RESULT UPDATE KOTAK MAHINDRA BANKstatic-news.moneycontrol.com/static-mcnews/2017/10/KOTAK_MAHI… · Kotak Mahindra Bank 3 Edelweiss Securities Limited Life insurance: Growth momentum

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Edelweiss Securities Limited

Kotak Mahindra Bank (KMB) reported robust performance, as Q2FY18 was characterised by crystallisation of synergy benefits (revenue and opex). Key highlight was the sustained delivery on loan growth>20% YoY (moving to pre-merger level). This, along with superior NIMs (4.3%, albeit down 20bps QoQ on competitive lending yields) and strong core fees, helped KMB register robust core revenue momentum. Meanwhile, higher opex (albeit lower than Q1FY18) and softer treasury led to marginally below estimated PAT. Asset quality continued to strengthenoverall stress (GNPLs + restructured) at 2.5% with credit cost contained at 50% YoY, raising CASA ratio to ~48%. With limited levers in credit cost & opex, sustained revenue traction will be key for RoE improvement (recent capital raising will cap RoE at low mid teens). Maintain HOLD.

Growth traction building up

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

KMBs performance over the past couple of quarters indicates that synergy benefits have

started crystallising, with loan growth crossing 20% in Q2FY18. This was led by CV, home

loans/LAP and unsecured portfolio within retail and supported by bumped-up corporate

spurt. More impressively, the liability franchise continued to strengthen (savings base has

nearly doubled over the past 2 years) and KMB is also investing heavily in digital

initiativestransforming the way business is sourced and transacted (811 is a case in

point). Even stress pool stands at comfortable level despite absorbing stress from eIVBLs

portfolio, lending comfort that credit cost will be under control. Robust franchise, limited

stress baggage, strong capital position and digital initiatives equip KMB with the

ammunition to sustain growth opportunities.

Outlook and valuations: Synergies playing out; maintain HOLD

H1FY18 performance reflects synergy benefits playing through on cost as well as revenue

fronts. With recent equity infusion, leveraging of this capital in financing business &

efficient allocation across other businesses will be critical for RoE improvement. With

significant benefits likely to flow from formalisation of financial savings, subsidiaries

could see strong business tailwinds. Valuations at 3.8x FY19E P/ABV (banking business for

RoE of 14% by FY19E) factor in fair bit of upside. Maintain HOLD/SP with TP of INR1,056.

RESULT UPDATE

KOTAK MAHINDRA BANK Growth perking up; asset quality stable

COMPANYNAME

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 1,011

Target Price : INR 1,056

52-week range (INR) : 1,115 / 692

Share in issue (mn) : 1,903.8

M cap (INR bn/USD mn) : 1,924 / 29,637

Avg. Daily Vol.BSE/NSE(000) : 2,268.7

SHARE HOLDING PATTERN (%)

Current Q1FY18 Q4FY17

Promoters *

30.1 30.1 32.1

MF's, FI's & BKs 8.4 8.2 7.8

FII's 39.9 40.2 38.6

Others 21.6 21.5 21.5

* Promoters pledged shares (% of share in issue)

: NIL

PRICE PERFORMANCE (%)

Stock Nifty EW Banks and

Financial Services Index

1 month 1.1 4.3 4.2

3 months 2.3 3.3 2.1

12 months 28.5 18.5 24.4

Kunal Shah +91 22 4040 7579

[email protected]

Prakhar Agarwal +91 22 6620 3076

[email protected]

Malav Simaria +91 22 6623 3357

[email protected]

India Equity Research| Banking and Financial Services

October 25, 2017

Financials (INR mn)

Year to March Q2FY18 Q2FY17 Growth (%) Q1FY18 Growth (%) FY17 FY18E FY19E

Net revenue 51,901 47,088 10.2 49,596 4.6 154,052 180,544 211,582

Net profit 13,406 11,393 17.7 12,437 7.8 46,707 58,534 71,968

Dil. EPS (INR) 25.4 30.8 37.8

Adj. BV (INR) 188.5 239.1 273.3

Price/ Adj book (x) * 5.1 4.0 3.5

Price/ Earnings (x) * 38.6 31.7 25.8

* adj for insurance

Banking and Financial Services

2 Edelweiss Securities Limited

Asset quality holding fort

Asset quality continued to be best-in-class with GNPLs at 2.47% (2.58% in Q1FY18).

