Kotak Mahindra Bank. CMP: INR761 TP: INR866 (+14%) Buy. In-line, healthy lending business performance; stable asset quality

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1 BSE SENSEX S&P CNX 27,711 8,510 Motilal Oswal values your support in the Asiamoney Brokers Poll 2016 for India Research, Sales and Trading team. We request your ballot. Bloomberg KMB IN Equity Shares (m) M.Cap. (INR b) / (USD b) 1,298.1/ Week Range (INR) 790 / 587 1, 6, 12 Rel. Per (%) -2/-2/7 12M Avg Val (INR M) 1035 Free float (%) 66.3 Financials & Valuation (INR b) Y/E Mar 2016E 2017E 2018E NII OP NP Cons. NP NIM (%) Cons. EPS EPSG r. (%) Cons. BV. (INR) Cons. RoE (%) RoA (%) Valuations P/E(X) (Cons.) P/BV (X) Div. Yield (%) * Proforma merged (KMB+EIVBL ) 21 July QFY17 Results Update Sector: Financials Kotak Mahindra Bank CMP: INR761 TP: INR866 (+14%) Buy In-line, healthy lending business performance; stable asset quality KMB s standalone results: PAT grew 3x YoY to INR7.4b (in line with estimates). Strong core operating performance (+26% YoY), healthy NII growth (20% YoY) on the back of margin improvement (4.4%), controlled opex growth (adjusted +12% YoY), and stable asset quality (NSL at 1.3%) were the key highlights. Moderate wealth management fee was the key drag on fee income (+12% YoY) in the quarter. Loans grew 17% YoY (+2% QoQ) led by robust growth in the corporate banking (+9% QoQ, 22% YoY) and CV (+7% QoQ, 42% YoY) segments. Management expects 20% growth for FY17. Other highlights: a) SMA2 at 39bp; b) SA growth of 34% YoY; c) continued traction in CV loans (+14% QoQ) and business/personal loans (+9% QoQ). Other businesses: a) Profitability at its capital market businesses improved to INR830m v/s INR680m a quarter ago, led by KMCC (INR230m v/s INR170m); b) K-Sec market share improved 10bp QoQ to 2.4%; c) overall average AUM increased 8% QoQ (+18% YoY) average domestic AUM increased 7% QoQ and 31% YoY, of which equity AUM increased 7% QoQ (34% YoY). Valuation and view: Merger with eivbl places KMB in a sweet spot, with strong presence across geographies and products, and continued healthy capitalization (T1 of ~16%). The merged entity is India s fourth largest private sector bank, with a loan book of INR1.2t and loan market share of 1.7%+. 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 and OSRL (13bp). We cut standalone/consolidated earnings by 3-4% over FY17/18, led by lower revenue growth, and roll forward the target price. At our SOTP of INR866 (v/s INR863 previously), KMB will trade at 3.6x consolidated BV with cons. ROE of ~15%. Buy. Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); Krishnan ASV (A.Krishnan@MotilalOswal.com); / Dhaval Gada (Dhaval.Gada@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 deviation (INR m) Kotak Bank (standalone) 1QFY17A 1QFY17E v/s Est. Comments Net Interest Income 19,191 18,882 2 NIMs better than expected; loan growth lower than % Change (Q-o-Q) expected Operating Profit 13,150 12,970 1 % Change (Q-o-Q) Net Profit 7,420 7,349 1 % Change (Q-o-Q) Other Businesses Largely in-line Largely in-line Kotak Prime 1,200 1,300-8 Profitability below estimate Kotak Mah. Investments In-line Kotak Mah. Capital Co Helped by several equity issuances and corporate actions Kotak Securities Lower trading volumes QoQ partly offset by share increase International subs Kotak Mah. AMC & Trustee Co Kotak Investment Advisors Kotak OM Life Insurance Con. adj. and MI Consol. PAT 10,750 11,034-3 In-line performance in lending business and mixed % Change (Q-o-Q) performance at capital market businesses led to the miss K-Sec market improved 10bp QoQ at 2.4% (-30bp YoY) Lending businesses in line; mixed performance at capital market businesses Asset management business reported PAT of INR430m vs. INR520m in 4QFY16. Domestic AMC business PAT decreased to INR190m v/s INR250m a quarter ago. Overall AUM increased 7% QoQ (+31% YoY); equity AUM also increased 7% QoQ (+34% YoY). Capital market related business PAT was at INR8.3b v/s INR6.8b in 4QFY16 (INR7b in 1QFY16) driven by improvement in profitability in investment banking division. In the securities business, K-sec market share improved 10bp QoQ to 2.4% (v/s 2.7% in 1QFY16). Life insurance profit increased 8% YoY to INR710m (-8% QoQ). 21 July

