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In 4Q23, Kotak Mahindra Bank (Kotak) reported a significant beat on all parameters (NII, PPOP and PAT) led by strong margin expansion – NII grew +35% YoY, PPOP grew +39% YoY and PAT grew +26% YoY. NIMs stood at 5.75% (+28bps QoQ) due to benefit of rate hikes (high EBLR linked book at 57%) and growing share of unsecured loans at 10% in the overall mix. Loans grew (+18% YoY, +3% QoQ) while deposits grew (+17% YoY , +5% QoQ) though share of CASA+retail TD is now at 82% (vs 83% QoQ and 89% YoY). Mgmt remains confident of delivering growth at 1.5-2x of nominal GDP and believes credit environment remains benign which is naturally aiding growth in unsecured loans. Liability franchise is a work in progress though mgmt. believes that ability maintain NIMs >5% should not be a challenge and other levers (opex, credit costs) should aid earnings momentum. We believe Kotak’s focus on risk-adjusted underwriting has been its key strength over cycles and it continues to hold the bank in good stead. We like the bank’s growth stance (which could be aided by potential inorganic growth plays) and the next leg of valuation upsides will need clarity on succession, ability to further improve the liabilities franchise. We raise our FY24/FY25E EPS by 5/3%.

* Exceptional operational performance supported strong NII growth: In 4QFY23 PPOP grew to INR 46bn (+39% YoY, +21% QoQ) +14% above JMFe estimates on the back of strong NII growth (+35% YoY, +8%QoQ) and decline in opex (+21% YoY, -3% QoQ) with NIMs improved to 5.75% for the quarter (+28bps QoQ). Mgmt. guided that NIMs are expected to be above 5% for coming fiscal. PAT was at INR 35bn (+26% YoY, +25% QoQ) on account of lower credit costs. Slippages remained low with GNPA/NNPA improving to 1.78%/0.37% by -12bps/-6bps. We build CAGR PPOP growth of 19% for FY23-25E and credit cost to avg around 38bps in FY24-25E.

* Robust loan growth led by momentum across segments: Loan growth was robust at +18% YoY/+3% QoQ driven by SBL, PL & CC (+34% YoY, +7% QoQ), CV & CE (+24% YoY, +7.6% QoQ) and mortgages (+22% YoY, +4% QoQ) segments. However, corporate book witnessed challenging growth at +6%YoY/, flat QoQ due to competition led pricing pressure. Deposit growth picked up at +17% YoY/+5% QoQ with CASA at 52.8% (-44bps QoQ). Mgmt. highlighted that there was softening witnessed in wholesale deposit rates and higher contribution in the 2-5cr bracket this quarter leading to to lower retail deposits. We believe loans to grow at 17% CAGR of FY23-25E.

* Update on subsidiaries: Life insurance subsidiary reported a PAT of INR 2.05bn (-23% YoY) and gross written premium grew by +16 YoY. For NBFC subsidiaries- a) KMPL- PAT stood at INR 2.24bn (-28% YoY, flat QoQ), b) KMIL- PAT stood at INR 1bn (flat YoY, +16% QoQ). Kotak Securities reported a PAT of INR 1.82bn (-28% YoY, -25% QoQ), while mkt share of cash/overall mkt share was at 10.4/6.4% (+30/+60bps QoQ).

* Valuation and view: Kotak’s NIMs have been benefitting from the rising interest rates and sustainability of strength will be a key monitorable as interest rates peak out. Ability to drive

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