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NIM improves, business expansion stays robust

Kotak Mahindra Bank (“KMB”) is one of the leading banks in India, with over 1,700 branches and 2,800 ATMs

* The bank’s net interest income (NII) grew 8.9% QoQ (+26.3% YoY) to Rs. 7,207cr in Q3FY23, owing to sharp rise in interest on advances and income from investments. Net interest margin (NIM) also improved, widening 30bps QoQ (+85 bps YoY) to 5.47%, with the management projecting NIM to rise slightly further before moderating.

* Reported consolidated profit after tax rose 10.7% QoQ (+17.4% YoY) to Rs. 3,995cr

* Strong loan growth, improved NIM, well-established infrastructure, expansion into new segments, and reduction in non-performing assets (NPAs) should continue to support the bank’s performance over the long term. Hence, we reiterate our BUY rating on the stock, with a revised target price of Rs. 2,010 based on 2.8x FY25E book value per share (BVPS).

Strong NIM with growing asset base

The bank’s consolidated interest income rose 10.2% QoQ (+27.6% YoY) to Rs. 11,011cr in Q3FY23, mainly due to 11.3% QoQ growth (+39.6% YoY or Rs. 8,105cr) in interest on advances and 7.7% QoQ rise (+4.1% YoY or Rs. 2,511cr) in income on investments. Also, interest expense grew 12.7% QoQ (+30.3% YoY) to Rs. 3,804cr. As a result, NII reached Rs. 7,207cr, up 8.9% QoQ (+26.3% YoY). Standalone NIM expanded 30bps QoQ (+85 bps YoY) to 5.47% as well. The management expects NIM to rise slightly in the near term before moderating over the long run, based on trajectory in the repo rate and the bank’s asset mix. Asset quality continued to improve QoQ and YoY, with gross NPA (GNPA) at Rs. 6,730cr (declined 3.4% QoQ and 15.8% YoY). GNPA/net NPA ratio was at 1.91%/0.48% (vs. 2.09%/0.60% in Q2FY23). Advances rose 5.7% QoQ (22.9% YoY) to Rs. 310,734cr, primarily owing to secured and unsecured advances. The bank has committed to increasing unsecured advances as a % of advances from 9.3% to the mid-teens. Provision coverage ratio stood at 77.6%, declined 390bps QoQ. CASA ratio stood at 53.3%, down 290bps QoQ.

Broadening of business and increased investments to boost growth

KMB has committed to diversify its businesses to alternative asset management. The bank expects to have ~$5 billion in assets, including 15% of the company’s capital, in alternate asset pools in the next two quarters. It has also planned to add 150 branches in the next financial year (total branches are now 1,752). Further, KMB has continued to increase its digital investments to benefit from digital transformation. For instance, the bank’s Unified Payments Interface (UPI) transaction volume increased 2.5x YoY during the latest quarter.

Key quarter highlights

* Assets under management grew 4.9% YoY to Rs. 405,269cr in Q3FY23, with major contribution from domestic equity mutual funds (MFs; 40.0%) and domestic debt MFs (31.0%).

* Gross slippages in Q3FY23 were Rs. 748cr (0.2% of advances) vs. Rs. 983cr in Q2FY23. Recoveries and upgrades were Rs. 171cr in Q3FY23.

Outlook and valuation

Improved asset quality, robust growth in advances, a well-established brand, and strong lending growth with reduction in NPA are expected to continue to drive the bank’s performance. Hence, we reiterate our BUY rating on the stock, with a revised target price of Rs. 2,010 based on 2.8x FY25E BVPS.

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