Kotak Mahindra Bank. A lean quarter. Source: Company Data; PL Research

Transcription

1 A lean quarter July 31, 2015 Nitin Kumar Pritesh Bumb Rating Accumulate Price Rs717 Target Price Rs715 Implied Upside.3% Sensex 27,705 Nifty 8,422 (Prices as on July 30, 2015) Trading data Market Cap. (Rs bn) 1,107.2 Shares o/s (m) 1, M Avg. Daily value (Rs m) Major shareholders Promoters 33.86% Foreign 35.32% Domestic Inst. 3.69% Public & Other 27.13% 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) Jul 14 Sep 14 Nov 14 Source: Bloomberg Jan 15 Mar 15 May 15 Jul 15 KMB s Q1FY16 consolidated PAT of Rs5.2bn was below estimates due to hit in Bank s earnings post merger. Hit was mainly on (i) higher one time provisions of Rs3.3bn on retiral benefits towards ING Vysya s (IVBL) employees (ii) additional credit costs of 60 70bps from stressed assets lapse from IVBL s corporate loan book (overall credit cost 103bps) and (iii) other merger costs. Margins came off as advances loan growth slowed to 9 10% YoY as KMB consolidated overlapping exposure under the merged corproate portfolio. But the management remained constructive to achieve 15 20% loan growth for FY16. Asset quality dissapointed with stressed asset accretion slightly higher largely contributed by IVBL, but management retierated asset quality was in line with due diligence made and remains under comfort zone. We retain our Accumulate rating and PT of Rs715. Core performance impacted by one off costs: S lone bank s PAT of Rs1.9bn (55% YoY de growth) was impacted by one off expenses of Rs3.3bn towards retiral benefits of IVBL employees which came as a surprise, while certain merger integration costs were in line with guidance. Also, additional credit cost of 70 80bps were on higher side on identifying stressed loans from IVBL s corporate loan book which took overall credit cost to ~100bps of loans (merged). The Bank took a hit on Networth of Rs2.2bn towards writing off revaluation reserves, unamortized losses from sale of assets to ARCs and NPLs. Fee income and margins contribute to weakness; CASA growth remains impressive: Fees slowed down on regulatory changes in accounting and slow integration on fee based products. Margins came off to 4.2% (merged basis) v/s 4.87% (non merged basis) as overlapping loan book was run off and re pricing of some loans (to KMB s rates from IVBL s rates). Management guided NIMs of above +4% in FY16. CASA growth remained impressive with 26% YoY growth led by robust growth in SA as bank offers SA benefits to erstwhile IVBL s customers. Asset quality witnesses slight deterioration: Asset quality saw slight deterioration on higher stressed asset accretion mainly contributed from IVBL s corporate book. KMB has identified 6% of IVBL s exposures (of the total book of Rs550bn) under stress and have been shifted under ARC (not sold) for recovery & resolution. We believe, substantial synergies lie ahead from the merger but high opex & IVBL s asset quality overhang will remain for next few quarters. Key financials ( Y/e March) E 2017E Net interest income (Rs m) 48,382 52,991 66,280 80,666 Growth (%) Operating profit (Rs m) 37,669 43,178 54,388 66,127 PAT (Rs m) 22,858 27,367 32,257 39,156 EPS (Rs) Growth (%) Net DPS (Rs) Profitability & Valuation E 2017E NIM (%) RoAE (%) RoAA (%) P / BV (x) P / ABV (x) PE (x) Net dividend yield (%) Source: Company Data; PL Research Q1FY16 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 Please note: We have not yet integrated erstwhile ING Vysya Bank s in our financial numbers and our estimates. Exhibit 1: Q1FY15 PPOP growth moderation continues Standalone Bank* 1Q15 4Q15 1Q16 YoY gr. QoQ gr. NII 10,022 11,232 15,982 Other income 3,998 6,681 5,924 Total Revenues 14,020 17,913 21,906 Employee expense 3,484 3,789 9,288 Other expense 3,880 5,517 6,649 Operating expense 7,364 9,306 15,937 PPOP 6,655 8,607 5,970 Provisions ,053 PBT 6,515 7,938 2,917 Tax 2,217 2,667 1,019 PAT 4,298 5,271 1,898 Consolidated PAT Standalone Bank 4,298 5,271 1,898 56% 64% Kotak Prime 1,200 1,430 1,190 1% 17% KMCC % 90% Kotak Securities % 30% International subsidiaries % 39% Kotak AMC NA 11% Kotak Investment Advisors NA NA Kotak Mahindra Investments % 25% Lending business 5,498 6,701 3,088 44% 54% Flow business, Subsidiaries 960 1,770 1,450 51% 18% Consolidated PAT (ex insurance) 6,458 8,471 4,538 30% 46% Insurance % 13% Consolidated PAT 6,948 9,231 5,198 25% 44% *Please note: Quarterly numbers for Standalone Bank are not comparable on ING Kotak merger July 31,

