HOLD KOTAK MAHINDRA BANK LTD. Highlights. STANDALONE Result Update: Q3 FY14. CMP Target Price JAN. 29 th, 2014

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1 HOLD CMP Target Price KOTAK MAHINDRA BANK LTD. STANDALONE Result Update: Q3 FY14 JAN. 29 th, 2014 ISIN: INE237A01028 Stock Data Sector Banking BSE Code Face Value / Div. Per Share wk. High / Low (Rs.) / Volume (2wk. Avg ) Market Cap ( Rs in mn ) Annual Estimated Results (A*: Actual / E*: Estimated) YEARS FY13A FY14E FY15E Int. Earned T. Income Net Profit EPS P/E Shareholding Pattern (%) Highlights Kotak Mahindra Bank impacted by economic slowdown posted lackluster third quarter results with 6% fall in its Net Profit YOY. Net interest margin, main profitability criteria, stood at 4.8% against 4.5% in same quarter previous year. Net profit for the current quarter stood at Rs mn against Rs mn in Q3 FY13. Net Interest Income (NII) was up 11% YoY at Rs mn from Rs mn in Q3FY13. Advances as on December 31 st, 2013 were up 6% YoY to Rs. 53, 1490 mn compared to Rs. 50,2450 mn as on December 31 st, Savings deposits as on December 31 st, 2013 grew by 38% to Rs. 9,1060 mn from Rs. 6,6160 mn as on December 31 st, CASA ratio was 30%. Asset quality was under stress as percentage of gross non-performing assets to gross advances increased by 55 basis points from 1.46% to 2.01% in Q3FY14. Net non-performing assets to net advances rose from 0.64% to 1.10% in current December quarter. 1 Year Comparative Graph Provisions and contingencies were up by 65% at Rs YOY from Rs mn in Q3 FY13. Price to Book value multiple stands at Net Profit of the company is expected to grow at a CAGR of 14% over 2012 to 2015E. As on December 31, 2013 the Bank had 533 fullfledged branches across 315 locations and 1,036 ATMs. KOTAK MAHINDRA BANK LTD BSE SENSEX CAR and Tier I excluding profit stand at 17.4% & 16.2% respectively as on 31 st Dec PEER GROUPS CMP MARKET CAP EPS P/E (X) P/BV(X) DIVIDEND Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%) Kotak Mahindra Bank Ltd ICICI Bank Ltd HDFC Bank Ltd SBI

2 Analysis & Recommendation - BUY Kotak Mahindra Bank, large cap private sector bank reported subdued third quarter results with net profit falling by 6% at Rs mn against Rs mn in the corresponding quarter of the previous year. Net Interest Income, difference between interests earned and expended rose by 11% from Rs mn to Rs mn in current December quarter. Net Interest Margin (NIM) stood at 4.80%, 30 basis points up compared to 4.50% in Q3 FY13. Asset quality of the bank also deteriorated as gross non-performing assets to gross advances rose from 1.46% to 2.01% in the current quarter. Net non-performing assets to net advances rose from 0.64% to 1.10% in Q3 FY14. On absolute basis, gross and net NPAs rose by 45% and 81% respectively. Though operational efficiency of the bank improved with 22% growth in CASA deposits at Rs mn against Rs mn in same quarter of the previous year, advances were up by just 6% at Rs mn against Rs mn in Q3 FY13. As permitted by RBI, Kotak Mahindra Bank has amortised Rs. 434 mn as depreciation from AFS/ HFT category which has also impacted its quarterly profit. In addition to that there has been rise in Provisions and contingencies by 65% YOY at Rs mn in the current December quarter. Though the bank is fundamentally strong, it is overvalued compared to its industry years with P/E multiple of and thus we recommend HOLD with the target price of Rs. 690 for medium and long term. Company Profile Kotak Mahindra Bank is the flagship company of the Kotak Mahindra group established in Kotak Mahindra Finance Ltd, a part of the Kotak Mahindra group received banking license in 2003 from RBI to form Kotak Mahindra Bank Limited. It was the first NBFC to receive a banking license. At present, Kotak group constitutes of Kotak Mahindra Bank and its 16 subsidiaries. The Group offers a wide range of financial services that encompass every sphere of life. From commercial banking, to stock broking, mutual funds, life insurance and investment banking, the Group caters to the diverse financial needs of individuals and the corporate sector. The Group has a wide distribution network through branches and franchisees across India, and international offices in London, New York, Dubai, Abu Dhabi, Mauritius and Singapore. Kotak Mahindra Bank Ltd is a one stop shop for all banking needs. The bank offers personal finance solutions of every kind from savings accounts to credit cards, distribution of mutual funds to life insurance products. Kotak Mahindra Bank offers transaction banking, operates lending verticals, manages IPOs and provides working capital loans. Kotak Mahindra Bank has one of the largest and most respected Wealth Management teams in India, providing the widest range of solutions to high net worth individuals, entrepreneurs, business families and employed professionals. As on December 31 st, 2013 the Bank had 533 full-fledged branches across 315 locations and 1,036 ATMs.

