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Kotak Mahindra Bank
Overweight
KTKM.BO, KMB IN
3Q11: Asset quality continues to improve
• Solid 3Q11: Kotak reported net profit of Rs3.8bn, up 16% y/y. PAT
adjusted for insurance at Rs3.6bn was up 15% y/y, marginally lower
than our estimate of Rs3.7bn. Margins are coming off, as expected, but
strong asset quality improvement continues.
• Margins coming off as expected: Margins contracted by ~20bps q/q to
5.4% as expected but q/q NII growth was strong due to one-off interest
income. Loan growth continues to remain strong at 35% y/y growth
driven by CV, mortgage, and corporate book. We expect margins to
moderate and management has been guiding to ~5.0% margins.
• Asset quality continues to get better: Gross NPAs have been coming
off for Kotak and credit costs in the lending business are <50bps
currently from ~2.0% in FY10. We expect the positive momentum in
asset quality momentum to continue and with a less riskier business mix,
lower credit costs more than offset the margin compression.
• Mixed performance from subsidiaries: Improvement in the lending
business was also reflected in Kotak Prime's performance with ~40%
loan growth and lower credit costs. But capital markets businesses
continue to remain under pressure with overall profits for the nonlending business down q/q. Management does expect pressure to
continue for the flow businesses.
• Maintain Overweight: Given the strong trend in asset quality, we
maintain our Overweight recommendation. Margins could come off but
would be more than offset by falling credit costs and strong growth in
the lending business should continue to drive overall profitability. We
think current valuations at ~2.4x FY12E book are attractive, though the
near term is challenging, given the inverted yield curve. Key risks to our
OW are a spike in interest rates and a sharp slowdown in economic
growth.
Standalone bank: key highlights
• Loan growth was strong at ~35% y/y growth driven primarily by
CV and home loan book. Management has guided that given the
macro headwinds and rising interest rates, growth would be ~30-35%
in FY12E.
• Credit costs continued to moderate provisions 5% lower q/q.
Credit costs dipped further to <50bps in this quarter as >50% of the
3Q11 provisions on account of investment depreciation. We expect
asset quality momentum to continue and low credit costs to offset
any margin pressure.
• Opex growth at 43% y/y was higher than expected and was the
primary reason for the earnings miss. Expenses relating to 25-year
celebrations and hike in employee compensation led to the increase
in opex growth, which should moderate from current levels.
Subsidiary performance
• Kotak Prime: Big positive surprise in profitability with 85% y/y
growth in PAT driven by 40% y/y growth in advances and falling
credit costs. Profitability in 3Q11 is positively impacted by a NPA
recovery.
• Capital markets businesses : PAT for Kotak securities was down
10% q/q, KMCC profits up 4% q/q. Management believes that
capital markets business has seen too much fragmentation and would
require some consolidation before margin pressure ebbs.
• Asset Management: Turned positive again following a loss
last quarter (one-off in 2Q11).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Kotak Mahindra Bank
Overweight
KTKM.BO, KMB IN
3Q11: Asset quality continues to improve
• Solid 3Q11: Kotak reported net profit of Rs3.8bn, up 16% y/y. PAT
adjusted for insurance at Rs3.6bn was up 15% y/y, marginally lower
than our estimate of Rs3.7bn. Margins are coming off, as expected, but
strong asset quality improvement continues.
• Margins coming off as expected: Margins contracted by ~20bps q/q to
5.4% as expected but q/q NII growth was strong due to one-off interest
income. Loan growth continues to remain strong at 35% y/y growth
driven by CV, mortgage, and corporate book. We expect margins to
moderate and management has been guiding to ~5.0% margins.
• Asset quality continues to get better: Gross NPAs have been coming
off for Kotak and credit costs in the lending business are <50bps
currently from ~2.0% in FY10. We expect the positive momentum in
asset quality momentum to continue and with a less riskier business mix,
lower credit costs more than offset the margin compression.
• Mixed performance from subsidiaries: Improvement in the lending
business was also reflected in Kotak Prime's performance with ~40%
loan growth and lower credit costs. But capital markets businesses
continue to remain under pressure with overall profits for the nonlending business down q/q. Management does expect pressure to
continue for the flow businesses.
• Maintain Overweight: Given the strong trend in asset quality, we
maintain our Overweight recommendation. Margins could come off but
would be more than offset by falling credit costs and strong growth in
the lending business should continue to drive overall profitability. We
think current valuations at ~2.4x FY12E book are attractive, though the
near term is challenging, given the inverted yield curve. Key risks to our
OW are a spike in interest rates and a sharp slowdown in economic
growth.
Standalone bank: key highlights
• Loan growth was strong at ~35% y/y growth driven primarily by
CV and home loan book. Management has guided that given the
macro headwinds and rising interest rates, growth would be ~30-35%
in FY12E.
• Credit costs continued to moderate provisions 5% lower q/q.
Credit costs dipped further to <50bps in this quarter as >50% of the
3Q11 provisions on account of investment depreciation. We expect
asset quality momentum to continue and low credit costs to offset
any margin pressure.
• Opex growth at 43% y/y was higher than expected and was the
primary reason for the earnings miss. Expenses relating to 25-year
celebrations and hike in employee compensation led to the increase
in opex growth, which should moderate from current levels.
Subsidiary performance
• Kotak Prime: Big positive surprise in profitability with 85% y/y
growth in PAT driven by 40% y/y growth in advances and falling
credit costs. Profitability in 3Q11 is positively impacted by a NPA
recovery.
• Capital markets businesses : PAT for Kotak securities was down
10% q/q, KMCC profits up 4% q/q. Management believes that
capital markets business has seen too much fragmentation and would
require some consolidation before margin pressure ebbs.
• Asset Management: Turned positive again following a loss
last quarter (one-off in 2Q11).
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