3 Key Q1FY16 Concall highlights: Merger with ING Vysya: Hit on P&L (i) Retiral benefits Provided Rs3.39bn on retiral benefits (Rs320 was provided by IVBL in Q1FY15). Had ~Rs5bn of O/s retiral benefit provision on B/s which is now ~Rs8bn. (ii) Credit costs Provided Rs3.05bn as provisions with significant portion from ING Vysya Bank (IVBL) (iii) Incurred Integration cost of Rs630mn (Q4FY15 had incurred expenses of Rs540mn). Had estimated Rs2.0bn as integration cost and now likely to incur Rs800mn in next three quarters towards integration cost. (iv) Additional Rs300mn was paid for higher SA rate to IVBL customers, which will normalize in base going ahead. Asset quality According to bank, 6% of IVBL fund based + non fund based of Rs bn is under stress via NPAs/Restructured/SRs/Watchlist a/c. Stress via same channels is 2.5% for the combined entity. Have transferred most stressed assets to the division under ARC for recovery/resolution/monitoring (but remains in KMB s books and not sold to ARC). SME/Retail has not seen significant asset deterioration. Have completely provided on provisions towards asset quality issues and expect credit cost to lower going ahead (guidance 40 50bps in FY16). Have also completed retiral provisions as of June end on actuarial assumptions Wholesale and Treasury businesses have been already merged, while retail assets & branch banking to be integrated by Q4FY16. Asset quality for KMB: Restructured book Fresh restructuring increased by Rs2.6bn in Q1FY16 and largely was from IVBL book (Rs1.71bn) and now stands at 0.4% of combined loan book Credit costs Expect 40 50bps of credit cost for next 9 months in FY16, while credit costs to lower in FY17. Balance sheet Growth/Outlook: Loan book Outlook: Loan book growth guidance at 15 20% for FY16. KMB has consolidated loan book after merger as certain loan accounts in corporate loan portfolio would be overlapping and hence, have revised the credit limits lower (to comfort level). As a result merged loan book has grown by 9% YoY. CASA CASA growth of 26.7% YoY on combined continues to be strong, mainly strong traction in SA profile with growth of 30% YoY. Mortgage book Proportion of mortgage book between LAP & Home loans remains 50:50. Originations have been from existing customer base and have remained conservative on underwriting. July 31,

4 Networth hit Have taken ~Rs2.27bn of hit on networth of which Rs1.16bn on NPA provisions/write off unamortized loss on sale of ARC and Rs1.01bn on writing off revaluation reserve on fixed assets. Do not see impact on Retail loan book as quality of book remains reasonably inline with expectations Margins: Margins are likely to be above 4% in FY16 but overall NII turnover could be under pressure as assets getting re priced at lower rates (to KMB s rates against earlier IVBL rates) Fees, Opex & capacity building: Fee income was sluggish on capping of fee commissions by regulator on Mutual Funds distribution and has elongated commissions on annuity basis than upfront. Also IVBL in Q1FY15 had onetime non recurring fee income. Have also seen some integration issues towards fee instruments which may have impacted fee income. Going ahead, DCM business and retail to provide traction to fee income. Cost income likely to normalize to 50% and below by FY16 17 as synergies comes in place on both income and costs. Exhibit 2: Margins come off post merger but was in line with guidance 6.00% 5.50% 5.00% 4.50% 5.4% 5.6% 5.0% 4.8% 4.7% 5.0% 4.9% 4.9% 4.8% 4.7% 4.7% 5.0% 4.8% 4.8% 4.9% 4.7% 4.6% 4.7% 4.00% 4.2% 3.50% 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 July 31,

