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Asset quality remains healthy | Raising earnings estimates

* Kotak Mahindra Bank (KMB) reported strong earnings growth in 4QFY23. Standalone PAT rose 26% YoY to INR35b (16% beat), driven by lower opex and controlled provisions as PPoP was up 39% YoY. Consolidated PAT grew 17% YoY to INR45.7b during the quarter.

 * Loan growth moderated sequentially to ~3%, while margin expanded further by 28bp QoQ to 5.75%. CASA ratio moderated 50bp QoQ to 52.8%. Gross slippages increased slightly to INR8.2b, of which INR2.2b were upgraded in 4QFY23. Healthy recoveries and upgrades led to a 12bp/6bp QoQ decline in the GNPA/NNPA ratios. KMB reversed INR130m of Covidrelated provisions; outstanding Covid-related provisions now stand at INR3.87b (12bp of loans). Reiterate Neutral with a TP of INR2,050 (based on 3.0x Sep’24E BV and INR524 for its subsidiaries).

Unsecured loan mix rises to 10%; NIM improves 28bp QoQ

* KMB reported a standalone PAT of INR35b (+26% YoY; 16% beat), aided by lower opex and controlled provisions as the bank reversed Covid-related provisions of INR130m. Consolidated PAT stood at INR45.7b (up 17% YoY).

* NII grew 35% YoY (in line), driven by a loan growth of 3% QoQ and margin expansion of 28bp QoQ to 5.75%. Other income grew 28% YoY, aided by core fee income that rose by a healthy 22% YoY.

* Opex growth was lower supported by lower employee cost even as the bank continued to invest in building a digitally savvy franchise. PPoP grew 39% YoY, while core PPoP was up 37% YoY in 4QFY23. For FY23, NII/PPoP/ PAT grew 28%/23%/28% YoY to INR215b/INR148b/INR109b.

* Loan book rose 2.9% QoQ (+18% YoY), led by healthy traction across segments barring corporate. KMB reported healthy sequential trends in Home loans, Personal loans, Business loans, Consumer Durable loans, Credit Cards and MFI. Deposits jumped 16% YoY (+5% QoQ), while the CASA mix moderated 50bp QoQ to 52.8%. CASA and TDs (below INR50m) fell to 83% in 4QFY23. The mix of unsecured loans increased to 10% and management suggested raising this further to the mid-teens level by the end of FY24.

* Gross slippages increased slightly to INR8.2b, of which INR2.2b were upgraded in 4QFY23. The GNPA/NNPA ratios improved 12bp/6bp QoQ to 1.8%/0.37%, aided by higher recoveries and upgrades. PCR improved to 79.3%. KMB carries outstanding Covid-related provisions of INR3.87b.

* SMA-2 advances increased to INR2.04b (v/s INR1.91b in 3QFY23). The outstanding restructured portfolio stood at INR7.2b (0.22% of advances), with the bank holding an additional provision of INR1.81b.

* Subsidiaries’ performance: Kotak Prime and Kotak Securities reported a net earnings decline of 28% YoY each. Kotak Capital posted an earnings growth of 14% while Kotak Investments recorded flat trends. Kotak Life reported an earnings decline of 23% YoY to INR2.1b.

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