RESULT UPDATE KOTAK MAHINDRA BANK - …static-news.moneycontrol.com/.../07/Kotak_Mahindra_Bank_210717.pdf · Kotak Mahindra Bank 3 Edelweiss Securities Limited Life insurance: Growth

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Kotak Mahindra Bank’s (KMB) Q1FY18 performance was marked by delivery on loan growth at 18% YoY (moving to pre-merger levels suggesting synergy benefits). This along with superior NIMs (4.5%, commendably sustained through merger exercise) and strong core fees helped KMB register robust core revenue momentum. Meanwhile, higher opex (marketing cost on “811”) and lower treasury led to below estimated PAT. Asset quality continued to hold forth - overall stress (GNPLs + restructured) was stable at 2.6% with credit cost at <60bps (commendably through entire integration process, AQR among others). Liability franchise continued to strengthen with average SA jumping >40% YoY, keeping CASA ratio at ~44%. With limited levers in credit cost and opex, revenue traction improvement will be key for RoE improvement (recent capital raising will keep RoEs capped at low mid teens). Maintain ‘HOLD’ as valuations, at 3.7x FY19E P/ABV (standalone), factor in fair bit of upside.

Ammunition in place to capitalise on growth

Integration challenges followed by demonetisation weighed on loan growth. However,

performance in past couple of quarters suggests that benefits have started crystallising,

with loan growth touching 19% in Q1FY18 led by CV, home loans/LAP and unsecured

portfolio. Even stress pool stands at very comfortable levels compared to peers, despite

absorbing stress from eIVBL portfolio providing comfort that credit cost will be under

control. Liability franchise has also strengthened (savings base nearly doubled in past 2

years) and KMB is also investing heavily in digital initiatives – transforming the way

business is sourced and transacted. Robust franchise, limited stress baggage, strong

capital position and digital initiatives equip the bank with the ammunition to capitalise on

growth opportunities.

Outlook and valuations: Fairly priced; maintain ‘HOLD’

Q1FY18 suggests strong beginning to the year with green shoots visible in terms of

synergy benefits, both on cost and revenue fronts. Performance of other subsidiaries was

broadly in line with estimates. With significant benefits likely to flow from formalisation

of financial savings, subsidiaries could see strong business tailwinds. With recent equity

infusion (INR58bn), leveraging of this capital in financing business and efficient allocation

across other businesses will be critical for RoE improvement. Valuations at 3.7x FY19E

P/ABV (std. for RoE of 16% by FY19E) factor in fair bit of upside. Hence, we maintain

‘HOLD/SP’ with revised TP of INR1,001 (earlier INR896), factoring recent capital raising.

RESULT UPDATE

KOTAK MAHINDRA BANK Growth arsenal in place

COMPANYNAME

EDELWEISS 4D RATINGS

Absolute Rating HOLD

Rating Relative to Sector Performer

Risk Rating Relative to Sector Medium

Sector Relative to Market Overweight

MARKET DATA (R: KTKM.BO, B: KMB IN)

CMP : INR 980

Target Price : INR 1,001

52-week range (INR) : 1,019 / 692

Share in issue (mn) : 1,903.5

M cap (INR bn/USD mn) : 1,865 / 28,961

Avg. Daily Vol.BSE/NSE(‘000) : 359.4

SHARE HOLDING PATTERN (%)

Current Q3FY17 Q2FY17

Promoters *

32.1 33.6 33.6

MF's, FI's & BK’s 7.8 8.5 5.7

FII's 38.6 36.8 35.1

Others 21.5 21.1 25.6

* Promoters pledged shares (% of share in issue)

: NIL

PRICE PERFORMANCE (%)

Stock Nifty EW Banks and

Financial Services Index

1 month 0.7 2.5 2.0

3 months 13.5 8.7 11.4

12 months 27.8 16.1 26.3

Kunal Shah +91 22 4040 7579

[email protected]

Nilesh Parikh +91 22 4063 5470

[email protected]

Prakhar Agarwal +91 22 6620 3076

[email protected]

India Equity Research| Banking and Financial Services

July 20, 2017

Financials (INR mn)

Year to March Q1FY18 Q1FY17 Growth (%) Q4FY17 Growth (%) FY17 FY18E FY19E

Net revenue 49,596 43,871 13.1 56,085 (11.6) 1,54,052 1,80,197 2,10,783

Net profit 12,437 9,960 24.9 13,032 (4.6) 46,707 58,238 71,356

Dil. EPS (INR) 25.4 30.6 37.5

Adj. BV (INR) 188.5 239.0 272.8

Price/ Adj book (x) * 5.0 3.9 3.4

Price/ Earnings (x) * 37.7 31.2 25.5

* adj for insurance

Banking and Financial Services

2 Edelweiss Securities Limited

Asset quality in good stead despite absorbing stress from eIVBL book GNPLs were broadly stable at 2.6% (stable QoQ as well), even post considering the exposure

to accounts referred to NCLT (total exposure of INR2.36bn to 4 -12 accounts with all 4

accounts inherited from eIVBL). The management highlighted they are adequately provided

towards these accounts. Even then, credit cost stood at <60bps levels versus 61bps in FY17

and 82bps in FY16. This continues to be in line with management guidance, which

indicatively suggests continued directional improvement in credit cost in FY18 (implying

<60bps credit cost). While there was a marginal rise in SMA-2 accounts (INR3bn versus

INR1.3bn in Q4FY17), even factoring evaluation of potential stress, viz., 5:25/restructured

book/SRs, indicates limited stress baggage. Given superior retail franchise and stringent risk

management framework (no divergence with RBI), KMB seems to be better placed than

other corporate banks.

