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Strong growth/margin delivery, but treasury/opex led to earnings miss

* Kotak Mahindra Bank reported a 12% miss on PAT at Rs20.7bn, mainly due to an MTM hit on treasury (Rs8.5bn) and higher opex due to higher investments/business-related expenses, partly offset by lower provisions as the bank continues to draw down contingent provisions as it gains more confidence on the asset-quality front.

* The bank continued to clock strong credit growth - up 29% yoy/3% qoq, mainly led by mortgages, unsecured loans and vehicle loans. SA growth was lower at 6% yoy, prompting it to raise SA rates, reversing earlier stance to stay put. But, the bank surprised positively on margins - up 14bps qoq to 4.9% on better LDR/sharp drop in borrowings.

* Higher slippages, at Rs14.4bn/2.6% of loans, were mainly due to the change in RBI norms on out-of-order a/cs, of which >50% (Rs7.8bn) was upgraded in Q1 itself, leading to a 10bps contraction in GNPA to 2.2%. Management remains confident about asset quality and expects the LLP to remain low in FY23, including consumption of Covid provisions.

* We expect the bank to deliver 2-2.1% RoA on the back of accelerating growth and lower LLP, with RoE of around 13-14% over FY23-25E due to its elevated capital levels. Retain Buy with a TP of Rs2,180 based on standalone P/ABV of 3.5x Jun’24E ABV and subsidiaries’ value of Rs620 per share. Retain Buy.

Sustained strong delivery on growth/NIMs, but SA growth disappoints:

Overall credit growth accelerated to 29% yoy/3% qoq, mainly led by strong traction in mortgages, unsecured loans and even vehicle loans. Corporate growth remained sluggish at 11% yoy/flat qoq. SA growth too was sluggish at 6% yoy, which we believe would have prompted the bank to raise SA rate, reversing its earlier stance of not raising SA rates. However, NIM surprised positively with a 14bps uptick despite the recent increase in SA rates, mainly led by a higher LDR of 89% and a sharp drop in high-cost borrowings. KMB has guided for sustained healthy credit growth, mainly led by retail and a clear focus on risk-adjusted earnings. Management believes that its strong liability profile, including a high CASA ratio (58%), should help it manage costs well in a rising interest rate scenario.

Higher slippages but NPAs decline due to better recovery:

Despite elevated slippages at Rs14.4bn/2.6% due to the change in RBI norms on out-of-order a/cs, of which >50% (Rs7.8bn) got upgraded in Q1 itself, leading to a 10bps qoq improvement in GNPA ratio to 2.2%. The cumulative restructured pool declined to Rs10.7bn (0.4% of loans), which is one of the lowest among large peers. KMB continued to draw down its contingent buffer (Rs0.6bn), which now stands at Rs4.8bn, or 0.17% of loans (vs. 0.9%/0.7% for ICICI/HDFCB). KMB remains confident of lower LLP in FY23 as NPAs continue to decline.

Outlook and valuation:

We expect the bank to deliver 2-2.1% RoA on the back of accelerating growth and lower LLP, while RoE should be around 13-14% due to its elevated capital levels. Retain Buy with a TP of Rs2,180 based on standalone P/ABV of 3.5x Jun’24E ABV and subsidiaries’ value of Rs620 per share. Maintain Buy. Key risks: Significant macro-slowdown leading to derailment of growth trajectory, and top management attrition.

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