Higher LLP, capital raise to depress RoEs; valuations remain demanding
* Despite healthy NIMs, which led to strong PPoP at 19.4% yoy, Kotak reported lower PAT of Rs12.7bn due to contingent Covid-19 LLP of Rs6.5bn (30bps of loans). GNPA ratio declined 21bps qoq to 2.3% due to the moratorium (~2.6% ex-moratorium).
* Credit growth remained subdued at 7% yoy (consol-3% yoy), given the bank’s conscious stance, but deposit/CASA growth has been stronger. Nearly 26% of the loan portfolio is under the moratorium. Kotak believes that the govt’s SME guarantee scheme should easeoff some portfolio risk and facilitate lending in this space.
* The bank is planning a fresh issue of 65mn shares to shore up its capital (Tier I ~17%) and reduce promoter stake by 1% to 29%, but in the process, it may depress RoEs to 11- 12% over FY21/FY22. However, promoter will have to further reduce stake to 26% before Sep’20 to meet RBI requirement.
* KMB offers a safe harbor in the current risk-off environment, given its strong liability/capital buffer, traditionally conservative underwriting and pedigree management. We retain Hold/UW in EAP, with a TP of Rs1290 due to its rich valuations.
Deposits soar, but credit growth slips: The bank’s loan growth slipped further to 7% yoy due to lower utilization of working capital limits and risk averseness adopted by the bank across business segments. However, deposit/CASA growth was far stronger as it benefits from the flight to safety from small, mid-sized private banks post-Yes Bank fiasco and its otherwise higher rate on SA. Its CASA ratio now stands at an industry high level of 56%. This, coupled with steady loan yields, led to high and healthy NIMs at 4.7%. As a strategy, the bank has further trimmed its savings rate, given the strong SA flow without any risk of customer drop-out, which along with capital raising should support the bank’s margins.
Headline NPA down due to moratorium: GNPA was down by 20bps QoQ due to lower slippages of Rs4.9bn, in turn due to the moratorium (Rs6.6bn) and absence of lumpy corporate NPA. Adjusting for the moratorium, GNPAs would have been higher by 30bps to 2.55%. The bank has created contingent Covid-19 provisions of Rs6.5bn; 30bps of loans in Q4, which is a tad below Axis @60bps and ICICI @40bps. Separately, the bank has made provisions of Rs0.5bn (0.3% of loans) in Kotak Prime and Rs0.14bn (0.24% of loans) in Kotak Investments. Given Kotak’s conservative underwriting standards, we believe that the overall asset quality disruption for the bank could be lower vs. peers, but we remain concerned around its CV (8% of consol loans), PL/CC – 6% and CRE loans (6% incl LRD).
Outlook and valuation:
We have cut our FY21/22 earnings estimates by 9% due to slower growth/higher LLP and also introduce FY23 estimates. The bank is already well-capitalized, with CET 1 at 17%, but raising capital (65mn shares) to shore-up capital buffer and reduce promoter stake, which will depress the bank’s RoE to 11-12% from 13% in FY20. We maintain Hold, with a TP of Rs1290 (based on 2.8x FY22E core ABV + subsidiaries’ valuation of Rs337 per share), and UW stance in EAP. Key risks to our call are: Higher-than-expected NPA formation and slower growth.
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