ADD on Kotak Mahindra Bank - Well-placed, but expensive - HDFC Securities

Posted On : 2020-07-28 22:59:04( TIMEZONE : IST )

ADD on Kotak Mahindra Bank - Well-placed, but expensive - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

KMB's 1Q earnings were below estimates on account of a steep fall in non-interest income. We believe KMB is fundamentally one of the strongest banks, given (1) its strong liability franchise, (2) capital base, bolstered by the recent fund-raise, and (3) demonstrable asset quality track record. Our ADD rating (SoTP value of Rs 1,331) reflects our discomfort on valuations.

1QFY21 highlights: NII grew 17.4/4.6% YoY/QoQ, in line with estimates, aided by a reduction in interest expenses. PPOP grew 9.4% YoY, but dipped 3.7% QoQ, due to a sharp 48.1% QoQ fall in non-interest income (fees dipped 32.5/38.9%), despite operating expenditure dipping 48.1% QoQ.

Funding: While overall deposits were flat QoQ (+12.3% YoY), SA (+34.5/4.9%) and TD sweep (+15.3/8.1%) saw strong growth. On the back of strong SA growth, the CASA ratio rose ~600/60bps to 56.7% (one of the highest in the industry). The bank's CRAR increased to 21.2%, boosted by the Rs 74bn QIP. Evidently, the bank is very well-placed on the capital and liabilities' side.

Moratorium and asset quality trends: GNPAs rose 21.8/11.8% to Rs 56.2bn (2.7%), and accounts overdue in February contributed to most of the slippages. These were mostly granular except for one large account. ~9.7% of KMB's portfolio was under moratorium, vs. ~26% as of April. 95% of the portfolio under the second moratorium came from the first one. The management indicated that the bank was more stringent while offering the second moratorium, and it would recognise stress upfront rather than defer such recognition. We expect slippages of ~2.8% over FY21-22E.

Provisioning: Non-tax provisions, although down 8.2% QoQ to Rs 9.6bn, remained elevated (~3x YoY). KMB made COVID-19 related provisions of Rs 6.2bn in 1Q, taking the total stock of such provisions to ~Rs 12.7bn (62bps of advances). KMB's PCR fell 63bps QoQ to 68.4%. We anticipate non-tax provisions of 1.24% of average assets over FY21-22E.

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