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Healthy asset quality; attractive valuations

Kotak Mahindra Bank is one of the leading banking and financial groups in India. KMB has 1,700 full-fledged branches and 2,705 ATMs.

* Net interest income (NII) in 1QFY23 stood at Rs. 6,160cr (up 18.6% YoY and 3.8% QoQ) driven by the strong growth across corporate/ wholesale banking and retail banking segments. Net interest margin improved to 4.92%.

* Reported PAT grew at 52.6% YoY to Rs. 2,755cr due to a drastic reduction in operating expenses. Sequentially, however, PAT was down 29.2% QoQ, because of lower non-interest income

* Strong parentage, well-established business infrastructure, strong asset quality, robust growth in advances, and reduction in NPA auger well for the bank’s performance going forward. Hence, we reiterate our BUY rating on the stock albeit with a revised target price of Rs. 2,173 based on 3.4x FY24E BVPS.

PAT up 52.6% YoY on a drastic reduction in opex

Interest income grew at 13.9% YoY to Rs. 9,164cr (up 3.7% QoQ), driven by a 11.1% YoY growth in corporate/wholesale banking activity and a 22.0% YoY growth in retail banking. These were however, partly offset by a 36.4% YoY degrowth in treasury, BMU and corporate centre segment. Interest expenses grew 5.4% YoY and 3.5% QoQ to Rs. 3,004cr. Consequently, Net interest income grew 18.6% YoY and 3.8% QoQ to Rs. 6,160cr. In effect, Net interest margin (NIM) expanded 32bps YoY and 14 bps QoQ to 4.92%. Operating expenses (opex) declined 21.8% YoY and 46.1% QoQ to Rs. 4,960cr, due to a fall in policy holders’ reserves, surrender expense and claims to Rs. 584cr (down 80.9% YoY and 88.1% QoQ). Reported PAT at Rs. 2,755cr was up 52.6% YoY, but was down 29.2% QoQ, as other income fell 30.4% QoQ to Rs. 1,807cr.

Asset quality improves QoQ and YoY

The bank’s asset quality continued to improve QoQ and YoY with gross nonperforming assets standing at Rs. 7,224cr (down 19.7% YoY and 1.5% QoQ). GNPA/NNPA ratio stood at 2.27%/0.69% (vs. 2.37%/0.71% in Q4FY22). Advances grew 28.8% YoY to Rs. 280,171cr, driven by secured and unsecured retail segments. Deposits grew 10.4% YoY to Rs. 316,483cr. Provision coverage ratio stood at 72.6%. CASA ratio stood at 58.1%. Credit cost on advances was 16bps (annualised). Capital adequacy ratio was 23.3% and Tier-I ratio 22.4%, well above the required levels.

Key quarter highlights

• Assets under management grew at 10.1% YoY to Rs. 378,283cr, with major contribution from domestic MF debt (37.0%) and domestic MF equity (35.0%).

• As on 30th June 2022, customer base stood at 34.5mn (vs. 26.8mn in Q1FY22).

• Gross Slippages in the quarter were Rs. 1,435cr, (0.5% of advances) while recoveries and upgrades amounted to Rs. 781cr. Hence, net slippages were Rs. 654cr (0.2% of advances).

Outlook & valuation

Healthy asset quality, robust growth in advances, financial prudence backed by strong governance focus and lending growth with reduction in NPA auger well for the bank’s performance going ahead. We remain confident on its long-term growth prospects. The stock is currently trading at attractive valuations. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 2,173 based on 3.4x FY24E BVPS.

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