3 Exhibit 2: KMPL: Overall loans grew by 13% YoY (-8% QoQ), similar to 4QFY16 Auto Loans (INR b) Other Loans (INR b) Exhibit 3: Debt funds now account for 41% of overall AUMs, similar to 1QFY16 (v/s 39% in 4QFY16) Debt Equity PMS Offshore Funds Alternate assets Insurance QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 9MFY16 FY16 1QFY17 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 9MFY16 FY16 1QFY17 Exhibit 4: K-Sec: QoQ profitability ticked higher (INR b) Tot. Inc. PAT PATM (%) Exhibit 5: K-Sec market share increased 10bp QoQ (%) QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Exhibit 6: Investment Banking: Earnings trend (INR m) Tot. Inc. PAT Exhibit 7: Kotak AMC: Equity AUMs trending higher (INR b) Eq. AUM PMS AUM Offshore AUM QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 9MFY16 FY16 1QFY17 21 July

4 1QFY17 Conference call highlights Macro Related Seeing demand pick-up in construction and road sector; expect faster growth rate in wholesale and corporate banking business Expect improvement in liquidity position Expect LCV growth to be better than last year; MHCV growth is likely to moderate Guidance Credit growth 20%, (b) Credit costs below 50bp and steady state credit costs would be 30-35bp, (c) NIM 4%+ Integration Related Technology and retail integration have been completed; 90%+ integration done Relocating branches which are currently at similar locations (largely in metro market) and expect 1,400 branch network by next calendar year Working on rationalizing / selling surplus residential apartments Currently, overall integration costs are less than INR2b BS Related Commercial vehicles, construction equipment, credit cards, personal loans are some of the key areas of growth P& Related Half of non-fee income (INR1.7b) is trading gains during the quarter MF fees are flat on YoY basis moved to amortizing trail fee income model Insurance fee income is 4x in 4Q v/s 1Q Asset Quality Related GNPA position for the bank is close to peak position One account amounting to INR1.5b was in SMA2 as of June 30 and has now been fully recovered One restructured account has fully paid back Buy with SoTP of INR866 (3.6x FY18E Consolidated BV) 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 ~INR1.2t and market share of ~1.7%+ of loans. Further, KMB s conglomerate structure places it in a very sweet position to ride the up-cycle across financial services. Improvement in macro-economic environment coupled with healthy capitalization leaves KMB in a strong position to lever on growth opportunities in the economy. 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. CV loans have bottomed out and likely to 21 July

5 show traction in ensuing quarters. We have cut estimates by 3-4% for standalone bank for FY17/18 led by lower than expected revenue growth. Operating leverage is expected to kick in the expanded underutilized capacity. We are already seeing benefit of eivbl network on SA growth (30%+ YoY). 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 ~21% over FY16-19E. We expect PPoP (adjusted) CAGR of ~25% over FY16-19E, largely driven by stable margins and operating leverage. Large part of current year credit cost was driven by eivbl portfolio, adjusted for provisions surprised us positively. With just 39bp of SMA2 accounts, No 5:25 and SDR on balance sheet comfort on asset quality remains the highest. Management has guided of credit cost of 45-50bp v/s 82bp in FY16. We expect adjusted PBT CAGR of ~38% over FY16-19E. Post-merger with eivbl, share of lending business in steady state profitability is likely to increase to ~83% - 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. We expect consolidated ROEs to improve to ~15% by FY18 on back strong improvement in banking business ROAs to ~1.8%. 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 INR866, KMB will trade at 3.6x FY18 Consolidated BV (pro-forma merged basis). Buy. Exhibit 8: Kotak Mahindra: SOTP Valuation (FY18-based) Value (INR B) Value (USD B) INR per share % To Total Rationale Lending Business 1, Kotak Mahindra Bank 1, x FY18E Core NW, ~1.5% RoA and ~14% Core RoE Kotak Prime (Car and other loans) x FY18E Net Worth, ~15% Core RoE Kotak Investment Company (LAS) x FY18E Net Worth Asset Management Business Domestic Mutual Fund % of FY18E Avg. AUM of INR820b Alternative Assets % of FY18E AUM of INR136b Offshore Funds % of FY18E AUM of INR284b Capital Markets related Business Kotak Securities x FY18E Earnings; Implied ~9x Core BV Kotak Investment Banking (KMCC) x FY18E Free Networth Kotak Life Insurance Target Value 1, Implied 3.6x PBV; ROE of ~15% Current market cap. 1, Upside (%) July

