Kotak Mahindra Bank. Healthy performance but limited upside. Source: Company Data; PL Research

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1 Healthy performance but limited upside April 30, 2018 R Sreesankar rsreesankar@plindia.com / Pritesh Bumb priteshbumb@plindia.com / Shweta Daptardar shwetadaptardar@plindia.com / Vidhi Shah vidhishah@plindia.com / Rating Accumulate Price Rs1,210 Target Price Rs1,239 Implied Upside 2.4% Sensex 35,160 Nifty 10,739 (Prices as on April 30, 2018) Trading data Market Cap. (Rs bn) 2,306.5 Shares o/s (m) 1, M Avg. Daily value (Rs m) Major shareholders Promoters 30.04% Foreign 51.48% Domestic Inst. 8.98% Public & Other 9.50% 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) 1,400 1,200 1, May 17 Jul 17 Source: Bloomberg Sep 17 Nov 17 Jan 18 Mar 18 KMB s s lone earnings were slightly lower than expectations at Rs11.2bn (PLe: Rs12.0bn) on back of higher provisions (non NPA related) and hit on opex from change in gratuity assumptions. Loan growth momentum of 25% YoY was a positive surprise, while accretion in CASA also has been phenomenal. Subsidiaries especially the financial savings business continues to see good growth & profitability, while the capital market businesses were slightly slower this quarter. Management expects loan growth of 20% with steady growth in corporate, CV/CEs and retail segments and continue its traction on CASA mainly driven from its digital drive. We retain Accumulate with revised TP of Rs1,239 (up from Rs1,165) based on Mar 20 SOTP with lending biz valued at 3.5x ABV. Strong topline but higher provisions slow PAT growth: Overall PPOP grew by 18.6% YoY on relatively higher opex from one time hit of Rs820mn on change in gratuity assumptions, while NII came in strong supported by robust loan book growth and improved CASA mix, helping NIMs improve by 15bps QoQ to 4.35%. Earnings were hit by non credit provisions mainly from investment depreciation, but loan losses were lower on back of improvement in asset quality. Loan growth was led by all segments except SME/Biz banking which is expected to see pick up in ensuing quarters. Synergies from multiple areas playing out on business: Bank s digital strategy continues to help acquire N T B customer and diversify amongst customer profile, steadying CASA base and lower cost of acquiring customer (C/I at 45%). But at the same time bank continues to invest in physical infrastructure helping it acquire mass/mass affluent customer which has helped in strong CASA growth of 42% YoY (SA led). Merger synergies also continue to benefit on productivity, increase asset penetration by cross selling products especially from Subsidiaries. Financial services growth better, cyclical businesses slower: Life & AMC showed strong growth, with Life biz having VNB margin of 29% with ULIP share of 36% and better persistency levels. Sourcing mix also remains optimum at 53:47 within Banca and non Banca. AMC saw a AUM growth of 70% growth especially in equity improving market share & profitability. Prime (car lending), and capital market earnings were slower. Key financials ( Y/e March) E 2020E Net interest income 96, , , ,790 Growth (%) Operating profit 78,911 98, , ,557 PAT 46,621 57,732 69,103 83,429 EPS (Rs) Growth (%) Net DPS (Rs) Profitability & Valuation E 2020E NIM (%) RoAE (%) RoAA (%) P / BV (x) P / ABV (x) PE (x) Net dividend yield (%) Source: Company Data; PL Research Q4FY18 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 NII growth was decent on better loan growth of ~25% YoY Fee income was strong at 33% YoY Opex cost included one time gratuity of Rs820mn and continued investment in physical & digital Exhibit 1: Q4FY18 Financials Profitability impacted on one time gratuity and higher tax Standalone (Rs mn) Q4FY18 Q4FY17 YoY gr. (%) Q3FY18 QoQ gr. (%) Interest Income 53,234 44, , Interest Expense 27,436 22, , Net interest income (NII) 25,798 21, , Other income 11,516 10, , Total income 37,314 31, , Operating expenses 17,134 14, , Staff expenses 7,664 6, , Other expenses 9,470 7, , Operating profit 20,180 17, , Total provisions 3,069 2, , Profit before tax 17,110 14, , Tax 5,870 4, , Profit after tax 11,241 9, , Business growth was strong on both assets and liabilities (SA) Balance sheet (Rs mn) Deposits 19,26,433 15,74, ,08, Advances 16,97,179 13,60, ,90, Margin remain healthy at 4.35% levels Ratios (%) Profitability ratios RoaA (16) 1.8 (4) RoaE Calc (223) NIM (25) Asset quality improved sequentially while coverage ratio improved with credit cost lower than guidance levels Asset Quality ratios Gross NPL 38,254 35, , Net NPL 16,651 17,181 (3.1) 17,280 (3.6) Gross NPL ratio (37) 2.3 (9) Net NPL ratio (28) 1.1 (11) Coverage ratio Calc Restructured Assets Rest. assets/ Total adv. CASA continued its strong traction led by Savings Business & Other Ratios Low cost deposit mix Cost income ratio (29) 47.0 (107) Non int. inc / total income (83) Credit deposit ratio CAR Tier I (80) April 30,

