Result Update Rating matrix Rating : Hold Target : 750 Target Period : 12 months Potential Upside : 1% What s changed? Target Changes from 677 to 750 EPS FY17E Changed from 11.7 to 14 EPS FY18E Introduced at 16.6 Rating Unchanged Quarterly performance Crore Q4FY16 Q4FY15 YoY (%) Q3FY16 QoQ (%) NII 1857.2 1589.7 16.8 1766.2 5.2 Other Income 681.9 1767.2-61.4 1205.2-43.4 PPP 1194.2 1767.2-32.4 1205.2-0.9 PAT 695.8 1320.8-47.3 634.7 9.6 Key financials (Merged) crore FY15 FY16E FY17E FY18E NII 6142 6900 7941 9219 PPP 4166 4041 4747 5542 PAT 2477 2090 2568 3043 Valuation summary (Merged) FY15 FY16E FY17E FY18E P/E 54.4 65.1 53.0 44.7 Target P/E 55.0 65.8 53.6 45.2 P/ABV 6.4 5.9 5.3 4.8 Target P/ABV 6.5 6.1 5.5 4.9 RoA 1.5 1.1 1.2 1.2 RoE 12.1 9.2 10.2 10.8 Stock data Market Capitalisation 133302 crore GNPA (Q4FY16) 2838 crore NNPA (Q4FY16) 1262 crore NIM (Q4FY16) 4.4% 52 week H/L 744/586 Net worth 33361 crore Face value 5 DII holding (%) 4.7 FII holding (%) 35.9 Price performance Return % 1M 3M 6M 12M Kotak Mahindra bank 6.8 4.9 8.0 7.9 HDFC Bank 7.5 7.9 2.6 14.0 Axis Bank 10.0 15.7 0.7-14.4 Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com May 12, 2016 Kotak Mahindra Bank (KOTMAH) 741 Healthy performance with prudent asset quality PPP came in at 1194 crore, marginally below our estimate of 1245 crore. The variation was primarily due to lower-than-expected net interest income at 1857 crore (I-direct estimate: 1876 crore). Opex came in at 1345 crore with CI ratio at 53% during the quarter Provisions were reported at 200 crore compared to 235 crore in Q3FY16, led by funds parked in lieu of securities receipts (SR) and credit substitutes from merger of ING Vysya loan book. Asset quality has remained resilient with QoQ net GNPA addition at 148 crore with absolute GNPA at 2838 crore and GNPA ratio at 2.36% NIM witnessed a marginal improvement of 5 bps QoQ at 4.35% in Q4FY16, led by incremental CASA accretion and higher proportion of high yielding loan. The bank incurred an expense of 36 crore in Q4FY16 on higher interest outgo on ING Vysya Bank s saving deposit The credit book grew 2.9% QoQ to 118665 crore led by higher accretion in the CV/CE and home loans (including LAP). Lending to corporate segment remained flattish QoQ. Deposit accretion came in at 5.9% QoQ to 138643 crore with CASA ratio at 38% The management has provided guidance of 45-50 bps credit cost in FY17E and combined advance growth of ~20% in FY17E. Credit book to grow at ~18% CAGR in FY16-18E Kotak Mahindra Bank, promoted by Uday Kotak, post receiving a licence in 2002, grew to a loan book size of 118665 crore in FY16. It has built a branch network of 1333 branches. Retail loans form ~50% of total loans, enabling KMB to earn the best NIM in industry at 4.5-4.9% led by high yielding retail loans. With the ING Vysya Bank merger, composition of the loan portfolio has been altered with retail advances proportion declining to ~42% from 50%. Accordingly, blended margins are expected to remain steady at ~4% in FY16-18E. Going ahead, credit book (merged entity) is expected to grow at 18% CAGR in FY16-18E to 165268 crore. CASA accretion to continue at healthy pace The savings rate was hiked to 6% by KMB post deregulation by RBI in September 2010. The bank increased its savings deposits from 3331 crore in March 2011 to 29495 crore by March 2016. CASA ratio improved from 28-29% in the past to ~38% in merged bank. For the combined entity, we expect deposit growth at 18.5% CAGR to 194660 crore in FY17-18E. Strong management, business model and controlled asset quality KMB had stable asset quality with NNPA ratio of 1% and negligible restructured assets. With the merger, GNPA ratio rose to 2.4%, NNPA ratio to 1.1% in FY16 but overall asset quality remains manageable. PAT in FY16 remained healthy at 2089 crore. Post merger, we expect PAT to grow at 20.7% CAGR in FY17-18E to 3043 crore. Synergy