Reduce Kotak Mahindra Bank Ltd For Target Rs. 2,050 By Emkay Global Financial Services Ltd
KMB posted strong credit growth yet again, well above the industry trend, with heavy lifting done by corporate growth. This, with lower investment yield, led to 11bps contraction in margin (vs 32bps in 1Q; 4-10bps for peers in 2Q), while MTM loss caused a 4% PAT miss at Rs32.5bn/RoA at 1.9%. While KMB expects growth to stay healthy, it seeks an opportune time to grow back its unsecured retail book. Stress in PL/Cards has largely peaked out, while MFI should see it moderating from 3Q, thus leading to lower LLP in 2H (1.1%/0.8% in 1Q/2Q). KMB remains open to inorganic acquisition opportunities, although it would be mindful of quality franchisees/valuations. We expect KMB to report a relatively moderate RoA of 1.9% in FY26E, albeit an improvement to 2% in FY27/28E as margins/LLP normalize. We raise our TP by ~5% to Rs2,050 (from Rs1,950), rolling forward standalone bank valuation on 1.8x Sep-27E ABV and subs at Rs690/sh (from Rs670). We though retain REDUCE, given rich valuations (2.1x FY27E ABV) for sub-optimal return ratios (RoE at 11-12%) vs peers.
Strong growth at the cost of margins
KMB logged system-beating strong credit growth of 16% YoY/4% QoQ, with heavy lifting done by corporates (+17.6% YoY/6% QoQ) for a 2 nd quarter in a row. SME (+15.6% YoY) and retail (+17.8% YoY) growth too stayed healthy. However, within retail, the cards/MFI portfolio declined further, by 4%/3% QoQ – the bank expects a growth rebound as the environment improves. It indicated that credit card portfolio growth has been sub-par and below own estimates. CASA trended well, with ratio up by 144bps QoQ to 42%, with full benefit of the SA rate cut sinking in, and leading to lower CoF. However, NIM contracted by 11bps QoQ (vs a 32bps fall QoQ in Q1) to 4.5% due to lower investment yield. KMB, though, expects NIM to have bottomed out, subject to no further rate cut.
Unsecured retail stress easing: CV/CE remains an area to watch
Gross slippages slightly moderated QoQ to Rs16.3bn/1.6% of loans (Rs18bn in 1Q) which, coupled with higher recovery/write-offs, led to a 9bps QoQ improvement in GNPA ratio to 1.4%. The mgmt highlighted that the decline in slippages and credit costs was mainly driven by the cards and MFI segments, while higher write-offs in the quarter were undertaken in the PL, CC, and MFI portfolios, in line with the bank’s 180/270-day writeoff policy. Ahead, the management expects credit cost for cards to gradually decline, MFI to ease from Q3, and PL to reduce meaningfully. However, the CV/CE portfolio remains under stress, similar to other lenders and, thus, needs to be kept a watch on.
We retain REDUCE
We expect KMB to post a relatively moderate RoA of 1.9% in FY26E, albeit improve to 2% in FY27/28E as margins/LLP normalize. We revise TP by ~5% to Rs2,050, rolling forward standalone bank valuations on 1.8x Sep-27E ABV and subs at Rs690/sh (from Rs670). We, though, retain REDUCE, given rich valuations (2.1x FY27E ABV) for suboptimal return ratios (RoE@11-12%) vs large peers. Key risks to our rating/estimate: Earlier than expected recovery in margin/asset quality.
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