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Add Kotak Mahindra Bank Ltd For Target Rs.2.453

KMB displays standout sequential growth, We await sustained delivery

Result Highlights

* Asset quality: Gross slippage amounted to Rs 12.93bn (annualized slippage ratio of 2.3%) but recoveries and upgrades were also healthy at Rs 13.5bn.

* Margin picture: NIM declined 15 bps QoQ to 4.45% due to loan mix change and most of the growth being back-ended.

* Asset growth: Advances grew 8.0%/14.7% QoQ/YoY driven on sequential basis by all-round growth, barring the CV/CE segment.

* Opex control: Total opex rose 12.9%/31.2% QoQ/YoY, employee expenses rose 8.8%/18.9% QoQ/YoY and other expenses rose 16.2%/42.5% QoQ/YoY.

* Fee income: Fee income rose 21.4%/34.2% QoQ/YoY as business activity improved on sequential basis.

Our view – KMB displays standout sequential growth, We await sustained delivery

All restructuring including MSME restructuring amounts to 54 bps of loan book: Credit costs for the quarter were 63 bps. Total non-tax provisions for the quarter amounted to Rs 4.24bn, of which Rs 3.85bn were provisions on advances and the remainder on investments. Collection efficiency is back to normal in commercial vehicle finance and agri SME segments, near normal in microfinance and much improved in the tractor finance segment.

Management commentary alluded to possible NIM expansion going forward: Management stated that corporate spreads have been maintained over the year and that pricing power in this segment will return. They further stated that the bank is not fixated on the recent rear-view mirror, when growth has come from low-yielding home loans. Prospectively, an incrementally higher proportion of growth will come from unsecured retail and business banking, which are higher-yielding.

Management reminded us that the bank had slowed prior to the GFC, before accelerating: Sequential growth for the home loan, secured small business loans, noncards unsecured retail and credit card dues delivered standout growth of 10.5%, 9.7%, 10.6% and 13.4% QoQ, respectively.

We maintain ‘Add’ rating on KMB with a revised price target of Rs 2453: We value the consolidated bank at 4.5x FY23 P/BV for an FY22E/23E/24E RoE profile of 12.4/13.2/14.0%.

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