benefit to augment fundamentals; maintain HOLD rating 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%). For the merged entity, NIMs and RoA are expected to remain at steady at ~4-4.1% and 10.8%, respectively, in FY18E, and may continue to stay better than peers. Going ahead, CI ratio is expected to ease with integration process coming to an end. Asset quality is expected to remain prudent with GNPA seen at ~2.5% in FY17-18E. We revise our SOTP target price higher to 750 from 677 earlier as we roll over to FY18E with standalone ABV of 152. We maintain our HOLD rating on the stock. ICICI Securities Ltd Retail Equity Research
Variance analysis Q4FY16 Q4FY16E Q4FY15 YoY (%) Q3FY16 QoQ (%) Comments NII 1,857.2 1,876.4 1,589.7 16.8 1,766.2 5.2 Improvement in margin led NII growth NIM (%) 4.35 4.30 4.80-45 bps 4.30 5 bps Other Income 681.9 830.6 914.0-25.4 722.2-5.6 Fee income came in at 510 crore vs 466 crore in Q3FY16 Net Total Income 2,539.2 2,707.0 2,503.7 1.4 2,488.4 2.0 Staff cost 634.0 670.3 348.4 82.0 618.2 2.6 Integration cost of 7 crore in Q4FY16; 149 crore in FY16 Other Operating Expenses 711.0 751.6 388.0 83.2 665.0 6.9 PPP 1,194.2 1,285.0 1,767.2-32.4 1,205.2-0.9 Provision 200.4 287.3 106.0 89.0 235.3-14.8 Credit cost came at 82 bps for FY16 PBT 993.7 997.7 1,661.2-40.2 970.0 2.5 Tax Outgo 298.0 308.6 340.4-12.5 335.2-11.1 PAT 695.8 689.1 1,320.8-47.3 634.7 9.6 Key Metrics GNPA 2,838.1 2,838.2 1,237.2 129.4 2,690.3 5.5 GNPA increased 6 bps QoQ to 2.36% NNPA 1,262.0 1,262.3 609.1 107.2 1,110.8 13.6 NNPA increased 10 bps at 1.06% Total Restructured assets 305.0 346.0 159.1 91.7 346.0-11.8 Standard RA at 305 crore of which 165 crore is from ING Vysya Bank Change in estimates FY17E FY18E ( Crore) Old New % Change Introduced Comments Net Interest Income 7,958.9 7,940.8-0.2 9,218.8 Pre Provision Profit 4,852.8 4,747.3-2.2 5,541.8 NIM (%) 4.0 4.1 8 bps 4.1 NIM estimate revised upwards led by CASA PAT 2,586.5 2,567.9-0.7 3,042.8 ABV ( ) 137.9 136.6-0.9 151.8 Assumptions Current FY15 FY16E FY17E FY18E FY17E Credit growth (%) 24.8 79.4 17.9 18.2 16.3 Deposit growth (%) 26.7 85.2 18.5 18.5 18.4 CASA ratio (%) 35.4 38.1 38.1 38.1 35.5 NIM calculated (%) 4.5 4.0 4.1 4.1 4.0 Cost to income ratio (%) 52.1 57.5 56.8 56.7 56.6 GNPA ( crore) 2,010.4 2,838.2 3,402.5 4,058.7 3,389.0 NNPA ( crore) 779.8 1,262.3 1,491.0 1,758.1 1,438.1 Slippage ratio (%) 1.0 1.0 1.0 1.0 1.0 Credit cost (%) 0.3 0.8 0.7 0.6 0.7 Earlier ICICI Securities Ltd Retail Equity Research Page 2
[ Going ahead, the management has guided ~20% growth in advance in FY17E Company Analysis Business aspects 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, credit, deposit have grown at 26%, 29% CAGR to 66161 crore, 74860 crore, respectively, by FY15, higher than industry averages. 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 66161 crore. Ex CV/CE, growth was 28.2% YoY. Deposits grew a strong 26.7% YoY to 74860 crore. Post merger, Kotak Bank s loan book was at 118665 crore with alteration in composition of loan portfolio, retail advances proportion declining to ~44% from 50%. Going ahead, we expect credit offtake at 18% CAGR in FY16-18E to 165268 crore. Exhibit 1: On YoY basis healthy business growth 210000. ( crore) 180000 150000 120000 90000 60000 30000 95101 103676 100506 112755 105198 119018 109155 122968 103614 116812 111662 123212 115345 130939 118665 138643 139853 164269 165268 194660 0 Q1FY15 Q2FY15 Q3FY15 FY15 Q1FY16 Q2FY16 Q3FY16 FY16 FY17E FY18E Advances Deposits Source: Company quarterly earnings update, ICICIdirect.com Research Retail loans now constitute ~44% of total credit in standalone whereas due to auto loans of Kotak Prime, in consolidated, retail forms ~43% of total credit of 144793 crore as on FY16. Exhibit 2: Loan book movement over the years (standalone) crore Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Growth yoy (%) CVs and contruction