Other highlights Operating expenses were elevated following higher advertisement cost related to 811 to

the tune of INR630mn (large part of which is non-recurring). Management expects cost

synergy benefit to play through.

Other income stood at INR9bn (up >23% YoY) with fee & services being INR8bn (broad

based improvement which bank expects to sustain). Having said that treasury and

recovery from w/o accounts was softer during the quarter.

Table 1: Commercial banking – Key metrics

Other business updates

Table 2: Business-wise profitability

Source: Company

(INR mn) Q1FY18 Q1FY17 Growth (%) Q4FY17 Growth (%) FY16 FY17 Growth (%)

Net interest income 22,456 19,191 17.0 21,614 3.9 69,004 81,262 17.8

Pre-provisioning profits 15,954 13,150 21.3 17,020 (6.3) 40,411 59,848 48.1

Provisions 2,037 1,795 13.5 2,674 (23.8) 9,174 8,367 (8.8)

PBT 13,916 11,355 22.6 14,346 (3.0) 31,237 51,481 64.8

Tax 4,789 3,936 21.7 4,582 4.5 10,339 17,366 68.0

PAT 9,127 7,420 23.0 9,765 (6.5) 20,898 34,115 63.2

Advances 14,23,590 12,07,650 17.9 13,60,820 4.6 11,86,650 13,60,820 14.7

Deposits 16,35,180 14,00,280 16.8 15,74,260 3.9 13,86,430 15,74,260 13.5

Advances + Investments 18,87,852 16,83,100 12.2 18,11,560 4.2 16,99,250 18,11,560 6.6

Year to March Q118 Q117 Growth (%) Q317 Growth (%) FY16 FY17 Growth (%)

Kotak Mahindra Bank (merged, standalone) 9,130 7,420 23.0 9,760 (6.5) 20,910 34,110 63.1

Kotak Mahindra Prime 1,320 1,200 10.0 1,330 (0.8) 5,030 5,160 2.6

Kotak Mahindra Capital Company 50 230 (78.3) 110 (54.5) 330 460 39.4

Kotak Securities 1,250 600 108.3 1,210 3.3 2,510 3,620 44.2

International subsidiaries 170 130 30.8 210 (19.0) 1,050 870 (17.1)

Kotak Mahindra AMC & Trustee Co 150 190 (21.1) 130 15.4 720 550 (23.6)

Kotak Mahindra Investments 450 400 12.5 560 (19.6) 1,550 1,970 27.1

Total consolidated profit after tax 12,510 10,190 22.8 13,190 (5.2) 32,040 46,490 45.1

Equity affi l iates/Minority int & others (70) (230) NA (160) NA 50 (120) NA

PAT (excluding life insurance) 12,440 9,960 24.9 13,030 (4.5) 32,090 46,370 44.5

Kotak Life Insurance 1,030 710 45.1 1,010 2.0 2,510 3,030 20.7

PAT 13,470 10,670 26.2 14,040 (4.1) 34,600 49,400 42.8

Kotak Mahindra Bank


Life insurance: Growth momentum maintained

Life insurance sustained a fairly good quarter with individual WRP registering >30% YoY

growth; having said that, lower contribution from group business (down >20% YoY),

restricted NBP to INR4.8bn (up 1 % YoY). The improvement also seems to percolate into

renewal premiums (up >50% YoY), leading to >20% YoY growth in gross written

premium.

Life insurance business reported PAT of INR1bn (versus PAT of INR3bn in FY17 and

INR2.5bn in FY16).

Solvency ratio came in at 304% (300% in Q4FY17 and regulatory requirement of 150%).

The bank has agreed to acquire Old Mutual’s 26% Stake in Kotak Life, and is awaiting

regulatory approvals.

Table 3: Kotak Life Insurance—Key metrics

Source: Company

Kotak Mahindra Prime: Steady quarter

Given high competitive landscape and the bank’s focus on profitability, growth has

been relatively softer. Overall, car financing portfolio grew ~9% YoY to INR183.7bn,

however overall customer assets grew >24% following growth in capital market related

lending in Q1FY18. Management expects growth to gain traction given few new

initiatives (launched consumer durable financing business through KMP).

Asset quality continued to be benign with NNPLs at 36bps (stable QoQ).

Table 4: Kotak Mahindra Prime – Key metrics

Source: Company

Kotak Securities: Impressive performance

Average daily trading volumes (ADTV) came in at INR109.8bn (up ~43% YoY/5.3% QoQ),

leading to market share of 1.9% (2.2% in previous quarter).

