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Add Kotak Mahindra Bank Ltd For Target Rs.2,023

Kotak Mahindra Bank’s (KMB) Q1FY22 earnings were being assessed on a few specific metrics like slippage run-rate, credit cost behaviour and loan growth. Credit cost at 130bps was better than expected as slippages were contained at 2.8%. Net stress pool (post covid buffer) at 0.6% provides comfort on credit cost trajectory. Growth momentum failed to cheer and lagged its private sector peers (down 2.8% QoQ, up 6.6% YoY on a low base). Given investments in technology and people to tap opportunities available with best-in-class liability franchise, growth is now looking up.

NIMs settling at 4.6% (above expectations) reflects strength of the liability franchise. Higher employee costs offset the benefit of NIMs while earnings were in line with expectations. Consolidated earnings were impacted by loss in life insurance and elevated stress in auto financing. Earnings momentum in Kotak Securities, KMCC and Kotak AMC was robust. Maintain ADD with the target price unchanged at Rs2,023. Key risks: 1) lower than anticipated growth restricting RoE improvement; 2) succession planning related to MD&CEO retirement in Dec’23.

* Slippages contained at 2.8%; restructured pool at 25bps:

Management highlighted slippages of Rs15bn (2.8% run-rate vs >4% in H2FY21). Bulk of the slippages flowed from retail and commercial segment (namely tractors, CV, CEs). Corporate portfolio displayed resilience and MSME behaviour too was steady. Bounce rates in July are similar to fourth quarter of last year. Slippages were more pronounced in segments resorting to cash collections due to physical inability to reach out to customers to collect. Collections were impacted in April and May, but improvement was visible in June and July. GNPAs, as anticipated, rose to 3.56% (from 3.25% in FY21). Bank has not resorted to sale of any assets to ARC. SMA-2, given these challenging times, constituted 20bps of advances (compared to a mere 5bps in FY21). Bank has implemented restructuring of Rs5.5bn – 25bps of advances. Given stable bounce rates, steady recoveries in June and robust collection momentum in July, the management is confident of sailing through covid second wave relatively well.

* Credit cost at 130bps; net stress pool at 60bps:

Credit cost in Q1FY22 was lower than expectation at 130bps as provisioning was primarily towards incremental stress. Bank neither dipped into, nor created any additional buffer in Q4FY21. Besides covering loan loss, further provisions (Rs2.1bn) were investment-related. Provisioning coverage improved 120bps to 64.8% and net NPAs were contained at 1.28% (higher than the average of 0.7-0.9%). This needs to be looked in conjunction with standard provisioning (Rs10bn) + covid-related buffer of Rs12.8bn (60bps of advances). Considering the Q1FY22 trend, we are building-in credit cost at 1.2%/1.0% for FY22E/FY23E.

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