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Improvement in key business parameters

Kotak Mahindra Bank is one of the leading banking and financial groups in India. Currently, the bank has 1,700 full-fledged branches and 2,705 ATMs.

• Net interest Income (NII) increased 18.2% YoY to Rs. 5,935cr while NIM improved 16bps YoY to 4.8%.

• PPOP grew by 13.5% YoY and 9.1% QoQ, while provisions reduced drastically by -152.7% YoY as company reverse the COVID provisions leading to higher profitability.

• Continued growth in deposits and advances, stable asset quality, and healthy provisions in place, coupled with further reductions in gross and net NPA levels to drive banks’ performance over the medium term, we reiterate our BUY rating on the stock with a rolled forward target price of Rs. 2,221 based on 3.5x FY24E BVPS.

PAT grew 50.3% on YoY basis supported by lower provisioning

During Q4FY22, Interest Income has improved to Rs. 8,838cr (+11.1% YoY, +2.5% QoQ) particularly driven by the 13.6% YoY growth in Corporate/Wholesale Banking, 20% YoY growth in Retail Banking but offset by -15% decrement in Treasury, BMU and corporate centre segment while interest expenses saw a decline of 1% YoY and -0.5% QoQ to Rs. 2,903cr. Resultantly, Net Interest Income improved Rs. 5,935cr (+18.2% YoY, +4% QoQ). Improvement in NII was due to 16bps sequential improvement in NIM to 4.8% due to lower cost of funds. But Operating Expenses grew by 6.2% YoY and +32.2% QoQ due to significant increase in policy holders reserves. On the other hand, significant reductions could be seen in overall provisions due to reversal of COVID provisions during the quarter, leading to higher profitability. Reported PAT thereby grew 50.3% YoY and 14.4% QoQ to Rs. 3,892cr during the quarter

Continuous improvement in Asset quality

GNPA ratio during the quarter improved 340bps to 2.37% compared to 2.71% sequentially. NNPA ratio stood at 0.71% against 0.79% in Q3FY22 showing a sequential improvement of 8bps. Advances grew significantly 20.7% YOY basis to Rs.3,04,474cr whereas deposits also grew by 11.2% YoY to 3,10,087cr whereas Provision Coverage Ratio improved to 73.2% compared to 71.3% during previous quarter. Return on average asset increased to 0.72% vs 0.65% in Q3FY22 and 0.54% in Q4FY21. Capital adequacy ratio of the Bank stood at 23.7% (+30 bps YoY) and Tier I ratio was 22.8% (+20 bps YoY), well above the required levels.

Key Concall highlights

• Holding Subsidiary Mix of profit was 70/30 showing financial services having dominance over all the other businesses.

• Slippage for the quarter was 1.27% of advances at Rs. 736cr vs 0.3% of advances at Rs. 750cr in Q3FY22 aided by reduction in number of bad loans.

Outlook & Valuation

The bank reported a strong performance during the quarter with improvement in all key parameters like advance growth, profitability, asset quality etc. We expect this momentum to continue considering the improving economic condition aiding higher disbursements and better asset quality. We remain confident on the long-term growth story of the bank and expect valuations to improve from current levels. Hence, we reiterate our BUY rating on the stock with a rolled forward target price of Rs. 2,221 based on 3.5x FY24E BVPS.

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