Impressively, the KMB did not have any divergence with respect to RBIs annual inspection.

Furthermore, the banks exposure to RBIs 2 lists is limited and the bank has adequately

provided for these accounts. Even then, credit cost stood at 40% YoY.

Table 1: Commercial banking Key metrics

Other business updates

Table 2: Business-wise profitability

Source: Company

(INR mn) Q2FY18 Q2FY17 Growth (%) Q1FY18 Growth (%) FY16 FY17 Growth (%)

Net interest income 23,127 19,954 15.9 22,456 3.0 69,004 81,262 17.8

Pre-provisioning profits 17,248 14,401 19.8 15,954 8.1 40,411 59,848 48.1

Provisions 2,165 1,978 9.5 2,037 6.3 9,174 8,367 (8.8)

PBT 15,083 12,423 21.4 13,916 8.4 31,237 51,481 64.8

Tax 5,140 4,290 19.8 4,789 7.3 10,339 17,366 68.0

PAT 9,943 8,133 22.3 9,127 8.9 20,898 34,115 63.2

Advances 15,25,740 12,60,150 21.1 14,23,590 7.2 11,86,650 13,60,820 14.7

Deposits 16,56,710 14,10,450 17.5 16,35,180 1.3 13,86,430 15,74,260 13.5

Year to March Q218 Q217 Growth (%) Q118 Growth (%) FY16 FY17 Growth (%)

Kotak Mahindra Bank (merged, standalone) 9,940 8,130 22.3 9,130 8.9 20,910 34,110 63.1

Kotak Mahindra Prime 1,500 1,300 15.4 1,320 13.6 5,030 5,160 2.6

Kotak Mahindra Capital Company (10) 50 (120.0) 50 (120.0) 330 460 39.4

Kotak Securities 1,180 960 22.9 1,250 (5.6) 2,510 3,620 44.2

International subsidiaries 280 310 (9.7) 170 64.7 1,050 870 (17.1)

Kotak Mahindra AMC & Trustee Co 230 70 228.6 150 53.3 720 550 (23.6)

Kotak Mahindra Investments 550 530 3.8 450 22.2 1,550 1,970 27.1

Total consolidated profit after tax 13,650 11,300 20.8 12,510 9.1 32,040 46,500 45.1

Equity affi l iates/Minority int & others (240) 100 NA (70) NA 50 (120) NA

PAT (excluding life insurance) 13,410 11,400 17.6 12,440 7.8 32,090 46,380 44.5

Kotak Life Insurance 1,000 630 58.7 1,030 (2.9) 2,510 3,030 20.7

PAT 14,410 12,030 19.8 13,470 7.0 34,600 49,410 42.8

Kotak Mahindra Bank


Life insurance: Growth momentum maintained

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

growth. However, lower contribution from group business (down >1% YoY) restricted

NBP to INR6.9bn (up 16.6 % YoY). The improvement also seems to have percolated to

renewal premiums (up >26% YoY), leading to ~16% YoY growth in gross written

premium.

Life insurance business reported PAT of INR1bn (INR1bn in Q1FY18, INR3bn in FY17 and

INR2.5bn in FY16).

Solvency ratio came in at 308% (304% in Q1FY18 and regulatory requirement of 150%).

The bank has acquired Old Mutuals 26% stake in Kotak Life for INR12.93bn.

Table 3: Kotak Life InsuranceKey metrics

Source: Company

Kotak Mahindra Prime: Back on growth track

The quarter was characterised by strong 15% YoY growth in overall car financing

portfolio (to INR198bn). This, along with strong growth in capital market related lending

in Q2FY18, led to overall customer asset growth of >21% YoY. Management expects

growth to gain traction given a few new initiatives (launched consumer durable

financing business through KMP).

