Buy Kotak Mahindra Bank Ltd For Target Rs.500 by Motilal Oswal Financial Services Ltd
Steady quarter; growth outlook remains healthy RoA outlook robust at 2.0-2.1%
* Kotak Mahindra Bank (KMB) posted a standalone 2QFY27 PAT of INR42.1b (in line; up 29% YoY/2% QoQ), aided by healthy NII growth, partly offset by high provisioning. Consol PAT stood at INR56.4b (up 26% YoY/3% QoQ).
* NII grew 16% YoY/7% QoQ to INR84.6b (in line). NIMs declined 22bp QoQ to 4.31% (below est. of 4.43%), largely on account of strong FCNR (B) sourcing.
* Advances grew 25% YoY/13% QoQ to INR5.8t. Excl. FCNR (B) related and KMIL loans, growth was 19% YoY/8% QoQ, aided by growth in SME and corporate banking and some pickup in unsecured segments.
* Deposits grew by 23% YoY/14% QoQ, with CA book up 11% QoQ and SA book up 6% QoQ. CASA ratio declined by 210bp QoQ to 38.2%.
* Slippages declined to INR12.3b (down 7% QoQ). Credit cost moderated to 0.35% vs. 0.46% in 1QFY27. GNPA/NNPA ratios improved by 14bp/3bp QoQ at 1.04%/0.24%.
* We upgrade our earnings estimates by 3%/7% for FY27/28E and estimate RoA/RoE of 2.07%/12.5% by FY27. Reiterate BUY with a revised TP of INR500 (2.0x Mar’28E ABV + SOTP of INR155).
NIMs down 22bp QoQ; CASA ratio drops to 38.2%
* Standalone PAT stood at INR42.1b (up 29% YoY/2% QoQ), aided by healthy NII growth offset by higher provisions. Consol PAT stood at INR56.4b (up 26% YoY/3% QoQ).
* NII grew 16% YoY/7% QoQ to INR84.6b (in line), led by strong FCNR (B) mobilization of INR553b. NIMs fell 22bp QoQ to 4.31% (below est. of 4.43%).
* Other income was up 23% YoY/down 4% QoQ, with additional fee income on advances on FCNR(B) deposits and continued treasury loss. Opex rose 14% YoY/3% QoQ to INR52.7b. PPoP rose 21% YoY/4% QoQ to INR63.8b (in line).
* Loan growth was robust at 25% YoY/13% QoQ to INR5.8t. Excl. FCNR (B) related and KMIL loans, growth was 19% YoY/8% QoQ, aided by growth in SME (10% QoQ) and corporate (7% QoQ excl. KMIL loans), while growth in unsecured segments and CV/CE inched up.
* Deposits grew by 23% YoY/14% QoQ, aided by FCNR(B) deposit mobilization of INR553b. CASA deposits grew 8% QoQ. As a result, CASA ratio fell to 38.2% (down 210b QoQ). TD growth picked up by 32% YoY/18% QoQ.
* Fresh slippages fell to INR12.3b (down 25% YoY/down 7% QoQ) with asset quality improving across portfolios. GNPA/NNPA ratios declined to 1.04%/0.24%. PCR was stable at ~78%. SMA-2 loans increased to INR4.7b/8bp of loans. CAR/CET-1 ratios stood at 21.9%/21.4%. Credit costs declined to 0.35% as against 0.46% in 1Q.
* Performance of subsidiaries: Kotak Prime’s net earnings fell 29% QoQ to INR2.5b, Kotak Life’s PAT declined by 41% QoQ to INR2.0b. For Kotak Securities’ reported PAT declined 35% QoQ to INR3.5b. Kotak AMC’s PAT declined by 28% QoQ to INR4.0b.
Highlights from the management commentary
* FCNR(B) proceeds partly funded the KMIL loan book, repaid high-cost deposits and reduced IBPC borrowings, with the balance to be deployed over the coming quarters.
* NIM declined 22bp QoQ, with 15bp impact from FCNR(B) deposits and leverage, and the balance from day-count variations and IBPC repayment.
* The unsecured portfolio continued to report improving credit costs, while delinquencies in retail commercial vehicles stabilized.
* ~60% of the loan book is repo-linked, while floating-rate advances account for 65-70% of total advances.
Valuation and view
KMB reported a steady quarter, marked by strong NII growth, which was partly offset by higher provisioning. NIMs declined 22bp QoQ owing to surplus liquidity on the balance sheet thanks to FCNR(B) deposits, though they are expected to improve after deployment of this liquidity and repo rate hike transmission. The unsecured portfolio has attained stability, and the bank expects credit costs to remain well contained going ahead. While overall advances growth was steady, SME lending picked up meaningfully on the back of higher ECLGS loans. Management reiterated its guidance of delivering loan growth at ~1.5-2.0x nominal GDP, supported by steady traction in retail and unsecured segments. On the regulatory front, the bank highlighted that the transition to ECL would have a limited impact of less than 2% on net worth, reinforcing visibility on asset quality. We upgrade our earnings estimates by 3%/7% for FY27/28E and estimate RoA/RoE of 2.07%/12.5% by FY27. Reiterate BUY with a revised TP of INR500 (2.0x Mar’28E ABV + SoTP of INR155)
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