CMP: INR915 TP: INR1,050(+15%) Buy

Transcription

1 28 April QFY17 Results Update Sector: Financials Kotak Mahindra Bank BSE SENSEX S&P CNX 30,030 8,476 Bloomberg KMB IN Equity Shares (m) 1,834.4 M.Cap.(INRb)/(USDb) / Week Range (INR) 920 / 690 1, 6, 12 Rel. Per (%) 2/5/13 Avg Val, INR m 1760 Free float (%) 67.9 Financials & Valuations (INR b) Y/E March E 2019E NII OP Cons. NP Cons. EPS (INR) EPS Gr. (%) Cons. BV. (INR) Cons. RoE (%) RoA (%) P/E(X) (Cons.) P/BV (X) (Cons.) CMP: INR915 TP: INR1,050(+15%) Buy Strong all-around performance; merger synergies yielding results Standalone results: PAT grew 40% YoY to INR9.8b (10% beat). Strong core operating profit (+31% YoY), led by healthy NII growth (16% YoY; 10bp NIM improvement to 4.6%), acceleration in fee income (+24% YoY) and controlled opex growth (+9% YoY), was the key highlight. Absolute GNPAs increased 13% QoQ on a low base; largely stable in % terms at 2.6%. 4QFY17 loan growth picked up from 10-12% in the past quarters to 15% YoY. Sequential loan growth of 5% was led by robust growth in CV (+12% QoQ, 38% YoY), pick-up in business loan (+8% QoQ) and unsecured loan products (+10% QoQ). Management guided for 20%+ loan growth in FY18. Other highlights: a) CASA ratio improved 600bp in FY17 to 44% driven by robust SA growth of 41% YoY. Benefit received in cost of funds drove NIMs higher by ~30bp over FY16; b) SMA2 declined 9bp QoQ to 10bp, OSRL fell to 7bp (v/s 11bp in 3Q) Other businesses: a) Profitability at its capital market businesses improved to INR1.3b (+94% YoY), led by better profitability of K-Sec (1.4x increase to INR1.2b); b) K-Sec market share remained stable at 2.2%; c) overall AUM increased 6% QoQ, led by strong inflows in equity AUM of 25% QoQ. Valuation and view: With completion of integration, synergies of merger with eivbl are expected to flow in. Strong presence across geographies/products and healthy capitalization (T1 of ~16%) place the bank in a sweet spot to capitalize on growth opportunities and gain market share. KMB s premium multiples are likely to sustain, considering strong growth and operating leverage available across businesses, and a clean loan portfolio. Comfort on asset quality remains the highest, with no SDR/5:25, negligible SMA2 (9bp) and OSRL (7bp). At our SOTP of INR1,050, KMB will trade at 3.8x 2019E consolidated BV. Buy. Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); Subham Banka (Subham.Banka@MotilalOswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Exhibit 1: Quarterly performance v/s our estimates and reasons for deviations (INRm) Kotak Bank (standalone) 4QFY17A 4QFY17E v/s Est. Comments Net Interest Income 21,614 21,008 3 % Change (Y-o-Y) Strong NIM performance Operating Profit 17,020 15, % Change (Y-o-Y) strong core operating performance Net Profit 9,765 8, % Change (Y-o-Y) strong other income and controlled opex drives beat Other Businesses Kotak Prime 1,330 1,393-4 Declining PAT margins Kotak Mah. Investments Kotak Mah. Capital Co Sharp improvement in profitability Kotak Securities 1, Sharp improvement in profitability International subs Kotak Mah. AMC & Trustee Co Kotak Investment Advisors 0 5 Kotak OM Life Insurance 1, Con.adj and MI Consol. PAT 14,045 12, Strong operating performance in banking business and higher % Change (Y-o-Y) profitability in broking drives better earnings Overall CASA ratio further improved to 44% as compared to 42% in 3QFY17 Strong emphasis on digital initiatives is driving down cost structure of the bank Lending Business: healthy loan growth and strong key operating metrics; Stable asset quality maintained Healthy loan growth; Strong CASA inflows continue even post demonetization On a standalone basis, loans grew by 5% QoQ and 15% YoY, driven by robust growth in CV segment (+12% QoQ and 38% YoY). Corporate loan growth declined 2% sequentially, but grew 22% on a YoY basis. Growth in personal loans and credit card businesses pick up during the quarter (+10% QoQ, 16% YoY). KMPL s growth picked up to 7% QoQ (+12% YoY) v/s flat loan book in 3Q. Consolidated loan growth was at 15% YoY. SA deposits grew 7% QoQ and 41% YoY. SA deposits as a proportion of overall deposits stood at 26.4% (25.8% a quarter ago and 21.3% a year ago). Overall CASA ratio further improved to 44% as compared to 42% in 3QFY17. Strong NIMs, healthy fee income and controlled opex drives strong core performance Led by strong CASA inflows, calc. COF declined 64bp QoQ. Hence, despite challenging economic environment, bank was able to improve NIMs to 4.6%. As a result NII grew +16% YoY. Contribution of fee income to profitability remained high (+24% YoY, 4% above expectation). Coupled with cost containment (+9% YoY), led to 8% beat on core operating profits (+31% YoY ) Net stress loans including SMA2 accounts at ~140bp Net stress loans remain one of lowest in the system While the challenges continue in the economy, KMB reported stable asset quality performance with net stress loans increasing only marginally by 6bp QoQ to 143bp (one of the lowest in the system). The bank has negligible stress in the book in terms of OSRL (7bp) and SMA2 accounts (10bp), demonstrating the robust risk management of the bank. 27 April

