Kotak Mahindra Bank (KOTMAH) 1388

Transcription

1 Result Update Rating matrix Rating : Hold Target : 1437 Target Period : 12 months Potential Upside : 4% What s changed? Target Changed from 1505 to 1437 EPS FY16E Changed from 27 to 29.5 EPS FY17E Changed from 32.4 to 36 Rating Unchanged Quarterly performance (Standalone Kotak) Crore Q4FY15 Q4FY14 YoY (%) Q3FY15 QoQ (%) NII Other Income PPP PAT Key financials (Merged) crore FY14 FY15E FY16E FY17E NII PPP PAT Valuation summary (Merged) FY14 FY15E FY16E FY17E P/E Target P/E P/ABV Target P/ABV RoA RoE Stock data Market Capitalisation crore GNPA (Q4FY15) 1237 crore NNPA (Q4FY15) 609 crore NIM (Q4FY15) week H/L 1444/630 Equity capital 386 crore Face value 5 DII holding (%) 2.0 FII holding (%) 36.9 Price performance Return % 1M 3M 6M 12M Kotak Mahindra bank HDFC Bank Axis Bank Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com May 6, 2015 Kotak Mahindra Bank (KOTMAH) 1388 Merger to bring synergy; 1:1 bonus approved Standalone profit grew 29.5% YoY to 527 crore higher than our estimate of 481 crore, mainly due to strong other income and NII Other income grew 96% YoY to 668 crore higher than our estimate led by strong treasury gains of 164 crore vs. 118 crore in Q3FY15 The asset quality was stable as GNPA was reported at 1.85% increasing marginally from 1219 crore to 1237 crore QoQ while NNPA declined marginally to 609 crore Credit grew higher than estimates at 24.8% YoY ( crore) while deposits grew 26.7% YoY ( crore) vs. our estimate of 27% Consolidated PAT grew 38% YoY and 27% QoQ to 913 crore. Share of subsidiaries in PAT improved to 42% vs. 35% earlier The board of directors approved the issue of bonus shares in the ratio of 1:1; subject to approval of shareholders at the AGM Credit book structure expected to get altered with merger Kotak Mahindra Bank (KMB), promoted by Uday Kotak, post receiving a licence in 2002 has grown to a loan-book size of crore and built a branch network of 684 branches. The bank s retail loans form ~50% of total loans with home and other personal loans growing fast. This enables KMB to earn the best NIM in the industry at % led by high yielding retail loans. With the ING Vysya Bank merger, the composition of the loan portfolio is expected to get altered with the retail advances proportion declining to 40% from 50%. Accordingly, blended margins of the merged business can decline to 4.06% from 4.5%. This is expected to remain broadly stable in the % range in FY16-17E. Savings rate deregulation; raising same to 6% proves beneficial The savings rate was hiked to 6% by KMB post deregulation by the RBI in September The bank almost tripled its savings deposits from 3331 crore in March 2011 to crore by March The CASA ratio averaged around 28-29% in the past and is seen averaging around 32-33%. We expect deposits to grow at 22% CAGR to crore in FY17E. For the combined entity, post merger, we expect deposit growth at 20.7% CAGR to crore in FY17E. Strong management, business model, controlled asset quality KMB has one of the most stable asset qualities with NNPA ratio of 1% and negligible restructured assets. The bank is well capitalised with tier I of 16.2% (maintained 15-18% since start). It has grown credit by 15x in FY02-08 to crore and post that at 25% CAGR to crore by FY13 with profit surging to 1360 crore from 54 crore in FY02. PAT growth in FY15 remained healthy at 1866 crore (up 24% YoY). We expect PAT to grow at 22% CAGR to 2783 crore while on a merged basis, PAT may grow at 18% CAGR over FY15-17E to 3489 crore. Maintain HOLD, merger to add strength KMB has traded at rich valuations consistently due to its superior return ratios, NIM (RoA of ~1.8%, NIM at ~4.8-5%). Post merger, NIM, RoA are expected to decline to 4.06%, 1.5% in FY15E, respectively. However, it will continue to remain competitive compared to peers. Synergy benefits are expected to accrue over time and will enable the bank to improve RoA along with prudent asset quality (GNPA at 1.7% in FY17E vs. 1.8% in FY15E). We expect post merger ABV of Kotak s banking business to increase to 258 in FY16E and 291 in FY17E. Valuing on SOTP basis (merged bank at 4.0x), we arrive at a target price of 1437 and maintain HOLD rating on the stock. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q4FY15 Q4FY15E Q4FY14 YoY (%) Q3FY15 QoQ (%) Comments NII 1, , , NII came in higher than estimate due to 24.8% YoY credit growth vs. our estimate of 21% Calculated NIM (%) bps bps Other Income Strong treasury gain of 164 crore and higher fee income at 389 crore push other income Net Total Income 1, , , , Staff cost Other Operating Expenses Integration expenses push other operating cost PPP Provision , PBT Tax Outgo PAT PAT growth came in higher-than-expected Key Metrics GNPA 1, , , , NNPA Asset quality relatively stable Total Restructured assets , Restructured assets stable at 0.25% of total credit Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Net Interest Income 4, , , , Pre Provision Profit 3, , , , NIM (%) bps bps PAT 2, , , , ABV ( ) Assumptions Current Earlier FY14 FY15 FY16E FY17E FY16E FY17E Credit growth (%) Deposit growth (%) CASA ratio (%) NIM calculated (%) Cost to income ratio (%) GNPA ( crore) 1, , , , , ,784.5 NNPA ( crore) Slippage ratio (%) Credit cost (%) Estimate (Introduced for Merged banking entity) FY16E FY17E ( Crore) Net Interest Income 7, ,473.6 Pre Provision Profit 4, ,758.3 NIM (%) PAT 2, ,383.1 ABV ( ) ICICI Securities Ltd Retail Equity Research Page 2

