Kotak Mahindra Bank. Opportunity on a platter, focused on where and how to grow. Management Meet Update

Transcription

1 Opportunity on a platter, focused on where and how to grow June 10, 2016 R Sreesankar rsreesankar@plindia.com / Pritesh Bumb priteshbumb@plindia.com / Vidhi Shah vidhishah@plindia.com / Rating Accumulate Price Rs754 Target Price Rs850 Implied Upside 12.7% Sensex 26,763 Nifty 8,204 (Prices as on June 10, 2016) Trading data Market Cap. (Rs bn) 1,382.2 Shares o/s (m) 1, M Avg. Daily value (Rs m) Major shareholders Promoters 33.70% Foreign 35.90% Domestic Inst. 4.74% Public & Other 25.66% Stock Performance (%) 1M 6M 12M Absolute Relative How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: KTKM.BO, BB: KMB IN) (Rs) Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 We met the top management of KMB to understand the outlook on banking sector, as well as business and how merger synergies benefits flow to the Bank. While we came back with a cautious outlook on the sector on account of stress seen in metals, steel and BOT/infrastructure projects for the medium term, our strong belief in the bank got reiterated following the focus and clarity that the management have on the path that they are taking to achieve growth. The management remained optimistic and remained confident of achieving desired synergies of merger in business growth, CASA, cost optimisation & scalability. We believe KMB is on cusp of reviving towards the growth path and improve market share and hence we estimate our earnings at 40% CAGR for the bank over FY16 18E.We maintain ACCUMULATE with increase price target of Rs850 (from Rs800) as we roll over to Mar 18E ABV for the lending business (3.6x on lending business). Consistently gaining market share with no let up in credit quality; momentum to pick up in H2FY17: KMB has maintained guidance of 18 20% loan growth in FY17 mainly driven by the strong SME advantage of erstwhile ING Vysya (eivbl) and replicating the same in KMB s core book, while in retail KMB is seeing healthy growth across segments except mortgages where management believes margins are thin. Management addressed the concern of lower growth target, where they believe growth led by corporate book will be comparatively lower as it still foresee different levels of risk and has been letting off some corporate accounts from eivbl book (30 35% de growth in FY16). Contd...2 Key financials ( Y/e March) E 2018E Net interest income 54,815 84, , ,015 Growth (%) Operating profit 44,277 56,508 75,567 92,849 PAT 27,942 31,043 45,318 55,736 EPS (Rs) Growth (%) 25.0 (6.4) Net DPS (Rs) Profitability & Valuation E 2018E NIM (%) RoAE (%) RoAA (%) P / BV (x) P / ABV (x) PE (x) Net dividend yield (%) Management Meet Update Source: Bloomberg Source: Company Data; PL Research Note Consolidated financials ex insurance 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 Strong comfort on asset quality, maintain credit cost guidance of 50bps: Management expressed strong comfort on asset quality with major pain taken upfront in the merged eivbl s book and do not see any more spill over into stressed assets from the eivbl s book. Management also mentioned that provisions remain adequate on troubled assets including aggressive assumptions on LGDs and hence maintained its credit cost guidance to 50bps for FY17 (82bps in FY16) with 15bps related to eivbl s book. In Q4FY16, GNPLs/NNPLs stand at 2.36%/1.06% respectively, while, O/s restructured assets remains small at 0.26% of loans and SMA 2 accounts at 0.13% of loans the lowest in the industry. Synergies to benefit both cost & income side: Management believes integration cost are largely done and would see cost rationalisation going ahead, but management remains more optimistic on income drive from introduction of full bouquet of products from the eivbl s branches driving loan growth, cross sell fees especially on MF & insurance and CASA improvement driving down cost of funds. Synergy benefits can drive cost income ratio down to ~50% in FY17 from ~55% in FY16 which will be driven by higher productivity from eivbl network. Fee growth to map loan growth: Management guided the fee growth to map loan growth mainly led by transaction led fees and some improvement from TPD products as eivbl branches start distributing MF/Insurance products. Fees from credit will pick up as loan growth picks up, while they remain averse on fees based on high risk. Management also mentioned that recovery from written off account remain low. CASA mix improvement on track: KMB has witnessed granular SA growth on offering of 6% rate of interest which has improved SA growth of the overall bank to 11% QoQ. CASA mix in FY16 improved to ~38% from ~36% (43% YoY SA growth for KMB and 34% YoY SA growth for eivbl). Cost of SA deposits stands at 5.5% and management is targeting to further increase the CASA ratio to 40% going ahead. Subsidiaries set to grow: Kotak Prime is expected to show improved traction as vehicle financing has been showing signs of improvement especially in commercial vehicles and would add to overall lending growth and agur well for margins. Kotak life insurance continues to perform well as industry has been recovering, while support for growth from introduction of Kotak s products in the eivbl branches is also expected to improve. The share of subs in total consolidated profits now stands at ~35% and we expect this remain stable in FY17. June 10,

