Kotak Mahindra Bank - Result Update - Strong Traction in Earnings to Continue

Kotak Mahindra Bank (KMB) has reported a healthy performance in 3QFY18. Its standalone PAT grew by 19.7% YoY and 5.9% QoQ to Rs10.5bn aided by healthy growth in customer assets (23.4% YoY and 3.3% QoQ), best-in-class NIMs (4.2%) and strong growth in core fee income (14.3% YoY and 2.3% QoQ). Further, its consolidated PAT surged by 28.2% YoY and 12.7% QoQ to Rs16.2bn led by strong bottom-line growth in Kotak AMC (137.5% YoY and 65.2% QoQ to Rs380mn), Kotak Capital (414% YoY to Rs360mn), Kotak Securities (81.2% YoY and 30.5% QoQ to Rs1.5bn) and Kotak Life (42.6% YoY to Rs970mn). Customer assets growth was aided by 22.4% YTD and 8.6% QoQ growth in CV & CE portfolio, 20.7% YTD and 3% QoQ growth in Corporate portfolio, 18.5% YTD and 5.1% QoQ  growth in Home Loan & LAP portfolio, and 32.0% YTD and 9.8% QoQ growth in Small Business & Personal Banking portfolio. Notably, KMB has started getting benefitted from full integration of erstwhile ING Vysya Bank especially in post demonetisation period.

Management Commentary & Guidance

• KMB witnessed a strong improvement in profitability from its financial services and life insurance business subsidiaries. Notably, it owns 100% stake in these subsidiaries. Recently, it completed process of buying back the remaining 26% stake in Kotak Life from Old Mutual.
• Fresh slippages/new inflows to stressed assets portfolio declined considerably to the Bank’s comfort level. Currently, only 0.19% of its loan book is 60-day overdue and classified under SMA 2. Further, only 0.4% of its loan book is classified as standard restructured loan book.
• KMB will launch consumer finance business through its NBFC subsidiary i.e. Kotak Prime, which will help the Bank to optimally utilise the excess capital available at Kotak Prime.
• With the positive initial response to Digital 811 Account, KMB expects the traction to continue in FY19 as well. However, standalone opex was partially impacted due to higher promotional cost for same. The Management has clearly indicated that apart from organic growth, the Bank will be continuously exploring suitable inorganic growth opportunities as well.

Outlook & Valuation

KMB has undoubtedly proven its competitive edge over its private sector peers with higher fee income, superior asset quality management and effective management of financial business arms. It continues to witness moderation in SMA-2 balance, which clearly suggests a stable trend on asset quality front. Looking ahead, we expect strong traction in earnings to continue owing to robust growth in loan book, moderate credit cost and healthy margins. Introducing our estimates for FY20E, we expect KMB’s earnings to witness 24% CAGR through FY17-20E.Valuing standalone entity at 4.2xFY19E adjusted BV and expecting subsidiaries to fetch Rs257/share after deducting holding company discount of 15%, we maintain our BUY recommendation on the stock with a revised Target Price of Rs1,172. 
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