REDUCE on Kotak Mahindra Bank - Positives fully priced in - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities

KMB's 3Q operating performance was in line with estimates, and was backed by a QoQ revival in credit growth and sustained CASA traction. Current lofty valuations fully price in (1) an imminent pick-up in loan growth momentum, (2) strong CASA traction and resulting CoF tailwinds, and (3) a gradual return to the pre-COVID-19 credit cost trajectory post FY21E. This underpins our REDUCE rating (SoTP value of Rs 1,717).

Pro forma stress rises: Like several banks this quarter, KMB witnessed a rise in pro forma GNPAs to ~3.3% (vs. ~2.7% QoQ), implying pro forma slippages of ~Rs 20bn (3.8% ann.). Retail unsecured loans disproportionately contributed to a majority of incremental stress (~45% of slippages vs. ~6% of loans). We continue to conservatively build GNPAs of ~4.0% in FY21E as we expect SME and unsecured retail loans to contribute to incremental stress as suggested by commentary and significant disbursals under the ECLGS.

Lower-than-expected provisions: Overall non-tax provisions rose 34.9/62.5% to ~Rs 6bn, albeit ~11.3% below our estimates. Adjusted for interest reversals on pro forma slippages, credit costs would've been ~30bps lower at 86bps. The bank held COVID-19 provisions of ~60bps of loans (flat QoQ). We continue to conservatively build LLPs of 1.0% over FY21-23E.

Growth revives, sequentially: While outstanding loans dipped 1.2% YoY, they witnessed a QoQ growth of 4.5%, led by corporate (+5.8%), mortgages (+4.7%) and agri (+5.9%) segments. Commentary suggests that KMB continues to log sustained improvement in monthly business volumes, which are nearing pre-COVID-19 levels across several businesses. We continue to factor in a sharp uptick in loan growth to ~13.6% over FY22-23E.

CASA engine continues to fire: Aggregate deposits grew 10.8/1.7%, while CASA balances grew at nearly double the rate (+21.5/4.5%). Consequently, the CASA ratio rose, yet again, to an all time high of ~58.9% (+517/173bps).

Shares of KOTAK MAHINDRA BANK LTD. was last trading in BSE at Rs.1722.5 as compared to the previous close of Rs. 1762.15. The total number of shares traded during the day was 159665 in over 11121 trades.

The stock hit an intraday high of Rs. 1763.5 and intraday low of 1700.45. The net turnover during the day was Rs. 274059730.

Source : Equity Bulls

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