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Published on 12/11/2020 12:54:33 PM | Source: Emkay Global Financial Services Ltd

Hold Kotak Mahindra Bank Ltd For Target Rs.1,465 - Emkay Global

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After fortifying liabilities, shows intent to focus back on asset growth

* Despite subdued credit growth, KMB reported a strong beat on PAT at Rs21.8bn, up 27% yoy, mainly due to high treasury gains (including equity) and contained provisions as the bank believes that it is well guarded for the incoming asset quality stress.

* GNPA ratio was down qoq at 2.55% due to SC stay on NPA tagging, while proforma ratio was flat at 2.7% partly due to proactive recognition in Q1. Kotak Prime (sub) continues to report asset quality deterioration, partly exacerbated by contraction in the portfolio.

* KMB has now the industry-best liability profile with a CASA ratio at 57%, but credit growth trajectory has been sub-par for the last two years, despite strong capital, due to its conservative management style. The bank has not given any numerical guidance, but has shown strategic intent to accelerate growth, led by secured products to begin with.

* We raise earnings estimates for FY21-23E by 10-19%, factoring in better growth/margins and moderation in LLP. We revise our TP to Rs1,465 vs. Rs1,360 earlier and retain Hold/UW in EAP, given moderate return ratios against high valuations (2.9x core P/ABV adj. for subs valuation of Rs353).

 

Credit growth subdued, but NIMs improve due to lower CoF: Overall loan growth remains subdued (down 4% yoy/up 0.4% qoq) mainly due to contraction in the corporate and retail book as the bank turned cautious after Covid-19-induced disruption. The bank has disbursed ~Rs81bn to SMEs under the ECGLS scheme, which is nearly 5% of systemic disbursement vs. its otherwise lower SME book share of ~2-3%. Amid the better growth outlook by large peers, KMB too has now shown a strategic intent for growth, beginning with secured loans while retaining a conscious stance on unsecured loans. Deposit growth also moderated to 12% yoy, but CASA growth remained healthy at 20% yoy with industry-best CASA ratio at 57%. The bank has trimmed saving deposits rate to 3.9% (vs. 5.3% in Q2FY20), which coupled with recent capital raise aided a 12bps qoq rise in NIM to 4.5%. We believe that better LDR and spill-over effect of recent SA rate cut should keep margins healthy.

 

NPA formation well under control; guides for soft-landing:

Fresh slippages were lower at 0.5% (1.5% in Q1) due to SC stay on NPA tagging, excluding which it would have been at ~1.1% due to pro-active recognition in Q1. As per management, overall collection efficiency in Oct’20 has improved in line with the industry, while recoveries in secured loans are now near at pre-Covid levels. Despite strong core earnings and treasury gains, the bank did not made any material additional contingent provisions in Q2 as it believes that the current provisioning buffer of Rs12.7bn (62bps of loans) is largely sufficient and the overall impact on the asset quality in H2 will be lower than anticipated. That said, these expectations are largely based on current collection trends and any risk of the second wave of Covid-19 infections could derail collection efficiency.

 

NPA formation well under control; guides for soft-landing: Fresh slippages were lower at 0.5% (1.5% in Q1) due to SC stay on NPA tagging, excluding which it would have been at ~1.1% due to pro-active recognition in Q1. As per management, overall collection efficiency in Oct’20 has improved in line with the industry, while recoveries in secured loans are now near at pre-Covid levels. Despite strong core earnings and treasury gains, the bank did not made any material additional contingent provisions in Q2 as it believes that the current provisioning buffer of Rs12.7bn (62bps of loans) is largely sufficient and the overall impact on the asset quality in H2 will be lower than anticipated. That said, these expectations are largely based on current collection trends and any risk of the second wave of Covid-19 infections could derail collection efficiency.

 

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