Kotak Mahindra Bank (Q1 FY15)

India Infoline News Service | Mumbai |

In-line with management commentary, Kotak Bank’s loan growth on stand-alone basis further improved to 12.6% yoy from 9% yoy in the previous quarter.

CMP Rs885, Target Rs903, Upside 2.1%
  • Stand-alone loan growth ex-CV/CE book at strong 20% yoy 

  • Persistent improvement in SA contribution; CASA outlook remains strong 

  • NIM improved by 10bps qoq; strengthening deposits franchise to keep NIM firm 

  • Robust fee growth was a positive surprise; operating leverage to start kicking-in 

  • Asset quality was stable and credit cost was low; annualized RoA at 2% 

  • Kotak Prime - loan growth remains lackluster but profitability sustained 

  • Rich valuation limits upside in the medium term; Rate stock as Accumulate

Result table
(Rs mn) Q1 FY15 Q4 FY14 % qoq Q1 FY14 % yoy
Total Interest Income 22,864 22,125 3.3 21,900 4.4
Interest expended (12,842) (12,459) 3.1 (12,734) 0.8
Net Interest Income 10,022 9,665 3.7 9,167 9.3
Other income 3,998 3,405 17.4 4,624 (13.5)
Total Income 14,020 13,070 7.3 13,791 1.7
Operating expenses (7,364) (6,999) 5.2 (6,003) 22.7
Provisions (140) 62 (326.0) (1,689) (91.7)
PBT 6,515 6,133 6.2 6,099 6.8
Tax (2,217) (2,061) 7.6 (2,071) 7.1
Reported PAT 4,298 4,072 5.6 4,028 6.7
EPS 22.3 21.2 5.4 21.0 6.3

Key  Ratios Q1 FY15 Q4 FY14 chg qoq Q1 FY14 chg yoy
NIM (%) 4.7 4.7 0.0 4.5 0.2
Cost of Funds (%) 7.1 7.1 (0.0) 7.2 (0.1)
CASA (%) 31.0 31.9 (0.9) 28.8 2.2
C/D (x) 0.93 0.90 0.03 0.96 (0.04)
Non-interest income (%) 28.5 26.1 2.5 33.5 (5.0)
Non-int inc/Int exp (%) 31.1 27.3 3.8 36.3 (5.2)
Cost to Income (%) 52.5 53.6 (1.0) 43.5 9.0
Provisions/Income (%) 0.5 (0.2) 0.8 6.4 (5.8)
RoA (%) 2.0 1.8 0.2 1.9 0.0
CAR (%) 19.1 18.8 0.3 18.2 0.9
Gross NPA (%) 1.9 2.0 (0.1) 2.0 (0.1)
Net NPA (%) 1.0 1.1 (0.1) 1.0 -
Source: Company, India Infoline Research
 

Stand-alone loan growth ex-CV/CE book at strong 20% yoy 

In-line with management commentary, Kotak Bank’s loan growth on stand-alone basis further improved to 12.6% yoy from 9% yoy in the previous quarter. This is despite sustained contraction in CV/CE portfolio which was down 6% qoq and 32% yoy. Strong growth in agri lending (27% yoy) and corporate book (25% yoy) were the key credit growth drivers. Growth momentum in the mortgage segment has waned over the past five quarters from 26% yoy to 12% yoy. After decelerating sharply in preceding quarters, growth in Business Banking portfolio improved marginally to 7% yoy. Encouraged by gradually improving macro situation, Kotak Bank expects its advances to grow by brisk 18-20% in FY15. CV/CE portfolio is expected to grow gradually from the current levels as the underlying industry dynamics improve. 

Persistent improvement in SA contribution; CASA outlook remains strong 

Overall deposits growth remained higher than loan growth at 17% yoy with the bank continuing to substitute borrowings (down 37% yoy) on the liability side. Traction in CASA deposits remained strong at 26% yoy mainly driven by robust 37% growth in savings deposits. Aided by substantial branch additions (added 250 branches over FY12-14, 70% growth) and higher savings rate offered post de-regulation (current average cost at 5.5%), the savings deposits franchise of the bank has doubled over the past two years and its contribution has increased from 13% to 18%. Current deposits declined by 8% qoq on account of seasonality; overall CASA ratio was stable qoq at 31% but represented an improvement of 220bps on yoy basis. Bank has been adding granularity to its deposits base and reducing its dependence on bulk/CD funding. TDs <Rs1cr grew by 31% yoy and CASA + TDs <Rs5cr now make up for 65% of deposits. The share of CDs has declined to 8% as compared to 14% at the end of Q1 FY14. With the bank targeting to reach 1,000 branches by end CY16, the pace of network expansion will continue to be robust. Thus, outlook for CASA ratio remains strong. 

