Kotak Mahindra Bank - Q1 FY21 - ADD - YES Securities

(Target Rs1,435, Upside 8.5%)

Kotak Bank delivered a 15% beat on our core PPOP estimate enabled by a stronger NII growth (18% yoy), resilient fee performance and steeper decline in opex. Core PPOP grew by 17% yoy, despite Covid impacting fees. Disappointingly, the loan book and customer assets (incl. credit substitutes) de-grew sequentially by 7% and 5% respectively. Barring mortgages and tractor loans, portfolios in all other credit segments contracted. Bank's focus on building high-quality deposit franchise remains unwavering. Despite reducing SA rates, avg. SA grew 34% yoy and SA alone formed 42% of deposits. On computed basis, the cost of funds fell materially. Unlike peers, Kotak Bank chose to not book treasury gains on bond portfolio (MTM at Rs30bn+) at current juncture. It would do so at an appropriate time to cushion the P&L.

Portfolio under 2nd morat is at 9.65% of loan book (includes 9.2% from 1st morat), far lower than 26% in 1st morat as of April 30. About 80% of the 2nd morat book is secured. Bank assessed viability of each business/customer seeking morat in the 2nd phase. Unviable businesses/customers were not given morat and were allowed to slip buckets or flow into NPLs (reason behind higher slippages in Q1). Additional Covid provisions of Rs6.2bn in Q1 took the cumulative balance to Rs12.7bn (0.6% of adv.). In comparison to peers, the bank holds a lower buffer. Maintain ADD. While we lower growth estimates, earnings still get an upgrade from likely large treasury gains and resilient NII growth. FY21 credit cost will be high, but FY22 should be much lower. Core Bank trades at 2.8x FY22 P/ABV; still a 15% valuation premium to HDFC Bank.

Shares of KOTAK MAHINDRA BANK LTD. was last trading in BSE at Rs.1382.75 as compared to the previous close of Rs. 1322.45. The total number of shares traded during the day was 220715 in over 11367 trades.

The stock hit an intraday high of Rs. 1401.1 and intraday low of 1321.9. The net turnover during the day was Rs. 301780491.

Source : Equity Bulls

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