Kotak Mahindra Bank Rating: Buy- A strong second quarter for company

Kotak Mahindra Bank (KMB) reported a strong quarter – with lower provisions and higher treasury income boosting earnings, even as core PPOP grew 19% y-o-y. The bank reported an uptick in fee income and margins too expanded 12bp q-o-q, while loan growth stood flat. On the asset quality front, slippages stood lower (partially aided by the SC order), driving sequential improvement in asset quality ratios, while PCR increased to 76%. The bank carries total COVID-19 provisions of Rs 12.79 bn (0.6% of advances).

On the business front, the loan book stood flat q-o-q, reflecting the bank’s cautious approach in a weak environment. Disbursals under the ECLG scheme exceeded Rs 81 bn in Oct’20 (Rs 76 bn as of end-Sep’20), while the Agri/Tractor portfolio reported healthy growth. CASA growth remains steady, driving further improvement in the CASA mix to 57.1%. We increase our FY21/FY22 earnings by 27%/20%, aided by steady revenues and sharp decline in provisioning expenses. We upgrade to Buy, following a gap of 10 quarters, when we had downgraded our rating to Neutral, nearly at current price.

Steady growth in revenue/core PPoP
KMB reported standalone PAT of Rs 21.8 bn (+27% y-o-y), boosted by (i) treasury gains, (ii) lower provisions at Rs 3.7 bn (-62% q-o-q), and (iii) 17% y-o-y growth in total revenues. Consolidated profit grew 22% y-o-y to Rs 29.5 bn. NII grew ~17% y-o-y to Rs 39.1 bn, supported by sequential recovery in margins to 4.52% (v/s 4.4% in Q1FY21). Other income grew 19% y-o-y, while fee income grew 36% q-o-q (9% y-o-y decline). Opex stood flat y-o-y (+10% q-o-q), resulting in PPoP growth of 31% y-o-y.

Loan book declined 4% y-o-y to Rs 2.0 trn (flat q-o-q, after 7% q-o-q decline in Q1FY21), while deposits grew 12% y-o-y to Rs 2.6 trn. CASA deposits increased ~20% y-o-y. Slippages came in at ~Rs 2.6 bn. Thus, the GNPA/NNPA ratio declined by 15bp/23bp q-o-q to ~2.6%/0.6%. PCR improved 719bp q-o-q to ~76%. The GNPA/NNPA ratio – without considering any deferment due to the SC order – would have been 2.7%/0.74%. Moreover, the bank made provisions of `920 m toward these accounts.

Subsidiaries reported mixed performances, with PAT down 23% y-o-y for Kotak Prime, up 19% y-o-y for Kotak Life, and rising 34% y-o-y for Kotak Securities.

Highlights from commentary
The bank would now incrementally start focusing on increasing customer acquisitions on the asset side and seeking growth opportunities. The non-urban sector has been growing better than urban and seeing recovery across multiple segments. Collection efficiencies have been improving across segments, but unsecured loans need to catch up in terms of progress.

Valuation and view
The bank continues to report steady progress in building a strong liability franchise, with the CASA ratio improving further to ~57%. Loan growth remains flattish; however, a strengthening liability franchise would improve competitive positioning and aid asset growth. Margins are likely to remain steady going forward.The bank remains confident on the quantum of COVID provisions made (62bp of loans). We introduce FY23 to our estimates. We revise our TP to Rs 1,650 (3.2x Sep’22e ABV + Rs 493 for subs).