Q3FY24 Review: Kotak Mahindra Bank: In-line PPOP led by stable margins

23 Jan 2024 , 02:07 PM

KMB’s Q3 PPOP was in line, but PAT was 3%/6% below consensus/IIFLe; due to AIF provision of Rs 1.9bn. With 16-17 bps of increase in asset yield offset by a similar rise in COF, NIM was flat QoQ. Consumption of excess liquidity and increase in LDR to 88% aided yields. However, analysts of IIFL Capital Services expect NIMs to decline in the near term, owing to higher residual deposit re-pricing. GNPA ratio was stable because of higher write-offs, even as recoveries and upgrades were lower. Analysts of IIFL Capital Services fine-tune their FY25-26 estimates and raise TP to Rs1,880 (4% upside), as they roll forward to FY26. Analysts of IIFL Capital Services believe NIM contraction and normalisation in credit cost should drive 20 bps of ROA decline. Retain REDUCE. 

NIMs stable; loan growth slows. 

Loans grew 3% QoQ/16% YoY, led by retail loans; while corporate loans de-grew 2.4% QoQ. Unsecured loans grew 44% YoY, and the bank intends to increase its share to midteens from the current 11.6% of loans. NIM was flat because the higher yields (thanks to consumption of excess liquidity and increase in LDR) were offset by a similar rise in the cost of deposits. Analysts of IIFL Capital Services expect NIM to stay under pressure, due to higher residual deposit re-pricing, and weakening liability franchise as per their ‘Race for Deposit’ analysis. 

Asset quality stable.

Net slippages inched up to 1.0% (vs 0.5% in Q2) due to lower recoveries and upgrades (Rs2.9bn). GNPA ratio remained flat as write-offs increased to 0.8% (vs 0.2% in Q2). The bank provided Rs1.9bn for AIF investments leading to higher than expected credit costs at 0.65%. Overall asset quality remains stable with PCR at 81% 

Risk-reward unfavourable. 

Based on analysts of IIFL Capital Services ‘Race for Deposits’ analysis, Kotak is a laggard among peers. They expect the bank’s COF to cease to be the best in class. They think Kotak’s distinct and superior earnings drivers are dissipating, and the franchise is becoming homogenous vs the larger peers. NIM contraction and normalisation in credit cost should drive 20 bps of ROA decline. Kotak is trading at 2.6x FY25 core P/ABV for FY25-26 ROA/ROE of 2.2%/14%. Analysts of IIFL Capital Services SOTP based TP of Rs1,880 is based on 2.3x FY26 P/ABV for the bank and subs at Rs488/share.