Kotak Mahindra Bank - Recoveries boost profits:: Macquarie Research

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Kotak Mahindra Bank
Recoveries boost profits
Event
 Kotak nos above our estimates due to provision writeback: Kotak
reported 4Q11 net profit of Rs4.9bn - 20% above our estimates due to
provision writeback (higher recoveries). Maintain Outperform.

Impact
 Banking and NBFC business continues to be the key driver of
profitability: Kotak’s dependence on capital market income streams is
steadily reducing with banking and NBFC business now contributing nearly
80% of overall FY11 profits. Asset quality has also significantly improved and
consequently credit charges are likely to materially decline from 2% levels
observed in FY10 to 50-60bps in FY12E.
 Chasing low-risk growth, well capitalised: Kotak is now expanding its
branch network by 62 branches this year to 321, has a CASA of 30% and is
focusing on corporate banking (predominantly working capital loans) which
are low risk loans and has expanded the corporate advances by a significant
51% this year. The bank is heavily capitalised with a 20% CAR and at least in
our view there are lesser balance sheet concerns (read asset quality) for
Kotak compared to most of the other banks in the country.
 Securities business losing steam consistently: The MD Mr. Kotak had
earlier articulated the challenges that are arising due to increased
fragmentation and consequent pressure on margins and expects some
consolidation in this industry. Kotak has consistently lost market share in this
business and has lost close to a significant 70bps this year to 3.4%.
Revenues and profits for the quarter were down sharply and from a full year
perspective, revenues and profits are down 11% and 30% YoY.
Commissions in the securities business are also coming down sharply.
 ROA down due to fall in margins, however leverage improvement should
result in improving RoE: Kotak’s sharp 33bps decline in ROA this year has
been mainly due to a 60bps decline in NIMs to 5.6%. As the bank is moving
more towards corporate loans where yields are low, ROA will be under
pressure though some of the decline in NIMs will be offset by decline in credit
costs. However the bank is strongly capitalised with Tier-I at 18% and we
expect that the strong growth in balance sheet that Kotak is likely to
experience will result in improvement in leverage thereby improving ROE.
Earnings and target price revision
 No change.
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 the bank’s lesser dependence on volatile
income streams is likely to result in more consistent earnings growth and
return ratios.