Maintain REDUCE on Kotak Mahindra Bank - Strong profitability but growth remains elusive - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

Kotak Mahindra Bank's (KMB) 1QFY22 performance was broadly in line with our estimates on the back of continued funding cost tailwinds resulting in sequentially stronger NIMs even as loans shrank 2.8% QoQ. Annualised slippages were up at 2.8% (FY21: 2.4%) as collections were affected during Apr- May'21 on account of the second wave (as witnessed by peers), with most of the stress emerging from secured retail portfolio. KMB maintained its stock of COVID provisions and the loan loss coverage at ~65%. We believe that current valuations factor in a high-quality franchise and best-in-class profitability (RoAs >1.8%) - however, we await growth catalysts (thus far elusive) before we can turn more constructive on the stock. Maintain REDUCE with an SOTP target price of INR 1,747 (standalone bank at INR1,378, 3.6x Mar'23 ABVPS).

Credit growth disappoints: KMB's loan book clocked a 2.8% de-growth QoQ - including credit substitutes, loan growth clocked in at +8.6% YoY. The management articulated its long-term target of growing in its segments of choice (commercial banking, SME and retail) while maintaining its risk-adjusted RoE. The bank disbursed INR 5bn of ECLGS during the quarter (total disbursements at INR 119bn, 5.5% of loan book). We expect loan growth of 12.6/14.6% in FY22/FY23E.

Hallmark - pristine asset quality: KMB reported marginally higher GNPAs at 3.6% (+30bps sequentially) as slippages clocked in at 2.8%, predominantly from secured retail portfolio (tractors, CV and CEs). The SMA-2 book increased to INR 4.3bn (20bps) from INR 1.1bn (5bps) in FY21, alongside a marginal increase in the restructured portfolio to 25bps of loans (Q4FY21: 19bps). We expect slippages of 1.7%/1.6% in FY22/FY23E. Credit costs clocked in at 1.4%, as the bank chose to maintain its stock of COVID provisions (INR 12.8bn, 0.6% of loans) and its loan loss coverage at 65%.

Subsidiaries disappoint; maintain REDUCE: KMB's consolidated profit was lower 30% sequentially (-2.5% YoY), primarily on account of loss in Kotak Life (consistent with the profit warning issued by the management earlier). Kotak Prime also reported lower PAT (-57% QoQ) as collections and disbursements continued to be impacted on account of the second wave. However, the operating performance of the AMC business, securities business, and investment banking business continued to remain robust. We believe that the current valuation (standalone bank at 3.6x Mar'23 ABVPS) factors in best-in-class profitability (RoAs >1.8%) - however, it is worth highlighting that these ratios appear optically better in a low-growth mode. We await growth catalysts (thus far elusive) before we can turn more constructive on the stock and maintain our REDUCE rating.

Shares of KOTAK MAHINDRA BANK LTD. was last trading in BSE at Rs. 1697.95 as compared to the previous close of Rs. 1740.4. The total number of shares traded during the day was 66798 in over 5312 trades.

The stock hit an intraday high of Rs. 1750.95 and intraday low of 1695. The net turnover during the day was Rs. 114519846.

Source : Equity Bulls

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