5 Reported asset quality not comparable and hence we have combined historical numbers for trend comparison. On comparable basis asset quality seems to have deteriorated slightly mostly contributed from ING s loan book Exhibit 3: Asset quality deteriorates slightly Reported Combined Entities 1Q15 4Q15 1Q16 YoY gr. QoQ gr. Gross NPAs 12,113 13,924 27, % 94.8% Net NPAs 6,270 6,974 7, % 5.0% Coverage 48.2% 49.9% 73.0% 24.8% 23.1% Restructured loans 1,450 1,581 4, % 164.4% % of loans 0.3% 0.2% 0.4% 0.1% 0.2% On restructured, some accounts from steel & infra likely have added to restructured book. Bank added Rs2.6bn to restructured book of which Rs1.7bn belonged from ING Vysya s book Comparable Combined Entities 1Q15 3Q15 1Q16 YoY gr. Gross NPAs 20,077 19,839 24, % Net NPAs 8,912 8,981 10, % Coverage 55.6% 54.7% 55.5% 0.1% Exhibit 4: CASA growth on merged basis continued to remain robust mainly led by SA Merged CASA Growth 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 1Q16 Exhibit 5: Credit cost rises mainly on slippages from IVBL loan book 1.60% 1.10% 0.60% 0.10% 0.40% 1.36% 1.44% 0.62% 0.64% 0.57% 0.29% 0.32% 0.35% 0.38% 0.57% 0.34% 0.11% 0.30% 0.19% 0.41% 0.05% 0.05% 0.10% 0.03% 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 Exhibit 6: Asset quality deteriorates mainly from IVBL s loan book Gross NPAs % Net NPAs % (RHS) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q July 31,

6 Exhibit 7: Subsidiary businesses continue to hold up steady 1,900 KMCC Kotak Sec Int. Subs. AMC Kotak Inv. Advisors Kotak Investments 1, (100) 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 (Rs m) Exhibit 8: Q1FY16 Subsidiary performance break up 1Q15 4Q15 1Q16 YoY gr. QoQ gr. Kotak Mahindra Bank PAT 4,298 5,271 1, % 64.0% Kotak Mahindra Prime (KMP) Profit before royalty & taxes 1,830 2,180 1, % 16.1% PAT 1,200 1,430 1, % 16.8% KMCC PAT NA NA Kotak Securities Total income 2,230 2,890 2, % 13.5% PAT % 30.2% Kotak Asset Management PAT (AMC and Trustee Co.) NA 11.1% Kotak Insurance Gross premium income 4,580 12,460 3, % 68.9% Profit % 13.2% International subsidiaries PAT % 38.9% July 31,

7 Exhibit 9: Consolidated ROEs Lending profitability strong to return on merger synergies, while subsidiary value addition to be gradual ROA Decomposition E 2016E 2017E Net Interest Income 5.40% 4.77% 4.60% 4.64% 4.58% 4.60% 4.52% Fees 3.03% 2.59% 2.16% 2.15% 2.41% 2.37% 2.22% Investment profits 0.16% 0.15% 0.18% 0.20% 0.25% 0.13% 0.10% Net revenues/assets 8.60% 7.51% 6.93% 6.99% 7.24% 7.10% 6.85% Operating Expense 4.43% 3.85% 3.44% 3.38% 3.64% 3.46% 3.26% Provisions 0.29% 0.14% 0.23% 0.31% 0.12% 0.19% 0.18% Taxes 1.19% 1.13% 1.05% 1.11% 1.14% 1.13% 1.12% Total Costs 5.91% 5.12% 4.73% 4.80% 4.90% 4.78% 4.56% ROA 2.69% 2.39% 2.20% 2.19% 2.34% 2.32% 2.28% Equity/Assets 17.31% 16.56% 15.20% 16.06% 16.89% 15.89% 14.81% ROE 15.5% 14.4% 14.5% 13.7% 13.8% 14.6% 15.4% Exhibit 10: We maintain Accumulate with TP of Rs715 based on Mar 17 adjusted book for Bank & Kotak prime, while on SOTP basis for subsidiaries Value (Rs m) Per Share (Rs) Valuation Basis Kotak Securities 63, x Mar 17 Earnings Asset Management 29, % of AUMs KMCC 7, x Mar 17 Earnings International subsidiaries 12, x Mar 17 book Others 20, x Mar 17 Earnings Insurance 31, P/NBAP Total 164, Ex insurance 133, Shares (m) 1,545 Total Subsidiary valuation 164, Lending bix valuation 937, x Mar 17 book Mar 17 PT 714 July 31,