3 Quarterly Highlights (Standalone) Q3 FY14 (Rs. Million) Dec-13 Dec-12 % Change Total Interest Earned % Interest on advances % Income on investments (1.57%) Other Income (1.68%) Provisions & contingencies % Net Interest Income % Net Profit (6%) Advances % NIM 4.8% 4.5% 30 BP CASA %

4 Total interest earned by the bank stood at Rs mn against Rs mn in Q3 FY13. Two main constituents of total interest earned are interest on advances and income on investments. Income on investments grew by 6.52% whereas income on investments fell by 1.57% YOY. Other Income of the bank comprises treasury income, ARD buyout income and fees & services declined by 1.68% over December quarter of the previous year. Other Income of the Bank stands at Rs mn against Rs mn in Q3 FY13. Provisions and contingencies are net of recoveries made against accounts which have been written off as bad in the previous period/year. Provisions and contingencies rose by 65% YOY at Rs mn against Rs mn in Q3 FY13. Kotak Mahindra Bank reported 11% jump in its Net Interest Income in Q3 FY14 over corresponding quarter of the previous year. NII stood at Rs mn against Rs mn in Q3 FY13. Net Profit of the bank declined by 6% YOY to Rs mn in Q3 FY14. Net Interest Margin of the bank stood at 4.8% against 4.5% in the corresponding quarter of the previous year. CASA stood at Rs mn against Rs mn in Q3 FY14, a rise of 22% YOY. Asset Quality of the Bank Asset Quality(In mn) As on As on Change Amount of Gross NPAs % Amount of Net NPAs % % of Gross NPAs BP % of Net NPAs BP Gross NPAs of the Bank rose by 45% and stood at Rs mn against Rs mn in corresponding quarter of the previous year. Net NPAs rose by 81% from Rs mn to Rs mn in the current December quarter. GNPAs have grown in absolute terms by 7% and NNPAs by 20% QOQ. Percentage of Gross NPAs to gross advances increased from by 55 basis points whereas Net NPAs to Net advances rose by 46 basis points over the corresponding quarter of the previous year. Restructured loans considered standard as on December 31 st, 2013 stood at Rs. 420 mn or 0.08% of net advances.

5 Segment Revenue (Q3 FY14) (In Rs. Millions) Q3 FY14 Q3 FY13 CHNG % Treasury % Wholesale banking % Retail banking % Retail banking which constitutes 50% of the total revenues grew by 2.41% YOY at Rs mn against Rs mn in Q3 FY13. Wholesale or corporate banking was at Rs mn against Rs mn in the corresponding quarter of the previous year. Treasury segment fell by 12% in current December quarter from Rs mn to Rs mn in the current December quarter. Other Updates The Bank had opted to amortise MTM losses equally over the financial year and did not transfer any security to HTM. The Bank s SLR securities in HTM category at December 31 st, 2013 were 11.70% of net demand and time liabilities (NDTL). Out of net depreciation of Rs mn as on December 31 st, 2013, the Bank has amortised net depreciation on HFT/AFS portfolio aggregating to Rs cr (Rs mn for Q3FY14) till December 31 st, Kotak Mahindra Bank Consolidated results Consolidated PAT for Q3FY14 was at Rs mn against Rs mn in Q3FY13. PAT for 9M FY14 increased to Rs mn from Rs mn in 9MFY13 up by 18%. Consolidated advances up 6% to Rs mn as on December 31, 2013 from Rs mn as on December 31, Without considering CECV, the growth in advances was 10% YoY. Consolidated NIM for Q3FY14 stood at 4.9% (Q3FY13 4.6%). Consolidated capital adequacy ratio (CAR) including profits as per Basel III as on December 31, 2013 is 19.4%. Tier 1 ratio is 18.4%. Total assets managed / advised by the Group as on December 31 st, 2013 are Rs mn (December 31, 2012 Rs mn). As on December 31, 2013 the Bank had 533 full-fledged branches compared to 408 branches as on December31, 2012 across 315 locations and 1,036 ATMs.