There was some rise in stress pool with NNPLs at 41bps (36bps in Q1FY18).

Table 4: Kotak Mahindra Prime Key metrics

Source: Company

Kotak Securities: Steady performance

Average daily trading volumes (ADTV) came in at INR124bn (up >36% YoY/13% QoQ),

leading to market share of 1.9% (stable QoQ).

Revenue and PAT came in at INR3.5bn (up ~19.4% YoY) and INR1.2bn (up >22% YoY),

respectively.

Table 5: Kotak SecuritiesKey metrics

Source: Company


New Business premium 6,870 5,890 16.6 4,820 42.5 22,100 28,500 29.0

Profit (INR mn) 1,000 630 58.7 1,030 (2.9) 2,510 3,030 20.7


PBT 2,290 1,980 15.7 2,030 12.8 7,720 7,870 1.9

PAT 1,500 1,300 15.4 1,320 13.6 5,020 5,160 2.8

Auto advances 1,98,310 1,72,490 15.0 1,83,720 7.9 1,67,070 1,81,780 8.8


Revenues 3,510 2,940 19.4 3,650 (3.8) 9,730 11,850 21.8

PBT 1,770 1,440 22.9 1,870 (5.3) 3,800 5,430 42.9

PAT 1,180 960 22.9 1,250 (5.6) 2,510 3,620 44.2

PAT margin (%) 33.6 32.7 34.2 25.8 30.5

Avg daily volumes (INR bn) 124 91 36.8 110 13.0 73 90 22.6

Branches 1,454 1,273 14.22 1,455 (0.1) 1,209 1,281 6.0



Asset management: AUM growth momentum sustained

AUM growth extended traction, growing >55% YoY. AUMs crossed the INR1.1-tn mark

with equity AUMs amounting to INR369bn (up >21% QoQ).

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 INR340mn (albeit

improving) and PAT came in at INR230mn (INR150mn in Q1FY18 and INR550mn in

FY17).

Table 6: Domestic asset management businessKey metrics

Source: Company

Investment banking: Volatility persists

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

loss of INR10mn (INR50mn in Q1FY18, 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 CompanyKey metrics

Source: Company

Table 8: SoTP valuation (FY19E)

Source: Edelweiss research


PBT 340 110 209.1 210 61.9 900 840 (6.7)

PAT 230 70 228.6 150 53.3 730 550 (24.7)

AUMs 11,08,320 7,06,260 56.9 10,14,140 9.3 5,87,310 9,24,400 57.4


Total income 150 250 (40.0) 270 (44.4) 1,140 1,360 19.3

PBT (20) 60 NA 80 NA 460 610 32.6

PAT (10) 50 NA 50 NA 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 3,92,252 4.0 15,69,006 100 15,69,006 825

Prime PABV 47,847 3.2 1,67,464 100 1,67,464 88

Life insurance Appraisal value 65,698 100 65,698 35

Securities / Invt banking PE 7,118 15.0 1,06,775 100 1,06,775 56

MF/Offshore AUMs/PE % of AUM 19,10,369 5.2 99,713 100 99,713 52

Total 20,08,656 20,08,656 1,056

Kotak Mahindra Bank


Financial snapshot (INR mn) Year to March Q2FY18 Q2FY17 % change Q1FY18 % change YTD18 FY18E FY19E

Interest income 60,729 55,337 9.7 59,352 2.3 120,080 275,793 322,699 Interest exp 29,876 28,694 4.1 29,306 1.9 59,182 154,285 179,094

