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* Kotak Mahindra Bank (KMB) reported a strong PAT beat (+32%) to Rs35bn/3% RoA, up 26% YoY for Q4FY23, owing to continued margin uptick and lower opex and LLP as the bank continued to draw down contingent provisions (now at Rs3.9bn/0.12% of loans, being the lowest among large banks).

* Credit growth moderated to 18% YoY/3% QoQ from the highs of 23% YoY/6% QoQ in 3Q, mainly due to a decline in the corporate book. However, retail growth remained strong at 26% YoY/6% QoQ, led by unsecured loans and, thus, continued to see yield expansion (50bps QoQ)/margin expansion (+28bps QoQ to 5.75%). The bank expects NIM of >5% despite a rise in CoF, which should support core profitability.

* On succession planning, KMB has engaged an international consulting firm and will be applying to the RBI before August 31, 2023. We believe Shanti Ekambaram or KVS Manian, who are internal contenders, will likely be given preference for the MD’s position. Surprisingly, the board has recommended a board position (Non-Executive, NonIndependent Director) for Mr. Uday Kotak despite RBI’s stance that the departing MD should not hold any position in the bank or subsidiary, either directly or indirectly. It will be interesting to see what the RBI decides on Mr. Kotak's membership on the board of directors as well as the new MD.

* We have upgraded our earnings estimates for FY24/25E by 10-12% and introduced FY26E estimates. We expect KMB’s RoA/RoE to normalize to 2.1%/13% from the high of 2.4%/14% in FY23 due to the normalization of margins/LLP. We have lowered our P/ABV multiple to 2.8x FY25E ABV, factoring in the ensuing top management change, and retained our TP at Rs2,000 (incl. revised subsidiary value at Rs500).

* Growth moderates, but margin shoots up: Credit growth moderated to 18% YoY/3% QoQ, mainly due to contraction in the corporate book due to asset sell-off of DCM book and exit from low-yielding, short-term loans. However, retail growth stayed strong at 26% YoY/6% QoQ, led by mortgage, VF, unsecured loans and MFI loans. KMB is determined to grow its unsecured book and expects growth to be in mid-teens (incl. MFI book). Deposit growth was also healthy at 16% YoY/5% QoQ, while CASA ratio slipped further by 44bps QoQ to 53%. However, better loan yields on the back of strong growth in unsecured loans and favorable asset mix towards retail led to a 28bps QoQ improvement in NIM to 5.75%. KMB expects NIM of >5% despite increased CoF, which should support core profitability.

* NPAs continue to trend down and so bank continues to dip in contingent buffer: Slippages were higher than expected at Rs8.2bn/1.2% of loans, while improved recovery and w-offs led to a 12bps reduction in GNPA ratio to 1.8%. The restructured pool also declined to Rs7.1bn/0.2% of loans (0.25% in Q3), which is the lowest among large peers. The bank continues to draw down its contingent buffer (Rs0.13bn in 4Q), which now stands at Rs3.9bn/0.12% of loans, being one of the lowest among large banks.

* Outlook & valuation: We expect KMB’s RoA/RoE to normalize to 2.1%/13% from a high of 2.4%/14% in FY23 due to margins/LLP normalization. We have lowered P/ABV multiple to 2.8x FY25E ABV, factoring in the ensuing top mgmt. change, and retained our TP at Rs2,000 (incl. revised subs. value at Rs500). Key risks: Difficulty in mobilizing low-cost deposits, mgmt. attrition and asset-quality risk in the unseasoned unsecured loan book.

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