Kotak Mahindra Bank - 1QFY18 Result Update - Steady Quarterly Performance:BUY

Kotak Mahindra Bank - 1QFY18 Result Update - Steady Quarterly Performance; Maintain BUY

Kotak Mahindra Bank (KMB) has reported a healthy performance in 1QFY18 as its both standalone and consolidated net profit recorded a healthy growth. Its standalone PAT grew by 23.1% YoY (-6.5% QoQ) to Rs9.1bn on the back of healthy growth in customer assets (+19.8% YoY & +6.1% QoQ), best-in-class NIMs (4.5%) and strong growth in core fee income (+42.7% YoY & +6.3% QoQ). Further, the Bank’s consolidated PAT surged by 26.2% YoY (-4.1% QoQ) to Rs13.5bn backed by strong bottom line growth recorded by Kotak Securities (+108.3% YoY and +3.3% QoQ to Rs600mn), Kotak Life (+45.1% YoY and +2% QoQ to Rs710mn) and Kotak Prime (+10% YoY & -0.8% QoQ to Rs1.2bn). Customer assets growth was aided by 35.3% YoY and 5.7% QoQ growth in CV/CE and 21% YoY and 10.4% QoQ growth in corporate portfolio. Notably, the Bank has started benefiting from the full integration of erstwhile ING Vysya Bank (IVB) especially in post demonetization period.
 

Management Commentary & Guidance

• KMB successfully raised Rs58bn of core equity capital in 1QFY18, which helped the Bank to improve its Tier-I ratio to 18.8% vs. 16.5% in 1QFY17. The Management has clearly indicated that apart from organic growth, the Bank will be continuously exploring to expand through inorganic route as well.
   
• KMB will launch consumer finance business through its NBFC subsidiary – Kotak Prime, which will help the Bank to optimally utilise the excess capital available at Kotak Prime.
   
• Further, KMB is in process of buying back 26% stake in Kotak Life from Old Mutual which will take its holding to 100% in Kotak Life. Currently, the deal is waiting for regulatory approval.
   
• KMB has total exposure of Rs2.4bn to 4 out of 12 accounts – inherited from erstwhile ING Vysya Bank – identified by the RBI for insolvency proceeding. Provisioning on these accounts is in excess of RBI stipulation.
   
• With the positive initial response to the Bank’s Digital 811 Account, the Management believes the traction would continue in FY18 as well. However, standalone opex was partially impacted due to higher advertising cost for same.

Outlook & Valuation

KMB has undoubtedly proven its competitive edge over its private sector peers with higher fee based income generation, asset quality management and effective management of financial business subsidiaries. The Bank has raised Rs58bn of fresh equity during 1QFY18 via QIP at 5.1x Mar’17 consolidated book value. Resultantly, its standalone book value increased 17% QoQ. Further, incremental capital will help the Bank to explore organic and inorganic growth opportunities. Post this capital raising, we have upwardly revised our book value estimates for FY18E & FY19E by 19% and 16%, respectively. Valuing standalone entity at 4xFY19E adjusted BV and expecting subsidiaries to fetch Rs208/share after deducting holding company discount of 15%, we maintain our BUY recommendation on the stock with an upwardly revised Target Price of Rs1,144 (from Rs1,010 earlier).