Kotak Mahindra Bank 2Q12: Banking business is rocking ::Macquarie Research,

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Kotak Mahindra Bank
2Q12: Banking business is rocking
Event
 Banking business in full steam: Kotak’s 2Q FY12 consolidated profits came
in line with our estimate of Rs4.4bn up 20% YoY. The bank and auto financing
business continue to do well with strong growth in profits and excellent asset
quality. Maintain Outperform with a TP of Rs550.
Impact
 We are enthused by the financing business: The banking and auto finance
business which constituted nearly 80% of profits in 2Q FY12/1H FY12 posted
37% YoY increase in profits. The 20bps QoQ decline in restated NIMs to
4.8% is mainly due to the changing loan mix in our view. Kotak now is trying
to increase its share of corporate banking. On a QoQ basis corporate book
has grown 25% compared to 13% for overall loan book. Asset quality
continues to hold up extremely well with NPLs well under control.
 Capital market businesses – facing the brunt: Though only 7% of profits
are constituted by non-banking/financing and non-insurance streams, they still
tend to swing earnings a bit. The numbers posted by investment banking
business and international subsidiaries (predominantly asset management)
were quite dismal this quarter reflecting the current turmoil in capital markets.
Investment banking business has posted a loss for the first time since the
GFC and international subsidiaries (predominantly offshore asset
management) has posted a loss for the second consecutive quarter.
 Other positives and negatives: Pros – 1) Insurance business profitability is
improving; 2) Improvement in overall cost-income ratio is encouraging; 3) Fee
income growth has been strong in the bank driven by transaction banking.
Cons – 1) Weak CASA- Traction continues to be weak with CASA mix at
around 26%.
 Conference call takeaways: 1) In the current interest rate regime, Kotak
management feels that interest rate on savings deposits is expected to go up
post the deregulation of savings rate. The banks may not be fully in a position
to pass on the increased costs to customers. 2) There has been a 50%
decline in restructured loans to Rs700mn. 3) Management expects loan
growth to be 30% YoY for FY12. 4) Recoveries were very strong this quarter
and hence there was a writeback of provisions this quarter.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs550.00 based on a Sum of Parts methodology.
 Catalyst: Strong earnings 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