‘Hold’ on Kotak Mahindra Bank; expect subsidiaries to add value

Kotak Mahindra Bank’s Q4FY18 PAT at Rs 1,120 crore was marginally lower than our estimate as it took a one-time hit of Rs 82 crore on employee expenses and did not avail RBI dispensation on amortization of mark-to-market losses. Loan growth at 25% YoY gained momentum and management continues to guide for 20% YoY growth in FY19.

Headline GNPA ratio improved by 9 bps QoQ to 2.2% and credit costs are expected to reduce further (SMA 2 book at 0.04% of loans). NIM increased 15 bps QoQ to 4.35%, partly due to strong traction in CASA deposits. On a consolidated basis, PAT grew 27% YoY with strong show from securities, asset management and life insurance subsidiaries.

HOLD. Q4FY18 highlights: (a) Advances were up by 25% YoY on robust performance across CV’s, personal loans and corporate loans; (b) Asset quality was sturdy with Q4 slippages at Rs 590 crore; (c) CASA ratio increased to 51% with SA deposits up 58% YoY; (c) C/I ratio declined to 46% and likely to be maintained at mid-40% levels; (d) KMB’s key subsidiaries continue to add significant value. EV of Kotak Life stood at Rs 5,820 crore with VNB margin at 29.3%. Market share of Kotak Securities in FY18 stood at 8.5% in the cash segment. Relationship value of wealth and priority banking customers stood >Rs 2.3 lakh crore in FY18.

We have revised our TP to factor in the numbers reported by various subsidiaries and the bank. We like KMB’s business model, its well-managed balance sheet, and expect the subsidiaries to add significant value going ahead with the management in constant lookout for value accretive inorganic opportunities. However, with low RoEs, regulatory requirement for reduction of promoter stake and adequate valuations, we do not see any significant upside from current levels.

Kotak Mahindra Group