Revenue and PAT came in at INR3.7bn (up ~53% YoY) and INR1.3bn (up >2.0% YoY),

respectively.

Table 5: Kotak Securities—Key metrics

Source: Company


New Business premium 4,820 4,770 1.0 11,720 (58.9) 22,100 28,500 29.0

Profit (INR mn) 1,030 710 45.1 1,010 2.0 2,510 3,030 20.7


PBT 2,030 1,830 10.9 2,030 0.0 7,720 7,870 1.9

PAT 1,320 1,200 10.0 1,330 (0.8) 5,020 5,160 2.8

Auto advances 1,83,720 1,68,410 9.1 1,81,780 1.1 1,67,070 1,81,780 8.8


Revenues 3,650 2,380 53.4 3,660 (0.3) 9,730 11,850 21.8

PBT 1,870 920 103.3 1,820 2.7 3,800 5,430 42.9

PAT 1,250 600 108.3 1,210 3.3 2,510 3,620 44.2

PAT margin (%) 34.2 25.2 33.1 25.8 30.5

Avg daily volumes (INR bn) 110 77 43.2 104 5.3 73 90 22.6

Branches 1,455 1,229 18.39 1,281 13.6 1,209 1,281 6.0



Asset management: AUM growth momentum sustained

AUM growth extended traction, growing >60% YoY. AUMs crossed the INR1tn mark

with equity AUMs amounting to INR305bn (up >96% YoY).

Meanwhile, given that cost in AMC is not amortised, faster growth in business leads to

strain on profitability. Consequently, profitability was soft with PBT at INR210mn

(INR200mn in Q4FY17 and INR290mn in Q1FY17) and PAT came in at INR150mn

(INR130mn in Q4FY17 and INR190mn in Q1FY17).

Table 6: Domestic asset management business—Key metrics

Source: Company

Investment banking: Volatility persists

Kotak Mahindra Capital Company (KMCC), the investment banking division, reported

PAT of INR50mn (versus INR110mn in Q4FY17, INR460mn in FY17 and INR320mn in

FY16).

While the division has several mandates in the pipeline (ECM and advisory), it remains

to be seen how much it will contribute to bottom line.

Table 7: Kotak Mahindra Capital Company—Key metrics

Source: Company

Table 8: SoTP valuation (FY19E)

Source: Edelweiss research


PBT 210 290 (27.6) 200 5.0 900 840 (6.7)

PAT 150 190 (21.1) 130 15.4 730 550 (24.7)

AUMs 10,14,140 6,31,140 60.7 9,24,400 9.7 5,87,310 9,24,400 57.4


Total income 270 520 (48.1) 340 (20.6) 1,140 1,360 19.3

PBT 80 310 (74.2) 150 (46.7) 460 610 32.6

PAT 50 230 (78.3) 110 (54.5) 320 460 43.8

Method

AUMs /

earnings /

book

Multiple

(x)

Value of business

(INR mn)

Kotak Bank's

holding

Value

(INR mn)

Value per

share

(INR)

Bank PABV 3,91,984 3.8 14,89,540 100 14,89,540 783

Prime PABV 47,618 3.2 1,66,661 100 1,66,661 88

Life insurance Appraisal value 65,698 74 48,616 26

Securities / Invt banking PE 7,118 12.0 1,06,775 100 1,06,775 56

MF/Offshore AUMs/PE % of AUM 17,88,793 5.2 93,634 100 93,634 49

Total 19,22,309 19,05,228 1,001

Kotak Mahindra Bank


Financial snapshot (INR mn) Year to March Q1FY18 Q1FY17 % change Q4FY17 % change FY17 FY18E FY19E

Interest income 59,352 54,697 8.5 56,548 5.0 241,187 275,208 321,419 Interest exp 29,306 29,040 0.9 27,651 6.0 139,268 154,052 178,575

Net int. inc. (INR mn) 30,045 25,657 17.1 28,897 4.0 101,919 121,156 142,844

Non interest income 19,551 18,214 7.3 27,188 (28.1) 52,133 59,040 67,939

Net revenues 49,596 43,871 13.1 56,085 (11.6) 154,052 180,197 210,783

Non interest expenses 28,035 26,018 7.8 33,177 (15.5) 73,075 81,484 91,401

Pre-provision profit 21,561 17,852 20.8 22,908 (5.9) 80,977 98,712 119,382

Provisions 2,322 2,136 8.7 2,996 (22.5) 9,299 10,215 11,527

Profit before tax 19,239 15,717 22.4 19,912 (3.4) 71,677 88,498 107,856

Tax 6,638 5,415 22.6 6,447 3.0 23,670 29,110 35,499

Core profit 12,602 10,302 22.3 13,465 (6.4) 48,007 59,388 72,356

Minorities/affiliates (165) (342) NA (433) NA (1,300) (1,150) (1,000)

