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Kotak Mahindra Bank (KMB) posted a 7% beat on PAT at Rs25.8bn, mainly owing to better margins and continuation of the contingent-provision drawdown leading to lower LLP, albeit partly offset by higher opex on significantly-higher staff expenses. KMB expects opex to stay elevated, given investment in branches/technology and Mgmt hiring across verticals

Credit-growth momentum was strong at 25% YoY/5% QoQ, mainly led by robust growth in mortgages, vehicles and unsecured loans. Bank’s CASA book de-grew for a 2nd quarter in a row due to cannibalization in the HNI customer segment. NIMs improved 25bps QoQ to a high of 5.2% on asset re-pricing, but could moderate as deposit growth accelerates

Asset quality continues to improve, with 16bps contraction in GNPA ratio to 2.1%, while Bank does not see any incremental asset quality risk and continues to consume the contingent-provision buffer, unlike large peers. Lower incremental stress and rundown in the contingent buffer should support profitability.

We expect the bank to deliver strong RoA of around 2.1%, while RoE will improve to 14% by FY25E. We retain BUY, with TP of Rs2,230, based on standalone P/ABV of 3.4x Sep24E ABV and subsidiaries’ value of Rs620/share; but we believe that the impending MD change in Jan-24 will be a key overhang on the stock in the long run.

What we liked: Continued retail-driven, strong credit growth and healthy uptick in margins (25bps QoQ). What we did not like: Higher staff cost and CASA de-growth.

Sustained strong delivery on growth/NIMs, but SA growth disappoints: Overall credit growth accelerated to 25% YoY/5% QoQ, mainly led by strong growth in the retail book (up 34% YoY/7% QoQ) and pick-up in the commercial/agri book. Among retail, growth was strong in mortgage, vehicle and unsecured loans. Bank remains focused on growing its unsecured book, in which it targets mid-teen growth (incl. MFI). On the deposits front, Bank’s CASA growth was poor, as it de-grew for two consecutive quarters, particularly in the HNI customer segment. Hence, the bank was compelled to decrease the spread between SA rates and Liquid rates. NIMs surprised positively, with a 25bps uptick, which was mainly owing to asset re-pricing & faster growth. KMB has guided for healthy credit growth led by retail, and will continue pursuing opportunities in the mid-corporate segment.

Asset quality improves; thus, Bank continues to consume the contingent buffer: Slippages moderated to Rs9.8bn/1.7% of loans, but healthy recoveries/w-offs and upgrades have led to a 16bps QoQ contraction in the GNPA ratio to 2.1%. The cumulative restructured pool declined to Rs9.9bn/0.3% of loans (0.4% in Q1), which is the lowest among large peers. The bank continues to draw down its contingent buffer (Rs0.4bn), which now stands at Rs 4.4bn/0.15% of loans. Bank remains confident about its asset quality and expects LLP to be contained in FY23.

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