Kotak Mahindra Bank. Core performance on track. Source: Company Data; PL Research

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1 Core performance on track January 19, 2016 Nitin Kumar Pritesh Bumb Rating Accumulate Price Rs667 Target Price Rs725 Implied Upside 8.7% Sensex 24,188 Nifty 7,351 (Prices as on January 18, 2016) Trading data Market Cap. (Rs bn) 1,221.7 Shares o/s (m) 1, M Avg. Daily value (Rs m) Major shareholders Promoters 33.70% Foreign 34.70% Domestic Inst. 4.20% Public & Other 27.30% Stock Performance (%) 1M 6M 12M Absolute (5.0) (9.0) (4.3) Relative How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: KTKM.BO, BB: KMB IN) (Rs) Jan 15 Mar 15 May 15 Source: Bloomberg Jul 15 Sep 15 Nov 15 Jan 16 KMB s Q3FY16 consolidated PAT of Rs9.45bn was marginally ahead of estimates as bank s earnings starts coming back on track. Merger synergies are showing up in pace of customer acquisition, space rationalisation and higher cross sales while integration cost has stabilized at lower levels. Loan growth stood at 3.3% QoQ led by strong traction in CV/CE and personal loan segment. Overall consolidated PAT was led by Kotak Investments, Life insurance and international subsidiaries while Kotak Securities reported a 8% YoY drop in net profits. GNPL in the banking book remains stable at 2.3% of loans though coverage ratio improved to ~59%. KMB maintained its credit cost guidance of bp on combined book and expect merger to fully complete by April/May 2016 and we thus expect return ratios to improve gradually. We retain Accumulate and increase our PT to Rs725 from Rs715 as we roll our valuations based on Sep 17 book. Core performance getting back on track: KMB reported standalone PAT of Rs6.35 bn, ~2% ahead of our estimates. NII stood strong at Rs17.66bn (5% QoQ growth) and was led by 3.3% QoQ growth in advances portfolio and stable margins. Bank s core performance has started getting back on track but will take two more quarters to recover fully as integration process is still on. Fee income growth also remained modest at 2% QoQ and was led by TPD fees. Management guided fees growth of 15 20% going ahead as they are already witnessing higher transaction value esp. on retail side. SA growth traction continues: KMB has witnessed granular SA growth on higher rate offering of 6% to IVBL customers which has improved SA growth of the overall bank to 9% QoQ. CASA mix however declined to 35% (36% in 2QFY16) impacted by 3.5% QoQ fall in demand deposits. Management is targeting to improve the CASA ratio further to 40% going ahead. Asset quality largely stable; bank now accounts for 67% of consol profits: Asset quality was largely stable with GNPAs/NNPAs at 2.3% & 0.96% v/s 2.35% & 1.05% in Q2FY16 respectively. Credit costs moderated further to 52bp (89bp for 9MFY16) and KMB management full year guidance of 80 85bp. Stressed assets (transferred into recovery department so called Bad Bank in Q1FY16) remained static at 6% of IVBL s fund + non fund exposure or 2.5% of merged book. Among subsidiaries, Kotak Investments, Life insurance and intl subs did well. Key financials ( Y/e March) E 2017E 2018E Net interest income 54,815 66,247 77,349 90,075 Growth (%) Operating profit 44,277 55,304 65,723 76,453 PAT 27,942 30,140 38,339 43,487 EPS (Rs) Growth (%) 25.0 (9.0) Net DPS (Rs) Profitability & Valuation E 2017E 2018E NIM (%) RoAE (%) RoAA (%) P / BV (x) P / ABV (x) PE (x) Net dividend yield (%) Source: Company Data; PL Research Q3FY16 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Exhibit 1: Q3FY16 Financials Steady performance Standalone (Rs mn) Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 QoQ gr. (%) Net interest income (NII) 17,662 10, , Other income 7,222 4, , Total income 24,884 15, , Operating expenses 12,832 8, , Staff expenses 6,182 3, ,230 (0.8) Other expenses 6,650 8,160 (18.5) 6, Operating profit 12,052 7, , Core operating profit 11,467 6, , Total provisions 2, , Profit before tax 9,700 7, , Tax 3,352 2, , Profit after tax 6,347 7,374 (13.9) 5, Balance sheet (Rs mn) Deposits 1,309, , ,232, Advances 1,153, , ,116, Gross NPL 26,903 12, , Net NPL 11,108 6, ,676 (4.9) Restructured Assets (Rs mn) 3,460 1, ,030 (14.1) Ratios (%) Profitability ratios RoaA (12) RoaE , NIM (40) 4.3 Asset Quality ratios Gross NPL ratio (5) Net NPL ratio (1) 1.1 (9) Coverage ratio , Rest. assets/ Total adv (6) Business & Other Ratios Low cost deposit mix (100) Cost income ratio (96) 54.5 (290) Non int. inc / total income (278) Credit deposit ratio , (254) CAR (170) Tier I (150) *Please note: YoY financials for Bank are not comparable on ING Kotak merger January 19,