3 Loan growth was strong at ~25% YoY led by strong growth in CV/CE and unsecured loans Corporate Banking continued to be grow steady Biz banking continue to slow as bank remains cautious due to underlying issues in SME segment Exhibit 2: Consolidated Loan Book Strong growth in CV & unsecured segment continues Loan Book (Rs mn) Q4FY18 Q4FY17 YoY gr. (%) Q3FY18 QoQ gr. (%) CV/CE 1,52,020 1,08, ,32, Auto Loans 2,01,150 1,84, ,00, Personal Loans 2,51,890 1,73, ,29, Home loans & LAP 3,24,290 2,61, ,09, Corporate 6,04,200 4,82, ,81, Biz Banking 1,82,690 1,78, ,80, Agriculture 2,29,160 1,89, ,05, Others 1,14,570 92, ,17,450 (2.5) Total Advances 20,59,970 16,71, ,56, Loan Book mix (%) Q4FY18 Q4FY17 YoY (bps) Q3FY18 QoQ (bps) CV/CE Auto Loans (1.2) 10.2 (0.5) Personal Loans Home loans & LAP (0.1) Corporate (0.4) Biz Banking (1.8) 9.2 (0.3) Agriculture (0.2) Others (0.4) Exhibit 3: Subsidiary performance Kotak Securities earnings soft while AMC, Capital Markets & Life biz showed strong performance Consol Financials (Rs mn) Q4FY18 Q4FY17 YoY gr. (%) Q3FY18 QoQ gr. (%) Standalone Bank 11,241 9, , Kotak Prime 1,600 1, , KMCC (30.6) Kotak Securities 1,340 1, ,540 (13.0) International subsidiaries Kotak AMC Kotak Mahindra Investments Lending business 12,841 11, , Flow business, Subsidiaries 3,310 2, , Consol PAT (ex insurance) 16,750 13, , Insurance 1,140 1, Consolidated PAT 17,890 14, , April 30,

4 Key Q4FY18 Concall highlights: Balance sheet Growth/Outlook: Loan book Loan book grew by ~25% YoY led by strong growth in CV/CE and unsecured business while corporate banking continued to grow steady. Business banking growth continued to be slower as bank remains cautious with the underlying issues in SME segment. Outlook: Bank aims book to grow at +20% in FY19 with support from corporate (+25% growth target) and retail assets on cross sell in assets. Liabilities CASA growth continued to be stronger with 41% YoY growth. Avg. CA and SA growth stood at 25% and 58% YoY respectively. Retail deposits constitutes 77% of total deposits. Customer Addition 811 continues to help bank acquire customers which now reach to 13mn (12mn in ) and on track to achieve target of achieving 16mn customers by Sept, It has been able to diversify the customer segment from mass affluent to mass. Cost of acquisition for 811 customers is 80% lower. Fees/Opex/Branches: Fees Fee income grew strong at 33% YoY led by cards both debit and credit as 811 helps in cross selling. Opex Employee cost included one time gratuity expense of Rs820mn due to change in government regulations. Other opex included Rs1.5bn 811 related expenses and shall continue to occur. Bank will add 100 branches a year to improve presence in acquisition of customers and digital purposes with rationalisation of branches put far behind. Asset Quality: Slippages for the quarter were Rs5.9bn and for the year stood at Rs18bn. Bank s SMA 2 portfolio reduced to Rs720mn (0.04% of loans) from Rs3.1bn (0.2% of loans) which remains miniscule in an overall basis. Credit cost Credit cost was at 43bps (46bps in FY18) as slippages were lower. Investment provisions have been completely provided for in this quarter and not taken any dispensations. Outlook: Bank expects credit cost to reduce incrementally. April 30,

