Add Kotak Mahindra Bank Ltd For Target Rs. 2,023 - ICICI Securities
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Slippages and credit cost elevated; structurally ready for growth
Kotak Mahindra Bank’s (Kotak) Q4FY21 earnings disconcerted on two counts: 1) higher provisioning at >200bps (vs 120bps in 9MFY21) and slippages at 4% in H2FY21 (2.5% for FY21), quite uncharacteristic of Kotak. However, on a positive note, GNPAs settled near Q3FY21 proforma levels, restructuring was a mere 0.2%, and SMA-2 pool negligible at 5 bps. 2) On guided lines, loan growth sustained 4.5% QoQ momentum, yet lags its private sector peers with mere 2% YoY growth, due to cautious stance on unsecured lending and pricing focus in corporate banking.
NIMs sustained at 4.4% though derailed growth weighed on NII momentum (otherwise >15%). Below-expected banking business performance was offset by higher earnings traction in subsidiaries (be it auto financing, securities, investment banking or asset management). Maintain ADD with 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.
* Succession planning to be long-term and strategic:
RBI (on 14th Dec’20) approved re-appointment of Mr. Uday Kotak as MD & CEO and Mr. Dipak Gupta as Joint MD for a period of three years w.e.f. 1st Jan’21. Given their current tenure is till Dec’23, they have an opportunity to serve for another two years and eight months till retirement. However, considering RBI’s circular on MD&CEO and WTD tenure cap, Kotak will put in place long-term, strategic succession planning evaluating all various options. Bank and the Board would take steps to ensure growth in stakeholder and shareholder value. As part of the promoter family, Mr. Kotak is committed to be a long-term shareholder.
* Slippages elevated though GNPA settles near Q3FY21 proforma level; restructuring at mere 20bps:
Management highlighted slippages of Rs44bn in H2FY21 (suggesting >4% run-rate However, with lower slippages in H1FY21 of mere Rs10bn, full-year slippages were at 2.5%. Management earlier had highlighted that unsecured retail lending was throwing disproportionate stress. Infact corporate banks segment has displayed tremendous resilience – corporate slippages in FY21 were lower than FY20. With write-offs of Rs5bn, and recoveries and upgrades, GNPA was stable at 3.25% (compared to 3.27% reported in Q3FY21). The bank has not resorted to sale of any assets to ARC. SMA-2 even in these challenging times was negligible at mere 5bps. Bank has restructured 0.2% of advances against the approved restructuring of 0.28% in Q3FY21. Given the resilience in asset quality displayed in FY21 with GNPAs at 3.25% and credit cost (excluding covid provisions) at 84bps, it is confident of sailing through covid 2.0 relatively well.
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