3 Shareholding pattern (September 2014) % Ing Vysya Kotak Bank Kotak (Merged) FIIS Domestic Other FDI ING Groep Promoters Foreign Holding Source: Company, ICICIdirect.com, Research The merged entity will have 441 branches in the Top 8 cities Company Analysis Merged entity Effective April 1, 2015, ING Vysya Bank will merge with Kotak Mahindra Bank as it has received CCI and RBI approval for an all-stock amalgamation among banks. Post merger, Kotak Mahindra Bank will become the fourth largest private bank with 1261 branches, business size of crore, ~40000 employees and ~10 million customers. With ~15.2% dilution of equity share capital, the promoter holding in Kotak Mahindra Bank is expected to decline to 34% from 40% currently, in line with RBI s direction to bring down their holding to 30% by December 2016 and 20% by March Rationale for deal 1. The merger would give Kotak Mahindra Bank a deeper presence in southern India as ING Vysya has two-third of its 577 branches in the south. Kotak Bank has 79% of its 684 branches in the western and northern region. Thus, the merger provides a larger presence with minimum overlap 2. The merger would yield more liquidity with significant foreign headroom in Kotak Bank even post merger, with foreign shareholding at ~47% in the merged entity. The management indicated that they will apply to RBI for raising the foreign holding limit to 74% from 49% currently 3. The merger will allow Kotak Mahindra Bank to leverage on large international corporates in India with access to overseas relationships of the ING Group 4. The merger is also beneficial on the liability front as both banks have a CASA ratio of ~31%. Owing to the strong SME business, ING Vysya s CA float is healthy. Further, there is large scope for garnering savings balances as Kotak Bank offers a higher rate of 5.5-6% View on merged entity Post merger, Kotak s banking business, which currently stands at ~ crore, is expected to grow at 20.9% CAGR in FY15-17E. Advances are expected to grow at 21% CAGR in FY15-17E. The composition of the loan portfolio will get altered with the proportion of retail advances declining to 40% from 50% currently. Accordingly, blended margins of the merged business can decline to 4.06% from 4.5%. Going ahead, NIM are expected to remain broadly stable in the % range in FY16-17E, as downward trajectory in yields are expected to partially get offset by stable CASA (~35% in FY17E) and lower cost of funds. Owing to lower NIM and higher CI ratio of ING Vysya Bank, Kotak s banking business RoA is expected to decline to ~1.5% from 1.8% immediately. RoA can further be maintained at 1.5% in FY15-17E. However, we believe benefits of merger synergies will accrue over time, enabling the merged entity to clock healthy return ratios post FY17E. KMB has been trading at rich valuations consistently due to its superior return ratios and NIM (RoA of ~1.8% and NIM at ~4.8-5%). Post merger, NIM and RoA are expected to decline to 4.06% and 1.5% in FY15E. However, it will continue to remain competitive compared to peers. Synergy benefits are expected to accrue over time and will enable the bank to improve RoA along with prudent asset quality (GNPA at 1.7% in FY17E vs. 1.8% in FY15E). We expect the post merger ABV of Kotak s banking business to increase to 258 in FY16E and 291 in FY17E. ICICI Securities Ltd Retail Equity Research Page 3

