Kotak Mahindra Bank- A quality bank with fewer concerns on NPLs ::Macquarie Research,

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Kotak Mahindra Bank
A quality bank with fewer concerns on
NPLs
Event
 One of our top picks in the financials space: Kotak is one of our top picks
in the financials space. Reiterate Outperform with TP of Rs550.
Impact
 Less concerns on asset quality: With nearly 65% of the portfolio in retail
where asset quality is expected to be benign, we expect Kotak’s asset quality
to be relatively much better than most of its peers. Restructuring even during
the global financial crisis was insignificant for Kotak and since Kotak
predominantly is into working capital lending with little exposure to long-term
infrastructure loans, we don’t see any material risk to our credit costs
projections which are expected to be around 35-40bps. We expect stressed
assets as a % of net worth to be very comfortable around 3% levels by
FY13E. Consequently the risk to book is much less for Kotak.
 Contribution from banking and financing business now significant: More
than 80% of profits for Kotak now come from the banking and auto financing
business which is expected to do well. Even the insurance business will
contribute more to profitability and dependence on capital market-related
streams like investment banking and securities is likely to reduce further.
 Scale up of liabilities franchise has been unsatisfactory: Kotak’s CASA
has been fairly stagnant at 30% levels and including sweep deposits it has
been on average around 35% levels. The bank has not been aggressively
opening branches as it wants to ensure that appropriate systems and
infrastructure is in place before any expansion and going ahead, expansion
will continue to be in a calibrated manner with a roughly 20-25% increase in
the number of branches every year.
 Some volatility in earnings can’t be ruled out: There could be some
quarterly volatility in earnings owing to its relatively larger dependence on
capital market streams (~15% of profits) which are currently performing
poorly. The securities business has been consistently losing market share and
investment banking profits are dismal to say the least.
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: We believe the bank’s lesser
dependence on volatile income streams is likely to result in more consistent
earnings growth and return ratios.

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