eqmt. 6781 6005 5441 5104 5062 5027 5204 5626 6123 6550 7463 43.4 Personal Loans incl small business 3082 3156 4632 4723 5301 5929 6263 7429 8171 8813 9627 53.7 Home loans 11307 11454 12100 12312 12894 13738 14709 20756 21697 22327 23009 56.4 Corporate banking 14759 16621 14337 18568 21140 22044 20299 31205 33909 35239 34970 72.3 Agricultural finance 7910 9023 10468 9941 10137 10849 12106 15268 17112 16811 17993 48.6 Others 6770 6890 6010 706 759 7054 1158 1854 2034 2223 2285 97.3 Total 50609 53149 52988 56922 55293 64641 66161 103614 111662 115345 118665 79.4 KMB earned the best NIM in the 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. Post merger, NIM has declined to 4.2% in Q1FY16, owing to a decline in proportion of high yield retail credit and higher interest outgo on saving account of ING Vysya Bank. However, in Q2FY16, NIM improved 12 bps QoQ due to lower cost of deposit led by higher accretion in CASA at 36.2%. In Q3FY16, NIM continued to remain steady at 4.3%. Trajectory in Q4FY16 continued with ~5 bps ICICI Securities Ltd Retail Equity Research Page 3
improvement in margins at 4.35%, led by increase in proportion of high yield assets and CASA. Going ahead, a change in loan mix is expected to keep blended margins at current levels. However, owing to faster addition to saving account and substantial proportion of fixed rate book with southward movement in interest rates, we expect NIM to remain broadly near ~4-4.1% in FY17-17E. Further, as integration benefits unfold with proportion of retail advances rising in overall book, NIMs are expected to revive and inch up. We have currently not factored this in. Exhibit 3: Increase in NIM led by higher CASA accretion 5.2 5.0 (%) 4.8 4.6 4.4 4.2 4.0 4.8 4.8 4.9 4.9 4.9 5.0 5.0 4.7 4.7 4.8 4.6 4.6 4.6 4.3 4.3 4.35 4.2 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Series1 Q2FY15 Q3FY15 FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 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 is at 1298 as of December 2015. With strong CASA deposits growth at 52777 crore, branches are expected to deliver a strong performance over time. The initial cost is incurred on employees and set-up upfront. We expect deposits to grow at 18.5% CAGR to 194660 crore in FY18E, with CASA broadly remaining at the current level. Exhibit 4: Branch network grows to 1333 branches to support CASA accretion 1400 1200 1000 800 600 400 200 0 ` Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Source: Company quarterly earnings update, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 4
Other income growth remains strong Non interest income has grown 29% to 2612 crore in FY16. Core fee income and treasury gains enabled the bank to achieve stronger other income. Q4FY16 non-interest income was muted QoQ at 682 crore with core income at 510 crore. Change in mutual fund fees recognition from upfront to over the life, has been one of the factors impacting traction in fee income. With the alignment of banking integration, we expect noninterest income traction to remain healthy with 16.9% CAGR in FY16-18E to 3568 crore. Strong management, business model and controlled asset quality KMB s asset quality has been 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 the management having full control. Exhibit 5: NPA levels maintained at comfortable levels 3.0 Kotak Bank has identified total stress to the tune of 6% in erstwhile ING Vysya Bank s book, which constitutes ~2.5% of the merged entity (%) 2.6 2.2 1.8 1.4 1.0 0.6 0.2 2.3 2.4 2.3 2.4 2.4 2.5 2.0 2.0 2.0 2.0 1.9 1.9 1.9 1.9 1.5 1.6 1.6 1.6 1.5 1.6 0.6 0.6 0.8 1.0 1.1 1.0 1.1 1.0 1.0 1.0 0.9 1.0 1.1 1.0 1.1 1.1 1.1 0.8 0.6 0.6-0.2 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 FY15 Q1FY16 Q2FY16 Q3FY16 FY16E FY17E FY18E GNPA NNPA Source: Company quarterly earnings update, ICICIdirect.com Research GNPA surged QoQ by ~40 bps at 2.3% in Q1FY16 