3 Exhibit 2: Consolidated Loan Book CV/CE, auto and personal loans reported strong growth during the quarter Loan Book (Rs mn) Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 QoQ gr. (%) CV/CE 65,500 50, , Auto Loans 164, , , Personal Loans 88,350 59, , Home loans & LAP 223, , , Corporate 399, , , Biz Banking 233,820 60, , Agriculture 168, , ,120 (1.8) Others 68,330 42, , Total Advances 1,411, , ,346, Loan Book mix (%) Q3FY16 Q3FY15 YoY (bps) Q2FY16 QoQ (bps) CV/CE (1.2) Auto Loans (4.9) 11.7 (0.05) Personal Loans (0.7) Home loans & LAP (0.1) 16.1 (0.29) Corporate (1.8) Biz Banking (0.23) Agriculture (0.7) 12.7 (0.80) Others (0.1) Exhibit 3: Q3FY16 Subsidiary performance Share of bank in total consolidated profits now stands at 67% vs 65% in 3QFY15 (also aided by ING merger) Consol Financials (Rs mn) Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 QoQ gr. (%) Standalone Bank 6,347 7,374 (13.9) 5, Kotak Prime 1,260 1, ,270 (0.8) KMCC 60 (60) (200.0) 70 (14.3) Kotak Securities (8.3) 780 (29.5) International subsidiaries (18.8) Kotak AMC 40 (10) (500.0) 230 (82.6) Kotak Investment Advisors (10) 20 (150.0) NA Kotak Mahindra Investments Lending business 7,607 8,574 (11.3) 6, Flow business, Subsidiaries 1, ,760 (26.7) Consol PAT (ex insurance) 8,897 9,504 (6.4) 8, Insurance Consolidated PAT 9,497 10,014 (5.2) 9, January 19,

4 Key Q3FY16 Concall highlights: Updates on business from merger: Integration process is underway and bank expects to complete the merger fully by April May Liabilities Seeing traction in SA for erstwhile IVBL which saw growth of 30% vs 40% growth for Kotak Bank. Assets/Products Started selling Auto products (Kotak Prime) in e IVBL branches (312 branches) which was not there in the erstwhile Bank. SME book (largely trader book) continues to see traction, with robust asset quality. Some of the products have been unified in merged co like gold loans, personal loans, LAP. Cross selling, customer acquisition and cost / space rationalisation has started yielding results. KMB expects synergy benefits to fully show in FY17. Balance sheet Growth/Outlook: Loan book Loan growth stood at 3.3% QoQ and management suggested growing the portfolio at 2x the nominal GDP growth. Traction to pick up from Wholesale in coming quarters, while retail/sme traction will continue. CASA CASA ratio currently at 35% and the momentum remains strong. KMB would like to see its CASA mix moving towards 40% going ahead. Mortgages/LAP Still seeing good growth but certain segment of market have got aggressive but KMB continues to have stable metrics on LTVs, yields and asset quality. Historically, 60% of e IVBL book has been SME/LAP. Agri KMB was lacking on agriculture financing business, but on merger have acquired decent agri portfolio offering crop loans, tractor financing & broader Agri Financing. Crop loans are basically Kisan Credit Card (KCC) with business being flattish as integration of risk system, credit underwriting etc has taken time. Margins: Margins are likely to remain between % going ahead. Fees, Opex & capacity building: Fees remains tepid (on merged entity) however transactions value has picked up and KMB is confident to return fee growth back to trend levels. Opex Employee costs were flat sequentially on lower merger cost incurred of Rs130mn (v/s Rs630mn in Q1FY16) and however other opex increased on higher advertisement costs. Branches Plan to take branches to 1400 by Dec January 19,