3 Proportion of Equity AUM increased to 20% of overall AUM v/s 14% in 3QFY17/FY16 Healthy performance in non-lending business Capital market related business PAT was at INR1.3b (44% above our expectation) driven by strong profitability in the securities division. K-sec net profit increased 137% YoY to INR1.2b; its market share remained stable QoQ at 2.2%. Asset management business reported PAT of INR340m vs. INR520m in 4QFY16. Overall AUM increased 6% QoQ (+38% YoY) led by strong inflows in Equity AUM of 52% QoQ (+98% YoY). Domestic AUM grew 19% QoQ and 64% YoY. Life insurance profit increased 49% QoQ and 31% YoY to INR 1b. Exhibit 2: Growth in auto loans picked up during the quarter Auto Loans (INR b) Other Loans (INR b) Exhibit 3: Domestic AUM increased 64% YoY (+19% QoQ) Debt Equity PMS Offshore Funds Alternate assets Insurance MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 9MFY16 FY16 1QFY17 1HFY17 9MFY17 FY17 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 9MFY16 FY16 1QFY17 1HFY17 9MFY17 FY17 Exhibit 4: K-Sec: PAT grew 137% YoY (INR b) Tot. Inc. PAT PATM (%) Exhibit 5: K-Sec market share stable at 2.2% QoQ QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 Exhibit 6: Investment banking earnings trend (INRm) Tot. Inc. PAT QFY13 4QFY13 1QFY14 2QFY14 3QFY QFY14 1QFY QFY QFY QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 Exhibit 7: Kotak AMC: Equity AUMs trending higher (INRb) Eq. AUM PMS AUM Offshore AUM HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 9MFY16 FY16 1QFY17 1HFY17 9MFY17 FY17 27 April

4 4QFY17 Conference call highlights Asset Quality Entire identified stress loans of eivbl (6% of eivbl and 2.5% of merged entity) at the time of merger is now reported as GNPA Credit cost to be lower than that of FY17. FY17 credit cost stood at 61bp (55bp NPA and 6bp on standard assets) vs 82bp a year ago. There were no divergence in terms of asset quality for bank vs RBI audit. The bank accounts NPLs based on inherent weakness, rather than waiting for the 90dpd rule to take effect. Significant portion of NPLs recognized (slippages of INR4b) in 4Q relate to the merger with eivbl. Balance sheet related The bank is targeting a loan growth of ~20%+ Business banking and SME business growth was muted (until 9M) in the past due to a) integration challenges and b) Demon. However, it started showing improvement from 4Q. Expect healthy growth from SME, mid-market and Retail segment KMB will be cautious on its growth strategy in microfinance. Moderate growth in housing finance is due to integration issues and not focused on takeover cases Focused on low cost and stable liability is the core philosophy of the bank. Not clearly focused on any ratios P/L related NIMs to be in the range of % on a quarterly basis and for the full year to be % Of the others section (INR2.45b) in non-interest income, ARD is 1b+; treasury gains have come in slightly lower than the previous quarter. Banca growth remains strong Sustainable target for cost to income ratio set at early-to-mid 40%. Provisioning includes standard asset provisioning of ~6bp. Write back of certain provisions has led to lower tax rate this quarter 32% v/s an average of 34%+ Maintain Buy with a TP of INR1,050 (3.8x Consol. FY19E BV) Other highlights All the distribution expenses related to AMC is accounted upfront hence, profitability is muted Some of the business that were being done in KMPL are now being booked in KMIL. Acquisitions will continue to be a focus area for the bank. The management highlighted its commitment to grow through both organic and inorganic opportunities. No intention to open bank platform for insurance company. 27 April

