IGI Logo

Stable quarter disrupted by a one-time provision impact

In 3QFY24, Kotak Mahindra Bank (Kotak) reported healthy NII growth of +16% YoY (4.1% QoQ) but higher than expected provisions (due to AIF exposure) resulted in a PAT miss (INR 30.1bn, +8% YoY, -6% QoQ) vs JMFe of INR 33.4bn (var -10%). Kotak successfully averted NIM compression for the quarter (5.22%, flat QoQ) as the bank utilised liquidity buffers and increased the share of high yielding unsecured loans (11.6% vs 11.0% QoQ). We believe that the bank has levers to sustain healthy NIM going ahead. Although, the deposit growth for 3Q24 was soft (+2% QoQ, 19% YoY), the bank continued to scale up ActivMoney – Sweep facility on SA and launched new initiatives to garner deposits. CASA ratio stood at 47.7% (vs 48.3% QoQ) while TD grew by 33% YoY. Loan growth (+16% YoY, +3.2% QoQ) remained steady across segments led by unsecured loans (PL+CC+MFI) (+44% YoY, +8% QoQ). Mr Ashok Vaswani joined as MD and CEO wef 1st Jan 2024. We believe clarity on leadership transition removes overhang on KMB’s stock price and should drive the focus now on key strategic priorities of the new leadership. Stock offers compelling risk-reward at current valuations of 1.75x FY26E P/BV for the core banking business given its strong risk-adjusted NIM and best-in-class RoAs. Maintain BUY with TP of INR 2,300 (valuing the core bank at 2.5x FY26E P/BV).

? Averted NIM contraction; deposit growth soft: Kotak’s NIM stabilised at 5.22% (flat QoQ) as a) the increase in cost deposits was offset by yield expansion due to rising share of unsecured loans (at 11.6% vs 11.0% QoQ and 9.3% YoY) and b) loan growth outpaced deposit growth as liquidity buffers were utilised. Healthy NII growth (+16% YoY, 4.1% QoQ) was offset by higher provisions (5.8bn vs 3.7bn QoQ), resulting in a miss on PAT (+8% YoY, -6% QoQ, -10% JMFe). Although, the deposit growth for 3Q24 was soft (+2% QoQ, 19% YoY), the bank continued to scale up ActivMoney – Sweep facility on SA and launched new initiatives (special offer for senior citizens and global service account for exports) to garner deposits. We believe that the bank has levers to combat NIM contraction and build in NII CAGR of 20% FY24-26E for Kotak with avg NIM at 5.2% (calculated).

? Steady loan growth across segments: Net advances grew at a steady pace of 16% YoY (3.2% QoQ) in 3QFY24 driven by SBL, PL & CC (+33% YoY, +8.1% QoQ), CV & CE (+31% YoY, +9% QoQ) and mortgages (+15% YoY, +3.2% QoQ) segments. Corporate book witnessed mild growth at +16%YoY/, +3% QoQ. We expect loans to grow at 19% CAGR for FY24-26E. Management continues to exude confidence w.r.t unsecured products and delivery of risk adjusted returns. Kotak has been at the forefront of growth amongst larger private banks (FY21-23 loan CAGR is fastest for KMB vs ICICIBC, AXSB, HDFCB) and we expect the stance to persist.

? One time hit on provisions due to AIF investments; asset quality sanguine: In 3Q24, Kotak reported one time provision of INR 2.55bn (fully providing for INR 1.9bn exposure to AIFs having downstream exposure to debtor companies and INR 6.5bn funded to these downstream companies) in compliance with RBI circular on AIF investments resulting in higher credit costs for the quarter (69bps, +23bps QoQ). Headline asset quality parameters remained steady (GNPA/NNPA at 1.73%/0.34%, +1bps/-3bps QoQ). Slippage ratio improved to 0.33% (-5bps QoQ) while PCR remained strong at 81% (SMA at 6bps, +2bps QoQ). We build avg credit costs of 50bps over FY24-26 on a standalone basis.

? Update on subsidiaries: Life insurance subsidiary reported a PAT of INR 1.4bn (-58% YoY) while gross written premium grew by +10% YoY. For NBFC subsidiaries- a) KMPL- PAT stood at INR 2.4bn (6.2% YoY, 15% QoQ), b) KMIL- PAT stood at INR 1.57bn (+83% YoY, +25% QoQ). Kotak Securities reported a PAT of INR 3.1bn (+27% YoY, -6% QoQ), while cash/overall market share improved to 10.3/10.3% (+30bps/+150bps QoQ).

? Valuations and view: We believe clarity on leadership transition removes overhang on KMB’s stock price and should drive the focus now on key strategic priorities of the new leadership. Stock offers compelling risk-reward at current valuations of 1.75x FY26E P/BV for the core banking business given its strong risk-adjusted NIM and best-in-class RoAs. Maintain BUY with TP of INR 2,300 (values the core bank at 2.5x FY26E P/BV).

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361