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Steady core performance; PAT impacted by MTM losses

KMB’s 1Q23 profits at INR 21bn (+26% YoY, -25% QoQ) - were impacted by sizeable MTM losses on the AFS portfolio (61% of the investment book). At the core, however, NIMs continued to uptrend (+32bps YoY, +14bps QoQ) on account of a) asset book- partly getting re-priced higher, b) proportion of unsecured retail increased to 7.9% (vs. 5.6% in 1Q22) and c) deployment of excess liquidity (LCR stood at 119% (vs 130% QoQ)). Incrementally, we believe, Kotak has further levers to accelerate deposit growth and yet protect its strong NIMs given management is looking to raise share of unsecured book to mid-teens from 7.9% currently and CASA ratio remains strong (58.1%). Loan growth was healthy at +29% YoY (also on a low base), +3% QoQ led by unsecured retail (+81% YoY, +18% QoQ) and mortgages (+46% YoY, +6% QoQ). Opex growth has accelerated and is likely to remain high given spends on technology and distribution. Gross slippages (2% of loans (annualised)) were a tad elevated impacted by RBI’s directive on overdraft facilities while net slippages were minimal (0.2%) given bulk of the slippages got upgraded during the quarter. Kotak has continued to reverse COVID provisions (only bank among large pvt. players) and it resulted in low credit costs for 1Q. We believe success on deposit momentum with continued strong risk-adjusted margins will drive Kotak’s outperformance incrementally and sustain its premium valuations. Succession clarity remains a key overhang. We maintain our BUY rating with a SoTP-based target price on INR 2,000 (valuing the bank at 2.8x FY24E BVPS).

Asset quality remains in fine fettle: Slippages were a tad elevated at INR 14bn (2% of loans (annualised)) due to impact of RBI directive on out of order accounts, however c.54% of the slippages got upgraded within 1Q23 itself. GNPLs/NNPLs improved to 2.24%/0.62% (-10bps/-2bps QoQ) on account of strong recoveries/upgrades. Total restructuring pool declined to 0.38% of loans (vs 0.44% QoQ) and SMA-2 was limited to 0.06% (vs 0.07% QoQ). KMB’s Covid related provision stood at INR 4.8bn (0.2% of loans) and should provide comfort against future contingencies. KMB’s top-notch underwriting and upfront recognition of stress, unwavering focus on risk based pricing and willingness to sacrifice growth in stressed sectors, should aid KMB in maintaining robust asset quality and we build in credit costs of 0.4% over FY23/24E.

Loan growth stays strong; NIMs improve 14bps QoQ: Loan growth was robust at +29% YoY/+3% QoQ driven by mortgages (+46% YoY, +6% QoQ), unsecured retail (+81% YoY, +18% QoQ) and business banking (+25% YoY, +0.4% QoQ) segments. While corporate banking growth was lower at +11% YoY/flat QoQ due to competition led prcicng pressure. Deposits growth was limited to +10% YoY/1.5% QoQ with CASA at 58.1% (-260bps QoQ, CA deposits declined 12% QoQ). NIMs for the quarter improved to 4.92% (+32bps YoY/+14bps QoQ) led by asset book getting repriced higher (though partially), deployment of excess liquidity and rising share of unsecured lending (7.9% of loans vs 5.6% in 1Q22). Management highlighted that 69% of the book is linked to floating rate (50% EBLR- 3 month reset period, 19% MCLR/base rate- 6 month reset period) and expects the re-pricing benefit to flow in 2Q23E. PAT stood at INR 21bn (+26% YoY/-25% QoQ) due to MTM loss of INR 8.6bn and higher opex (+31%YoY/+5% QoQ), partially offset by strong NII growth (+19% YoY/+4% QoQ) and lower provisions (-97% YoY). Post the MTM hit taken this quarter, AFS+HFT (forming 61% of the investment book has been re-priced) and has a modified duration of c.1year, thus we expect trading losses to be limited going forward.

 Update on subsidiaries: Life insurance subsidiary reported a PAT of INR 2.5bn (vs. loss of INR 2.4bn in 1Q22) and gross written premium grew by +36% YoY. For NBFC subsidiaries- a) KMPL- PAT stood at INR 1.6bn (+99% YoY,-50% QoQ) and management highlighted that PBT was lower by INR 1.1bn due to accounting policy change for brokerage, b) KMIL- PAT stood at INR 0.6bn (-11% YoY,-38% QoQ). Kotak Securities reported a PAT of INR 2.2bn (-7% YoY,-13% QoQ), while cash and overall market share stood at 10.4% (+80bps YoY) and 4.3% (+190bps YoY) respectively

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