6 Exhibit 9: We cut standalone earnings for FY17/18E by 3-4% led by lower income growth INR b Old Est. Revised Est. Change (%) FY17 FY18 FY19 FY17 FY18 FY19 FY16 FY17 FY18 Net Interest Income Other Income Total Income Operating Expenses Operating Profits Provisions PBT Tax Standalone PAT Consolidated PAT Margins (%) SA RoA (%) Core RoE (%) Exhibit 10: Lending business driving estimates lower 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 July

7 Exhibit 11: KMB Group: Earnings Estimates KMB - Consolidated (INR M) FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017E FY2018E FY2019E Lending Business 14,786 19,415 24,380 26,930 30,914 27,462 40,472 52,076 64,469 Kotak Mahindra Bank 11,367 15,414 19,737 21,603 24,776 20,898 33,097 43,545 54,445 Kotak Mahindra Prime (car finance) 3,179 3,849 4,307 4,907 5,077 5,025 5,424 6,172 7,075 Kotak Mah Investments (lending) ,060 1,540 1,951 2,359 2,948 Capital Market 2,338 1,318 1,312 1,743 3,030 2,835 3,668 4,293 5,126 Kotak Securities 1,819 1,258 1,145 1,603 2,900 2,515 2,806 3,432 4,196 Kotak Investment Banking (KMCC) Asset Management Business 1, ,820 2,181 2,731 3,329 Kotak AMC and trustee co ,207 1,449 International Subsidiaries (AMC and IB) , ,024 1,331 KMIA (alternative assets management) Sub Total 18,133 21,137 26,093 29,333 34,423 32,117 46,320 59,100 72,924 Growth YoY Om Kotak Life Ins (from FY06 Onwards) 1,014 2,030 1,900 2,390 2,290 2,510 2,887 3,319 3,817 Consolidated PAT (Incl Insurance) 19,147 23,167 27,993 31,723 36,713 34,627 49,206 62,420 76,742 Growth YoY Consolidation Adjustments Reported PAT Per MI and AFF 18,878 23,068 28,172 31,693 36,767 34,311 49,181 62,395 76,717 Add: MI and Affiliates Cons Profit Post MI and Affiliates 18,853 22,885 28,014 31,228 36,571 34,589 49,081 62,295 76,617 Growth YoY *Including ING Vysya Bank Exhibit 12: Kotak Group Earnings Snapshot (% of total) % to total profit FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017E FY2018E FY2019E Lending Business Kotak Mahindra Bank Kotak Mahindra Prime (car finance) Kotak Mah Investments (lending) Capital Market Kotak Securities Kotak Investment banking (KMCC) Asset Management Business Kotak AMC and trustee co International Subsidiaries (AMC and IB) KMIA (alternative assets management) Sub Total Om Kotak Life Ins Consolidated PAT (Incl Insurance) Less: Cons. Adj, MI and Affiliates etc Consolidated PAT (Post Adjustments) *Including ING Vysya Bank 21 July

8 Exhibit 13: Financials: Valuation metrics Rating 66 CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%) (INR) (USDb) FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 ICICIBC* Buy HDFCB Buy 1, AXSB Buy KMB* Buy YES Buy 1, IIB Buy 1, IDFC Bk Buy FB Neutral DCBB Buy JKBK Neutral SIB Buy Private Aggregate SBIN (cons)* Buy PNB Neutral BOI Neutral BOB Buy CBK Neutral UNBK Buy OBC Neutral INBK UR ANDB Buy Public Aggregate Banks Aggregate HDFC* Buy 1, LICHF Buy IHFL Buy GRHF Buy REPCO Buy DEWH Buy Housing Finance RECL Neutral POWF Neutral Infra Finance SHTF Buy 1, MMFS Buy BAF Buy 8, ,631 1, MUTH Buy SKSM Buy Asset Finance NBFC Aggregate Financials *Multiples adj. for value of key ventures/investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries 21 July

