Buy Kotak Mahindra Bank Ltd For Target Rs. 1,950 By Motilal Oswal Financial Services Ltd
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Operating performance inline; Card delinquencies drive an increase in slippage run-rate
NIMs decline 11bp QoQ; CASA showing signs of stability
* Kotak Mahindra Bank (KMB) posted a standalone PAT of ~INR33.4b (5% miss, 5% YoY growth). Consol. PAT stood at INR50.4b (13% YoY growth) in 2QFY25.
* NII grew 11.5% YoY to INR70.2b (inline). NIM moderated 11bp QoQ to 4.91%. Other income grew 16% YoY to INR26.8b (11% miss). Total revenue thus grew 12.7% YoY.
* Advances rose 14.7% YoY/2.5% QoQ to ~INR4t while deposits grew 15.1% YoY/3.1% QoQ. CASA mix improved 20bp QoQ to 43.6%.
* Fresh slippages were elevated at INR18.7b (INR13.6b in 1QFY25). GNPA/NNPA ratio rose 10bp/8bp QoQ to 1.49%/0.43%. PCR declined 344bp QoQ to 71.4%.
* KMB entered into an agreement to acquire the personal loan book of Standard Chartered Bank (INR41b) to further fortify its position in the retail credit market. The acquisition is likely to be completed in the next three months, subject to regulatory/other approvals.
* KMB is navigating well through the limitations that regulator has imposed on the bank and potential lifting of the ban will further aid operating performance. We fine-tune our earnings and estimate KMB’s RoA/RoE at 2.2%/13.6% by FY26. Reiterate Neutral with a TP of INR1,950 (based on 2.2x FY26E ABV).
Deposit growth healthy; other income misses estimate
* KMB reported a standalone PAT of ~INR33.4b (5% miss, 5% YoY growth) led by lower other income. Consolidated PAT stood at INR50.4b (13% YoY growth). KMB’s 1HFY25 earnings grew 3.3% YoY (including exceptional items, it rose 44% YoY). We estimate 2HFY25 earnings to grow ~3.4% YoY to INR74b.
* NII grew 11.5% YoY to INR70.2b (inline). NIMs moderated 11bp QoQ to 4.91%. Other income grew 16% YoY to INR26.8b (11% miss). Treasury gain was INR0.9b vs. INR1.05b in 1QFY25.
* Opex grew 15% YoY to INR46b (inline). C/I ratio thus increased 122bp QoQ to 47.5%. PPoP grew 10.6% YoY at INR51b (4% lower than MOFSLe).
* Loan book grew 14.7% YoY (up 2.5% QoQ). KMB reported a healthy sequential trend in business banking and home loans. Deposit grew 15.1% YoY/3.1% QoQ. CASA mix improved 20bp QoQ to 43.6%.
* Fresh slippages increased 38% QoQ to INR18.7b, with a large chunk of slippages from credit cards. GNPA/NNPA ratio increased 10bp/8bp QoQ to 1.49%/0.43%. PCR declined 344bp QoQ to 71.4%. SMA-2 advances stood at INR1.76b (4bp of loans). CAR stood at 22.6%, while CET-1 was 21.5%.
* Performance of subsidiaries: Kotak Securities reported net earnings growth of 37% YoY, while KIL reported PAT growth of 12% YoY
Highlights from the management commentary
* The bank has cut the savings account deposit rate (up to 0.5m) by ~50bp, which will expand its NIM by ~4bp and will improve yield.
* Reduction in yield on advances and deterioration in NIM are due to the change in asset mix more towards secured products. ? A larger chunk (~30-35%) of slippages was from credit cards; the recoveries from rural and secured businesses will help the bank reduce slippages going forward.
Valuation and view
KMB reported a slight miss on earnings due to lower other income and 11bp sequential contraction in margin. Asset quality ratios deteriorated slightly, affected by higher slippages in unsecured and credit card segments. However, the bank expects recoveries from rural and secured businesses to mitigate the overall impact. Changes in the asset mix more towards secured products have affected the yields and margins, but the management continues to guide for mid-teen growth in unsecured lending. Growth in deposits was healthy, leading to moderation in the CD ratio to 86.6%. However, we will closely monitor the pace of deposit accretion for the bank and the impact on margins over the coming quarters. In this quarter, the full effect of the embargo has adversely affected the business, and we believe that the removal of the ban remains critical for KMB to deliver sustainable growth and earnings going forward. KMB is navigating well through the limitations that regulator has imposed on the bank and potential lifting of the ban will further aid operating performance. We fine-tune our earnings and estimate KMB’s RoA/RoE at 2.2%/13.6% by FY26. Reiterate Neutral with a TP of INR1,950 (based on 2.2x FY26E ABV).
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