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Kotak Mahindra Bank
Banking business in the spotlight
Event
Kotak is a diversified financial conglomerate. Kotak Mahindra Bank is a fastgrowing
private sector bank with a loan book size of Rs289bn. The major
subsidiaries are: Kotak prime-car financing, Kotak Securities - India’s largest
domestic brokerage firm, Kotak life insurance – a private life insurance firm,
and Kotak Capital- investment banking.
Impact
Business model set for a change: We believe Kotak’s business model is in
the process of undergoing a transformation in which banking and life
insurance businesses are likely to be greater contributors of overall value
compared to capital markets-related businesses. The step jump in RoE from
single digits to closer to 20% — levels seen during record high capital market
activity — is likely to be driven largely by increasing profitability from all noncapital
markets-related businesses.
Dependence on capital markets decreasing: Over the past few years
Kotak’s profit contribution from the two main capital markets businesses
(securities and investment banking) have consistently decreased and banking
business has become a large contributor to overall profitability. We don’t
attribute the entire decrease to the subdued momentum in capital markets.
Banking business indeed has shown a commendable turnaround, with RoEs
improving rapidly, and the insurance business has now turned profitable
compared to earlier years when it used to make substantial losses. Kotak’s
renewed focus in the other verticals is also a function of heightened
competition in securities and the investment banking business.
Banking business increasingly getting profitable: Kotak’s focus in
expanding its branch network and improving its liabilities franchise coupled with
commendable achievements on the expense ratios front is likely to result in a
significant improvement in RoE over the next few years. The transition from a
pure retail loan mix to a more balanced retail-corporate one has happened
without any significant compromise on margins. Though NIMs are unlikely to
remain at current levels (management expects NIM to stabilise at 5%), a lower
opex coupled with lower credit charges could result in higher RoE.
Action and recommendation
Reiterate Outperform: We believe the bank’s lesser dependence on volatile
income streams is likely to result in more consistent earnings growth and
return ratios. Maintain Outperform with a TP of Rs515.
Kotak Mahindra Bank Aide Memoire
1. What is the incremental spreads you are making on loans?
2. How has the wholesale funding cost moved in the last six months?
3. Your CASA ratio has not grown despite a fairly good pace of opening branches. How do you see the situation now that the
term deposit rates have again become fairly attractive? Where do you see CASA stabilizing for you in the next 12-18
months?
4. What is your outlook on the liquidity tightness? Do you think it will ease in the next 2-3 months? What deposit growth do
you see for the system at large?
5. What is the loan growth you are expecting for 4Q11 and FY12?
6. What are the key drivers for loans? How broad based is the loan growth?
7. How long do you think before banks would again become aggressive on unsecured retail lending? How has your credit
screening/monitoring evolved in the segment?
8. Continuously improving asset quality has been a key positive for the bank. Where do you think asset quality will stabilise in
terms of the Gross NPL ratio? Do you see concerns on asset quality again emerging due to tightening and the possible
slowing of the economy?
9. What are the margins that Kotak prime currently enjoys? What margin and profit growth do you expect given the very tight
liquidity?
10. Kotak securities has been continuously loosing market share. Do you see that bottoming out? What are the margins you
make on the cash and F&O side? Do you think that they have bottomed out?
11. What new business premium growth do you expect for the life business? Where do you think margins will stabilize? Do you
have any plans of listing the business?
12. Do you see a need to acquire a smaller bank to gain size? If so, what could be the possible acquisition criteria/targets?
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Kotak Mahindra Bank
Banking business in the spotlight
Event
Kotak is a diversified financial conglomerate. Kotak Mahindra Bank is a fastgrowing
private sector bank with a loan book size of Rs289bn. The major
subsidiaries are: Kotak prime-car financing, Kotak Securities - India’s largest
domestic brokerage firm, Kotak life insurance – a private life insurance firm,
and Kotak Capital- investment banking.
Impact
Business model set for a change: We believe Kotak’s business model is in
the process of undergoing a transformation in which banking and life
insurance businesses are likely to be greater contributors of overall value
compared to capital markets-related businesses. The step jump in RoE from
single digits to closer to 20% — levels seen during record high capital market
activity — is likely to be driven largely by increasing profitability from all noncapital
markets-related businesses.
Dependence on capital markets decreasing: Over the past few years
Kotak’s profit contribution from the two main capital markets businesses
(securities and investment banking) have consistently decreased and banking
business has become a large contributor to overall profitability. We don’t
attribute the entire decrease to the subdued momentum in capital markets.
Banking business indeed has shown a commendable turnaround, with RoEs
improving rapidly, and the insurance business has now turned profitable
compared to earlier years when it used to make substantial losses. Kotak’s
renewed focus in the other verticals is also a function of heightened
competition in securities and the investment banking business.
Banking business increasingly getting profitable: Kotak’s focus in
expanding its branch network and improving its liabilities franchise coupled with
commendable achievements on the expense ratios front is likely to result in a
significant improvement in RoE over the next few years. The transition from a
pure retail loan mix to a more balanced retail-corporate one has happened
without any significant compromise on margins. Though NIMs are unlikely to
remain at current levels (management expects NIM to stabilise at 5%), a lower
opex coupled with lower credit charges could result in higher RoE.
Action and recommendation
Reiterate Outperform: We believe the bank’s lesser dependence on volatile
income streams is likely to result in more consistent earnings growth and
return ratios. Maintain Outperform with a TP of Rs515.
Kotak Mahindra Bank Aide Memoire
1. What is the incremental spreads you are making on loans?
2. How has the wholesale funding cost moved in the last six months?
3. Your CASA ratio has not grown despite a fairly good pace of opening branches. How do you see the situation now that the
term deposit rates have again become fairly attractive? Where do you see CASA stabilizing for you in the next 12-18
months?
4. What is your outlook on the liquidity tightness? Do you think it will ease in the next 2-3 months? What deposit growth do
you see for the system at large?
5. What is the loan growth you are expecting for 4Q11 and FY12?
6. What are the key drivers for loans? How broad based is the loan growth?
7. How long do you think before banks would again become aggressive on unsecured retail lending? How has your credit
screening/monitoring evolved in the segment?
8. Continuously improving asset quality has been a key positive for the bank. Where do you think asset quality will stabilise in
terms of the Gross NPL ratio? Do you see concerns on asset quality again emerging due to tightening and the possible
slowing of the economy?
9. What are the margins that Kotak prime currently enjoys? What margin and profit growth do you expect given the very tight
liquidity?
10. Kotak securities has been continuously loosing market share. Do you see that bottoming out? What are the margins you
make on the cash and F&O side? Do you think that they have bottomed out?
11. What new business premium growth do you expect for the life business? Where do you think margins will stabilize? Do you
have any plans of listing the business?
12. Do you see a need to acquire a smaller bank to gain size? If so, what could be the possible acquisition criteria/targets?
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