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Elevated provisioning and weak NII drive earnings miss; asset quality ratios remain stable

Loan book grows 4.5% QoQ; CASA crosses 60% milestone

* KMB reported a miss on our expectations as PAT stood at INR16.8b (14% below our estimate), affected by lower NII and higher provisions. Loan book grew 4.5% QoQ led by steady traction in Home loans, CV/CE, and the Agri business. CASA growth remains steady, driving further improvement in the CASA mix to 60.4%.

* Asset quality trends were broadly stable, with GNPA/NNPA ratio at 3.25%/1.21% (v/s 3.27%/1.25% on a pro forma basis in 3QFY21). Total slippages stood at INR54b (2.4% of loans) in FY21. PCR stood ~64%. Restructuring book stands limited at 0.19% of advances, while the bank carries COVID-related provisions of INR12.8b (0.6% of advances, unchanged), which gives us comfort. We maintain our Neutral stance.

PAT miss affected by elevated provisions; CASA mix scales another peak

* KMB reported a standalone PAT of INR16.8b (14% below our estimate), affected by higher provisions and lower NII. Consolidated PAT grew 36% YoY to INR25.9b in 4QFY21. NII/PPOP/PAT grew 14%/22%/17% YoY in FY21.

* NII grew by ~8% YoY to INR38.4b (below our estimate), affected by refund of INR1.1b towards estimated interest relief. NIM declined 12bp QoQ to 4.39%. Other income grew 31% YoY, led by treasury gains, while fee income grew 8.5% YoY (~23% QoQ). Opex grew ~3% YoY, resulting in PPOP growth of 25% YoY.

* Loan book grew 4.5% QoQ to ~INR2.2t, led by improving trends in Home loans (9.5%), Agri (9%), and the CV/CE business. On the liability front, deposits grew 6.6% YoY to ~INR2.8t. CASA deposits grew by ~15% YoY (8% QoQ), and thus the CASA mix improved to 60.4% (150bp QoQ) – the highest in the industry. CASA + TDs (below INR50m) mix increased to ~91% of total deposits.

* Asset quality remains broadly stable QoQ, but deteriorated compared to pre-pandemic levels. GNPA/NNPA ratio stood at 3.25%/1.21% (v/s 3.27%/1.25% on a pro forma basis in 3QFY21). PCR stood ~64% (lower v/s other large peers). SMA-2 advances stood at INR1.1b v/s INR0.96b in FY20. Total restructuring implemented stood at INR4.35b (19bp of loans). The bank carries total COVID-19 provisions of INR12.8b (~0.6% of loans).

* Subsidiaries: PAT for Kotak Prime grew 14% YoY, while the same for Kotak Securities grew 48% (31% QoQ). Kotak Life posted 17% YoY growth.

Highlights from the management commentary

* KMB will continue to relentlessly grow its Home loan portfolio as competitive advantage in the cost of funds would help it gain market share.

* On the asset quality front, slippages stood at INR54b in FY21 (v/s INR34b in FY20), of which INR44b slipped during 2H. Higher slippages were witnessed in the unsecured portfolio

* The bank is seeing strong pricing competition in lending to highly-rated corporates. The management will be cautious about growing this portfolio in the near term as it isn’t getting well compensated on risk adjusted returns.

Valuation and view

KMB reported a miss on our expectations, affected by elevated provisions and lower NII. Loan growth is showing signs of a revival, with a higher focus on Home loans. The bank continues to report steady progress in building a strong liability franchise, with the CASA ratio improving to ~60% (highest in the industry). Asset quality ratios stood stable on a sequential basis, while restructuring book stands limited at 0.19% of advances.

The bank carries COVID-related provisions of INR12.8b (0.6% of advances), which provides us comfort, and estimate credit cost at 1% for FY22E (v/s 1.3% in FY21). However, the resurgence of COVID-19 and imposition of a lockdown in certain states keeps us watchful on asset quality/business growth in the near term. We broadly maintain our earnings estimate for FY22E/FY23E. We maintain our Neutral stance with a TP to INR1,900/share (3.5x FY23E ABV + INR533 for subsidiaries).

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