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Strength of liability franchise put to good use

NII/PPoP in-line; Asset quality remains robust

* KMB delivered an in-line operating performance though lower provisions resulted in standalone PAT coming in at INR20.32b (12% beat). Consolidated PAT remained flat YoY while the securities, prime and life insurance businesses witnessed a strong earnings growth.

* Loan book grew sharply by 8% QoQ (up 15% YoY) to INR2.35t, led by a pickup across the secured and unsecured retail as well as corporate banking segments. On the liability front, CASA growth remained steady and took the CASA mix to 60.6% (40bp QoQ increase; highest in the industry).

* Asset quality improved with fresh slippages at INR12.9b (annualised 2.3% of loans), supported by high recoveries and upgrades of INR13.5b. As a result, the GNPA/NNPA ratio improved by 37bp/22bp QoQ to 3.19%/1.06%. KMB did not utilise COVID-19 provisioning during the quarter and has total COVID-related provisions of INR12.8b (0.5% of loans). Maintain Neutral.

Loan growth up 8% QoQ; Margin down 15bp QoQ to 4.45%

* KMB reported a standalone PAT of INR20.3b (12% beat), led by a 40% QoQ decline in provisions (INR4.2b). Consolidated PAT stood at INR29.9b (flattish YoY). PAT for Kotak Prime/Kotak Securities grew 80%/22% YoY, while Kotak Life reported a PAT of INR1.55b, as against a loss of INR2.4b during 1QFY22.  NII recorded a weak growth of ~3% YoY to INR40.2b (2% miss) as NIM declined by 15bp QoQ to 4.45%, despite a strong loan growth of 8% QoQ.

* Other income grew 27% YoY (above estimate), supported by strong fee income which grew 34% YoY. Opex grew ~31% YoY, pushing C/I ratio up to 46.5% (v/s 45.4% in 1QFY22). PPoP stood at INR31.2b (2% miss).

* Loan book grew by 8% QoQ (up 15% YoY) to INR2.35t, led by a pick-up across the secured and unsecured retail as well as corporate banking segments. Deposits grew 12% YoY/2% QoQ to INR2.92t. CASA deposits grew by 18% YoY, taking the CASA mix to 60.6% - the highest in the industry. CASA + TDs (below INR50m) mix was healthy at 90% of total deposits.

* Asset quality improved with fresh slippages at INR12.9b (annualised 2.3% of loans), supported by high recoveries and upgrades of INR13.5b. The GNPA/NNPA ratio improved by 37bp/22bp QoQ to 3.19%/1.06%. KMB did not utilise COVID-19 provisioning during the quarter and has total COVIDrelated provisions of INR12.8b (0.5% of loans). PCR improved by 267bp QoQ to 67.5%. SMA-2 book declined to INR3.88b (INR4.3b in 1QFY22). Total restructuring stood at INR12.6b (0.54% of advances).

Highlights of management commentary

* Vehicle segment: KMB’s collection efficiency has improved. The tours and travel segment is showing early signs of improvement, although the school bus segment continues to be impacted. The demand for tractor finance has been strong.

* KMB has become aggressive in the home loans space since the past few quarters. Further, the bank is also focusing on building its unsecured portfolio.

* KMB has increased its focus on both the unsecured business and consumer durable financing. The bank has made significant investments in technology to revamp its business model and risk models.

Valuation and view

KMB delivered an in-line core operating performance amidst a challenging environment while its loan growth also picked up smartly, and we expect this momentum to continue. The bank continued to report a steady progress in building a strong liability franchise, with its CASA ratio standing at ~61% (highest in the industry), which will enable it to competitively grow in its chosen business segments. KMB’s asset quality performance remained robust, and its restructured book also remained under control at ~0.54% of loans. The bank further carries COVID-related provisions of INR12.8b (0.5% of loans). While the pick-up in growth and our earnings projection of 21% CAGR over FY22-24E makes us look at the stock more constructively, we remain watchful of the profitability coming from this growth. Moreover, the recent run-up in the stock price leaves limited room for an upside to our revised TP. We maintain our Neutral rating with a revised TP of INR2,200 (3.8x Sep-23E ABV + INR630 for subs)

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