5 Subsidiaries: Life Insurance Disclosed Embedded Value (IEV) is at Rs58.2bn and VNB Margins (post over run) is at 29.3% with VNB at Rs5.2bn. Product mix on Individual APE basis is at 35/29/36 for PAR/Non PAR/ULIP. Protection is at 7% of total New Business APE. Protection includes more of credit life and is focusing to improve individual term. New business sourcing is led by Banca and agency at 53 and 47% of the mix. 13 th month Persistency is at 85% and 61 st month persistency is at 61.7%. Solvency Ratio is at 305%. Wealth Management Relationship value for them is at Rs2.25 trillion and is market leaders in this space. It caters to 40% of top influential families of India. Exhibit 4: Margins improve sequentially on some benefit in cost of funds 4.7% 4.7% 4.8% 4.6% 4.9% 4.8% 5.0% 4.9% 5.0% 4.7% 4.9% 4.2% NIM (%) 4.3% 4.3% 4.4% 4.4% 4.5% 4.5% 4.6% 4.3% 4.5% 4.4% 4.2% 2Q13 3Q13 4Q13 1Q14 Exhibit 5: CASA growth continued to be strong at 41% mainly led by SA deposits CASA (%) 29% 27% 29% 26% 29% 32% 31% 30% 36% 36% 32% 34% 31% 38% 39% 35% 37% 42% 44% 48% 44% 51% 47% 2Q13 3Q13 4Q13 1Q14 April 30,

6 Exhibit 6: Asset quality improved sequentially Exhibit 7: which resulted in lower credit cost of 46bps FY18 3.0% 2.5% Gross NPA (%) Net NPA (%) 1.2% 1.0% 0.8% Credit Cost 2.0% 0.6% 1.5% 1.0% 0.5% 0.0% 0.4% 0.2% 0.0% 0.2% 0.4% 1Q14 1Q14 Exhibit 8: Insurance, capital markets & AMC report strong earnings Kotak Prime Kotak Sec KMCC Kotak Life AMC Intl. subs KIAL KIL 6,200 5,400 4,600 3,800 3,000 2,200 1, (200) (Rs m) Exhibit 9: Consolidated ROEs Bank to see gradual improvement in return ratios ROA Decomposition E 2019E 2020E Net Interest Income 4.38% 4.50% 4.54% 4.84% 4.34% 4.33% 4.32% 4.51% Fees 2.02% 2.01% 2.50% 2.29% 2.15% 2.29% 2.08% 2.14% Investment profits 0.19% 0.20% 0.31% 0.17% 0.26% 0.23% 0.20% 0.18% Net revenues/assets 6.60% 6.70% 7.35% 7.30% 6.75% 6.86% 6.60% 6.82% Operating Expense 3.33% 3.25% 3.68% 3.95% 3.19% 3.09% 2.94% 2.99% Provisions 0.22% 0.30% 0.16% 0.57% 0.40% 0.38% 0.34% 0.32% Taxes 1.01% 1.06% 1.20% 0.92% 1.05% 1.18% 1.14% 1.21% Total Costs 4.56% 4.61% 5.03% 5.44% 4.64% 4.65% 4.42% 4.51% ROA 2.04% 2.09% 2.32% 1.86% 2.10% 2.21% 2.18% 2.31% Equity/Assets 14.49% 15.35% 16.50% 15.72% 15.68% 16.43% 16.49% 15.45% ROE 14.1% 13.6% 14.0% 11.8% 13.4% 13.4% 13.2% 14.9% April 30,