PAT 12,437 9,960 24.9 13,032 (4.6) 46,707 58,238 71,356

Diluted EPS (INR) 7.6 5.7 32.8 6.9 10.8 25.4 30.6 37.5

Ratios

NII/GII (%) 50.6 46.9 51.1 42.3 44.0 44.4

Cost/income (%) 56.5 59.3 59.2 47.4 45.2 43.4

Provisions / PPOP 10.8 12.0 13.1 11.5 10.3 9.7

Tax rate (%) 34.5 34.5 32.4 33.0 32.9 32.9

Adj book value / share 188.5 239.0 272.8

Price/ Adj. book (x) 5.0 3.9 3.4

Price/ Earnings 37.7 31.2 25.5



Key highlights of Q1FY18 concall takeaways

With respect to growth

For the quarter was pegged at 19% YoY, across various area. Bank has highlighted that

they are Internally well geared to capture opportunities (integration challenges are well

behind), however, external environment continues to be softer (private expenditure is

still not happening).

o Corporate segment grew > 20% growth (largely gaining market share). This is due

to both deepening of presence in high quality corporate and new customer

acquisition in mid-corporate segment. The bank continues to remain confident of

clocking 20-25% growth.

o Agri, home loan/LAP and unsecured portfolio (business loans/PL/CCs) witnessed

sharp momentum this quarter. The management believes that consumption story

will continue (pre-GST saw huge boost and that trend is continuing).

o CV/CE saw a very good growth during the quarter – up 43% YoY (all segment of CVs

has seen growth expect for small CV portfolio). This has been one of the focus area

for the bank over last 1-1.5 years and the investment done earlier is now reaping

benefits (the bank has increased market share on month on month basis).

o Quarter did see some slowdown in agri and business banking division ( view of the

transition towards GST environment)

The bank has raised capital in May, and stated that they will continue to evaluate

opportunities on both organic and inorganic routes.

New sales of tractor has been good over last 3months. There has been Issues in

collection due to DeMon and farm loan waiver, but the condition is now improving and

so are the sales. Having said that the bank is gaining market share.

Opex during the quarter was higher due to a) the marketing and advertising expenses

related to 811 scheme ( totalling to INR630mn, bulk of the initial spending happened in

April and thus is non-recurring in nature) and b) acquisition of some PSLCs.

Core fee income growth has been very string . the growth is more broad based in

nature and linked to business activities and thus expects the momentum to continue.

With respect of asset quality

With respect to accounts referred to NCLT

o Bank has total exposure of INR2.36bn toward 4 accounts ( out of the of 12

accounts referred by RBI to NCLT).

o Bank highlighted that all the 4 accounts were inherited from ING Vysya Bank

(Kotak Mahindra bank had no exposure towards these on standalone balance

sheet) at merger on April 1, 2015 ( and these accounts along with others were

taken into consideration while deciding on valuations). Also the bank highlighted

that the provisions well in excess of RBI mandate.

o For the banking system, the management sees increasing credit cost for the system

on account of reference of cases to IBC.

RWA has not risen significantly from previous quarter. The average rating of the

corporate portfolio will be around A/A+.

Kotak Mahindra Bank


During the quarter bank has a credit cost of 57bps. The bank maintained the guidance

that the credit cost will directionally move downward from FY17 levels ( essentially

suggesting < 60bps of credit cost)

SMA -2 accounts stood at INR3.05bn (versus 1.3bn in Q4FY17).

With respect to digital banking updates:

Traction in 811 is going strong: >9 mn customers. 55% of bank active customers are

digitally active.

Within the customers acquired through 811 : a) 82% is within 18-35 years ( far more

digital savvy customers and can be leveraged) b) 47% are salaried and c) 63% are from

top 20 cities

Monthly transactions on mobile more than doubled to INR60bn.

Digital contribution in overall sourcing one of the highest in the Industry

o ~70% - Recurring Deposit sourced digitally

o ~60% - Term Deposit sourced digitally

o ~20% of the Salaried Personal Loan is through digital share

o > 50% individual life insurance policies sourced through Genie

o > 20% of general insurance business sourced through digital channels

With respect to other business

AMC business: Cost in the AMC is not amortised thus the faster growth in business

leads to the strain in the business.

Kotak Prime: Large part of asset is car finance, and FY17 saw some pressure on margins

thus profitability was under pressure. Q1FY18, saw some improvement in NIMs and

consequent improvement profitability. Bank suggests that this improvement in NIMs

will sustain henceforth. Meanwhile the other than car loans grew sharply during the

quarter due to capital markets related lending.

Kotak Life : The bank keeps on evaluating various options at different point in time.

Having said that at this stage there is No intent to open bancassurance (as a bank

platform) to other partner.

Other highlights

Formal financial savings has seen a significant benefit- reflected in growth seen not

only in liability, but also in AMC, life insurance and capital market business. Looking

ahead overall financial services business has huge growth opportunity .

The bank has agreed to acquire Old Mutual 26% Stake in Kotak Life and is awaiting

regulatory approvals

The bank has received regulatory approvals to acquire BSS Microfinance ( will conclude

the deal by this quarter) . BSS has been growing , while asset quality saw some hiccup

but this is improving.

Launched consumer durable financing business through KMP , the aim is to slowly build

the business and then grow.



