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Long term prospects intact…

Kotak Mahindra Bank reported a mixed set of numbers on the operating front while credit growth trajectory on a sequential basis was maintained. Kotak Bank posted lower-than-expected NII growth at 8.0% YoY to | 3842 crore, mainly on account of 34 bps YoY and 19 bps QoQ decline in net interest margins. The bank took a hit of ~| 110 crore in NI line for relief on interest on interest.

Non-interest income (NII) reported a sharp jump of 31% YoY, 51% QoQ to | 1949 crore, driven by 23% QoQ rise in fee income and treasury gains (PBT level) of | 898 crore vs. | 48 crore QoQ. Cost to income ratio declined ~258 bps YoY with 9.4% QoQ reduction in employee expenses due to lower retirement benefits due to improved interest rates. The bank made elevated provisions worth | 1179 crore, up 181% QoQ. Thus, PAT came in at | 1682 crore, slightly below our estimates. Asset quality, on a reported basis, saw GNPA rise of 99 bps QoQ from 2.26% to 3.25% as Supreme Court quashed standstill asset classification norms.

However, considering previous quarter proforma GNPA level of 3.27% there was a tad improvement. The bank has implemented total restructuring of | 435 crore, 0.19% of loans. SMA 2 outstanding declined from | 654 crore to | 110 crore. Kotak Bank has provisions worth | 1279 crore for Covid-19 related stress while total provisions held were at 95% of GNPA.

Loan growth maintained its previous quarter’s trajectory as advances were up 4.5% QoQ, 1.8% YoY to | 223689 crore, positive growth on yearly basis for last four quarters. Growth was largely driven by 9.5% QoQ jump in home loan portfolio, 9.1% QoQ rise in CV/CE segment and 7.7% uptick in agri finance. Corporate banking segment remained a drag as it was down 6.8% YoY and flattish QoQ. Deposit growth came in at 6.6% on a yearly basis was among the lowest in past many quarters but sequentially deposits were up 5.6% to | 280100 crore.

CASA deposits showed strong 8.5% QoQ growth and as a result CASA ratio increased from 58.8% to 60.4% QoQ. Consolidated PAT came in at | 2589 crore; up 36% YoY driven by healthy performances of subsidiaries as well as bank’s YoY PAT growth of 33%. Overall performance of subsidiaries was decent with Kotak Securities positing healthy 48% YoY growth in earnings at | 241 crore. Kotak Life posted 17% YoY growth in PAT at | 193 crore. Kotak Prime, the non-banking arm, witness 14.3% YoY growth in earnings at | 184 crore.

Valuation & Outlook

KMB’s long term focus continues on maintaining risk adjusted returns. Credit growth momentum has been maintained sequentially, which is positive. Recent RBI announcement of limiting MD & CEO term to 15 years may not impact the bank immediately as there is adequate time of over 2.5 years for a smooth transition.

Comfortable provision provides comfort regarding volatility in asset quality and, thus, earnings. Consistent performance over a period of time, healthy return ratios ~2% RoA &13% RoE with strong management are reasons for premium valuations. We maintain our BUY rating with an SOTP target price of | 2040 (unchanged).

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