NIM improved by 10bps qoq; strengthening deposits franchise to keep NIM firm 

Against our expectation of 5-10bps contraction, Kotak Bank’s NIM improved by 10bps qoq to 5%. The margin expansion seemed to be solely driven by sequential uptick in C/D ratio (93% v/s 90%). On the back of stable CASA and steady wholesale rates, the overall cost of funds was largely unchanged. However, as per our computation, the blended yield on advances marginally declined by ~10bps during the quarter which could be attributable to the shift in loan mix towards lower-yielding corporate loans. Long-term NIM outlook is fairly strong with product mix headwind to alleviate while tailwinds from improving deposits franchise and benign wholesale rates to continue. 

Robust fee growth was a positive surprise; operating leverage to start kicking-in 

A spectacular 38% yoy growth in fee income was a positive surprise. Treasury income was modest at Rs540mn. As was expected, bank’s cost growth increased to 23% yoy on account of significant network investments in recent years. C/I ratio, as a result, remained high at 52.5%. As loan growth strengthens on the back of economic recovery and NIM firms up further, the cost/income ratio is expected to trend towards optimal levels in the longer run. 

Asset quality was stable and credit cost was low; annualized RoA at 2% 

Asset quality performance was strong with Gross and Net NPLs remaining steady qoq both in absolute and relative terms. As per the bank, NPL levels are expected to improve by the end of the fiscal. Credit cost for the quarter stood at annualized 53bps; significantly lower than 108bps in Q1 FY14. There was a provisioning reversal of Rs500mn on the investment portfolio. Aided by higher NIM, robust fee growth and investment provisioning write-back, annualized RoA improved to 2% from 1.8% in the previous quarter. With Tier-1 capital at 18%, Kotak Bank is well-capitalized for an impressive asset growth over the next couple of years.

Kotak Prime - loan growth remains lackluster but profitability sustained 

While Kotak Prime’s customer assets growth improved to 8% yoy, the growth in car financing portfolio (73% of loan assets) further decelerated to 3% yoy reflecting the weak underlying industry volume growth. Based on our broad computations, NIM is likely to have contracted qoq thus driving a muted 5% yoy growth in the NII. Net NPLs increased by 16% qoq suggesting an uptick in delinquencies during the quarter. The business has been able to sustain RoA near 2.5% despite a challenging environment which is impressive.

Rich valuation limits upside in the medium term; Rate stock as Accumulate 

Kotak Bank is well-placed on growth, capitalization, NIM and asset quality fronts and thus would be amongst the prime beneficiaries of revival in economic cycle. Bank’s RoA delivery is estimated to improve from 1.8% in FY14 to 2.1% by FY16 and during the period earnings CAGR is estimated at strong 25%. However, lofty valuation (3x FY16 P/ABV for the stand-alone bank, in-line with HDFC Bank) limits absolute upside in the medium term.


Financial Summary
Y/e 31 Mar (Rs m) FY13 FY14 FY15E FY16E
Total operating income 43,663 51,191 60,020 74,378
yoy growth (%) 25.1 17.2 17.2 23.9
Operating profit (pre-prov) 21,566 25,765 29,891 38,223
Net profit 13,606 15,019 18,356 23,384
yoy growth (%) 25.4 10.4 22.2 27.4
 
EPS (Rs) 18.2 19.5 23.8 30.4
Adj.BVPS (Rs) 122.4 152.0 174.4 202.0
P/E (x) 48.6 45.4 37.1 29.2
P/BV (x) 7.2 5.8 5.1 4.4
ROE (%) 15.6 13.8 14.0 15.4
ROA (%) 1.8 1.8 1.9 2.1
Dividend yield (%) 0.1 0.1 0.1 0.1
CAR (%) 16.0 18.8 17.2 16.0
Source: Company, India Infoline Research

***Note: This is a NSE Chart

 

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