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Business growth best among peers; Treasury income lag was on expected lines

Result and Price

Analysis Kotak Mahindra Bank (KMB) reported strong 1QFY23 results (treasury loss was anticipated) with the key pointers being: a) Strong NII (up 19.2% yoy and 4.3% qoq) and provision write-back, b) GNPA/NNPA ratio moderation to 2.24%/0.62%, c) restructured pool inched down to ?10.7bn (38bps of advances) v/s ?12bn in the previous quarter, d) credit off-take best among large private banks with growth of 28.8% yoy and 3.3% sequentially, e) covid provision held at ?4.8bn as of 1QFY23, provision write-back worth ?650mn, f) the total contingent provisioning (covid + Standard + Specific) stood 0.25% of net advances, h) Total PCR (including covid, general and specific provision) stood ~84 of NPL amount, g) Headline NIM inched up 14bps qoq to 4.92%. However, the expected treasury loss of ?4.12bn has dragged profitability. With an ease in bond yields rise, the treasury profits likely to be stable in coming periods. Therefore we believe the bank will further improve its profitability driven by higher growth, healthy margins, robust non-interest income and lower provisioning. We recommend BUY factoring best in class ROA of more than 2%.

Gazing the core

NPA ratio improved further; covid provision write-back continues:

The 1QFY23 witnessed a better asset quality performance as GNPA/NNPA/PCR/SMA2 stood at 2.24%/0.62%/73%/0.06% against 2.34%/0.64%/73%/0.07% in the previous quarter. The GNPA/NNPA ratio decreased because of sequentially higher upgrades (?13bn v/s ?9bn in 4QFY22). However, slippages were elevated at ?14.3bn (of which ?7.8bn got upgraded within 1QFY23). The absolute GNPA (?63.7bn) decreased sequentially by 1.4%. The SMA2 book decreased meaningfully to ?1.6bn (6bps of loans). The total restructuring amount (covid + MSME) moderated to ?10.8bn (0.38%) against ?12bn (0.44%) in 4QFY22, out of which covid related restructuring is ~?3.8bn and rest is MSME restructuring. The provisioning expenses stood at a mere 0.2bn v/s negative ?1.3bn in the previous quarter. Nevertheless, the bank has utilized covid provision worth ?0.65bn in this quarter. covid provision continued to be held at ?4.8bn and total provisions (excluding PCR) stood 0.25% of loans.

Credit growth best among peers:

The economic (nominal) recovery led to growth rejuvenation as the bank’s net advances (?2.8tn) grew by 29% yoy and 3.3% sequentially. It’s highest among large private sector banks reported result this quarter. Home loan & LAP (29% of book) will continue to be focus area and grew 6.4% sequentially. SME (7.3% of book) de-grew by 1.8% qoq. The bank’s deposit stood at ?3.16tn grew by 10.4% yoy and 1.5% sequentially; CASA ratio jumped moderated sequentially by 260bps and stood at 58.1%. Unsecured loan (PL+CC+MF+others) grew 15% sequentially. The management believes the bank is structurally growing and the unsecured pocket will grow with proper underwriting process. CRAR stood at 22.15% with Tier 1 of 21%.

Headline NIMs up; other income grew sequentially:

NIMs improvement of 14bps sequentially led to NII growth of 3.9% qoq. However, the other income witnessed de-growth of 32% qoq led by treasury (MTM) losses of ?4.1bn. Fixed and Floating rate loans account for 31% and 69% respectively. Push for growth and higher technology expenses led to higher operating expenses. However, the bank’s cost to income ratio stood at 53.2% driven by lower denominator effect. Despite healthy NII growth, the PPOP (de-grew 16.7% qoq) was muted owing to treasury losses and higher Opex. Moreover, provision write-back has resulted in 26% yoy jump and 25% sequential de-growth in PAT. The bank reported ROA/ROE at 2%/11.2%.

Outlook & Valuations

We expect KMB’s loan book to grow at CAGR of ~22% over FY22-24E. At CMP of ?1,826, the stock is available at 4.9(x) standalone FY24E Adj. BVPS of ?463. Valuing the standalone entity with 4.8xFY24E BVPS and subsidiaries valuation at ?84; we arrive at a target price of ?2,304. We recommend BUY rating with a potential upside of 26%.

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