4 Exhibit 1: Combined branch network (FY15) status (Total ~1261) Branches ING Vysya Kotak Bank Kotak (Merged) West 13% 46% 31% North 22% 33% 28% South 61% 15% 36% East 4% 6% 5% Exhibit 2: Advances mix (Q3FY15) % ING Kotak Bank Merged Agri SME Large corporates Retail Exhibit 3: Business parameters H1FY15 Merged banking entity Amount ( crore) ING Vysya Kotak bank* Kotak Bank (Merged) Branches (nos) ATMs (nos) Employees (nos) Customers (millions) ~2 ~8 ~10 Total Assets , * Standalone numbers ICICI Securities Ltd Retail Equity Research Page 4

5 [ Business aspects (Kotak) Kotak Mahindra Bank has a presence across all financial verticals, namely banking, securities, investment banking, asset management, consumer finance and life insurance. The company has a diversified product offering and has an experienced management. In the past six years, the credit and deposit CAGR has been 26% and 29%, respectively, to crore and crore by FY15, higher than industry average. Kotak Bank has largely been a retail lender with 64% of its loan book in retail in FY10. It has now moderated to 44% in FY15. In FY15, credit grew 24.8% YoY and deposits 26.7% YoY. In FY15, advances growth recovered with corporate banking loans surging 26% YoY while overall growth was 24.8% YoY to crore. Ex CV/CE, the growth was 28.2% YoY. Deposits grew a strong 26.7% YoY to crore. Exhibit 4: On YoY basis healthy business growth ( crore) FY12 Q1FY13 Q2FY13 Q3FY13 FY13 Q1FY14 Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 FY15 FY16E FY17E Advances Deposits Source: Company quarterly earnings update, ICICIdirect.com Research Except for CV/CE, credit growth on a YoY basis was strong across other segments, especially in case of personal and corporate loans. Retail loans now constitute 44% of total credit in standalone whereas due to auto loans of Kotak Prime, in consolidated, retail forms ~50% of the total credit of crore as on FY15. Currently, CV/CE is still seeing lower growth while home loans and personal loans including small business loans and agri saw strong QoQ growth. Exhibit 5: Loan book movement over the years (standalone) crore FY12 FY13 Q1FY14 Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Growth yoy (%) Proportion (%) CVs and contruction eqmt Personal Loans incl small busines Home loans Corporate banking Agricultural finance Others Total KMB earns the best NIM in industry at 4.7-5% led by high yielding retail loans and working capital corporate loans. NII has grown from 1858 crore in FY10 to 4224 crore by FY15 supported by strong credit and savings deposit growth. We expect higher NII. It is seen growing at 17% CAGR to 6217 crore by FY17E on account of the strong credit growth performance. Over FY15-17E, we expect NIM to stay at healthy levels of ~4.5%. For the combined entity, post merger, we expect NII to grow at 18.2% CAGR to 8584 crore in FY17E on the back of stable NIM and healthy credit growth. ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 6: NIM remains stable at 4.5% 5.2 (%) Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 FY15 Source: Company quarterly earnings update, ICICIdirect.com Research Deposit franchise (branches) build-up gradually enabled KMB to maintain healthy margins of >4.5% since FY08 despite a challenging environment. In the past two or three years due to higher focus on savings deposits, CASA has been stable at 31% wherein other banks saw a decline in CASA. The combined branch network post merger stands at 1261 as of March With strong savings deposits growth at 27% YoY to crore, branches are expected to deliver a strong performance over time. Initial cost is incurred on employees and setup upfront. We expect deposits to grow at 22% CAGR to crore in FY17E. For the combined entity, post merger, we expect deposit growth at 20.7% CAGR to crore in FY17E. Exhibit 7: Branch network grows to 684 branches (added 79 branches in last year) Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Source: Company quarterly earnings update, ICICIdirect.com Research Other income growth remains strong Non interest income has grown 44.9% to 2028 crore in FY15. Core fee income and treasury gains enabled the bank to achieve stronger other income. Q4FY15 saw non interest income surging 96% YoY to 668 crore mainly led by strong trading gains at 164 crore. On a QoQ basis, the growth was 35%. Strong management, business model and controlled asset quality KMB s asset quality is one of the most stable with NNPA ratio of 1% and negligible restructured assets. This depicts the strong operational business model of the bank and management having full control. ICICI Securities Ltd Retail Equity Research Page 6

