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Growth momentum steady; high CASA positions it well in a rising rate cycle

Provisioning reversal drives a strong beat in earnings

KMB reported a strong 4QFY22, with a 64% YoY growth in standalone PAT to INR27.7b. This was driven by provision write-back in 4QFY22 as PPOP growth stood at 13% YoY. Healthy loan growth and improving margin supported traction in PPOP. Consolidated PAT stood at INR39b, up 50% YoY.

Loan book grew 7% QoQ and 21% YoY to INR2.7t, led by sustained momentum across Home loans and the LAP business (+39% QoQ), while the Unsecured book (PL, BL, Consumer Durables, and Credit Cards) grew 42% YoY. This is a reflection of the huge opportunity in this segment and its comfort in growing the portfolio within the guardrails of risk applied by the bank. CASA mix improved by 80bp QoQ to 60.7%.

Asset quality improved, with fresh slippages declining to INR7.4b (similar to 3QFY22), while healthy recoveries and upgrades enabled a 37bp/15bp QoQ decline in the GNPA/NNPA ratio. KMB reversed INR4.53b of COVID-related provisions and it now has outstanding COVID-related provisions to the tune of INR5.5b (0.2% of loans). We maintain our Neutral rating.

Robust loan growth; NIM improves by 16bp QoQ (33bp in 2HFY22)

KMB reported a standalone PAT of INR27.7b, aided by a reversal of COVIDrelated provisions of INR4.5b. Consolidated PAT grew 50% YoY to INR39b.  NII grew 18% YoY (in line), led by healthy loan growth of 7% QoQ and 21% YoY, along with a 16bp QoQ expansion in margin to 4.78%. Other income jumped 34% QoQ, driven by higher distribution income and fees. The bank posted a MTM gain of INR1.3b in 4Q v/s a loss of INR1.3b in 3QFY22.

This resulted in a robust 19% YoY growth in total revenue. Growth in OPEX stood higher as the bank continues to invest in building a digitally savvy franchise, with hiring in technology and other functions. As a result, PPOP grew at 13% YoY (in line).

Loan book grew 7% QoQ and 21% YoY led by a pick-up across Secured and Unsecured Retail. This is the third consecutive quarter of strong growth in Home, PL/BL, and Consumer Durable loans. Deposits grew 11% YoY and 2% QoQ, while the CASA mix improved by 80bp QoQ to 60.7%. However, CASA + TDs (below INR50m) fell to 89% in 4QFY22 v/s 91% in 4QFY21.

Fresh slippages stood at INR7.4b (similar to 3QFY22). The GNPA/NNPA ratio improved by 37bp/15bp QoQ to 2.34%/0.64%, aided by higher recoveries/ upgrades of INR9b. Provisions stood negative at INR3.1b as the bank reversed INR4.53b of COVID-related provisions. PCR improved 185bp QoQ to 73%. KMB carries outstanding COVID-related provisions of INR5.5b.

SMA-2 advances fell to INR1.86b (v/s INR2.98b in 3QFY22). The outstanding restructured portfolio (under COVID-19 and MSME) stood at INR12.05b (0.44% of advances) with the bank holding an additional provision of 10% on its restructured book

Subsidiary performance: While PAT for the standalone bank jumped 65% YoY in 4QFY22, profitability of all subsidiaries grew 24%. Within this, Kotak Prime, Kotak Capital, Kotak Life, and Kotak Investments reported a 70%, 68%, 38%, and 38% YoY growth in earnings, respectively.

Highlights from the management commentary

The bank is taking appropriate steps towards management transition and is comfortable with its current strength and depth of its senior management.

The quality of its Balance Sheet, low cost of funds, and historic ability to raise liability make it confident of growing its Secured as well as Unsecured book.

KMB has made significant inroads in the cost of funds. The same is at a historic low and therefore allows it to be well positioned for growth.

Collection efficiency is back to normal. It held up well in Apr’22 as well.

Valuation and view

KMB delivered a healthy core operating performance and broad-based loan growth. NIM inched up further sequentially and is at the higher end of the range in recent years. The bank continues to demonstrate steady progress in building a strong liability franchise, with CASA ratio standing ~61% (highest in the industry). This positions it favorably in a rising rate environment and will enable it to grow competitively in its chosen business segments. Asset quality stays robust, with a further dip in GNPA/NNPA and an improvement in PCR, while the restructured book remains under control ~0.44% of loans. KMB carries additional COVID-related provisions of INR5.5b (0.2% of loans). We fine-tune our earnings and estimate the bank to deliver 15% earnings CAGR over FY22-24. We maintain our Neutral rating with a TP of INR2,000/share (3.1x FY24E ABV + INR587 for its subsidiaries).

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