E/FY21E on back of its expanding retail franchisee (1,503 branches at end 1QFY20 vs. 1,391 branches Q1FY19). The digital banking and focus on small ticket size deposits should keep their Opex lower while keeping cost of funds low. The growth rates in auto and corporate lending are likely to increase in the next few quarters which will further support loan book growth. We expect the C/I to come down in the future as the bank’s 811 account and other smaller ticket deposits help maintain liquidity. Kotak Mahindra Bank is currently trading at a P/B multiple of 5.9x/4.7x on FY20E/FY21E book value and we expect the premium valuation of the bank to continue on the back of its growing loan book despite industry headwinds, high spreads in corporate lending and solid performance of its various subsidiaries, specially the insurance business to provide consistent growth in the near future. We apply a P/B multiple of 4.8x to the FY20 book value of the parent bank and arrive at a TP of INR 1,620 per share on SoTP basis, an upside of 8.4% over CMP. Since, our last “BUY” rating, the shares of Kotak Bank has advanced 6.4%. We remain positive on the counter and recommend an “Accumulate” rating.

Key Concall Highlights: (i) The bank maintained is focus towards growth in retail segment through engagement with customers of lower ticket size deposits of less than INR 5 Cr, which now constitutes 82% of their total deposit base (ii) The bank stated that their SMA 2 category loans stood at INR332 Cr (0.16%) of their total advances. (iii) KMB’s management also stressed on their focus towards growth in the consumer banking through digital eKYC after the government’s Aadhaar regulation and is expecting their UPI and digital banking to grow with their product “811 account”. The management stressed on the fact that it costs them just 15-20% of what it costs with regular savings account. (iv) On their subsidiaries front, Kotak Life saw new business premium growing by 42% YoY, Kotak Securities witnessed cash volumes/market share of 10% for Q1 FY20 and the group AUM grew by 19% YoY (v) Mr. Uday Kotak acknowledged that there is a consumption slowdown in the economy which is felt across all businesses on a sequential basis (vi) The management also stated the bank is able to price its corporate/business loan higher since new loan underwriting is under stress across banking sector and KMB is enjoying a higher spread on account of that (vii) The management expects double digit growth in the corporate and business banking segment in the coming quarters. (viii) The management also mentioned that only 1 account in the stressed asset for which they assured that the bank has very well secured and that there is no overall stress in the portfolio otherwise.






93.2%

89.9%

91.9% 91.1%

89.3%

Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20

Advance/Deposit Ratio stabilizing around +90%

4.3%

4.2%

4.3%

4.5%

4.2%

4.0%

4.2%

4.4%

4.6%


NIM: High CASA share yet to translate fully into margin

2.19%

0.73%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%


Stable Asset Quality to help maintain premium valuation

GNPA NNPA

45.8% 46.2%

50.3%

47.1% 46.4%


C/I Ratio : Improving trend in recent quarters

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Exhibit 1: Profit & Loss Statement


KEY FINANCIALS





Forecast is based on merged financials of BFIL; Historical numbers are not comparable

INR Crores FY 17 FY 18 FY 19 FY 20E FY 21E

Interest Income 17,699 19,749 23,943 28,119 32,630

Interest Expense 9,573 10,217 12,684 14,589 16,433

Net Interest Income 8,126 9,532 11,259 13,530 16,197

Non interest income 3,477 4,052 4,604 4,713 5,090

Operating income 11,603 13,584 15,863 18,243 21,288

- Employee expense 2,769 2,950 3,159 3,475 3,753

- Other operating expense 2,850 3,475 4,355 5,135 6,042

Operating Expense 5,618 6,426 7,515 8,610 9,795

PPOP 5,985 7,158 8,348 9,633 11,493

Provisions 837 940 962 917 687

PBT 5,148 6,218 7,386 8,717 10,805

Tax Expense 1,737 2,134 2,520 2,888 3,580

PAT 3,412 4,084 4,865 5,828 7,225

Diluted EPS (INR) 18.53 21.43 25.49 30.53 37.85

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Exhibit 2: Balance Sheet





Forecast is based on merged financials of BFIL; Historical numbers are not comparable