7 Exhibit 8: NPA levels maintained at comfortable levels NNPA has been consistently maintained ~1% bodes confidence in asset quality (%) Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 FY16E FY17E GNPA NNPA Source: Company quarterly earnings update, ICICIdirect.com Research Standard restructured loans were stable at 159 crore (stable at 0.25% of net advances) after seeing a huge surge in Q1FY15. In FY14, RA was 0.01% of net advances. However, the number is too small. We expect GNPA and NNPA ratios to be the same around 1.8% and 0.9%, respectively, by FY17E. For the merged entity, we expect asset quality to remain stable with GNPA at ~1.8% and NNPA ~0.6% in FY17E. Healthy performance of consolidated entity Exhibit 9: Consolidated profit over the years, ex bank other subsidiaries form 42% of PAT Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Kotak Bank Kotak Securities * Kotak Mahindra Capital Kotak Prime Kotak AMC & Trust International Subsidiaries Kotak Investment advisors Kotak Mahindra Investments Kotak Mahindra Old Mutual Total (net off aflliates/minority) Exhibit 10: Profitability performance at consolidated level PAT ( crore) Q4FY15 Q4FY14 YOY (%) Q3FY15 QoQ (%) Kotak Bank Kotak Securities Kotak Mahindra Capital NA -6.0 NA Kotak Prime Kotak AMC & Trust NA NA International Subsidiaries NA Kotak Investment advisors Kotak Mahindra Investments Kotak Mahindra Old Mutual Total (net off equity aflliates/minority) Source: Company quarterly earnings update, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Kotak Prime The overall loan book has increased nearly four times in seven years from 5615 crore to crore in FY15. Kotak Prime, the next highest profit making segment, grew tepidly with loan growth of 13.4% YoY to crore in FY15 while car loans within the same grew 10.9% YoY to crore. PAT grew 13.5% YoY to 507 crore. Q4FY15 PAT was slower at 143 crore with subdued loan growth continuing. Exhibit 11: Kotak Mahindra Prime profitability on a slower track Crore Q4FY15 Q3FY15 Q4FY14 YoY Gr. (%) QoQ Gr. (%) PBT PAT Loans car loans in same CAR (%) ROA (%) NET NPA -cars (%) Source: Company quarterly earnings update, ICICIdirect.com Research Exhibit 12: Kotak Prime second highest profit contributor Q4FY15 Q3FY15 Q2FY15 Q1FY15 Q4FY14 Q3FY14 Q2FY14 Q1FY14 Q4FY13 Q3FY13 Q2FY13 Q1FY13 Q4FY12 Q3FY12 Q2FY12 PBT PAT Loans car loans CAR ROA Net NPA -cars 0.4% 0.4% 0.3% 0.3% 0.3% 0.4% 0.3% 0.2% 0.2% 0.2% 0.2% 0.1% 0.2% 0.20% 0.2 Kotak Securities Kotak Securities (K-Sec), a KMB subsidiary, has been one of the large stock broking firms offering both retail and institutional services. It had 9% market share in FY07, which has declined to as low at 2.8% currently on account of rising options volume generating lower yields and relative lower push by the broker in the same. The company clocked an average daily turnover of 3,720 crore in FY07 that was at 3920 crore in FY14, which rose to 7107 crore in FY15 on the back of increased volumes in the industry. The end of the JV with Goldman Sachs in May 2006 has not made any meaningful impact on its market share. Competition intensified in the recent past in the Indian broking space, which resulted in a fall in broking yields for all players. ICICI Securities Ltd Retail Equity Research Page 8

