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Coming good on growth, sustenance key

Kotak Mahindra Bank (KMB) delivered an impressive set of Q3FY22 numbers, reinforcing our view that its earnings momentum would sustain despite the challenging environment. Q3FY22 was marked by sustained strong growth in bank, 8% QoQ; with KMB confident of sustaining the momentum. Asset quality has persistently been better than peers, with controlled stress addition vindicating the bank’s strict risk polices. Performance of other businesses also improved.

KMB’s strong foundations — liability franchise, capital, limited stress — form a perfect launching pad. That said, growth momentum pick up is key—a trend whose sustenance is vital to maintaining premium valuations. Maintain ‘BUY’ with TP of INR2,540.

Asset quality impressive; stringent risk guard rails lend comfort

KMB’s risk management approach is aptly reflected in proactive recognition and limited restructuring use (sub-60bps). Slippages were pegged at mere INR7.5bn (1.2%). With collections picking up, KMB has incrementally turned positive, thus it utilised INR2.8bn but still holds a buffer of INR10bn, eliminating any material possibility of earning shocks even post the Covid waves. We believe the performance of asset quality will be better than most banks; thus credit cost will be reined in. Moreover, capitalisation and a lower mix of vulnerable segments lend comfort.

Growth panning better than expected, sustainability key

The bank has been risk-conscious for a while, which has taken a toll on growth—a strategy that gave it an edge in challenging environment. However, with things improving the bank has turned towards growth (8% QoQ growth on back of 8% QoQ growth seen in Q2FY22) and with arsenal in place (strong franchise), it is KMB’s return to a growth path that is the long-term driver to watch for, in our view. The bank’s lower funding cost helped it trace better NIMs, and Q3FY22 performance vindicates this. PPoP was impacted by higher opex and lower treasury income. Management once again articulated its strategy towards accelerated asset accretion. Execution on this front will be monitored closely, as will be the possibility of inorganic growth.

Outlook and valuations: Well-positioned; maintain ‘BUY’

KMB’s strong foundations—liability franchise, capital, limited stress—form a perfect launching pad. Non-banking subsidiaries are also scaling up steadily. We maintain ‘BUY/SN’. Key to watch out will be management transition post CY23.

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