5 Valuation and view Merger with eivbl places KMB in a sweet spot with strong presence across geographies, products and healthy capitalization (tier 1 of ~16%). The merged entity is the fourth largest private sector bank with a loan book of ~INR1.35t. Further, KMB s conglomerate structure places it in a very sweet position to ride the up-cycle across financial services. Emerging opportunities for mid-size private banks post demon coupled with healthy capitalization leaves KMB in a strong position to capitalize. To leverage on its geographical expansion, the management is focusing on product penetration, with higher emphasis on Agriculture (will help in priority sector loans), small business loans (untapped opportunity; creating niche for itself) and mortgage loan. Post initial merger related hiccups most products have started witnessing healthy traction. Operating leverage is expected to kick in the expanded underutilized capacity. Higher refinancing opportunities, increased product offering on the combined network and product penetration to eivbl customers, will keep loan growth healthy. On a lower base we are factoring loan CAGR of ~24% over FY17-20E. We expect PPoP (adjusted) CAGR of ~23% over FY17-20E, largely driven by stable/marginally decline in margins and operating leverage. Large part of current year credit cost was driven by eivbl portfolio, and the credit cost has normalized and is expected to remain under check. With just 10bp of SMA2 accounts, No 5:25 and SDR on balance sheet comfort on asset quality remains the highest. Post-merger with eivb, share of lending business in steady state profitability is likely to increase to ~84% - providing much needed stability to earnings. Capital light nature of capital market and asset management businesses can provide upside to ROE if there is a strong improvement in business cycle. Green shoots of the same are visible post demon. We expect consolidated ROEs to improve to ~15-16% by FY18 on back strong improvement in banking business ROAs to ~1.8%. The bank, in a board meeting held on 30 March 2017, approved the sale of up to 62m shares. This translates to 3.4% pre-issue dilution and capital raise of INR53b at CMP. The stated intent by management is to augment KMB s capital base for the purpose of: a) pursuing consolidation opportunities, b) acquisition/ resolution of stressed assets and participation in a Bad Bank, c) organic growth opportunities and digital expansion and d) growth in subsidiaries. Post capital issue, tier I capital will improve by bp to ~18.5%. Backed by higher capitalization, diversified business loan book, strong risk management and presence across financial services KMB historically traded at a premium multiples to peers despite relatively lower ROE. We are positive on the business with the expected operating leverage from eivbl. At our SOTP of INR1,050, KMB will trade at 3.8x FY19 Consolidated BV. Buy. 27 April

6 Exhibit 8: Kotak Mahindra: SOTP Valuation FY19 based Value (INR B) Value (USD B) INR per share % To Total Rationale Lending Business 1, Kotak Mahindra Bank 1, x FY19E Core NW, ~1.8% RoA and ~16% Core RoE Kotak Prime (Car and other loans) x FY19E Net Worth, ~14% Core RoE Kotak Investment Company (LAS) x FY19E Net Worth; ~25% ROE Asset Management Business Domestic Mutual Fund % of FY19E Avg. AUM of INR1.25T Alternative Assets % of FY19E AUM of INR116b Offshore Funds % of FY19E AUM of INR318b Capital Markets related Business Kotak Securities x FY19E Earnings; Implied ~2.5x Core BV Kotak Investment Banking (KMCC) x FY19E Free Networth Kotak Life Insurance Target Value 1, , Implied 3.8x PBV; ROE of ~15% Current market cap. 1, Upside (%) Exhibit 9: We largely maintain our earnings estimates INR b Old Est. Revised Est. Change (%) FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19 Net Interest Income Other Income Total Income Operating Expenses Operating Profits Provisions PBT Tax Standalone PAT Consolidated PAT Loans 1,365 1,665 2,081 1,361 1,660 2, Deposits 1,560 1,840 2,245 1,574 1,810 2, Margins (%) SA RoA (%) Core RoE (%) Exhibit 10: We largely maintain estimates at the consolidated level; raise estimates for Capital market by 11-17% to factor in stronger profitability of K Sec INR b Old Est. Revised Est. Change (%) FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19 Kotak Mahindra Bank (Standalone) Kotak Mahindra Prime Kotak Mahindra Investments Lending Business International subsidiaries Kotak Mahindra AMC & Trustee Co Kotak Investment Advisors Asset Management Business Kotak Securities Kotak Mahindra Capital Company Capital Market Business Consol. PAT excluding Kotak Life Kotak OM Life Insurance Consolidation Adjust Consol. PAT Including Kotak Life April

