‘Neutral’ rating on Kotak Mahindra Bank: Street beater

Strong beat in Q4: Q4FY15 profit after tax of Rs 9.1 bn (+38% year-on-year) was better than expected with a beat on both lending and capital market businesses. For the lending business, not only is the revenue momentum picking up but also some of the fundamental metrics like CASA (current account savings account) and fee intensity performance is better than expected, and with buoyant capital markets we are finally seeing capital market profitability improving. We have nothing much to complain about; our only constraint remains rich valuations (3.4x FY17 book). Thus we maintain our Neutral rating.

Consistency in lending business continues: (i) Loan growth (24% y-o-y) is picking up with strong growth in corporate book and improving trends in cars/CVs. (ii) As guided, core fee growth at +40% in FY15 continues to outpace balance sheet growth. While corporate growth is lower NIMs (net interest margins), Kotak is increasingly mining more fee/CA opportunities with corporate clients. (iii) Opex (operating expense) growth pick-up to +30% is more ING-integration linked, which will continue into FY16F (forecast) but will likely taper off after that. (iv) Liability momentum improved significantly with average CASA growth of 30% y-o-y, especially on CA deposits where system level growth still remains weak.

Capital market businesses contributing now: PAT of capital market subsidiaries increased by +100% y-o-y to R1.8 bn, leading to highest ever contribution of the capital market business in the last four years (20% of consolidated earnings). While market buoyancy can impact future profitability, Kotak increased its share in equities in FY15 vs FY14.

Valuation remains rich: We increase our consolidated PAT by 3/4% for FY16/17F driven by better fees in lending business and higher profitability of capital market businesses. Thus, we increase our TP (target price) to R1,500 implying 3.7x FY17F book for Kotak’s lending business—similar to our HDFC Bank multiple. We now expect earnings CAGR of 33% over FY15-17F and risks from the ING Vysya consolidation looks fairly low now.

Kotak Mahindra Group