owing to merger related incremental addition of stressed assets. Kotak Mahindra Bank has identified total stress to the tune of 6% in erstwhile ING Vysya Bank s book, which constitutes 2.5% of the merged entity. In Q4FY16, asset quality remained resilient with GNPA at 2.36%, a sequential improvement of 6 bps. Standard restructured loans eased off to 305 crore (0.26% of net advances) owing to 165 crore from the erstwhile ING Vysya Bank. We expect GNPA and NNPA ratios to remain broadly stable at 2.5% and 1.0%, respectively, by FY17-18E. Credit cost came in higher at 82 bps in FY16, led by merger related provision. Going ahead, we expect credit cost to ease off and estimate it at ~70 bps in FY17-18E (management indicates ~50 bps credit cost in FY17E). ICICI Securities Ltd Retail Equity Research Page 5
Healthy performance of consolidated entity Exhibit 6: Consolidated profit over the years, ex-bank other subsidiaries form ~35% of PAT Q3FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Kotak Bank 276 282 280 362 436 403 353 340 407 430 626 611 527 191 570 635 696 Kotak Securities 24 23 40 38 *13 31 40 46 44 68 66 60 96 67 78 55 51 Kotak Mahindra Capital 4 6 4 2 4 4-2 7 5-4 -7-6 30 3 7 6 17 Kotak Prime 104 94 114 105 119 117 125 123 126 120 125 120 143 119 127 126 130 Kotak AMC & Trust 3 4-5 11 2 7 17 12 4 0-1 -10-18 20 23 4 25 International Subsidiaries -4-5 8 5-1 -10 1 9 6 7 13 14 18 25 32 26 22 Kotak Investment advisors 7 8 9 6 8 1 4 7 5 8 4 2 11 0 0-1 5 Kotak Mahindra Investments 3 4 16 8 5 4 11 11 16 17 25 24 40 30 36 39 50 Kotak Mahindra Old Mutual 47 32 47 53 58 71 44 60 65 49 52 51 76 66 48 60 77 Total (net off aflliates/minority) 464 443 502 577 666 627 583 591 678 695 899 863 913 518 942 945 1055 Exhibit 7: Profitability performance at consolidated level PAT ( crore) Q4FY16 Q4FY15 YOY (%) Q3FY16 QoQ (%) Kotak Bank 695.8 527.0 32.0 634.7 9.6 Kotak Securities 51.0 96.0-46.9 55.0-7.3 Kotak Mahindra Capital 17.0 30.0-43.3 6.0 183.3 Kotak Prime 130.0 143.0-9.1 126.0 3.2 Kotak AMC & Trust 25.0-18.0 NA 4.0 NA International Subsidiaries 22.0 18.0 NA 26.0-15.4 Kotak Investment advisors 5.0 11.0-54.5-1.0 NA Kotak Mahindra Investments 50.0 40.0 25.0 39.0 28.2 Kotak Mahindra Old Mutual 77.0 76.0 1.3 60.0 28.3 Total (net off equity aflliates/minority) 944.7 913.0 3.5 944.7 0.0 Source: Company quarterly earnings update, ICICIdirect.com Research Kotak Prime The overall loan book has increased nearly four times in seven years from 5615 crore to 22262 crore in FY16. Kotak Prime, the next highest profit making segment, witnessed loan growth of 13% YoY to 22262 crore in Q4FY16 while car loans within the same grew 13.4% YoY to 16707 crore, thereby running down erstwhile real estate exposure. PAT declined YoY and remained flat QoQ at 130 crore. Exhibit 8: Kotak Mahindra Prime profitability on slower track Crore Q4FY16 Q3FY16 Q4FY15 YoY Gr. (%) QoQ Gr. (%) PBT 201.0 193.0 218.0-7.8 4.1 PAT 130.0 126.0 143.0-9.1 3.2 Loans 22262.0 21851.0 19707.0 13.0 1.9 -car loans in same 16707.0 16432.0 14726.0 13.5 1.7 CAR (%) 18.2 18.3 - - ROA (%) 2.3 2.5 - - NET NPA -cars (%) 0.4 0.4 - - Source: Company quarterly earnings update, ICICIdirect.com Research Exhibit 9: Kotak Prime second highest profit contributor Q4FY16 Q3FY16 Q2FY16 Q1FY16 Q4FY15 Q3FY15 Q2FY15 Q1FY15 Q4FY14 Q3FY14 Q2FY14 Q1FY14 Q4FY13 Q3FY13 Q2FY13 PBT 201 193 195 183 218 183 190 183 192 190 191 179 174 158 170 PAT 130 126 127 119 143 120 125 120 126 123 125 117 119 105 114 Loans 22262 21851 20013 19728 19707 19073 18819 17693 17371 16858 16952 17093 17022 16042 15173 -car loans 16707 16432 15754 15070 14726 14234 13946 13418 13273 13066 13136 13055 12777 12237 11756 CAR 18.2 18.3 18.3 18.3 18.3 17.3 17.7 17 17.7 17.1 16.4 16 15.4 15.8 15.8 ROA 2.3 2.5 2.5 2.5 2.5 2.3 2.5 2.5 2.6 2.6 2.6 2.5 2.6 2.4 2.8 Net NPA -cars 0.40% 0.40% 0.44% 0.5% 0.4% 0.4% 0.3% 0.3% 0.3% 0.4% 0.3% 0.2% 0.2% 0.2% 0.2% ICICI Securities Ltd Retail Equity Research Page 6
