Kotak Mahindra Bank - Management meeting: key takeaways::Macquarie Research,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��



Kotak Mahindra Bank
Management meeting: key takeaways
Event
 Meeting with management reaffirms our positive view: We met with the
management of Kotak to get a brief update on the bank and the key message
was that growth is a concern on the retail side and not asset quality and there
could be some pressure on profitability in the auto finance business due to
proposed NBFC regulations. Maintain Outperform with a TP of Rs550.
Impact
 On retail loans, growth is a concern but not asset quality: The recent
sharp increases in rates have affected demand and they are seeing the
margin slow down in most retail segments. Management reiterated that asset
quality so far has been holding up well, with no major delinquencies in any
segment but it has put CVs under close watch. According to management,
despite the rise in interest rates, the EMI to salary ratio is still low, as salaries
have also risen and debt servicing ability of retail continues to be pretty good.
 The large commercial real estate portfolio – is there any worry? If one
looks at Kotak’s CRE portfolio, it’s around Rs42bn (10% of total funded
exposure), but the actual exposure to developers is around Rs12bn.
According to RBI, even LAP (loan against property) gets clubbed under the
CRE category, and also the CRE exposure, which is reported, includes a
sanctioned amount which is yet to be disbursed. So effective exposure to
developers is low. There are about 25 to 30 developers to which it has
exposure, with no particular concentration to any group.
 Proposed NBFC regulations could affect auto finance subsidiary: Kotak
Prime contributes nearly 20% to overall profits of Kotak group. The proposed
NBFC regulations could affect profitability on account of higher NPL and
standard asset provisioning. However, the bigger issue is higher capital
requirements as structural leverage/ROE comes down due to a proposed
increase in Tier-I requirements and risk-weighted asset calculations.
 No major worries over revised priority sector lending norms: It has
consistently met the agri targets. In the direct lending segment, it meets its
targets predominantly through tractor financing and crop loans and it actually
finds this segment very attractive ROE wise. Its presence is only in 7-8 states
and it avoids farmers who fall under the debt waiver category. Indirect lending
is met through the CV finance (financing of small truck operators). The
challenge is meeting the weaker sections and that has further increased due
to the crisis in the MFI sector. It is now trying to use business correspondents
(BCs) more effectively to meet PSL targets.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs550.00 based on a Sum of Parts methodology.
 Catalyst: Strong loan growth, improving ROE.
Action and recommendation
 Reiterate Outperform with TP of Rs550.