Net int. inc. 30,853 26,642 15.8 30,045 2.7 60,898 121,508 143,605

Non interest income 21,048 20,446 2.9 19,551 7.7 40,600 59,036 67,977

Net revenues 51,901 47,088 10.2 49,596 4.6 101,497 180,544 211,582

Non interest expenses 28,375 27,574 2.9 28,035 1.2 56,410 81,337 91,234

Pre-provision profit 23,526 19,514 20.6 21,561 9.1 45,087 99,207 120,348

Provisions 2,529 2,179 16.0 2,322 8.9 4,851 10,257 11,568

Profit before tax 20,997 17,335 21.1 19,239 9.1 40,237 88,950 108,779

Tax 7,113 5,852 21.5 6,638 7.2 13,751 29,266 35,811

Core profit 13,884 11,483 20.9 12,602 10.2 26,486 59,684 72,968

Minorities/affiliates (479) (89) NA (165) NA (643) (1,150) (1,000)

PAT 13,406 11,393 17.7 12,437 7.8 25,843 58,534 71,968

Diluted EPS (INR) 7.6 6.5 15.6 7.2 5.1 14.8 30.8 37.8

Ratios (%)

NII/GII 50.8 48.1 50.6 50.7 44.1 44.5

Cost/income 54.7 58.6 56.5 55.6 45.1 43.1

Provisions / PPOP 10.7 11.2 10.8 10.8 10.3 9.6

Tax rate 33.9 33.8 34.5 34.2 32.9 32.9

Valuation metrics

Adj book value / share 239.1 273.3

Price/ Adj. book (x) 4.0 3.5

Price/ Earnings 31.7 25.8



Key highlights of Q2FY18 concall takeaways

With respect to growth

Management believes that recpitalisation is like a steroid for the economy and would

potentially kick start economic reform process. PSU Banks will be able to take the

bolder steps even if this means to take higher haircut (as now they will have ability

and capital to do so). This will also open more opportunity for distress asset as well.

For the quarter was pegged at >20% YoY, across various area. The bank continues to

maintain the growth guidance of 20% plus for FY18 ( even accounting for the

announcement yesterday).

o Corporate segment grew > 26% 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.

o CV/CE saw a very good growth during the quarter up >33% YoY (all segment of

CVs has seen growth expect for small CV portfolio).

CASA deposit now standing. SA has registered a strong 60% growth, this has some

element of lumpy government business. The core saving growth ( ex-government

savings) is still > 40%.

Opex during the quarter was relatively higher (albeit lower sequentially) due to a) the

marketing and advertising expenses related to 811 scheme and b) acquisition of some

PSLCs.

This is the first year wherein the bank sees first time the revenue synergies has started

to play out, having said that banks still believe there is some more way to go.

The bank sees the challenges continuing in SME space and which is why the bank is

growing cautiously in this segment (reflected in softer business banking growth).

With respect of asset quality

The bank has nothing to report on divergence, based on t he RBI review for FY17.

In terms of accounts under NCLT: The bank had exposure to 4 accounts (from eIVBL

book) in first list. In terms of the second list, the exposure are relatively small and

bank highlighted that they are very adequately provided for.

Credit cost in line with guidance. The bank see it at levels of trending down from FY17

levels of 61bps. The bank maintained the same guidance.

SMA-2 at INR2.5bn (0.16% of advances) , versus INR3.05bn in previous quarter.

There was no sale to ARC during the quarter. The bank doesnt believe in selling for SRs,

bank will sell only on cash basis if any.

Kotak Mahindra Bank


With respect to digital banking updates:

Traction in 811 is going strong: ~10.5 mn customers.

Within the customers acquired through 811 : a) 91% is within 18-35 years ( far more

digital savvy customers and can be leveraged) b) 45% are salaried and c) 63% are

from top 20 cities

Monthly transactions on mobile more than doubled.

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

o ~77% - Recurring Deposit sourced digitally

o ~60% - Term Deposit sourced digitally

o ~29% of the Salaried Personal Loan is through digital share

Other highlights

There were some interest income reversal on agri. portfolio which has impacted the

NIMs during the quarter. The bank maintained the NIMs guidance of 4.25% (which bank

feels is more sustainable level). The bank is seeing yield pressure on higher quality

corporate (substitution effect playing through), having said that the bank will focus on

quality business and will continue to look at risk adjusted margins.

