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Kotak Mahindra Bank
Banking business: Bigger and better
Event
Kotak reported 14% YoY growth in net profit to Rs3.8bn, in line with our
estimate. We maintain our Outperform rating but reduce our target price by
11% to Rs515 due to a lower multiple for the banking business.
Impact
Banking and NBFC business remains the key driver of profitability:
Kotak’s dependence on capital market income streams is decreasing steadily,
with the banking and NBFC business now contributing nearly 75% of overall
profits. In addition, asset quality has improved significantly, and consequently,
we expect credit charges to decline materially from the 2% level last year to
60–70bp in FY12.
Bearish outlook on capital markets business: Managing Director Kotak
articulated the challenges that are arising due to increased fragmentation and
the consequent pressure on margins. Mr. Kotak expects some consolidation
in the industry, and perhaps some companies not to survive.
Opex high due to staff expenses and one-offs: The bank has given
midyear salary increments due to which staff expenses have gone up, and
there were one-offs related to the silver jubilee celebration. Expenses are
expected to remain high, as the bank intends to expand its branch network
from 296 currently to 500 in the next two years.
Other takeaways from the conference call: The bank expects long-term
NIMs to stabilise around 5%, due to a change in loan mix (moving more
towards corporate loans). The spurt in profitability of Kotak Prime (NBFC
business predominantly offering auto loans) was mainly due to recovery of
some bad assets. More than half the provisions on the consolidated entity
were due to MTM hits on the investment portfolio, implying very low credit
costs during the quarter (less than 50bp). The company targets a CASA of
40% for the next two to three years. Life insurance posted a sharp increase in
profits this quarter, due to aggressive reduction in costs and lower new
business strain.
Earnings and target price revision
We are fine-tuning our consolidated earnings estimates. We reduce our target
price by 11% to Rs515, mainly to reflect a lower multiple of 3.0x for the
banking business (vs 3.5x previously). We have reduced our sustainable ROE
forecast to 19% from 21%, mainly due to higher opex.
Price catalyst
12-month price target: Rs515.00 based on a Sum of Parts methodology.
Catalyst: Positive earnings surprises, improving ROE.
Action and recommendation
Reiterate Outperform: We believe that the bank’s lesser dependence on
volatile income streams is likely to result in more consistent earnings growth
and return ratios. We maintain our Outperform rating, with a new target price
of Rs515.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Kotak Mahindra Bank
Banking business: Bigger and better
Event
Kotak reported 14% YoY growth in net profit to Rs3.8bn, in line with our
estimate. We maintain our Outperform rating but reduce our target price by
11% to Rs515 due to a lower multiple for the banking business.
Impact
Banking and NBFC business remains the key driver of profitability:
Kotak’s dependence on capital market income streams is decreasing steadily,
with the banking and NBFC business now contributing nearly 75% of overall
profits. In addition, asset quality has improved significantly, and consequently,
we expect credit charges to decline materially from the 2% level last year to
60–70bp in FY12.
Bearish outlook on capital markets business: Managing Director Kotak
articulated the challenges that are arising due to increased fragmentation and
the consequent pressure on margins. Mr. Kotak expects some consolidation
in the industry, and perhaps some companies not to survive.
Opex high due to staff expenses and one-offs: The bank has given
midyear salary increments due to which staff expenses have gone up, and
there were one-offs related to the silver jubilee celebration. Expenses are
expected to remain high, as the bank intends to expand its branch network
from 296 currently to 500 in the next two years.
Other takeaways from the conference call: The bank expects long-term
NIMs to stabilise around 5%, due to a change in loan mix (moving more
towards corporate loans). The spurt in profitability of Kotak Prime (NBFC
business predominantly offering auto loans) was mainly due to recovery of
some bad assets. More than half the provisions on the consolidated entity
were due to MTM hits on the investment portfolio, implying very low credit
costs during the quarter (less than 50bp). The company targets a CASA of
40% for the next two to three years. Life insurance posted a sharp increase in
profits this quarter, due to aggressive reduction in costs and lower new
business strain.
Earnings and target price revision
We are fine-tuning our consolidated earnings estimates. We reduce our target
price by 11% to Rs515, mainly to reflect a lower multiple of 3.0x for the
banking business (vs 3.5x previously). We have reduced our sustainable ROE
forecast to 19% from 21%, mainly due to higher opex.
Price catalyst
12-month price target: Rs515.00 based on a Sum of Parts methodology.
Catalyst: Positive earnings surprises, improving ROE.
Action and recommendation
Reiterate Outperform: We believe that the bank’s lesser dependence on
volatile income streams is likely to result in more consistent earnings growth
and return ratios. We maintain our Outperform rating, with a new target price
of Rs515.
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