Kotak Mahindra Bank’s (KMB) Q1FY20 standalone NII has improved by 22.8% yoy to Rs3,173cr against Rs2,583cr in the corresponding quarter previous year. The bank’s standalone net profit was slightly below consensus estimates, which has improved by 32.7% yoy to Rs1,360cr against Rs1,025cr in Q1FY19. Its GNPA for Q1FY20 came at 2.19% against 2.14% qoq, which has increased by 5bps. NNPA for the quarter came at 0.73% against 0.75% qoq, which has decreased by 2bps.
Margins expanded 21bps yoy due to a higher yoy increase in yield on advances (34bps yoy - calculated) aided by re-pricing of MCLR-linked loans, while cost of funds declined 6bps yoy, aided by an improvement in CASA ratio and deposit rate cuts in SA deposits. Consequently, NII growth exceeded loan growth.
Other income growth was driven by strong growth in life insurance income (+54% yoy), while trading gains declined 9% Yyoyand stood at Rs150cr. Core fee income growth for the bank remained muted as it grew 12% yoy (10% yoy in 4QFY19) and lagged loan growth.
Provisions declined yoy driven by lower provisions for investment depreciation (-78% yoy), while provisions for loan losses grew moderately at 10% yoy.
Advances as on June 30, 2019 were up 18% to Rs2.08 lakh cr. Growth was especially weak in corporate and business banking, which grew 9% yoy, while auto loans declined 4% yoy. Unsecured retail loan growth was more resilient (+28% yoy). Loan growth for the standalone bank was 18% yoy (21% yoy in 4QFY19).
Average Savings deposits grew by 21% to Rs78,654cr for Q1FY20 compared to Rs65,135cr for Q1FY19. Average Current Account deposits grew by 23% to Rs32,679cr for Q1FY20 compared to Rs26,649cr for Q1FY19.
CASA ratio as on June 30, 2019 stood at 50.7% compared to 50.3% as on June 30, 2018. TD deposits as on June 30, 2019 were 7% of the total deposits. Cost of SA for Q1FY20 was 5.51%.
Capital adequacy ratio of the Bank, as per Basel III, as on June 30, 2019 is 17.8% and Tier I ratio is 17.3%.
Consolidated PAT for Q1FY20 increased to Rs1,932cr from Rs1,574cr in Q1FY19 up 23%.
Consolidated Advances were Rs2.44 lakh cr as on June 30, 2019.
The market share of Kotak Securities in the cash segment was 10% for Q1FY20 (8.3% in Q1FY19).
Total assets managed / advised by the Group as on June 30, 2019 were up 19% at Rs2.36 lakh cr.
Asset quality deteriorated marginally, as GNPL ratio increased 8bps qoq to 2%. The SMA-2 book increased to Rs332cr and comprised 0.14% of loans (0.06% of loans in 4QFY19). Slippages (consolidated) decreased to Rs890cr (Rs990cr in 4QFY19), however remained relatively elevated. Slippage ratio therefore decreased to 1.7% of opening loans (annualised) vs. 1.9% in 4QFY19.
Key takeaways from the earnings call
The financial sector is getting more discerning and availability of credit going forward will be disproportionately linked to solvency and corporate governance.
The financial services industry should see some level of consolidation as capital, both debt and equity, will be attracted to better governed entities.
Banks are benefitting in terms of higher trading income due to an increase in the fixed income and bond portfolio; this increases their ability to be more aggressive in provisioning going forward.
A higher degree of borrowing from offshore sources has created room for the RBI to further reduce interest rates going forward. KMB expects a 50-75bps reduction in rates by the end of FY20.
The bank believes that the RBI could re-consider linking bank MCLRs to an external benchmark in order to ensure better monetary policy transmission. The RBI had evaluated this option in the past but decided against it.
Growth opportunity for the bank looks better, as (i) it is able to get the pricing that it wants, (ii) NBFCs, which were under-cutting on pricing or diluting underwriting norms have receded from the market and (iii) KMB has tightened its underwriting in segments like tractors/MSME/etc, whereas other banks have been reckless and now face stress.
Management guided for a loan growth of ~20% for FY20 (down from >20% earlier) for the standalone entity.
The SME portfolio of the bank has now stabilised with very low additional slippage. The bank will now look to grow this book in the coming quarters.
Agriculture loans for KMB grew 22% yoy in 1QFY20. This includes the tractor segment where the bank has seen a significant improvement in market share, even as the industry did not grow.
KMB is the largest bank in the tractor segment and has been able to improve the quality of underwriting with better spreads due to the space vacated by NBFCs in the segment. KMB recognises stress within 90 days in the segment, as against the allowed period of one year.
Within agriculture loans, KMB has been cautious on the crop loan sub-segment due to large ticket sizes. It was not present in this segment till its merger with ING Vysya Bank. Since the merger, crop loans have declined on an absolute basis.
KMB reduced the SA deposit rate to 4% p.a. for balances up to Rs1 lakh during 1QFY20 (it had reduced rates in this bucket from 5% to 4.5% p.a. in 4QFY19). This has aided in a reduction in weighted average cost of SA to 5.3-5.4%. Management could consider a reduction in higher balance buckets as well, moving forward.
Management stated that it had always been cautious in the dealer finance segment within auto loans; however, some newer banks had been reckless in the same.
811 Accounts: The bank intends to return to its prior run-rate in terms of 811 accounts with the use of Aadhaar once again allowed for biometric activation. The cost of acquisition of 811 accounts is 12-15% that of physical accounts (average balance and revenue per account would also be lower). 811 account customers are primarily salaried customers between the ages of 25 and 35 years and there is significant opportunity to cross sell personal loans and credit cards to this segment.
Employee costs for the standalone bank grew 25% yoy, primarily due to higher provisions for retirement benefits due to lower bond yields.
Kotak Mahindra Bank Ltd ended at Rs. 1,453.65, down by 41 points or 2.74% from its previous closing of Rs. 1,494.65 on the BSE.
The scrip opened at Rs. 1,500 and touched a high and low of Rs. 1,500 and Rs. 1,442 respectively. A total of 35,51,607 (NSE+BSE) shares were traded on the counter. The stock traded above its 50 DMA.
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