The company now own 100% of the life insurance business. It acquired 26% stake in life

insurance business for INR12.93bn. The bank has concluded acquisition of BSS

Microfinance.

As of now the fixed rate book is 30% and of the balance 70% (floating book), the bank

has MCLR linked loans at 70%.

The banks believe that under IFRS the banks net-worth would be higher than current

reported net-wroth.



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.



Company Description

KMB is Indias 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 1,362 branches. The group has a decent

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

Securities has 1.9% 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 3.8x FY19E P/ABV (banking business for RoE of 14% 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 FY17 FY18E FY19E

Net Interest income 67,867 83,070 99,631 119,752

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

Net revenues 95,225 115,863 135,842 161,126

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

Preprovision profit 40,475 59,615 73,020 90,752

Provisions 8,890 8,102 9,131 10,282

PBT 31,585 51,513 63,889 80,469

Taxes 10,687 17,397 21,579 27,185

PAT 20,898 34,116 42,310 53,284

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 FY17 FY18E FY19E

Liabilities

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

Reserves 221,205 251,979 348,181 396,888

Net worth 230,376 261,184 357,696 406,403

Sub bonds/pref cap 501 501 501 501

Deposits 1,386,427 1,574,258 1,867,387 2,271,729

Borrowings 253,234 262,916 295,020 349,846

Other liabilities 56,167 62,990 73,004 83,799

Total 1,926,707 2,161,849 2,593,608 3,112,277

Assets

Loans 1,186,668 1,360,836 1,636,675 1,980,886

Investments 582,516 611,274 745,508 900,481

Gilts 396,644 412,951 511,218 619,944

Others 185,872 198,324 234,291 280,536

Cash & equi 114,046 143,300 159,566 172,498

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

Other Assets 27,657 31,149 37,255 44,652

Total 1,926,707 2,161,849 2,593,608 3,112,277

Balance sheet

(INR)


EPS 11.4 18.5 22.2 28.0

EPS growth (%) (64.8) 62.7 20.0 25.9

Book value per share 125.6 141.9 188.0 213.6

Adjusted BV/share 122.0 137.3 182.1 207.7

Valuation Metrics



Financial Statements

Income statement (INR mn)


Interest income 215,167 241,187 275,793 322,699

Interest expended 130,201 139,268 154,285 179,094

Net interest income 84,966 101,919 121,508 143,605

Non interest income 43,461 52,133 59,036 67,977

- Fee & forex income 31,506 37,673 44,614 52,499

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

- Investment profits 90 90 90 90

Net revenue 128,427 154,052 180,544 211,582

Operating expense 69,513 73,075 81,337 91,234

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

- Other opex 36,505 39,420 44,308 50,014

Preprovision profit 58,914 80,977 99,207 120,348

Provisions 9,805 9,299 10,257 11,568

Profit Before Tax 49,109 71,677 88,950 108,779

Less: Provision for Tax 15,992 23,670 29,266 35,811

Profit After Tax 32,318 46,707 58,534 71,968

Adj. Diluted EPS (INR) 17.6 25.4 30.8 37.8

Dividend per share (DPS) 2.1 3.4 4.1 5.1

Dividend Payout Ratio(%) 6.3 7.1 7.1 7.2

Growth ratios (%)


NII growth 9.0 20.0 19.2 18.2

Fees growth 10.6 19.6 18.4 17.7

Opex growth 10.5 5.1 11.3 12.2

PPP growth 0.7 37.4 22.5 21.3

Provisions growth 83.3 (5.2) 10.3 12.8

Adjusted Profit (6.4) 44.5 25.3 23.0

Balance sheet (INR mn)