3 Exhibit 1: Consolidated Loan Book Auto & retail loans gain traction; corporate loan growth remained soft on conscious rationalizing of exposures Loan Book (Rs m) Q4FY16 Q4FY15 YoY gr. (%) Q3FY16 QoQ gr. (%) CV/CE 74,630 52, , Auto Loans 166, , , Loan Book (Rs m) Personal Loans 96,460 62, , Home loans & LAP 230, , , Corporate 399, , ,880 (0.1) Biz Banking 233,180 64, ,820 (0.3) Agriculture 179, , , Others 67,300 46, ,330 (1.5) Total Advances 1,447, , ,411, Loan Book mix (%) CV/CE (0.7) Auto Loans (5.0) 11.6 (0.10) Personal Loans (0.4) Home loans & LAP (0.7) Corporate (0.1) 28.3 (0.74) Biz Banking (0.46) Agriculture (1.2) Others (0.6) 4.8 (0.19) Exhibit 1: Margins should be stable going ahead Exhibit 2: CASA should reach target of 40% as eivbl s synergy kick in 6.00% 5.50% 5.00% 4.50% 4.00% NIM (%) 4.8% 4.8% 4.9% 4.9% 5.0% 4.9% 4.7% 4.7% 5.0% 4.7% 4.7% 4.8% 4.8% 4.3% 4.4% 4.7% 4.6% 4.2% 4.3% % % 2 28% 26% 32% CASA (%) 38% 36% 36% 32% 29% 27% 29% 31% 30% 35% 34% 32% 29% 31% 27% 26% 3.50% 15.0% June 10,

4 Exhibit 3: Credit cost remained steady and in line with guidance of 82bps for FY16 Exhibit 4: Asset quality remains stable and mostly been taken from eivbl book 1.50% 1.00% 0.50% 0.00% 0.50% 0.6% 0.1% 0.7% Credit Cost 1.1% 0.2% 0.4% 0.3% 0.2% 0.3% 0.4% 1.3% 0.7% 0.6% 2.5% 2.0% 1.5% 1.0% Gross NPA (%) Net NPA (%) 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 Exhibit 5: Subsidiary performance continue to hold up Kotak Prime Kotak Sec KMCC Kotak Life AMC Intl. subs KIAL KIL 4,500 3,500 2,500 1, (500) 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 (Rs m) Exhibit 6: Sub performance Share of bank in total consolidated profits now stands at 65% Consol Financials (Rs m) Q4FY16 Q4FY15 YoY gr. (%) Q3FY16 QoQ gr. (%) Standalone Bank 6,958 5, , Kotak Prime 1,300 1,430 (9.1) 1, KMCC (43.3) Kotak Securities (46.9) 550 (7.3) International subsidiaries (15.4) Kotak AMC 250 (180) NA Kotak Investment Advisors (54.5) (10) NA Kotak Mahindra Investments Lending business 8,258 6, , Flow business, Subsidiaries 1,700 1,770 (4.0) 1, Consol PAT (ex insurance) 9,780 8, , Insurance Consolidated PAT 10,550 9, , June 10,

5 Exhibit 7: Consolidated ROEs Merger synergies to reflect in return ratios in FY17E ROA Decomposition E 2017E 2018E Net Interest Income 5.62% 4.51% 4.38% 4.50% 4.54% 4.94% 4.65% 4.93% Fees 2.61% 2.58% 2.02% 2.01% 2.50% 2.10% 1.96% 1.94% Investment profits 0.23% 0.14% 0.19% 0.20% 0.31% 0.23% 0.16% 0.14% Net revenues/assets 8.46% 7.24% 6.60% 6.70% 7.35% 7.28% 6.78% 7.01% Operating Expense 4.39% 3.73% 3.33% 3.25% 3.68% 3.99% 3.50% 3.54% Provisions 0.29% 0.14% 0.22% 0.30% 0.16% 0.56% 0.28% 0.29% Taxes 1.18% 1.09% 1.01% 1.06% 1.20% 0.93% 1.03% 1.09% Total Costs 5.85% 4.97% 4.56% 4.61% 5.03% 5.47% 4.81% 4.93% ROA 2.61% 2.27% 2.04% 2.09% 2.32% 1.81% 1.97% 2.08% Equity/Assets 17.03% 15.98% 14.49% 15.35% 16.50% 15.61% 14.99% 14.76% ROE 15.3% 14.2% 14.1% 13.6% 14.0% 11.6% 13.1% 14.1% Exhibit 8: We maintain Accumulate with increased TP of Rs850 (from 800) as we roll over our target to Mar 18 ABV based on 3.6x Mar 18 book Value (Rs m) Per Share (Rs) Valuation Basis Kotak Securities 83, x Mar 18 Earnings Asset Management 39, % of AUMs KMCC 6, x Mar 18 Earnings International subsidiaries 15, x Mar 18 book Others 42, x Mar 18 Earnings Insurance 53, x EV & 21x new biz multiple Total 240, Ex insurance 187, Total Subsidiary valuation 240, Lending biz valuation 1,320, x Mar 18 book Mar 17 PT 850 June 10,