5 Asset Quality: Have seen marginal stress from the e IVBL book but total stressed asset book remains at 6% of e IVBL s fund based + non fund or 2.5% of combined book. Credit cost Credit cost in Q3FY16 was ~52bps to advances (merged). Outlook: Have been guiding 35bp of credit cost on KMB book, while 50 55bps on VYSB s asset quality and still maintain the total credit cost guidance of 80 85bps for FY16. Subsidiaries: Insurance KMB has contributed ~50% growth to incremental insurance business, while also offer insurance at 95% of the e IVBL branches. Kotak Prime Shifting strategy to make Kotak Prime as an asset finance company catering to financing auto vehicles (so have seen some other businesses draw down). Digital initiatives: Launched Bharat Banking app which does not require internet connection and can do 23 different transactions incl. small value fund transfer. 7% market share in mobile banking transactions. Exhibit 4: Margins remained stable at 4.3% 6.00% NIM (%) 5.50% 5.00% 4.50% 5.0% 5.0% 4.7% 4.7% 4.8% 4.8% 4.6% 4.7% 4.8% 4.8% 4.9% 4.9% 5.0% 4.9% 4.7% 4.7% 4.2% 4.3% 4.00% 4.3% 3.50% 1Q12 2Q12 3Q12 4Q12 1Q13 January 19,

6 Exhibit 5: CASA growth was mainly led by SA deposits while CA mix declined CASA (%) 40.0% 35.0% 30.0% 25.0% 20.0% 36.0% 36.0% 35.0% 32.0% 31.9% 31.1% 29.2% 29.2% 34.0% 27.0% 28.0% 27.0% 31.0% 31.5% 28.8% 29.7% 26.5% 26.0% 25.9% 15.0% 1Q12 2Q12 3Q12 4Q12 1Q13 Exhibit 6: Credit cost steady on lower slippages; FY16 guidance maintained at 80 85bp 1.50% 1.00% 0.50% 0.00% 0.50% 0.6% 0.7% 0.2% 0.0% 0.3% 0.1% 0.0% Credit Cost 1.1% 0.2% 0.2% 0.3% 0.4% 1.3% 0.4% 0.7% 1Q12 2Q12 3Q12 4Q12 1Q13 Exhibit 7: Asset quality remains stable as most pain taken in Q1FY16 2.5% 2.0% 1.5% 1.0% 0.0% Gross NPA (%) Net NPA (%) 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 Exhibit 8: Subsidiary performance continue to hold up Kotak Prime Kotak Sec KMCC Kotak Life AMC Intnl subs KIAL KIL 4,500 3,500 Rs m 2,500 1, (500) January 19,

7 Exhibit 9: Consolidated ROEs Merger synergies to reflect in return ratios in FY17 ROA Decomposition E 2017E 2018E Net Interest Income 5.62% 4.51% 4.38% 4.50% 4.54% 3.96% 3.60% 3.71% Fees 2.61% 2.58% 2.02% 2.01% 2.50% 2.34% 2.10% 2.16% Investment profits 0.23% 0.14% 0.19% 0.20% 0.31% 0.24% 0.20% 0.19% Net revenues/assets 8.46% 7.24% 6.60% 6.70% 7.35% 6.55% 5.90% 6.06% Operating Expense 4.39% 3.73% 3.33% 3.25% 3.68% 3.21% 2.82% 2.86% Provisions 0.29% 0.14% 0.22% 0.30% 0.16% 0.62% 0.40% 0.46% Taxes 1.18% 1.09% 1.01% 1.06% 1.20% 0.88% 0.87% 0.89% Total Costs 5.85% 4.97% 4.56% 4.61% 5.03% 4.72% 4.09% 4.21% ROA 2.61% 2.27% 2.04% 2.09% 2.32% 1.83% 1.81% 1.85% Equity/Assets 17.03% 15.98% 14.49% 15.35% 16.50% 13.51% 11.74% 11.76% ROE 15.3% 14.2% 14.1% 13.6% 14.0% 13.6% 15.4% 15.8% Exhibit 10: We maintain Accumulate with increased TP of Rs725 (from 715) as we roll over to Sep 17 adjusted book for Bank & Kotak prime, while on SOTP basis for subsidiaries Value (Rs m) Per Share (Rs) Valuation Basis Kotak Securities 91, x Sep 17 Earnings Asset Management 32, % of AUMs KMCC 6, x Sep 17 Earnings International subsidiaries 14, x Sep 17 book Others 38, x Sep 17 Earnings Insurance 32, P/NBAP Total 215, Ex insurance 183, Total Subsidiary valuation 215, Lending biz valuation 1,111, x Sep 17 book Sep 17 PT 725 January 19,