As on 31st March FY16 FY17 FY18E FY19E

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

Reserves & Surplus 304,028 346,202 456,611 521,688

Net worth 313,200 355,407 466,125 531,203

Deposits 1,386,427 1,574,258 1,867,387 2,271,729

Total Borrowings 666,581 619,712 698,771 806,769

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

Total liabilities 2,369,043 2,552,662 3,036,109 3,614,175

Loans 1,212,421 1,390,375 1,670,645 2,020,025

Investments 593,914 622,843 757,256 912,416

Cash and Equivalents 245,971 183,556 200,444 214,055

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

Other Assets 300,229 339,933 392,529 453,330

Total assets 2,369,043 2,552,662 3,036,109 3,614,175

Key Assumptions


Macro

GDP(Y-o-Y %) 7.9 6.6 6.8 7.4

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) 65.5 67.1 65.0 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

Company

Banking business assump.

Credit growth 9.5 14.7 20.1 20.9

Deposit growth 12.4 13.5 18.6 21.7

Yield on advances 11.6 11.8 11.5 11.2

Cost of funds 6.7 6.3 6.1 6.0

CASA 38.1 44.0 44.5 45.1

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 47.0 25.0

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 29,637 31.7 25.8 4.0 3.5 14.5 14.6

Axis Bank 17,470 25.2 13.0 2.2 1.9 7.9 14.1

DCB Bank 841 20.3 16.5 2.2 1.9 11.8 11.9

Federal Bank 3,627 20.8 16.7 2.0 1.8 10.6 10.9

HDFC Bank 71,383 25.2 20.8 4.5 3.8 18.9 19.5

ICICI Bank 30,215 16.4 12.0 2.6 2.2 11.9 14.9

IndusInd Bank 14,689 26.0 20.7 4.1 3.5 16.5 17.9

Karnataka Bank 908 8.6 7.1 0.9 0.8 9.6 10.8

Yes Bank 11,533 3.5 2.6 0.6 0.5 18.2 20.3

Median - 20.8 16.5 2.2 1.9 11.9 14.6

AVERAGE - 19.9 15.1 2.6 2.3 13.3 15.0

Source: Edelweiss research

Valuation parameters


Adj. Diluted EPS (INR) 17.6 25.4 30.8 37.8

Y-o-Y growth (%) (60.6) 44.0 21.2 23.0

BV per share (INR) 170.7 193.1 245.0 279.2

Adj. BV per share (INR) 167.2 188.5 239.1 273.3

Diluted P/E (x) 57.4 39.8 32.9 26.7

Price/ BV (x) 5.9 5.2 4.1 3.6

Dividend Yield (%) 0.2 0.3 0.4 0.5

Price/Earnings (x) * 55.7 38.6 31.7 25.8

Price/ BV (x) * 5.8 5.1 4.0 3.5

* adj. for insurance

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 0.3

Taxes/assets 0.7 1.0 1.1 1.1

Total costs/assets 4.3 4.3 4.3 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 14.6



Holding - Top 10

Perc. Holding Perc. Holding

Capital Group Companies 10.19 Canada Pension Plan Investment Board 6.05

Commonwealth Bank of Australia 4.24 ING Mauritius Investments 3.74

Sumitomo Mitsui Financial Group 1.72 Massachusetts Mutual Life Insurance 1.47

SBI Funds Management 1.39 Caladium Investment 1.36

Matthews International Capital Management 1.30 Standard Life Aberdeen 1.23

*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

*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 HOLD SP L Bank of Baroda BUY SP M

Bharat Financial Inclusion BUY SO M Capital First BUY SO M

DCB Bank HOLD SP 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 SP 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

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

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



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

25-Oct-17 Banking Mega recapitalisation: The much needed succor; Sector Update

25-Oct-17 HDFC Bank On a strong footing; Result Update

1,867 Buy

23-Oct-17 IndiaBulls Housing Finance

Consistency at play; Result Update

1,338 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

400

600

800

1,000

1,200

1,400

Oct

-16

No

v-1

6

De

c-1

6

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

(IN

R)

Kotak mahindra Bank


Kotak Mahindra Bank

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Kotak Mahindra Bank

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2017-10-25T22:27:55+0530ADITYA NARAIN

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