Key highlights of Q4FY17 concall takeaways

With respect to growth

For the full year loan growth was pegged at 15% YoY, however for the quarter the

growth was 5% QoQ. Bank believe the trend seen in Q4FY17 to continue on annualized

basis (suggesting >20% growth) which to an extent will be supported by market share

gains

o For the full year business banking has seen a de-growth, but in Q4FY17 it saw a

good growth – reflecting that integration challenging are waning.

o CV/CE saw a very good growth during the quarter, given the small base

management expects growth will continue and they will continue to gain market

share

o While corporate segment as a sector has seen a slow pick up, but bank maintains

its target to grow > 20% gaining market share.

Other income during the quarter was INR10bn, with fee & services being INR7.57bn

(supported by better third party distribution fees). There has also been support from

recovery from w/o accounts which contributed INR1bn during the quarter.

Cost /income ratio target of early to mid 40’s.

With respect of asset quality

Bank highlighted that most of the stressed loans from eIVBL (earlier highlighted at 6%

of eIVBL) has been recognized in the GNPLs. Post the recognition the credit cost is

61bps (including 6 bps of standard assets) , versus 82bps in FY16. Bank believe that

broadly directional improvement will continue in credit cost in FY18.

There is no divergence with RBI assessment for the bank in terms of asset quality.

Bank highlighted that during the quarter there was a) No new CDR participation b) No

transfer to ARC and c) No 5/25 loans . SMA -2 accounts stood at INR1.31bn (versus

INR2.42bn in Q3FY17 and INR4.19bn in Q2FY17).

Other highlights

Formal financial savings has seen a significant benefit- reflected in growth seen not only

in liability, but also in AMC, life insurance and capital market business. Looking ahead

overall financial services business has huge growth opportunity.

Difficult to quantify the outflow of deposit post demonetisation but broadly 25% of CA

and 30-35% of SA has flown out of the system.

The process of be relocated/ rationalised will continue in FY18. These (relocated ) will

have a look like a new branches thus pure play new branch addition will be measured.

The banks on the quarterly basis have seen NIMs in the range of 4.2-4.6% and on the

annual basis 4.3-4.5%. Banks stated that trend will likely be maintained.

Staff expenses during the quarter were lower following some retrials in Q4FY17. On

the other hand other opex was slightly higher following higher advertisement cost

related to 811.

Kotak Mahindra Bank


With respect to digital banking updates:

Digital contribution in overall sourcing one of the highest in the Industry

o ~ 58% - Recurring Deposit sourced digitally

o ~ 63% - Term Deposit sourced digitally

19% of the Salaried Personal Loan is through digital share

Traction in 811 is good and hope to maintain that

With respect to other business

AMC business: Cost in the AMC is not amortised thus the faster growth in business

leads to the strain in the business.

Kotak Mahindra Prime: Large part of the AUM is being comprised by car (>75%) which

is a very competitive product and with bank focus on profitability the growth has been

relatively softer. However, management expects the growth to gains traction given few

new initiatives (plans to extend scope to consumer finance over next few quarters)

Kotak Life : No intent at this stage to open bancassurance (as a bank platform) to other

partner. As the life insurance company they have recently signed with South Indian

Bank for bancassurance partner.



Company Description

KMB is India’s leading full services financial conglomerate, dominating the securities and

investment banking space. It is currently focused on growing its banking, asset

management, and insurance businesses. It began operations in 1986 as a bill discounting

and leasing NBFC under Kotak Mahindra Finance and converted itself into a bank in 2003.

The group has a widespread presence across 1,348 branches. The group has a decent

platform to cross-sell its products, given its presence in the financial spectrum. Kotak

Securities has 2.2% market share in overall market volumes and is one of the prominent

domestic investment bankers. It is developing its presence in the asset management and

insurance businesses. Investment Theme

Given limited levers on credit cost & opex, we anticipate revenue traction to be key for RoE

improvement. Robust liability franchise (CASA + retail TD), rating upgrade (to AAA), CD ratio

at lower level will help sustain high NIMs, however it will be critical to step on growth pedal

to translate into respectable RoEs.. With recent equity infusion (INR58bn), leveraging of this

capital in financing business and efficient allocation across other businesses will be critical

for RoE improvement. Valuations at 3.7x FY19E P/ABV (std. for RoE of 16% by FY19E) factor

in fair bit of upside. Hence, we maintain ‘HOLD/SP’

Key Risks

Continued stress in the economy and hence the CV/CE portfolio can moderate the growth

prospects of the bank.

Depressed capital markets can impact the profitability of investment banking and securities

business.


