Visit http://indiaer.blogspot.com/ for complete details Kotak Mahindra Bank Overweight
KTKM.BO, KMB IN
Lending business profitability improves, flow business
gathering momentum
• 2Q FY11 impacted by one-offs in subsidiaries: Kotak reported 2Q11
net profit of Rs3.5B (excluding insurance profits), up 19%y/y. The
results were in line with street expectations, but 10% lower than our
estimates primarily due to the one-off charges/expenses in the AMC
business. Overall, lending business profitability continues to improve,
and with strong capital markets momentum flow business could surprise.
• Banking business – more room for surprises: Lending business profits
increased by 55%, driven by ~40% y/y loan book growth and a sharp fall
in credit costs. We believe profits for the lending business could surprise
the street given (1) faster-than-expected loan growth – management has
been upping guidance, (2) lower credit costs (50bp in 2Q FY11, and that
too mainly to increase provision coverage), and (3) lower opex/asset,
which would cushion any expected margin compression.
• Flow business gathering momentum: Kotak Securities’ and KMCC’s
profits were up 9% q/q, but we would expect the full impact of higher
capital market volumes to be reflected only in 3Q FY11 results, leading
to an earnings surprise. AMC and International business profits were
affected by one-offs, which management believes is unlikely to recur.
• Expect strong earnings growth: With lower credit costs and improving
flow business profitability, we expect strong earnings growth in 2H
FY11. We believe consensus is still not factoring in lower credit costs
from the retail asset turnaround and possible earnings upside from the
flow businesses.
• Maintain Overweight: We maintain our positive stance on Kotak given
the strong outlook of the lending business and current momentum in the
capital market businesses. Key downside risks include a spike in interest
rates and a sharp slowdown in economic growth.
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