Kotak Mahindra Bank - Prudence, caution, conservatism to further enhance stability - ICICI Securities

Balance sheet prudence, risk aversion (LCR>150%, loan portfolio rundown of >7% QoQ), conservative recognition (slippage run rate at >1.5%), cost agility, digital focus, scaling non-credit businesses - broadly summarise Kotak Mahindra Bank's (KMB) Q1FY21 performance. Morat-2.0 showed encouraging signs - sharply down to 9.65% (from 26% in April). Like peers, KMB too created further Covid provisions of Rs6.7bn (cumulative buffer now at ~60bps of advances). Cautiously weighing risk-reward, it is going slow on growth across most segments. This, with steady deposit flows, led to huge surplus liquidity suppressing NIM by 20bps QoQ despite the benefit of lower deposit cost and recent equity raise. Contingency buffer, unrealised treasury gains (Rs30bn), cost agility and low-cost deposit base will ensure earnings stability, but high capitalisation (tier-1 at >20%) might depress RoEs. Stability deserves premium; maintain BUY.

- Morat 2.0 witnessed sharp improvement to 9.65% in June (from 26% in April): This included 9.15% from Morat 1.0 and ~80% from Morat-2.0, which are secured in some form. Moratorium is offered only if there is reasonable confidence on fundamental viability, and if that is not found the bank has preferred to recognise it as stress. Out of Rs8bn slippages, Rs5bn was accelerated and Rs1bn-2bn was one corporate account. GNPLs therefore rose from 2.25% in Q4FY20 to 2.7% in Q1FY21. KMB also prudently continued with contingency buffer leading to credit cost of >175bps.

- Back-foot on growth front: Extreme caution on growth in this turbulent phase is reflected in consolidated advances (including credit substitutes) being down 3% with loans running down >7% QoQ. Corporate lending was down >10% QoQ (flat YoY) compared to >35% growth in FY20. Also, SME and commercial banking was down >8% QoQ though the bank has ramped up disbursements under ECLGS in July (from Rs5.5bn in June to Rs40bn by 23rd July).

- Surplus liquidity outweighs deposit cost benefit: Despite drop in savings rates (SA cost down 100bps to 4.2%), SA accretion continued - up 5% QoQ (CASA stable at 56.7%). However, surplus liquidity drag and chase towards low-risk assets led to 20bps NIM decline. KMB has not rushed to book investment gains to cushion earnings and holds on to an unrealised gain of Rs30bn (Rs10bn accrued in Q1FY21).

- Cost agility: Lower business activity, discretionary cost curtailment, focus on digitisation and efficiency, helped KMB cut operating expenses by 18% YoY / 29% QoQ ('cost to income' at 41%). This is not a new normal, nor is it sustainable, and with rise in activity level it might rise further. The benefit was offset by >30% YoY decline in fee income.

- Valuations - stability deserves premium: Conservatism, risk cautiousness and stability take precedence in a turbulent phase like the current one. We however see enough levers available to maintain earnings stability and all necessary ammunition to accelerate growth as the environment stabilises. Maintain BUY.

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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