9 Exhibit 13: Average daily turnover trend ( Crore) Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Exhibit 14: Market share in average daily volume surges in Q4FY15 (reported) The market share of Kotak Securities improved to 2.9% in Q4FY15 (%) FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Source: Company quarterly earnings update, ICICIdirect.com Research It recorded a profit of 290 crore in FY15, surging 81% on the back of increased traction in market. Increase in cash volumes with stable lower yield on turnover remain key reasons. In Q4FY15, business clocked 121% YoY jump in PAT at 96 crore on strong daily volume of 8372 crore vs crore in Q4FY14. Kotak Mahindra Old Mutual Life Insurance is a 74:26 JV between Kotak Mahindra Bank and Old Mutual Life. Kotak Life had managed to capture market share of ~3%. It recorded 74% CAGR in annualised premium equivalent (APE) over FY Post FY09, after which growth collapsed, annualised premium equivalent (APE) has been hovering around 1000 crore till now. Annual profits touched around 229 crore as on FY15 growing from 14 crore in FY09. The life insurance performance has stabilised with lower growth now. After de-growing in FY14, new business premium surged 40% YoY to 675 crore with APE increasing 58% YoY. The Q4FY15 PAT was at 76 crore led by strong 35% individual premium growth. On APE 1/10th) basis, share of Kotak Bank for FY14 is at 40% ICICI Securities Ltd Retail Equity Research Page 9

10 Exhibit 15: Life insurance business statistics on APE basis market share is 29% Premium ( crore) Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Renewal Indvl Regular Group Single New Business Premium APE Solvency Ratio (%) PAT Source: Company quarterly earnings update, ICICIdirect.com Research Kotak Mahindra Asset Management Kotak AMC has grown its average AUM at 21% CAGR to crore by FY Its share of equity in total has been rising gradually from 14% in FY09 to 24% in FY14. In FY15, share of equity in average AUM has doubled. However, the subsidiary reported a loss of 29 crore vs. 41 crore profit in FY14 owing to higher equity allocation cost. Kotak Mahindra Capital (KMCC) The Kotak Mahindra Group carries on its investment banking business through Kotak Mahindra Capital Company (KMCC), a subsidiary of Kotak Mahindra Bank (KMB). Kotak bought the 25% stake held by Goldman Sachs in KMCC in May 2006 by paying 210 crore, making it a 100% subsidiary. KMCC has a strong presence in managing equity issuances and advising on M&A transactions and has benefited largely from the boom in investment banking activity in India. The company de-merged its principal and trading investments division (including primary dealership) in March 2007 (to free up surplus capital) and now primarily operates as a full service investment bank, offering advisory and transactional services. It earned revenue of 89 crore and PAT of 12 crore in FY15. In Q4FY15, it reported a profit of 30 crore. ICICI Securities Ltd Retail Equity Research Page 10