8 Income Statement (Rs m) Int. Earned from Adv. 93, , , ,069 Int. Earned from Invt. 20,500 22,158 25,875 30,920 Others Total Interest Income 114, , , ,392 Interest expense 65,974 70,406 83, ,726 NII 48,382 52,991 66,280 80,666 Growth (%) Treasury Income 1,880 3,479 1,800 1,800 NTNII 22,597 29,706 36,062 41,977 Non Interest Income 24,477 33,185 37,862 43,777 Total Income 138, , , ,169 Growth (%) Operating Expense 35,190 42,998 49,753 58,316 Operating Profit 37,669 43,178 54,388 66,127 Growth (%) NPA Provisions 1,632 2,757 5,776 7,063 Investment Provisions 1,844 (1,072) Total Provisions 3,282 1,904 5,801 7,138 PBT 34,387 41,273 48,588 58,989 Tax Provisions 11,529 13,906 16,330 19,833 Effective Tax Rate (%) PAT 22,858 27,367 32,257 39,156 Growth (%) Balance Sheet (Rs m) Par Value No. of equity shares 1,541 1,545 1,287 1,287 Equity 7,703 7,724 7,724 7,724 Networth 186, , , ,811 Adj. Networth 179, , , ,404 Deposits 590, , ,896 1,145,321 Growth (%) Low Cost deposits 188, , , ,138 % of total deposits Total Liabilities 1,108,107 1,285,677 1,556,167 1,933,758 Net Advances 741, ,636 1,069,181 1,326,970 Growth (%) Investments 250, , , ,555 Total Assets 1,108,107 1,285,677 1,556,167 1,933,758. Quarterly Financials (Rs m) Y/e March Q2FY15 Q3FY15 Q4FY15 Q1FY16 Interest Income 23,525 25,001 25,809 39,914 Interest Expense 13,136 14,407 14,578 23,932 Net Interest Income 10,389 10,594 11,232 15,982 Non Interest Income 4,665 4,941 6,681 5,924 CEB Treasury Net Total Income 15,054 15,535 17,913 21,906 Operating Expenses 7,717 8,160 9,306 15,937 Employee Expenses 3,545 3,679 3,789 9,288 Other Expenses 4,172 4,481 5,517 6,649 Operating Profit 7,336 7,376 8,607 5,970 Core Operating Profit 7,336 7,376 8,607 5,970 Provisions ,053 Loan loss provisions Investment Depreciation Profit before tax 6,800 7,077 7,938 2,917 Tax 2,355 2,431 2,667 1,019 PAT before EO 4,445 4,645 5,271 1,898 Extraordinary item PAT 4,445 4,645 5,271 1,898 Key Ratios CMP (Rs) Equity Shrs. Os. (m) 1,541 1,545 1,287 1,287 Market Cap (Rs m) 1,104,318 1,107, , ,704 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) 2,728 2,882 3,065 3,330 Profit per Branch (Rs m) Asset Quality Gross NPAs (Rs m) 11,666 13,848 15,780 18,744 Net NPAs (Rs m) 6,300 6,932 7,912 9,407 Gr. NPAs to Gross Adv. (%) Net NPAs to Net Adv. (%) NPA Coverage (%) July 31,

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