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AIF provisions, treasury loss contribute to slight earnings miss

Margins stable QoQ

* Kotak Mahindra Bank (KMB) reported standalone PAT growth of 7.6% YoY to INR30b (11% miss) due to AIF provisions (INR1.9b) and treasury loss. Consolidated PAT stood at ~INR42.7b (7% YoY growth).

* NII grew 16% YoY to INR65.5b (in line; up 4.1% QoQ). NIMs stood stable QoQ at 5.22%. Opex grew 14% YoY to INR42.8b, thereby, resulting in a 19% YoY growth in PPoP at INR45.7b (5% miss).

* Advances grew 16% YoY/3% QoQ to INR3.6t, while deposits grew 19% YoY/ 2% QoQ, led by term deposits. CASA mix moderated 60bp QoQ to 47.7%.

* Fresh slippages declined 10% QoQ to INR11.7b. GNPA ratio stood largely stable at 1.7%, while Net NPA improved 3bp QoQ to 0.34%. PCR improved 150p QoQ to 80.6%.

* We cut our FY24/FY25 PAT estimates by 3.2%/2.7%. We estimate RoA/RoE at 2.4%/14.4% by FY25E. We maintain our Neutral stance on the stock with a TP of INR2,000.

Loan book grew 16% YoY; Asset quality ratios stable

* KMB reported a standalone PAT of INR30b (up 7.6% YoY; 11% miss), due to higher provisions as the bank provided INR1.9b toward AIF exposure. Consol PAT grew 7% YoY to INR42.7b.

* While NII grew 16% YoY (in line), margins stood stable at 5.22%. Other income grew 18% YoY (down 1% QoQ). Treasury loss stood at INR1.7b vs. a treasury gain of INR1.5b in 2QFY24.

* Opex growth was slightly higher than expected at 14% YoY (5% higher than MOSLe) and was driven by an increase in commercial and marketing expenses and employee-related expenses, thus, resulting in a 19% YoY growth in PPoP at INR45.7b (5% miss).

* Loan book grew 16% YoY (up 3% QoQ) led by healthy traction across segments. KMB reported healthy sequential trends in Personal loans, CV/CE and Credit Cards. Deposits grew 19% YoY (up 2% QoQ), led by term loans, which grew 33% YoY (up 3% QoQ), while the CASA mix moderated 60bp QoQ to 47.7%. Mix of unsecured loans increased to 11.6% and the management expects it to rise to mid-teens by FY24-end.

* Fresh slippages declined 10% QoQ to INR11.7b. GNPA ratio stood largely stable at 1.7%, while Net NPA improved 3bp QoQ to 0.34%. PCR improved 150p QoQ to 80.6%. KMB has o/s Covid provisions of INR2.95b.

* SMA-2 advances stood at INR2.1b (6bp of advances), while the outstanding restructured portfolio stood at INR4.6b (13bp of advances).

* Subs performance: Kotak Securities reported net earnings growth of 27% YoY, while KIL reported a PAT growth of 83% YoY.

Highlights from the management commentary

* The bank expects RoA to sustain at ~2-2.1% going forward.

* Unsecured retail advances (incl. Retail Micro Finance) as a % of net advances stood at 11.6% as on 3QFY24 vs. 9.3% in 3QFY23 and the portfolio continues to hold well.

* The provision of INR649m in respect of Security Receipts is classified as Non Performing Investments (NPI) during the quarter, which was earlier accounted as Mark-to-Market losses under Other Income. Accordingly, this has no impact on profit after tax.

* LCR stood at 120% for the bank and 127% for the group level in 3QFY24.

Valuation and view

KMB delivered a mixed quarter with a miss in earnings due to high provisions (AIF exposure); however, NIMs remained stable at 5.2% QoQ. Asset quality remained stable with slippages declining sequentially. KMB carries additional Covid-related provisions of ~INR2.95b. The bank continues to guide for steady growth trend and aims to improve the mix of unsecured loans to mid-teens, expressing confidence in the quality of the underlying portfolio. We cut our FY24/FY25 PAT estimates by 3.2%/2.7% and estimate bank to deliver RoA/RoE of 2.4%/14.4% by FY25. We maintain our Neutral stance on the stock with a TP of INR2,000 (2.5x Sep’25E ABV).

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