7 Exhibit 11: KMB group Earnings Estimates FY11 FY12 FY13 FY14 FY15E FY16 FY17 FY18E FY19E Kotak Mahindra Bank (Standalone) 11,367 15,414 19,737 21,603 24,776 20,898 34,115 40,267 51,185 Kotak Mahindra Prime 3,179 3,849 4,307 4,907 5,077 5,025 5,150 6,014 7,013 Kotak Mahindra Investments ,060 1,540 1,960 2,629 3,604 Lending Business 14,786 19,415 24,380 26,930 30,913 27,463 41,225 48,910 61,802 International subsidiaries , ,118 1,453 Kotak Mahindra AMC & Trustee Co ,042 1,303 Kotak Investment Advisors Asset Management Business 1, ,820 1,545 2,335 2,981 Kotak Securities 1,819 1,258 1,145 1,600 2,900 2,510 3,610 4,333 5,313 Kotak Mahindra Capital Company Capital Market Business 2,338 1,318 1,312 1,740 3,030 2,830 4,070 4,896 5,990 Consol. PAT excluding Kotak Life 18,133 21,137 26,093 29,330 34,423 32,113 46,840 56,141 70,773 YoY Growth (%) Kotak OM Life Insurance 1,014 2,030 1,900 2,390 2,290 2,510 3,030 3,485 4,007 Consolidation Adjust Consol. PAT Including Kotak Life 18,853 22,885 28,014 31,228 36,571 34,589 49,404 59,426 74,580 YoY Growth (%) Exhibit 12: KMB group earnings snapshot (% of total) FY11 FY12 FY13 FY14 FY15E FY16 FY17 FY18 FY19E Kotak Mahindra Bank (Standalone) Kotak Mahindra Prime Kotak Mahindra Investments Lending Business International subsidiaries Kotak Mahindra AMC & Trustee Co Kotak Investment Advisors Asset Management Business Kotak Securities Kotak Mahindra Capital Company Capital Market Business Consol. PAT excluding Kotak Life Kotak OM Life Insurance Consol. PAT Including Kotak Life April

8 Exhibit 13: Valuation metrics Rating 66 CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%) FY19E (INR) (USDb) FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E ICICIBC* Buy HDFCB Buy 1, AXSB Neutral KMB* Buy YES Buy 1, IIB Buy 1, IDFC Bk Neutral FB Buy DCBB Neutral JKBK Neutral SIB Neutral Equitas Buy RBL Under Review Private Aggregate SBIN (cons)* Buy PNB Buy BOI Neutral BOB Buy CBK Neutral UNBK Neutral OBC Neutral INBK Buy Public Aggregate Banks Aggregate HDFC* Buy 1, LICHF Neutral IHFL Buy 1, GRHF Neutral REPCO Buy DEWH Buy Housing Finance RECL Neutral POWF Neutral Infra Finance SHTF Buy 1, MMFS Buy BAF Buy 1, SCUF Buy 2, , MUTH Buy SKSM Neutral Asset Finance NBFC Aggregate Financials 27 April