INR Crores FY17 FY18 FY19 FY20E FY21E

Source of Funds

Capital 920 953 1,454 1,454 1,454

Reserves & Surplus/ Others 26,696 36,529 41,444 47,120 54,192

Networth 27,616 37,482 42,898 48,574 55,646

Borrowings 21,095 25,154 32,248 38,453 46,143

Deposits 1,57,426 1,92,643 2,25,880 2,62,310 3,18,707

Other liabilities & provisions 8,451 9,652 11,143 11,990 12,907

Total Equity & Liabilities 2,14,590 2,64,933 3,12,172 3,61,329 4,33,405

Uses of Funds

Cash & bank balances 22,572 19,620 13,798 17,421 21,401

- Cash in hand 997 1,205 0 -6,184 -7,279

- Balance w/ RBI 6,495 7,704 10,878 10,489 12,745

- Balance w/ banks & others 15,080 10,712 0 13,115 15,935

Net investments 45,074 64,562 71,189 81,867 91,692

Loans & advances 1,36,082 1,69,718 2,05,695 2,50,948 3,08,666

Fixed assets 1,538 1,527 1,652 1,684 1,768

Other assets 9,324 9,506 8,961 9,409 9,880

Total Assets 2,14,590 2,64,933 3,12,172 3,61,329 4,33,405

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Exhibit 3: Ratio Analysis






Key Ratio FY17 FY18 FY19 FY20E FY21E

Growth Rates

Advances (%) 14.7% 24.7% 21.2% 22.0% 23.0%

Deposits (%) 13.5% 22.4% 17.3% 16.1% 21.5%

Total assets (%) 11.6% 23.5% 17.8% 15.7% 19.9%

NII (%) 17.8% 17.3% 18.1% 20.2% 19.7%

Pre-provisioning profit (%) 48.1% 19.6% 16.6% 15.4% 19.3%

PAT (%) 63.2% 19.7% 19.1% 19.8% 24.0%

B/S Ratios

Credit/Deposit (%) 86.4% 88.1% 91.1% 95.7% 96.8%

CASA (%) 44.0% 50.8% 52.5% 51.2% 51.3%

Advances/Total assets (%) 63.4% 64.1% 65.9% 69.5% 71.2%

Leverage - Total Assets to Equity 7.8 7.1 7.3 7.4 7.8

Operating efficiency

Cost/income (%) 48.4% 47.3% 47.4% 47.2% 46.0%

Opex/total assets (%) 2.6% 2.4% 2.5% 2.4% 2.3%

Opex/total interest earning assets 2.9% 2.8% 2.8% 2.7% 2.5%

Profitability

NIM (%) 4.2% 4.2% 4.1% 4.2% 4.2%

RoA (%) 1.7% 1.7% 1.7% 1.7% 1.8%

RoE (%) 13.2% 12.5% 12.1% 12.7% 13.9%

Asset quality

Gross NPA (%) 2.6% 2.2% 2.2% 1.8% 1.7%

Net NPA (%) 1.3% 1.0% 0.8% 0.7% 0.6%

PCR (%) 52.0% 56.5% 65.4% 65.0% 65.0%

Slippage (%) 0.6% 0.2% 0.3% 0.2% 0.2%

Credit cost (%) 0.5% 0.4% 0.4% 0.3% 0.2%

Per share data / Valuation

EPS (INR) 18.5 21.4 25.5 30.5 37.9

BVPS (INR) 150.0 196.7 224.7 254.5 291.5

ABVPS (INR) 140.7 187.9 216.9 245.9 281.9

P/E (x) 47.1 69.7 58.6 48.9 36.4

P/BV (x) 5.8 7.6 6.6 5.9 4.7

P/ABV (x) 6.2 7.9 6.9 6.1 4.9

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Rating Legend (Expected over a 12-month period)

Our Rating Upside

Buy More than 15%

Accumulate 5% – 15%

Hold 0 – 5%

Reduce -5% – 0

Sell Less than – 5%



KRChoksey Research is also available on Bloomberg KRCS<GO> Thomson Reuters, Factset and Capital IQ


Kotak Mahindra Bank

Date CMP (INR) TP (INR) Recommendation

03-May-19 1,404 1,620 BUY

25-Oct-18 1182 1461 BUY

30-Aug-18 1276 1544 BUY

20-Jul-18 1333 1526 BUY

02-May-18 1209 1402 BUY

22-Jan-18 1071 1172 ACCUMULATE

26-Oct-17 1014 1104 ACCUMULATE

21-Jul-17 980 1104 ACCUMULATE

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