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Mixed performance in Q1; Outlook intact

Kotak Mahindra Bank is one of the leading banking and financial groups in India. Currently, the bank has 1,612 full-fledged branches and 2,591 ATMs.

* Net interest Income (NII) increased 8.3% YoY to Rs. 5,192cr and NIM increased 22bps YoY to 4.66%.

* Despite decline in provisions (-2.9% YoY), net profit declined 2.5% YoY due to higher operating expenses (+23.4% YoY) and corporate tax (+21.8%). COVID-19 provision remained at Rs. 1,279cr with no utilization during the quarter.

* The company is able to maintain positive operating profit with potential to grow from strong business infrastructure. However, it is getting pressure from COVID second wave and expectation of third wave along with slowness in loans. Still, we believe company can overcome this phase, and hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 1,846 based on 3.4x FY23E BVPS.

Performance impacted by higher opex and taxes

Interest income declined 4.5% YoY to Rs. 8,043cr in Q1FY22 (+1.1% QoQ) and interest expense fell 21.4% YoY to Rs. 2,851cr driven by lower cost of funds. NIM expanded by 22bps YoY to 4.66% and therefore NII increased to Rs. 5,192cr (+8.3% YoY). Noninterest income rose 21.9% YoY to Rs. 4,757cr, majorly due to premiums on insurance business (+35.6% YoY) and other income (+70.2%). Opex increased 23.4% YoY to Rs. 6,343cr (-26.8% QoQ). As a result, the pre-provisioning profit rose slightly by 1.4% YoY to Rs. 3,606cr. PAT decreased 2.5% YoY to Rs. 1,806cr due to increase in corporate tax (+21.8% YoY) partially offset by lower provisions (-2.9% YoY to Rs. 1,087cr).

CASA improved along with growth in consumer assets

CASA ratio improved to 60.2% (vs. 56.7% in Q1FY21) and reduced slightly compared to 60.4% in Q4FY21. Cost of SA decreased to 3.73% (vs. 4.22% in Q1FY21 and 3.74% in Q4FY21). Total consumer assets grew 7.7% YoY to Rs. 264,013cr. GNPA/NNPA stood at 3.58%/1.34% (vs. 3.22%/1.23% in Q4FY21 and vs. 2.67%/0.89% in Q1FY21). Capital adequacy ratio stood at 23.7% (vs. 21.7% in Q1FY21).

Key highlights

* During the quarter, slippages were at Rs. 1,500cr on account of secured assets compared to Rs. 4,400cr in Q4FY21.

* On June 30, Asset under Management stood at Rs. 343,708cr compared to Rs. 259,781cr of prior year period, major contribution from Domestic MF debt (39%) and MF Equity (34%).

* The bank issued 6.5cr shares of a face value Rs. 5 at a price of Rs. 1,145 per share (worth of Rs. 7,443cr).

* COVID provision remained at Rs. 1,279cr with no utilization during the quarter. The total provision incl. of standard and COVID, stood at Rs. 7,445cr.

Outlook & Valuation

Company has strong base of savings, payment, and investment to acquire customers along with growing pre-provisioning profit. However, due to second wave of COVID, the collections came down and slippages went up. The slowness in disbursement remains a concern in near future with expectation of COVID third wave. However, we believe that company can overcome this phase, hence, we reiterate our BUY rating on the stock with a target price of Rs. 1,846 based on 3.4x FY23E BVPS.

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