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Higher growth is new normal; upgrade to Buy

* Kotak has once again reported strong credit growth, but high other opex seen across banks and treasury hit led to a PPoP miss. However, the provision reversal (including Covid buffer utilization) led to an in-line PAT of Rs21.3bn, up 15% yoy. Most subsidiaries reported strong profitability, including Kotak Prime/Life Insurance, with the consolidated PAT up 31% yoy.

* Headline asset quality improved, with GNPA down 48bps qoq to 2.7%, due to contained slippages (Rs7.5bn; 1.4% vs. 2.5% in Q2) and better recoveries/upgrades. Specific PCR improved to 71%, while the Covid buffer moderated to 0.4% of loans as the bank partly utilized provisions, given better asset quality outcomes and outlook.

* Reflecting management’s newly found aggressive growth stance, the bank’s credit growth trajectory improved further (18% yoy/8% qoq), beating most of its peers, led by continued retail growth and back-end corporate support. We raise credit growth estimates for FY22/ FY23 to 17%/19% and expect KMB to report standalone RoE of 12-14% over FY22-24E, despite higher capital levels (400bps higher Tier I than best-in-class peers).

* The stock has seen a meaningful correction (trading at 3.2x Dec’23E ABV) amid reports of KMB missing on the Citi Bank portfolio acquisition. KMB is clocking strong organic growth, which looks sustainable with higher return ratios. We revise our TP to Rs2,300 (Rs2,350 earlier) now based on 4x Dec’23E standalone ABV + subs value of Rs632. We upgrade KMB to Buy, given a decent upside potential of over 15% from the current levels.

Growth accelerates and looks more sustainable: Overall credit growth accelerated to 18% yoy/8% qoq, mainly led by continued traction in mortgage, consumer banking and back-end support from corporate book (mainly w. capital). KMB claims that growth has been aided by strong customer acquisition (2mn vs. 0.8mn last qtr) and is now getting broad-based with most engines firing. The bank believes that the pandemic could become an endemic, and thus concerns about systemic risk are easing. This, coupled with the bank’s stance to capture market share, would keep growth strong and now looks more sustainable. The bank has also been acquiring loan pools (Volkswagen followed by Ford) and would look at more such inorganic opportunities, but only at the right price.

KMB partly utilizes Covid buffer as asset quality outlook improves: The GNPA ratio improved by 48bps qoq to 2.7% due to lower slippages of Rs7.5bn (1.4% vs. 2.5% in Q2) and higher recoveries/upgrades. The cumulative restructured pool inched up a bit in absolute terms to Rs13.6bn/0.54% of loans, but remained lower vs. peers at 0.6%-1.4%. However, the bank has a higher ECGLS pool at 5% of loans, where it remains confident of better assetquality outcomes. As a strategy, the bank has increased specific PCR to 71% but has partly consumed the Covid contingent buffer of Rs10bn/0.4% of loans (vs. 0.8% for ICICI/Axis/ HDFCB) as asset quality outcomes and outlook look to be improving.

Outlook and valuation: We raise our credit growth estimates for FY22-24E to 17%/19% from 15-17% earlier, leading to better NII growth that will be largely offset by higher opex. We expect KMB to report standalone RoE of ~12-14% over FY22-24E, despite higher capital levels (400bps higher than best-in-class peers). We revise our TP to Rs2,300 (Rs2,350 earlier) now based on 4x Dec’23E (earlier 4.2x) standalone ABV + subs value of Rs632, but upgrade KMB to Buy, given a decent upside potential of over 15% from the current levels. Key risks: higher-than-expected NPA formation, mainly in retail/SME book; failure to deliver on growth expectations; and top management attrition.

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