Visit http://indiaer.blogspot.com/ for complete details KOTAK MAHINDRA 2QFY11: Loan growth accelerates further; PCR improves to 70%; Neutral
- Kotak Mahindra Bank’s (KMB IN, Mkt Cap US$8.2b, CMP Rs500, Neutral) 2QFY11 consolidated PAT grew 21% YoY (up 11% QoQ) to Rs3.6b.
- Lending business consolidated profits growth was higher at 52% YoY led by 1) Strong loan growth of 40% YoY to Rs375b, and 2) decline in NPA provisions YoY.
- On a QoQ basis, lending PAT declined 2% as KMPL profits declined 19% QoQ and bank profits grew just 4% QoQ.
- Capital market related business (broking and IB) reported 26% YoY decline in profits. Lower market share (drop of 60bp YoY) and falling yields led to pressure on profitability. On a lower base, KMCC (IB business) profits grew 77% YoY to Rs73m. Pressure on KMCC profitability despite increasing deal flows remains a concern.
- Offshore AUM increased by US$0.4b during the quarter. Total AUM stood at Rs497b vs Rs480b a quarter ago. AMC business profits declined 84% YoY as bank took a hit of change in regulation for MTM of liquid MF (above 91 days) in P&L rather than passing it on to investors.
- GNPA in absolute terms declined 4% QoQ and GNPA ratio improved to 2.37% vs 2.79% a quarter ago. Provision coverage ratio (including technical write offs) improved to 70% vs 65% a quarter ago. The bank has already met 70% PCR; we expect provisions to fall sharply in 2HFY11 as slippages are well within the control.
- We have upgraded our standalone earnings estimates by ~2% for FY11 and ~3% for FY12 to account for higher loan growth and lower credit cost. However, upgrades in lending businesses are offset by downgrades in asset management business profits. Overall we maintain our earning estimates for FY11/12. We expect earnings CAGR (ex insurance) of 21% over FY10-12 and expect the bank to report EPS of Rs21 in FY11 and Rs26 in FY12. BV would be Rs151 in FY11 and Rs177 in FY12.
- Stock trades 2.8x FY12E BV and 19x FY12E EPS (adjusted for value of insurance business). Maintain Neutral.
Life Insurance: Up 25% YoY; Concern on profitability persists
- Kotak Life Insurance premium income grew 25.4% to Rs7.3b in 2QFY11. First year regular premium grew 24% to Rs2.7b.
- Life insurance reported a PAT of Rs134m vs loss of Rs69m in 1QFY11. With the recent regulatory changes concerns on the profitability prevails.
- AUM of life insurance increased to Rs76b vs Rs51b a year ago and Rs68b a quarter ago.
Valuation and view
- We expect earnings CAGR (ex insurance) of 21% over FY10-12 and expect the bank to report EPS of Rs21 in FY11 and Rs26 in FY12.
- Consolidated BV would be Rs151 in FY11 and Rs177 in FY12. RoA will remain strong at ~2.4% over FY10-12. On back of higher capitalization, we expect RoE to be 16-17% in next two years.
- Stock trades 2.8x FY12 P/BV and 19x FY12 EPS (adjusted for value of insurance business). We have upgraded our target price from Rs421 to Rs488 due to higher multiples for lending business. Maintain Neutral.
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