Kotak Mahindra Bank

Financial Statements (Banking merged entity)

(INRmn)

Year to March FY16 FY17E FY18E FY19E

Net Interest income 67,867 83,070 99,478 1,19,379

Non interest income 27,358 32,794 36,210 41,374

Net revenues 95,225 1,15,863 1,35,688 1,60,752

Operating expense 54,750 56,248 62,822 70,374

Preprovision profit 40,475 59,615 72,866 90,378

Provisions 8,890 8,102 9,088 10,241

PBT 31,585 51,513 63,778 80,137

Taxes 10,687 17,397 21,541 27,072

PAT 20,898 34,116 42,236 53,065

Income statement

(%)


ROA decomposition (%)

Net Int. Inc./Assets 3.8 4.2 4.3 4.3

Fees/Assets 1.4 1.5 1.5 1.4

Inv. profits/Assets 0.1 0.2 0.1 0.1

Net revenues/Assets 5.3 5.8 5.8 5.8

Operating Exp./Assets (3.0) (2.8) (2.7) (2.5)

Provisions/Assets (0.5) (0.4) (0.4) (0.4)

Taxes/Assets (0.6) (0.9) (0.9) (1.0)

Total Costs/Assets (4.1) (4.1) (4.0) (3.9)

ROA 1.2 1.7 1.8 1.9

Equity/Assets 12.4 12.3 13.3 13.7

ROAE 9.4 13.9 13.7 13.9

Ratios

(INRmn)

As on 31st March FY16 FY17E FY18E FY19E

Liabilities

Equity capital 9,172 9,205 9,515 9,515

Reserves 2,21,205 2,51,979 3,48,114 3,96,621

Net worth 2,30,376 2,61,184 3,57,629 4,06,135

Sub bonds/pref cap 501 501 501 501

Deposits 13,86,427 15,74,258 18,51,451 22,54,671

Borrowings 2,53,234 2,62,916 2,95,020 3,49,846

Other liabilities 56,167 62,990 72,621 83,353

Total 19,26,707 21,61,849 25,77,221 30,94,506

Assets

Loans 11,86,668 13,60,836 16,26,153 19,69,155

Investments 5,82,516 6,11,274 7,41,365 8,96,045

Gilts 3,96,644 4,12,951 5,07,074 6,15,509

Others 1,85,872 1,98,324 2,34,291 2,80,536

Cash & equi 1,14,046 1,43,300 1,58,145 1,71,229

Fixed Assets 15,819 15,289 14,603 13,760

Other Assets 27,657 31,149 36,955 44,317

Total 19,26,707 21,61,849 25,77,221 30,94,506

Balance sheet

(INR)


EPS 11.4 18.5 22.2 27.9

EPS growth (%) (64.8) 62.7 19.8 25.6

Book value per share 125.6 141.9 187.9 213.4

Adjusted BV/share (x) 122.0 137.3 182.1 207.6

Valuation Metrics



Financial Statements

Income statement (INR mn)

Year to March FY16 FY17 FY18E FY19E

Interest income 215,167 241,187 275,208 321,419

Interest expended 130,201 139,268 154,052 178,575

Net interest income 84,966 101,919 121,156 142,844

Non interest income 43,461 52,133 59,040 67,939

- Fee & forex income 31,506 37,673 44,618 52,460

- Misc. income 11,865 14,371 14,332 15,388

- Investment profits 90 90 90 90

Net revenue 128,427 154,052 180,197 210,783

Operating expense 69,513 73,075 81,484 91,401

- Employee exp 33,008 33,655 37,029 41,221

- Other opex 36,505 39,420 44,455 50,180

Preprovision profit 58,914 80,977 98,712 119,382

Provisions 9,805 9,299 10,215 11,527

Profit Before Tax 49,109 71,677 88,498 107,856

Less: Provision for Tax 15,992 23,670 29,110 35,499

Profit After Tax 32,318 46,707 58,238 71,356

Adj. Diluted EPS (INR) 17.6 25.4 30.6 37.5

Dividend per share (DPS) 2.1 3.4 4.1 5.1

Dividend Payout Ratio(%) 6.3 7.1 7.1 7.3

Growth ratios (%)


NII growth 9.0 20.0 18.9 17.9

Fees growth 10.6 19.6 18.4 17.6

Opex growth 10.5 5.1 11.5 12.2

PPP growth 0.7 37.4 21.9 20.9

Provisions growth 83.3 (5.2) 9.8 12.8

Adjusted Profit (6.4) 44.5 24.7 22.5

Balance sheet (INR mn)

As on 31st March FY16 FY17 FY18E FY19E

Share capital 9,172 9,205 9,515 9,515

Reserves & Surplus 304,028 346,202 456,321 520,806

Net worth 313,200 355,407 465,836 530,320

Deposits 1,386,427 1,574,258 1,851,451 2,254,671

Total Borrowings 666,581 619,712 698,610 806,936

Other liabilities 2,835 3,285 3,826 4,474

Total liabilities 2,369,043 2,552,662 3,019,721 3,596,401

Loans 1,212,421 1,390,375 1,660,123 2,008,293

Investments 593,914 622,843 753,113 907,980

Cash and Equivalents 245,971 183,556 199,023 212,786

Fixed assets 16,508 15,954 15,234 14,349

Other Assets 300,229 339,933 392,228 452,992

Total assets 2,369,043 2,552,662 3,019,722 3,596,401

Key Assumptions


Macro

GDP(Y-o-Y %) 7.2 6.5 7.1 7.7

Inflation (Avg) 4.9 4.5 4.0 4.5

Repo rate (exit rate) 6.8 6.3 5.8 5.8

USD/INR (Avg) 65.0 67.5 66.0 66.0

Sector

Credit growth 9.3 9.0 12.0 14.0

Deposit growth 8.6 14.0 12.0 13.0

CRR 4.0 4.0 4.0 4.0

SLR 20.8 20.0 20.0 20.0

G-sec yield 7.5 6.5 6.5 6.5

Banking business assump.

