4/15/2014

Kotak Mahindra Bank (Q3 FY14) Stock Advice & Tips | IIFL

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Kotak Mahindra Bank (Q3 FY14) India Infoline Research Team / 11:25 , Jan 23, 2014 CMP Rs706, Target Rs682, Downside 3.4% Muted loan growth on the b ack of severe contraction in CV/CE portfolio; growth came-off in other segments too CASA improves; sub stantial b ranch addition continues NIM was stab le; could trend upwards in the medium term Fee growth weakens; C/I ratio increases on muted income growth Asset quality was largely stab le; Net NPLs increased on lower incremental provisioning Kotak Prime growth continued to slow here also Rate Mark et Performer with

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9-month target price of Rs682 Result table (Stand-alone Bank)

(Rs m n) Q3 FY14 21,923 (12,796) 9,127 2,997 12,124 (6,277) Q2 FY14 21,723 (12,482) 9,241 2,971 12,213 (6,147) % qoq 0.9 2.5 (1.2) 0.9 (0.7) 2.1 Q3 FY13 20,946 (12,717) 8,229 3,049 11,277 (5,551) % yoy 4.7 0.6 10.9 (1.7) 7.5 13.1 Total Interest Income Interest expended Net Interest Incom e Other income Total Incom e Operating expenses

Ceramics Chemicals Coffee Consumer Goods

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Diversified FMCG Fertilizers Gems & Jewellery Hotels & Tourism Information Technology Logistics Media & Entertainment Metals, Mining & Minerals Oil & Gas Paints Paper & Packaging Pharma & Healthcare Power Real Estate Retail Shipping & Shipyard Sugar Tea Telecom Textile Others

Operating expenses Provisions PBT Tax Reported PAT EPS Key Ratios NIM (%) Cost of Funds* (%) CASA (%) C/D (x) Non-interest incom e (%) Non-int inc/Int exp (%) Cost to Incom e (%) Provisions/Income (%) RoA (%) CAR (%) Gross NPA (%) Net NPA (%)

Kotak Mahindra Bank (Q3 FY14) Stock Advice & Tips | IIFL (6,147) 2.1 (5,551) 13.1 (697) (723) (3.6) (424) 64.5 5,151 5,343 (3.6) 5,303 (2.9) (1,750) (1,817) (3.7) (1,686) 3.8 3,401 3,526 (3.5) 3,617 (6.0) 17.7 18.4 (3.7) 19.4 (9.0)
(6,277) Q3 FY14 4.6 7.6 29.7 0.97 24.7 23.4 51.8 2.8 1.6 17.4 2.0 1.1 Q2 FY14 4.6 7.3 29.2 0.96 24.3 23.8 50.3 2.9 1.7 18.2 2.0 1.0 chg qoq (0.0) 0.3 0.5 0.01 0.4 (0.4) 1.4 (0.1) (0.1) (0.8) 0.0 0.1 Q3 FY13 4.4 7.7 25.9 0.98 27.0 24.0 49.2 1.8 1.8 15.6 1.5 0.6 chg yoy 0.2 (0.2) 3.8 (0.00) (2.3) (0.5) 2.5 1.0 (0.2) 1.8 0.6 0.5

Recent Reports Krishna Bodanapu, President and COO, Infotech Enterprises

Apr 10, 2014 , 15:39

Source: Company, India Infoline Research; *Calculated

Muted loan growth on the back of severe contraction in CV/CE portfolio; growth came-off in other segments too Kotak Bank delivered a b elow expected loan growth of 6% yoy (our estimate was 11% yoy) driven b y steep sequential contraction in CV/CE portfolio (down 11% qoq and 26% yoy) and notab le growth moderation in other products. Excluding CV/CE b ook, Banks advances grew b y 7% qoq and 12% yoy. Though the b ank remains cautious in CV/CE segment, it b elieves that worst decline in the portfolio is b ehind. Surprisingly, growth significantly decelerated in Mortgages (16% yoy from 22% yoy in Q2), b usiness b anking (5% yoy from 16% yoy in Q2) and small b usiness & personal b anking (32% yoy from 45% yoy in Q2). Corporate credit continued to grow at muted pace of 2% yoy. CASA improves; substantial branch addition continues Deposits grew in-line with advances at 4% qoq and 6% yoy. The share of CASA deposits improved to 29.7% from 29.2% at the end of previous quarter. This was solely driven b y sustained rob ust traction in savings deposits which grew 38% yoy underpinned b y b risk pace of b ranch additions and higher savings rate offered. Bank added 31 b ranches during the quarter and plans to reach 600 b ranches b y the year-end. The contrib ution of CDs b ounced from a low 8.6% in Q2 FY14 to 10.9% which can b e attrib utab le to softening of rates. Outlook for CASA remains strong in the wake of significant network expansion.