9 Financials and valuations (KMB+EIVBL - Proforma-merged) Income Statement (INR Million) Y/E March E 2018E 2019E Interest Income 68, , , , , , , , ,559 Interest Expense 37,798 63,162 81,598 84,991 93,876 94, , , ,690 Net Interest Income 31,040 37,208 47,443 54,731 61,800 69,004 80,834 97, ,869 Change (%) Non Interest Income 14,355 16,471 18,875 22,668 29,119 26,122 32,658 41,416 51,787 Net Income 45,395 53,679 66,318 77,399 90,919 95, , , ,656 Change (%) Operating Expenses 25,793 29,450 34,825 40,353 48,711 54,715 55,788 64,187 75,741 Pre Provision Profits 19,602 24,229 31,493 37,046 42,208 40,411 57,704 74,430 92,915 Change (%) Provisions (excl tax) 2,887 1,688 2,758 4,545 4,723 9,174 7,175 7,949 9,793 PBT 16,715 22,541 28,735 32,501 37,486 31,237 50,529 66,481 83,122 Tax 5,347 7,127 8,998 10,898 12,710 10,339 17,433 22,936 28,677 Tax Rate (%) PAT 11,367 15,414 19,737 21,603 24,776 20,898 33,097 43,545 54,445 Change (%) Consolidated PAT (incl VYSB) 18,853 22,885 28,014 31,228 36,571 34,589 49,081 62,295 76,617 Change (%) Balance Sheet (INR Million) Y/E March E 2018E 2019E Net Worth 98, , , , , , , , ,075 Deposits 594, , ,628 1,002,891 1,240,148 1,386,430 1,594,395 1,881,386 2,295,291 Change (%) of which CASA Dep 192, , , , , , , , ,389 Change (%) Borrowings 158, , , , , , , , ,406 Other Liabilities & Prov. 47,124 43,125 47,809 54,053 67,119 86, , , ,972 Total Liabilities 898,646 1,126,673 1,385,301 1,479,986 1,733,198 1,922,598 2,200,064 2,595,039 3,126,744 Current Assets 49,924 58,651 65, ,060 97, , , , ,312 Investments 281, , , , , , , , ,261 Change (%) Loans 529, , , ,565 1,069,718 1,186,653 1,400,251 1,708,306 2,118,299 Change (%) Fixed Assets 9,284 9,508 9,640 16,315 16,204 15,516 15,764 16,012 16,261 Other Assets 28,326 37,532 36,508 34,994 36,507 99, , , ,612 Total Assets 898,646 1,126,673 1,385,301 1,479,986 1,733,198 1,922,598 2,200,064 2,595,039 3,126,744 Asset Quality (%) GNPA (INR m) 11,567 11,771 13,283 17,037 22,884 28,381 31,862 33,120 36,955 NNPA (INR m) 3,029 2,899 3,205 6,756 10,722 12,620 14,338 14,904 16,630 GNPA Ratio NNPA Ratio PCR (Excl Tech. write off) E: MOSL Estimates 21 July

10 Financials and valuations (KMB+EIVBL - Proforma-merged) Ratios Y/E March E 2018E 2019E 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 21 July

11 Corporate profile: Kotak Mahindra Bank 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 non-banking 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 10: Sensex rebased Exhibit 14: Shareholding pattern (%) Mar-16 Dec-15 Mar-15 Promoter DII FII Others Note: FII Includes depository receipts Exhibit 16: Top management Name Designation Uday Kotak Executive Vice Chairman & MD C Jayaram Joint Managing Director Dipak Gupta Joint Managing Director Jaimin Bhatt CFO Shanti Ekambaram CPresident Corporate and IB Exhibit 15: Top holders Holder Name % Holding ING MAURITIUS INVESTMENT I 6.4 EUROPACIFIC GROWTH FUND 5.0 CANADA PENSION PLAN INVESTMENT BOARD 4.9 ANURADHA MAHINDRA 2.7 SUMITOMO MITSUI BANKING CORPORATION 1.8 Exhibit 17: Directors Name Shankar Acharya* C Jayaram Dipak Gupta Asim Ghosh* Amit Desai* Name Prakash Apte* N P Sarda Uday Kotak S Mahendra Dev* Farida Khambata *Independent Exhibit 18: Auditors Name S B Billimoria & Co Type Statutory Exhibit 19: MOSL forecast v/s consensus EPS (INR) MOSL forecast Consensus forecast Variation (%) FY FY July

12 PRODUCT GALLERY Our recent reports on Kotak Mahindra Bank Our recent reports on Financial sector Our recent reports on other Financial companies

13 N O T E S 21 July

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