6 Income Statement (Rs m) Int. Earned from Adv. 104, , , ,780 Int. Earned from Invt. 21,335 34,560 39,501 42,847 Others 1,177 4, Total Interest Income 127, , , ,462 Interest expense 72, , , ,447 NII 54,815 84, , ,015 Growth (%) Treasury Income 3,761 4,022 3,752 3,883 NTNII 30,103 36,091 45,235 51,884 Non Interest Income 33,864 40,113 48,986 55,768 Total Income 161, , , ,230 Growth (%) Operating Expense 44,402 68,418 80,471 94,934 Operating Profit 44,277 56,508 75,567 92,849 Growth (%) NPA Provisions 2,757 7,938 6,412 7,808 Investment Provisions (1,072) 1, Total Provisions 1,904 9,580 6,503 7,902 PBT 42,373 46,927 69,065 84,947 Tax Provisions 14,431 15,885 23,747 29,210 Effective Tax Rate (%) PAT 27,746 30,837 45,102 55,509 Growth (%) Balance Sheet (Rs m) Par Value No. of equity shares 1,545 1,834 1,834 1,834 Equity 7,724 9,172 9,172 9,172 Networth 216, , , ,485 Adj. Networth 209, , , ,500 Deposits 748,603 1,386,430 1,663,716 1,963,185 Growth (%) Low Cost deposits 272, , , ,696 % of total deposits Total Liabilities 1,380,689 2,269,012 2,623,665 3,045,650 Net Advances 907,792 1,464,563 1,738,214 2,064,220 Growth (%) Investments 333, , , ,290 Total Assets 1,380,689 2,269,012 2,623,665 3,045,650. *Please note Consolidated Financials are ex insurance Quarterly Financials (Rs m) Y/e March Q1FY16 Q2FY16 Q3FY16 Q4FY16 Interest Income 39,914 40,057 41,217 42,654 Interest Expense 23,932 23,269 23,555 24,082 Net Interest Income 15,982 16,787 17,662 18,572 Non Interest Income 5,924 6,157 7,222 6,819 CEB 4,180 4,570 4,660 5,100 Treasury 1, Net Total Income 21,906 22,945 24,884 25,392 Operating Expenses 15,937 12,497 12,832 13,450 Employee Expenses 9,288 6,230 6,182 6,340 Other Expenses 6,649 6,267 6,650 7,110 Operating Profit 5,970 10,448 12,052 11,942 Core Operating Profit 4,590 9,538 12,052 11,942 Provisions 3,053 1,764 2,353 2,004 Loan loss provisions 2,662 1,891 1,483 1,651 Investment Depreciation 364 (140) Profit before tax 2,917 8,684 9,700 9,937 Tax 1,019 2,989 3,352 2,980 PAT before EO 1,898 5,695 6,347 6,958 Extraordinary item PAT 1,898 5,695 6,347 6,958 Key Ratios CMP (Rs) Equity Shrs. Os. (m) 1,545 1,834 1,834 1,834 Market Cap (Rs m) 1,163,935 1,382,205 1,382,205 1,382,205 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 2,376 2,617 2,877 Profit per Branch (Rs m) Asset Quality Gross NPAs (Rs m) 13,848 30,078 29,309 29,822 Net NPAs (Rs m) 6,932 13,588 15,344 15,985 Gr. NPAs to Gross Adv. (%) Net NPAs to Net Adv. (%) NPA Coverage (%) June 10,

7 Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai , India Tel: (91 22) Fax: (91 22) Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 50% 40% 30% 20% 10% 0% 45.1% 38.9% 15.9% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. R Sreesankar (B.Sc ), Mr. Pritesh Bumb (MBA, M.com), Ms. Vidhi Shah (CA), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as PL ) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document. PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities. PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company. PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report. PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report. PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or co managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. R Sreesankar (B.Sc ), Mr. Pritesh Bumb (MBA, M.com), Ms. Vidhi Shah (CA), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. DISCLAIMER/DISCLOSURES (FOR US CLIENTS) ANALYST CERTIFICATION The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report Terms & conditions and other disclosures: This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a 6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a 6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. June 10,