8 Income Statement (Rs m) Int. Earned from Adv. 104, , , ,636 Int. Earned from Invt. 22,158 23,931 25,750 27,707 Others Total Interest Income 127, , , ,889 Interest expense 72,432 76,639 81,432 86,814 NII 54,815 66,247 77,349 90,075 Growth (%) Treasury Income 3,761 4,134 4,546 4,998 NTNII 30,103 39,499 47,735 56,904 Non Interest Income 33,864 43,634 52,281 61,901 Total Income 161, , , ,791 Growth (%) Operating Expense 44,402 54,577 63,907 75,524 Operating Profit 44,277 55,304 65,723 76,453 Growth (%) NPA Provisions 2,757 8,807 9,828 10,178 Investment Provisions (1,072) 1,537 (1,162) 1,536 Total Provisions 1,904 10,585 8,931 12,006 PBT 42,373 44,718 56,792 64,446 Tax Provisions 14,431 14,578 18,453 20,959 Effective Tax Rate (%) PAT 27,746 29,934 38,122 43,260 Growth (%) Balance Sheet (Rs m) Par Value No. of equity shares 1,545 1,831 1,831 1,831 Equity 7,724 9,153 9,153 9,153 Networth 216, , , ,148 Adj. Networth 209, , , ,746 Deposits 748,603 1,362,458 1,607,700 1,897,086 Growth (%) Low Cost deposits 272, , , ,407 % of total deposits Total Liabilities 1,380,689 2,184,300 2,515,707 2,921,069 Net Advances 907,792 1,501,884 1,795,238 2,132,648 Growth (%) Investments 333, , , ,306 Total Assets 1,380,689 2,184,300 2,515,707 2,921,069. *Please note Consolidated Financials are ex insurance Quarterly Financials (Rs m) Y/e March Q4FY15 Q1FY16 Q2FY16 Q3FY16 Interest Income 25,809 39,914 40,057 41,217 Interest Expense 14,578 23,932 23,269 23,555 Net Interest Income 11,231 15,982 16,787 17,662 Non Interest Income 6,681 5,924 6,157 7,222 CEB 3,890 4,180 4,570 4,660 Treasury 1,640 1, Net Total Income 17,912 21,906 22,945 24,884 Operating Expenses 9,306 15,937 12,497 12,832 Employee Expenses 3,789 9,288 6,230 6,182 Other Expenses 5,517 6,649 6,267 6,650 Operating Profit 8,607 5,970 10,448 12,052 Core Operating Profit 6,967 4,590 9,538 12,052 Provisions 669 3,053 1,764 2,353 Loan loss provisions 619 2,662 1,891 1,483 Investment Depreciation (140) 839 Profit before tax 7,937 2,917 8,684 9,700 Tax 2,667 1,019 2,989 3,352 PAT before EO 5,271 1,898 5,695 6,347 Extraordinary item PAT 5,271 1,898 5,695 6,347 Key Ratios CMP (Rs) Equity Shrs. Os. (m) 1,545 1,831 1,831 1,831 Market Cap (Rs m) 1,030,936 1,221,679 1,221,679 1,221,679 M/Cap to AUM (%) EPS (Rs) Book Value (Rs) Adj. BV (100%) (Rs) P/E (x) P/BV (x) P/ABV (x) DPS (Rs) Dividend Yield (%) Profitability (%) NIM RoAA RoAE Efficiency Cost Income Ratio (%) C D Ratio (%) Business per Emp. (Rs m) Profit per Emp. (Rs lacs) Business per Branch (Rs m) 2,422 2,387 2,618 2,878 Profit per Branch (Rs m) Asset Quality Gross NPAs (Rs m) 13,848 21,407 24,346 26,984 Net NPAs (Rs m) 6,932 12,320 11,757 11,402 Gr. NPAs to Gross Adv. (%) Net NPAs to Net Adv. (%) NPA Coverage (%) January 19,

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