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NIM was stable; could trend upwards in the medium term Against our expectation of 10b ps decline, NIM (computed) was stab le at 4.6%. While the cost of funds seems to have increased in-line with our expectation, higher investment yield and marginal uptick in b lended lending rate protected margin. NIM outlook is fairly http://www.indiainfoline.com /Research/Recom m endations/Equity/Kotak-Mahindra-Bank-Q3-FY14/48629581

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4/15/2014

Kotak Mahindra Bank (Q3 FY14) Stock Advice & Tips | IIFL

yield and marginal uptick in b lended lending rate protected margin. NIM outlook is fairly strong with improving CASA ratio and softening wholesale rates. 16:40 Fee growth continued to decelerate; C/I ratio increases on muted income growth Fee income growth further moderated to 6% yoy as compared to 12% yoy in the previous quarter. Treasury income was also modest at Rs530mn v/s 700mn in Q2 FY14 despite lower interest rate volatility. Cost growth decelerated to 13% yoy notwithstanding significant b ranches addition in preceding 12-15 months. On account of muted NII and fee growth, cost/income ratio inched-up to 52%. Asset quality was largely stable; Net NPLs increased on lower incremental provisioning Kotak Banks asset quality remained fairly resilient during Q2 FY14 with Gross NPLs increasing b y 7% qoq driven largely b y a single mid-corporate account. With the b ank having sub stantially higher collateral than the recoverab le amount, it chose to provide at lower rate (b ut much higher than RBI prescription) against this delinquency. Consequently, Net NPLs inched up b y 10b ps qoq to 1.1%. The credit cost was marginal at annualized 20b ps. The b ank b elieves that it has recognized most of the assets exhib iting some kind of stress and therefore Gross NPLs are not likely to increase materially going ahead unless the macro deteriorates. Of the unamortized MTM depreciation on AFS/HFT investments standing at ~Rs1.1b n at the end of Q3 FY14, Kotak Bank provided for Rs430mn. As per the b ank, the residual MTM has turned marginally positive b ased on the current yields (softened post Dec 31, 2013). With Tier-1 capital at 17.4% as per Basel III, Kotak Bank is one of the b etter-capitalized b anks in the industry. 16:39 16:39

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Name BSE Carb onex BSE Greenex BSE SME IPO BSE 100 BSE 200 BSE 500 BSE AUTO Value 1,097.50 1,798.64 801.75 6,757.46 2,703.30 8,385.59 13,284.13 Change
[8.2] [15.2] 15.5 [49.8] [18.7] [55.4] [125.6]

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Kotak Prime growth continued to slow here also Kotak Primes loan growth moderated significantly to 5% yoy from 12% yoy in the previous quarter on the b ack of deceleration in the underlying vehicle sales growth. The loan b ook has b een flat near Rs170b n over the past four quarters. This has started to show-up in NII growth which decelerated to 10% yoy from a strong 25% yoy in Q2 FY14. PAT growth was at 17% yoy b ut is likely to weaken in the next couple of quarters. The sequential increase of 24% in Net NPLs suggests that asset quality deteriorated during the quarter.

Rate Market Performer with 9-month target price of Rs682 While Kotak Bank seems to b e well-placed with respect to margin and asset quality, concerns around near-term growth has increased. Banks RoA is estimated to improve to 2% in FY15/16 supported b y gradual NIM expansion, b etter treasury performance, restrained cost growth and b enign credit cost. However, lofty valuation (3x FY15 P/ABV for stand-alone b ank; just ~10% discount to HDFC Bank) limits ab solute upside in the medium term. Rate Market Performer with 9m target of Rs682.

Financial Summary (Stand-alone Bank)

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Y/e 31 Mar (Rs m ) Total operating income yoy growth (%) Operating profit (pre-prov) Net profit yoy growth (%) EPS (Rs) Adj.BVPS (Rs) P/E (x) P/BV (x) ROE (%) ROA (%) CAR (%)

Kotak Mahindra Bank (Q3 FY14) Stock Advice & Tips | IIFL
FY13 43,663 25.1 21,566 13,606 25.4 18.2 122.4 38.7 5.8 15.6 1.8 0.1 FY14E 52,009 19.1 26,376 15,257 12.1 19.9 150.9 35.5 4.7 14.1 1.8 0.1 FY15E 61,132 17.5 30,885 18,832 23.4 24.5 173.2 28.8 4.1 14.4 2.0 0.2 FY16E 73,773 20.7 37,628 23,220 23.3 30.2 199.8 23.4 3.5 15.4 2.0 0.2

Source: Company, India Infoline Research

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