Credit growth 9.5 14.7 19.4 20.9

Deposit growth 12.4 13.5 17.6 21.8

Yield on advances 11.6 11.8 11.5 11.3

Cost of funds 6.7 6.3 6.1 6.0

CASA 38.1 44.0 44.5 45.0

Slippages 1.3 1.3 1.3 1.3

Securities bus. Assump.

Avg Daily Trading Vol. 73,302 89,834 104,272 120,866

Commission yields 2.0 2.0 2.0 2.0

PMS AUMs 79,506 95,407 114,488 137,386

Investment Banking assumption

Fin adv. & transact. fee 960 1,176 1,409 1,635

Operating margin 23.6 42.6 47.5 49.7

Kotak Prime assumption

Advance growth 18.8 13.0 14.8 14.8

Yield on advances 12.9 12.5 12.2 11.9

Cost of funds 8.7 8.5 8.4 8.3

Gross NPLs 1.2 1.4 1.5 1.6

Kotak AMC

AUM growth 43.9 41.0 40.0 20.0

Management fees 0.4 0.3 0.3 0.3


Kotak Mahindra Bank

Peer comparison valuation

Market cap Diluted P/E (X) Price/ Adj. BV (X) ROAE (%)

Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E

Kotak Mahindra Bank 28,961 32.0 26.1 4.1 3.6 14.5 14.5

Axis Bank 20,097 19.0 12.5 2.4 2.1 11.7 16.0

DCB Bank 924 23.3 19.9 2.7 2.3 11.5 11.9

Federal Bank 3,590 16.3 13.7 2.2 1.9 13.3 14.2

HDFC Bank 68,366 25.4 21.4 4.3 3.7 17.9 18.3

ICICI Bank 29,928 14.3 10.0 2.3 1.9 12.1 15.8

IndusInd Bank 14,496 25.7 20.7 4.1 3.5 16.8 17.9

Karnataka Bank 928 8.3 7.1 0.9 0.8 10.2 11.0

Yes Bank 11,162 16.7 13.0 2.9 2.5 18.0 19.9

Median - 19.0 13.7 2.7 2.3 13.3 15.8

AVERAGE - 20.1 16.1 2.9 2.5 14.0 15.5

Source: Edelweiss research

Valuation parameters


Adj. Diluted EPS (INR) 17.6 25.4 30.6 37.5

Y-o-Y growth (%) (60.6) 44.0 20.6 22.5

BV per share (INR) 170.7 193.1 244.8 278.7

Adj. BV per share (INR) 167.2 188.5 239.0 272.8

Diluted P/E (x) 55.6 38.6 32.0 26.1

Price/ Adj. BV (x) 5.9 5.2 4.1 3.6

Dividend Yield (%) 0.2 0.3 0.4 0.5

Price/Earnings (x)* 54.4 37.7 31.2 25.5

Price/ BV (x)* 5.6 5.0 3.9 3.4

RoE decomposition (%)


