Reduce Kotak Mahindra Bank Ltd For Target Rs.1,717 - HDFC Securities
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Positives fully priced in
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).
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