11 Outlook and valuation KMB has been trading at rich valuations consistently due to its superior return ratios with FY14 RoA of 1.7%. It earns highest NIM in the industry. This bank depicts its strong operational business model and management having full control via consistent performance. With the ING Vysya Bank merger, the bank brought down its promoter stake from 40% to 34% and also added value and geographical synergies in the company. Post merger, NIM and RoA are expected to decline to 4.06% and 1.5% in FY15E. However, it will continue to remain competitive compared to peers. Synergy benefits are expected to accrue over time and will enable the bank to improve RoA along with prudent asset quality (GNPA at 1.7% in FY17E vs. 1.8% in FY15E). We expect Kotak s banking business post merger ABV to increase to 258 in FY16E and 291 in FY17E. Valuing on SOTP basis (merged bank at 4.0x), we arrive at a target price of 1437 and maintain HOLD rating on the stock. Exhibit 16: DuPont Analysis (Bank standalone) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Net interest income/ avg. total assets Non-interest income/ avg. total assets Non-operating profit/ avg. total assets Operating expenses/ avg. total assets Operating profit/ avg. total assets Provisions/ avg. total assets Return on avg. total assets Leverage Return on equity Exhibit 17: Valuation FY14 FY15 FY16E FY17E EPS ( ) Growth (%) P/E (x) ABV P/ABV (x) GNPA (%) RoNA (%) RoE (%) Exhibit 18: Valuation ( ) Merged Entity Company Value / share KMB (Merged entity) 1165 Kotak Life 42 Kotak Mahindra Prime 131 Kotak Mahindra Capital 11 Kotak Securities 64 Kotak AUM ICICI Securities Ltd Retail Equity Research Page 11

12 Company snapshot 1,600 Target ,400 1,200 1, Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Mar-03 Promoter stake was at 63% in the bank, post incorporation in 2002 May-05 Announced bonus shares May-07 In peak market, capital market related businesses were doing well and getting higher valuation multiples. Bank's market cap share in total market used to be less FY08 Announced stock split, FV reduced to 5 from 10 Jun-09 Anand Mahindra ceased to be a promoter of the bank Feb-11 Bank aspired to be national, inorganic (route) is something that was on radar also. Thereafter, the stock saw a new rally and is rising continuously Oct-11 Savings rate de-regulated by RBI, Kotak Bank offered higher interest rate of 6% above 1 lakh and 5% below 1 lakh vs the floor of 4%. This has been very helpful in saving balance increase as it started adding crore in a quarter post this hike Mar-12 Asset quality maintained even with a large commercial vehicle and construction equipment portfolio Jul-12 RBI asked promoters of Kotak Mahindra Bank to cut their stake in the bank to 20% from 45 % by With expectation of continuous dilution at higher multiple of BV, stock price remained on an uptrend May-13 G-sec yields spiked post Fed announcement on May 22 of its intention to taper QE and tight liquidity measures by RBI of MSF rate hike etc, impacted banks, particularly wholesale funded. However, Kotak Bank although lower on CASA remained resilient Oct-13 Post liquidity tightening measures like MSF reversed by RBI, stock saw respite Nov-14 Announced merger with ING Vysya Bank in ratio of 725 shares of Kotak bank for 1000 shares of ING Vysya Bank Jan-15 Merger approved by shareholders Apr-15 Scheme of amalgamation of Kotak Mahindra Bank and ING Vysya Bank comes into effect from April 1, 2015 Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Kotak (Uday Suresh) 31-Dec Capital International, Inc. 31-Dec CPP Investment Board 31-Dec Sumitomo Mitsui Banking Corp 31-Dec First State Investment Management (UK) Limited 31-Dec Caladium Investments Pte. Ltd. 31-Dec Mahindra (Anuradha) 31-Dec Matthews International Capital Management, L.L.C. 31-Dec Genesis Group Trust Employee Benefit Plans 30-Sep The Vanguard Group, Inc. 31-Dec Source: Reuters, ICICIdirect.com Research Recent Activity ( crore and shares in mn) Shareholding Pattern (in %) Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Promoter FII DII Others Buys Sells Investor name Value Shares Investor name Value Shares First State Investment Management (UK) Limited Kotak (Uday Suresh) CPP Investment Board BlackRock Institutional Trust Company, N.A Capital International, Inc ICICI Prudential Asset Management Co. Ltd Franklin Advisers, Inc Lyxor Asset Management Matthews International Capital Management, L.L.C Kotak Mahindra Asset Management Company Ltd Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 12