9 Financials and valuations (KMB+EIVBL - Proforma-merged) Income Statement (INR Million) Y/E March E 2019E 2020E Net Interest Income 31,040 37,208 47,443 54,731 61,800 69,004 81,262 89, , ,053 Change (%) Non Interest Income 14,355 16,471 18,875 22,668 29,119 26,122 34,772 41,711 50,926 62,182 Net Income 45,395 53,679 66,318 77,399 90,919 95, , , , ,235 Change (%) Operating Expenses 25,793 29,450 34,825 40,353 48,711 54,715 56,185 62,490 71,863 83,708 Pre Provision Profits 19,602 24,229 31,493 37,046 42,208 40,411 59,848 68,994 85, ,527 Change (%) Provisions (excl tax) 2,887 1,688 2,758 4,545 4,723 9,174 8,367 7,984 7,763 9,579 PBT 16,715 22,541 28,735 32,501 37,486 31,237 51,481 61,010 77, ,948 Tax 5,347 7,127 8,998 10,898 12,710 10,339 17,366 20,743 26,368 34,662 Tax Rate (%) PAT 11,367 15,414 19,737 21,603 24,776 20,898 34,115 40,267 51,185 67,286 Change (%) Consolidated PAT (incl VYSB) 18,853 22,885 28,014 31,228 36,571 34,589 49,404 59,426 74,580 95,468 Change (%) Balance Sheet (INR Million) Y/E March E 2019E 2020E Net Worth 98, , , , , , , , , ,172 Deposits 594, , ,628 1,002,891 1,240,148 1,386,430 1,574,259 1,810,397 2,262,997 2,828,746 Change (%) of which CASA Dep 192, , , , , , , ,932 1,048,258 1,290,335 Change (%) Borrowings 158, , , , , , , , , ,781 Other Liabilities & Prov. 47,124 43,125 47,809 54,053 67,119 86,790 85,836 94, , ,248 Total Liabilities 898,646 1,126,673 1,385,301 1,479,986 1,733,198 1,922,598 2,145,881 2,450,089 2,984,135 3,649,946 Current Assets 49,924 58,651 65, ,060 97, , , , , ,135 Investments 281, , , , , , , , , ,522 Change (%) Loans 529, , , ,565 1,069,718 1,186,653 1,360,821 1,660,202 2,075,252 2,594,066 Change (%) Fixed Assets 9,284 9,508 9,640 16,315 16,204 15,516 15,376 15,625 15,873 16,121 Other Assets 28,326 37,532 36,508 34,994 36,507 99,030 93, , , ,102 Total Assets 898,646 1,126,673 1,385,301 1,479,986 1,733,198 1,922,598 2,145,881 2,450,089 2,984,135 3,649,946 Asset Quality (%) GNPA (INR m) 11,567 11,771 13,283 17,037 22,884 28,381 35,786 43,245 49,190 58,567 NNPA (INR m) 3,029 2,899 3,205 6,756 10,722 12,620 17,181 19,460 22,135 26,355 GNPA Ratio NNPA Ratio Slippage Ratio Credit Cost PCR (Excl Tech. write off) E: MOSL Estimates 27 April

10 Financials and valuations (KMB+EIVBL - Proforma-merged) Ratios Y/E March E 2019E 2020E Spreads Analysis (%) Avg. Yield-Earning Assets Avg. Yield on loans Avg. Yield on Investments Avg. Cost-Int. Bear. Liab Avg. Cost of Deposits Interest Spread Net Interest Margin Profitability Ratios (%) RoE RoA Consolidated ROE Other Ratios (%) Int. Expense/Int.Income Non Int. Inc./Net Income Cost/Income Empl. Cost/Op. Exps Loans/Deposit Ratio CASA Ratio Investment/Deposit Ratio Valuation Standalone Book Value (INR) Change (%) Consolidated BV (INR) Change (%) Price-BV (x) Consolidated EPS (INR) Change (%) Price-Earnings (x) Dividend Per Share (INR) Dividend Yield (%) E: MOSL Estimates 27 April

11 Corporate profile Company description Kotak Mahindra Bank (KMB) is part of the larger Kotak Mahindra Group led by Mr. Uday Kotak, Founder and Managing Director of the Bank. The group has a strong presence across financial services value chain. Notably, KMB is the only bank in India s corporate history to be converted into a bank from a nonbanking finance company. The bank has pan-india presence with 1,333 branches and 2,032 ATMs as on March 31, In 2015, KMB merged with EIVBL in an all-stock deal. Exhibit 1: Sensex rebased Source: MOSL/Bloomberg Exhibit 2: Shareholding pattern (%) Mar-17 Dec-16 Mar-16 Promoter DII FII Others Note: FII Includes depository receipts Source: Capitaline Exhibit 3: Top holders Holder Name % Holding CANADA PENSION PLAN INVESTMENT BOARD - MANAGED BY IM2 6.3 EUROPACIFIC GROWTH FUND 5.0 ING Mauritius Investments I 3.9 FIRST STATE INVESTMENTS ICVC- STEWART INVESTORS ASIA PACIFIC LEADERS FUND 2.1 Sumitomo Mitsui Banking Corporation 1.8 Source: Capitaline Exhibit 4: Top management Name Designation Exhibit 5: Directors Name Name Shankar Acharya Dipak Gupta Uday Kotak Bina Chandarana Chairman Joint Managing Director Executive Vice Chairman & MD Company Secretary Amit Desai Prakash Apte Farida Khambata S Mahendra Dev N P Sarda C Jayaram Mark Edwin Newman Uday Chander Khanna *Independent Source: Capitaline Exhibit 6: Auditors Name S R Batliboi & Co LLP Type Statutory Source: Capitaline Exhibit 7: MOSL forecast v/s consensus EPS (INR) MOSL Consensus forecast forecast Variation (%) FY FY FY Source: Bloomberg 27 April

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This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited: Varun Kumar Varun.kumar@motilaloswal.com Contact : (+65) Office Address:21 (Suite 31),16 Collyer Quay,Singapore Motilal Oswal Securities Ltd Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai Phone: reports@motilaloswal.com 27 April