6 9 Month Results In Rs. Mn As on Net Profit Operating Profit Net Interest Income PBT Other Income ROA 1.32% % Gross NPAs 2.01 Industry Overview RBI through its cautious approach has tried its best to insulate Indian banking industry and Indian financial system from various external financial shocks. With its conservative monetary policies, RBI has steered our financial system through the 2008 financial crises. After May 2013, rupee has stabilized at levels after falling 25% to the level of Rs. 68. In the last RBI policy, measures have been taken to improve liquidity and control inflation and stimulate growth at the same time by maintaining the same repo rate at 7.75%. The performance of the banking industry is dependent on the monetary policy and regulations of the RBI which is dependent on stability of rupee dollar exchange rate and status of inflation in the economy. Another challenge for the Indian banking industry is the implementation of Basel III norms. Indian banks especially PSU banks are already reeling under bad loans and loan restructuring demands of corporate. A number of private banks already qualify Basel III as their Tier I capital comprises of core equity. For the public sector banks, the government has infused Rs mn in the year Our banking industry has also to prepare itself for the tapering of US stimulus which started in December But the major issues rest with the government which needs to make strong structural changes such as reduction of CAD, fiscal deficit and subsidies. The government also needs to reduce regulatory hurdles; streamline procedures of government clearances for various infrastructure and power projects. Banking industry s exposure to these high capital intensive sectors has resulted in high proportion of bad loans and non performing assets. Indian banking industry has shown its resilience to external financial turmoil but it will perform well only if all major industries and sectors are financially healthy as banks form the network which connects the financial sector and the economy as a whole.

7 FINANCIAL STATEMENTS & ESTIMATIONS (STANDALONE) (A*- Actual, E* -Estimations & Rs. In Millions) Balance sheet as on March 31 st 2012 to FY15E Kotak Mahindra Bank Ltd FY12A FY13A FY14E FY15E CAPITAL AND LIABILITIES Capital Reserves and Surplus Employees' Stock Options Deposits Borrowings Other Liabilities and Provisions Total Liabilities ASSETS Cash and Balances with Reserve Bank of India Balances with Banks and Money at Call and Short notice Investments Advances Fixed Assets Other Assets Total Assets Annual Profit & Loss Statement for the period from 2012 to 2015E Value(Rs.in.mn) FY12A FY13A FY14E FY15E Description 12m 12m 12m 12m Interest Earned Other Income Total income Interest Expended Net Interest Income Operating Expenses Operating Profit Provisions and Contingencies Profit Before Tax Tax Profit After Tax Equity Capital Reserves Face Value (Rs.) EPS

8 Quarterly Profit & Loss Statement for the period from 30 th June 2013 to 31 st March 2014E Value(Rs.in.mn) 30-Jun Sep Dec Mar-14E Description 3m 3m 3m 3m Interest Earned Other Income Total income Interest Expended Gross Interest Income Operating Expenses Operating Profit Provisions and Contingencies Profit Before Tax Tax Profit After Tax Equity Capital Face Value (Rs.) EPS Ratio Analysis Particulars FY12A FY13A FY14E FY15E EPS (Rs.) Operating Profit Margin (%) 26.78% 26.82% 29.28% 29.41% PAT Margin (%) 17.56% 16.92% 16.46% 16.82% P/E Ratio (x) ROE (%) 13.66% 14.40% 12.43% 12.26% ROCE (%) 0.47% 0.51% 0.52% 0.50% Debt-Equity Ratio Book Value (Rs.) P/BV (x)

9 Charts Outlook and Conclusion At the current market price of Rs , the stock P/E ratio is at x FY14E and x FY15E respectively. Earning per share (EPS) of the company for the earnings for FY14E and FY15E is seen at Rs and Rs respectively. PAT of the company is expected to grow at a CAGR of 14% over 2012 to 2015E respectively. Price to Book Value of the stock is expected to be at 4.44 x and 3.90 x for FY14E and FY15E respectively. We recommend HOLD in this particular scrip with a target price of Rs for Medium to Long term investment.

10 Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

11 Firstcall India Equity Research: C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods Ashish.Kushwaha IT, Consumer Durable & Banking Anil Kumar Diversified Suhani Adilabadkar Diversified M.Vinayak Rao Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s,takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions(domestic and cross-border), divestitures, spin-offs, valuation of business, corporate restructuring-capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and other international stock exchanges. For Further Details Contact: 3rd Floor,Sankalp,The Bureau,Dr.R.C.Marg,Chembur,Mumbai Tel. : / / Telefax : info@firstcallindiaequity.com