7 Exhibit 10: Change in estimates We adjust earnings to factor in better business growth in the bank and slight increase in opex (Rs mn) Old Revised % Change FY19E FY20E FY19E FY20E FY19E FY20E Net interest income 1,35,902 1,61,039 1,36,901 1,62, Operating profit 1,14,593 1,35,601 1,15,987 1,38, Net profit 69,063 82,812 68,864 83,179 (0.3) 0.4 EPS (Rs) (0.3) 0.4 ABVPS (Rs) (0.1) (0.7) Price target (Rs) 1,165 1, Recommendation ACCUMULATE ACCUMULATE Exhibit 11: We revise our TP to Rs1,239 from Rs1,165 as we rollover to Mar 20 Value (Rs m) Per Share (Rs) Valuation Basis Kotak Securities 1,26, x Mar 20 Earnings Asset Management 91, % of AUMs KMCC 21, x Mar 20 Earnings International subsidiaries 19, x Mar 20 book Others 56, x Mar 20 Earnings Insurance 1,13, x EV & 21x new biz multiple Total Subsidiary Valuation 4,28, Ex insurance 3,15, Total Subsidiary valuation 4,28, Lending biz valuation 19,33,377 1, x Mar 20 book Mar 20 based PT 1,239 Exhibit 12: KMB one year forward P/ABV trend 6.5 P/ABV 3 yr avg. avg. + 1 SD avg. 1 SD Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 April 30,

8 Income Statement (Rs m) Int. Earned from Adv. 170, , , ,167 Int. Earned from Invt. 36,810 39,330 48,539 53,687 Others 6,158 10,875 7,434 8,065 Total Interest Income 213, , , ,918 Interest expense 117, , , ,129 NII 96, , , ,790 Growth (%) Treasury Income 5,730 6,106 6,325 6,558 NTNII 47,640 60,004 66,094 77,155 Non Interest Income 53,369 66,110 72,420 83,712 Total Income 266, , , ,631 Growth (%) Operating Expense 70,588 80,858 93, ,945 Operating Profit 78,911 98, , ,557 Growth (%) NPA Provisions 7,600 9,944 10,667 11,384 Investment Provisions 1,392 Total Provisions 8,964 9,944 10,667 11,384 PBT 69,947 88, , ,173 Tax Provisions 23,325 30,831 36,217 43,744 Effective Tax Rate (%) PAT 46,405 57,504 68,864 83,179 Growth (%) Balance Sheet (Rs m) Par Value No. of equity shares 1,841 1,906 1,906 1,906 Equity 9,204 9,528 9,528 9,528 Networth 375, , , ,692 Adj. Networth 357, , , ,978 Deposits 1,574,259 1,926,433 2,292,455 2,705,097 Growth (%) Low Cost deposits 692, ,750 1,168,107 1,389,187 % of total deposits Total Liabilities 2,543,927 3,101,629 3,634,150 4,050,701 Net Advances 1,703,062 2,086,673 2,499,546 2,846,718 Growth (%) Investments 495, , , ,534 Total Assets 2,543,927 3,101,629 3,634,150 4,050,701. Quarterly Financials (Rs m) Y/e March Q1FY18 Q2FY18 Q3FY18 Q4FY18 Interest Income 46,558 47,601 50,092 53,234 Interest Expense 24,102 24,475 26,155 27,436 Net Interest Income 22,456 23,127 23,937 25,798 Non Interest Income 9,069 9,539 10,398 11,516 CEB 8,050 8,100 8,290 10,100 Treasury Net Total Income 31,524 32,665 34,335 37,314 Operating Expenses 15,571 15,417 16,135 17,134 Employee Expenses 7,062 7,230 7,342 7,664 Other Expenses 8,509 8,188 8,793 9,470 Operating Profit 15,954 17,248 18,201 20,180 Core Operating Profit 15,954 17,248 18,201 20,180 Provisions 2,037 2,165 2,128 3,069 Loan loss provisions 1,928 2,055 1,698 1,749 Investment Depreciation ,320 Profit before tax 13,916 15,083 16,073 17,110 Tax 4,789 5,140 5,541 5,870 PAT before EO 9,127 9,943 10,532 11,241 Extraordinary item PAT 9,127 9,943 10,532 11,241 Key Ratios CMP (Rs) 1,210 1,210 1,210 1,210 Equity Shrs. Os. (m) 1,841 1,906 1,906 1,906 Market Cap (Rs m) 2,228,131 2,306,491 2,306,491 2,306,491 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) 1,073 2,867 3,423 3,966 Profit per Branch (Rs m) Asset Quality Gross NPAs (Rs m) 37,954 40,639 42,417 45,241 Net NPAs (Rs m) 18,095 17,627 18,814 20,714 Gr. NPAs to Gross Adv. (%) Net NPAs to Net Adv. (%) NPA Coverage (%) April 30,

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