Kotak Mahindra Bank - Merger to Provide Leap Forward, Integration Key Monitorable; Result Update Q3FY15 :: Edelweiss

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Kotak Mahindra Bank’s (KMB) Q3FY15 PAT (consolidated, excluding life insurance) at INR6.7bn (up 27% YoY) was marginally lower than our estimate following > 25bps NIMs compression, lower-than-expected profitability of auto financing and capital market related businesses. Loan growth for third consecutive quarter was strong (at 22% YoY) with robust build up in corporate banking book (benefitting from market share gains). Credit cycle seems to be bottoming out and credit cost was contained at ~20bps. Moreover, recent acquisition of ING Vysya Bank (VYSB) will provide the much needed leap in terms of scale, synergies in terms of presence and product repertoire, among others. Operating leverage benefit will offset savings deposit cost hit it may have to take. Key monitorable will be successful integration of VYSB including intricacies regarding HR related and various synergy benefits. KMB’s valuation at 4.25x FY17E P/BV factors in a fair bit of upside.

Banking: NII growth was modest on lower NIMs (down ~25bps QoQ) as asset growth was driven by low yielding wholesale banking and investment book. Fee income gained traction on higher distribution fees. Asset quality continued to hold the fort. Management anticipates growth to average 20% plus in medium term with KMB being excited about mid-market space and targeting market share gains.

Kotak Mahindra Prime continued to report muted earnings. Auto advance growth continued to be moderate for the sixth consecutive quarter-up only 9% (versus historical run rate of 20% plus).

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https://www.edelweiss.in/research/Kotak-Mahindra-Bank--Merger-to-Provide-Leap-Forward,-Integration-Key-Monitorable;-Result-Update-Q3FY15/28090.html