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Strong top-line; Outlook promising

Kotak Mahindra Bank is one of the leading banking and financial groups in India. Currently, the bank has 1,622 full-fledged branches and 2,601 ATMs.

* Net interest Income (NII) increased 6.3% YoY to Rs. 5,345cr whereas NIM remained muted YoY at 4.54%.

* Higher operating expenses (36.8% YoY) outweighed the lower provisions and relatively lower taxes, thereby bringing down PAT to Rs. 2,989cr (1.4% YoY). COVID-19 provision remained at Rs. 1,279cr with no utilization during the quarter.

* Given the Bank’s growth potential and strong business infrastructure supported by a strong balance sheet and improved asset quality, we reiterate our BUY rating on the stock with a revised target price of Rs. 2,353, based on 4.3x FY23E BVPS.

Higher costs impact bottom-line

In Q2FY22, the Bank reported a Net Interest Income of Rs. 5,345cr, up 6.3% YoY, and Net Interest margin (NIM) of 4.54%. This growth was on account of lower interest expense (-12.3% YoY) to Rs. 2,880cr, due to lower cost of funds, despite slight decline in interest income of 1.0% YoY to Rs. 8,226cr.

Revenue from Retail banking business grew 7.5% YoY to Rs. 3,834cr, whereas, Corporate/Wholesale Banking and Treasury, BMU and corporate centre business witnessed slight degrowth of 1.3% YoY and 0.7% YoY respectively. Operating expenses surged 36.8% YoY to Rs. 8,096cr, mainly pertaining to card-related costs, brokerage expenses or acquisition costs, thereby leading to flat Pre-provision profit growth of 0.5% YoY to reach Rs. 4,365cr. Bank’s PAT increased 1.4% YoY to Rs. 2,989cr, aided by lower provisioning (Rs. 434cr in Q2FY22 vs. Rs. 430cr in Q2FY21).

Healthy balance sheet

Loan book grew 8.9% QoQ to Rs. 234,965cr, led by secured and unsecured retail as well as corporate banking segments. Bank’s CASA ratio was recorded as 60.6% (vs. 57.1% in Q2FY21; highest in the industry). Additionally, Bank’s asset quality improved sequentially with drop in the gross nonperforming assets from Rs. 7,932cr to Rs. 7,658cr. GNPA/NNPA ratio stood at 3.19%/1.06% (compared to 3.56%/1.28% in Q1FY22). Additionally, the Bank did not utilise COVID-19 provisioning during the quarter and has total COVID-related provisions of Rs. 1,279cr as on 30th Sept 2021. Capital adequacy ratio of the Bank stood at 24.2% and Tier I ratio was 23.4%, well above the required levels. Collection efficiency returned to the pre-COVID levels.

Key highlights

* Kotak Mahindra Bank has become aggressive in the home loans space since a few quarters. It is also focusing on building its unsecured portfolio and consumer durable financing.

* The Bank has made significant investments in technology and increased hiring - added ~10,000 employees over the past one year (4000 in Q2FY22).

* Gross slippages during the quarter stood at Rs. 1,293cr, while recoveries and upgrades amounted to Rs. 1,350cr.

Outlook & Valuation

Company is expected to perform much better in the coming quarters, on the back of continued growth in interest income revenue and efficiency in operating profit with a potential to grow given a strong business infrastructure. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 2,353, based on 4.3x FY23E BVPS.

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