13 Financial summary Profit and loss statement Crore (Year-end March) FY14 FY15 FY16E FY17E Interest Earned Interest Expended Net Interest Income growth (%) Non Interest Income Net Income Operating expense Gross profit Provisions Taxes Net Profit growth (%) EPS Key Ratios (Year-end March) FY14 FY15 FY16E FY17E Valuation No. of Equity Shares EPS ( ) BV ( ) BV-ADJ ( ) P/E P/BV P/ABV Yields & Margins (%) Yield on avg earning assets Avg. cost on funds Net Interest Margins Avg. Cost of Deposits Yield on average advances Quality and Efficiency (%) Cost / Total net income Credit/Deposit ratio GNPA NNPA ROE ROA Balance sheet Crore (Year-end March) FY14 FY15 FY16E FY17E Sources of Funds Capital ESOPS Reserves and Surplus Networth Deposits Borrowings Other Liabilities & Provisions Total Applications of Funds Fixed Assets Investments Advances Other Assets Cash with RBI & call money Total Growth ratios (Year-end March) FY14 FY15 FY16E FY16E Total assets Advances Deposits Total Income Net interest income Operating expenses Operating profit Net profit Book value EPS ICICI Securities Ltd Retail Equity Research Page 13

14 Financial summary (Merged Entity) Profit and loss statement Crore (Year-end March) FY14 FY15E FY16E FY17E Interest Earned Interest Expended Net Interest Income growth (%) Non Interest Income Net Income Operating expense Gross profit Provisions Taxes Net Profit growth (%) EPS Key Ratios (Year-end March) FY14 FY15E FY16E FY17E Valuation No. of Equity Shares EPS ( ) BV ( ) BV-ADJ ( ) P/E P/BV P/ABV Yields & Margins (%) Yield on avg earning assets Avg. cost on funds Net Interest Margins Avg. Cost of Deposits Yield on average advances Quality and Efficiency (%) Cost / Total net income Credit/Deposit ratio GNPA NNPA ROE ROA Balance sheet Crore (Year-end March) FY14 FY15E FY16E FY17E Sources of Funds Capital ESOPS Reserves and Surplus Networth Deposits Borrowings Other Liabilities & Provisions Total Applications of Funds Fixed Assets Investments Advances Other Assets Cash with RBI & call money Total Growth ratios (Year-end March) FY14 FY15E FY16E FY16E Total assets Advances Deposits Total Income Net interest income Operating expenses Operating profit Net profit Book value EPS ICICI Securities Ltd Retail Equity Research Page 14

15 ICICIdirect.com coverage universe (Banks) CMP M Cap EPS ( ) P/E (x) P/ABV (x) RoA (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E Bank of India (BANIND) Hold 12, Bank of Baroda (BANBAR) Buy 35, Dena Bank (DENBAN) Hold 2, Punjab National Bank (PUNBAN) Buy 28, Syndicate Bank (SYNBN) Hold 5, Indian Bank (INDIBA) Buy 5, Axis Bank (UTIBAN) Buy 134, City Union Bank (CITUNI) Buy 4, DCB Bank (DCB) Buy 3, Federal Bank (FEDBAN) Buy 11, HDFC Bank (HDFBAN) 981 1,225 Buy 245, IndusInd Bank (INDBA) 826 1,000 Buy 43, Jammu & Kashmir Bank(JAMKAS) Hold 4, Kotak Mahindra Bank (KOTMAH) 1,303 1,437 Hold 99, ICICI Securities Ltd Retail Equity Research Page 15

16 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 16

17 ANALYST CERTIFICATION We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. ( associates ), the details in respect of which are available on ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts have any material conflict of interest at the time of publication of this report. It is confirmed that Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. It is confirmed that Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. 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