Kotak Bank, Growth traction strong; merger to add value :: ICICI Securities

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Growth traction strong; merger to add value
• Standalone profit grew 36% YoY to | 464 crore, higher than our
estimate of | 432 crore, mainly due to strong other income and lower
provisions that came in higher than estimates at | 444 crore rising
26% YoY vs. our estimate of | 404 crore. NII grew 12.4% YoY to
| 1038 crore as estimated with stable margin at 5%
• Other income grew 65% YoY to | 494 crore, higher than expectation
led by strong treasury gains of | 118 crore vs. | 85 crore QoQ
• Credit and deposits grew higher than estimates at 21.6% YoY
(| 64641 crore) and 33.6% YoY (| 73066 crore), respectively, vs. 17%
and 28% expected. Higher growth was seen in retail (mortgage) and
agri loan book whereas the corporate book slowed down leading to
NII growth coming marginally lower at | 1058 crore while NIM has
also declined to 4.8% vs. 5% QoQ
• Consolidated PAT grew 21% YoY and flat QoQ to | 716 crore. Share
of subsidiaries in PAT moderated to 36% vs. 38% earlier
New bank in 2002, making material mark in industry-retail heavy
Kotak Mahindra Bank, promoted by Uday Kotak, post receiving a licence
in 2002 has grown to a loan-book size of | 60948 crore and built a branch
network of 641 branches managing CASA ratio of 31%. The bank’s retail
loans form 41% of total loans while corporate & agriculture comprise the
rest. In 2003, it had 72% retail loans while CV loans dominated the book
that has slightly moderated now at | 5062 crore. However, home loan (|
1284 crore) & other personal loans are also growing fast in retail. Hence,
KMB earns the best NIM in industry at 4.5-4.9% led by high yielding retail
loans. Also, auto loans by Kotak Prime are strong. We revised credit
CAGR of 20% to 22% to | 79249 crore, maintaining margins at ~4.5%.
Savings rate deregulation; raising same to 6% proves beneficial
The savings rate was hiked to 6% by KMB post deregulation by the RBI in
September 2010. The bank almost tripled its savings deposits from | 3331
crore in March 2011 to | 9200 crore by March 2014. It garnered | 600-800
crore on a quarterly basis vs. | 900 crore in full year FY11. CASA ratio
averaged around 28-29% in the past and is seen averaging around 32-
33% consistently by FY16E to | 28716 crore. Total deposits grew at 23%
CAGR over FY10-13. We have raised growth estimates and see deposits
growth at 21.2% CAGR (from 19%) over FY14-16E to | 86712 crore.
Strong management, business model and controlled asset quality
KMB has one of the most stable asset quality with NNPA ratio of 1% and
negligible restructured assets. KMB is well capitalised with tier I of 18.1%
(maintained 15-18% since start). It has grown credit by 15x in FY02-08 to
| 15520 crore and post that at 25% CAGR to | 48468 crore by FY13 with
profit surging to | 1360 crore from | 54 crore in FY02. FY14 growth was
sluggish on a conscious slowdown. On high other income and low
provisions, PAT may grow at 18% CAGR over FY14-16E to | 2077 crore.
Maintain HOLD, merger to add strength…
KMB trades at rich valuations consistently due to its superior return ratios
and NIM (RoA of 1.8% and NIM at 5%). With the ING Vysya Bank merger,
the bank brought down promoter stake from 40% to 34% and also added
value and geographical synergies in the company. We roll over to FY17
factoring in current Kotak group valuation on an SOTP basis at | 1370
(4.5x FY16E standalone ABV for bank). However, addition of ING Vysya
incremental BV and assigning KMB multiple we add | 135 to the SOTP.
We maintain HOLD rating with a revised target price of | 1505.

LINK
http://content.icicidirect.com/mailimages/IDirect_KotakBank_Q3FY15.pdf