Net int. income/assets 3.8 4.2 4.4 4.3

Fees/Assets 1.9 2.1 2.1 2.1

Net revenues/assets 5.7 6.3 6.5 6.4

Operating expense/assets 3.1 3.0 2.9 2.8

Provisions/assets 0.4 0.4 0.4 0.4

Taxes/assets 0.7 1.0 1.1 1.1

Total costs/assets 4.3 4.3 4.4 4.2

ROA 1.5 2.0 2.1 2.2

Equity/assets 13.5 13.7 14.8 15.1

ROAE (%) 11.0 14.4 14.5 14.5



Holding - Top 10

Perc. Holding Perc. Holding

Capital Group Companies 9.66 Canada Pension Plan Investment 6.05

ING Mauritius Investments 3.74 Commonwealth Bank of Australia 2.55

Sumitomo Mitsui Financial Group 1.72 Massachusetts Mutual Life Insurance 1.46

Caladium Investment 1.36 Matthews International Capital Management 1.31

Aberdeen 1.31 J.P. Morgan Chase & Co. 1.09

*as per last available data

Insider Trades

Reporting Data Acquired / Seller B/S Qty Traded

07 Apr 2017 ANUPAMA ACHIA Sell 16000.00

07 Apr 2017 Prasad Jagajit Mangal Sell 40000.00

06 Apr 2017 Prasad Jagajit Mangal Sell 40000.00

27 Mar 2017 Mahesh Dayani Sell 150000.00

24 Mar 2017 Ashok Baswa Rao Sell 20000.00

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

29 Mar 2017 Mahindra Family Trust I Buy 740590 860.00

29 Mar 2017 Anand Mahindra Family Trust Sell 740590 860.00

29 Mar 2017 Mahindra Family Trust Ii Buy 1584990 860.00

29 Mar 2017 Anuradha Mahindra Family Trust Sell 1584990 860.00

08 Mar 2017 Caisse De Depot Et Placement Du Quebec Buy 18400000 817.00

08 Mar 2017 Canada Pension Plan Investment Board Buy 9200000 817.00

08 Mar 2017 KEDAR S. MANKEKAR Buy 150000 825.00

08 Mar 2017 MANKEKAR LAXMI SHIVANAND Buy 358820 825.00

08 Mar 2017 OM KEDAR INVESTMENTS Sell 508820 825.00

08 Mar 2017 Uday Suresh Kotak Sell 27600000 817.00

29 Sep 2016 Canada Pension Plan Investment Board Managed By Im2 Buy 16136310 782.30

29 Sep 2016 Ing Mauritius Investments I Sell 46700000 782.32

*in last one year

Additional Data

Directors Data Dr. Shankar Acharya Non-Executive Chairman Uday Kotak Executive Vice Chairman & MD

Dipak Gupta Joint Managing Director C. Jayaram Director

Amit Desai Director Uday Chander Khanna Director

Prof. S. Mahendra Dev Director Farida Khambata Director

Mark Edwin Newman Director Prakash Apte Director

Auditors - S. R. Batliboi & Co. LLP

*as per last annual report


Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Allahabad Bank HOLD SU M Axis Bank BUY SO M

Bajaj Finserv BUY SP L Bank of Baroda BUY SP M

Bharat Financial Inclusion BUY SO M Capital First BUY SO M

DCB Bank REDUCE SU M Dewan Housing Finance BUY SO M

Equitas Holdings Ltd. BUY SO M Federal Bank BUY SP L

HDFC HOLD SP L HDFC Bank BUY SO L

ICICI Bank BUY SO L IDFC Bank HOLD SP L

Indiabulls Housing Finance BUY SO M IndusInd Bank BUY SP L

Karnataka Bank BUY SP M Kotak Mahindra Bank HOLD SP M

L&T FINANCE HOLDINGS LTD BUY SO M LIC Housing Finance BUY SP M

Magma Fincorp BUY SP M Mahindra & Mahindra Financial Services HOLD SU M

Manappuram General Finance BUY SO H Max Financial Services BUY SO L

Multi Commodity Exchange of India BUY SP M Muthoot Finance BUY SO M

Oriental Bank Of Commerce HOLD SP L Power Finance Corp BUY SO M

Punjab National Bank BUY SP M Reliance Capital BUY SP M

Repco Home Finance BUY SO M Rural Electrification Corporation BUY SO M

Shriram City Union Finance BUY SO M Shriram Transport Finance BUY SO L

South Indian Bank BUY SP M State Bank of India BUY SP L

Union Bank Of India HOLD SP M Yes Bank BUY SO M

RATING & INTERPRETATION

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe

within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%



Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91-22) 4009 4400, Email: [email protected]

Aditya Narain

Head of Research

[email protected]

Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services

Allahabad Bank, Axis Bank, Bharat Financial Inclusion, Bajaj Finserv, Bank of Baroda, Capital First, DCB Bank, Dewan Housing Finance, Equitas Holdings Ltd., Federal Bank, HDFC, HDFC Bank, ICICI Bank, IDFC Bank, Indiabulls Housing Finance, IndusInd Bank, Karnataka Bank, Kotak Mahindra Bank, LIC Housing Finance, L&T FINANCE HOLDINGS LTD, Max Financial Services, Multi Commodity Exchange of India, Manappuram General Finance, Magma Fincorp, Mahindra & Mahindra Financial Services, Muthoot Finance, Oriental Bank Of Commerce, Punjab National Bank, Power Finance Corp, Reliance Capital, Rural Electrification Corporation, Repco Home Finance, State Bank of India, Shriram City Union Finance, Shriram Transport Finance, South Indian Bank, Union Bank Of India, Yes Bank

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 161 67 11 240 * 1stocks under review

Market Cap (INR) 156 62 11

Date Company Title Price (INR) Recos

Recent Research

14-Jul-17 Multi Commodity

Exchange

Volume triggers deferred a bit; operating leverage kicks in; Result Update

1,097 Buy

14-Jul-17 Insurance Insurance premiums: Healthy growth momentum sustains; Sector Update

13-Jul-17 South Indian Bank

Core improving; stress crystallisation on expected lines ; Result Update

28 Buy

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to

-

149

297

446

594

743

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c-1

4

(IN

R)

One year price chart

650

730

810

890

970

1,050

Jul-

16

Au

g-1

6

Au

g-1

6

Sep

-16

Oct

-16

Oct

-16

No

v-1

6

De

c-1

6

Jan

-17

Jan

-17

Feb

-17

Mar

-17

Mar

-17

Ap

r-1

7

May

-17

May

-17

Jun

-17

Jul-

17

(IN

R)

Kotak mahindra Bank


Kotak Mahindra Bank

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Kotak Mahindra Bank

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RESULT UPDATE KOTAK MAHINDRA BANK - …static-news.moneycontrol.com/.../07/Kotak_Mahindra_Bank_210717.pdf · Kotak Mahindra Bank 3 Edelweiss Securities Limited Life insurance: Growth

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