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 declined to as low at 2.3% 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 and was at 3920 crore in FY14, which rose to 7403 crore in Q4FY16 on the back of increased volumes in the industry. The market share has taken a knock by 20 bps in FY16 to 2.6%. 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. Exhibit 10: Average daily turnover trend 9000 8000 7000 ( Crore) 6000 5000 4000 3000 2000 3925 4522 5205 4648 3582 4261 4160 4137 3300 3343 3673 3814 3692 4248 3720 3903 6053 6621 8372 8372 7813 7593 6481 7403 1000 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Exhibit 11: Market share in average daily volume declined in Q4FY16 (reported) The market share of Kotak Securities declined 40 bps QoQ to 2.3% in Q4FY16 (%) 4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0 3.8 3.8 3.7 3.5 3.0 2.9 2.9 2.9 2.7 2.5 2.5 2.6 2.5 2.4 2.4 2.3 2.2 2.9 2.7 2.82.85 2.7 2.7 2.7 2.3 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Source: Company quarterly earnings update, ICICIdirect.com Research In Q4FY16, Kotak Securities topline declined 22% YoY to 225 crore, on lower daily volume of 7403 crore vs. 8372 crore in Q4FY15. PAT was at 51 crore, 46% decline YoY owing to lower topline during the quarter. 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 FY04-07. Post FY09, after which growth collapsed, annualised premium equivalent (APE) has been hovering around 1000 ICICI Securities Ltd Retail Equity Research Page 7
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 traction returning in terms of new business premium accretion. After de-growing in FY14, new business premium surged 34.3% YoY in Q4FY16 to 850.8 crore led by individual premium. Q4FY16 PAT was at 77 crore led by strong individual premium growth. On APE (single @ 1/10th) basis, Kotak Bank s share for FY16 is 51% (Q3FY15 34%) for first year individual premium Exhibit 12: Life insurance business statistics on APE basis market share at 51% Premium ( crore) Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Renewal 337.0 350.0 571.0 Indvl Regular 111.0 133.0 301.0 124.0 202.0 211.0 389.0 Group 170.0 159.0 328.0 248.0 239.0 205.0 454.0 Single 50.0 26.0 46.0 16.0 20.0 25.0 78.0 New Business Premium 331.0 318.0 675.0 388.0 461.0 441.0 921.0 APE 286.0 294.6 633.6 373.6 443.0 418.5 850.8 Solvency Ratio (%) 3.0 3.0 3.1 3.2 3.2 3.2 3.1 PAT 52.0 51.0 76.0 66.0 48.0 60.0 77.0 Source: Company quarterly earnings update, ICICIdirect.com Research Kotak Mahindra Asset Management Kotak AMC has grown its average AUM at 21% CAGR to 38600 crore by FY07-15. Growth continued to remain healthy at 41.8% YoY to 54745 crore in FY16. Its share of equity in total has been rising gradually from 14% in FY09 to 24% in FY14 and further inched up at 24.9in FY16. PAT came in at 25 crore in Q4FY16 compared to loss of 18 crore in Q4FY15 and 4 crore in Q3FY16 (owing to a one-time operational loss). 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 36 crore (28.5% QoQ) and PAT of 17 crore ( 6 crore in Q3FY16) in Q4FY16. ICICI Securities Ltd Retail Equity Research Page 8
Outlook and valuation KMB has been trading at rich valuations consistently due to its superior return ratios with FY15 RoA of 1.9%. It earns highest NIM in the industry. This depicts its strong operational business model and management having full control via consistent performance. With the ING Vysya Bank merger, the bank brought down the promoter stake from 40% to 34% and also added value and geographical synergies in the company. For the merged entity, NIMs and RoA are expected to remain at steady at ~4-4.1% and 10.8% in FY18E, and will continue to remain better than peers. Going ahead, CI ratio is expected to ease with integration process coming to an end. Asset quality is expected to remain prudent with GNPA seen at ~2.5% in FY17-18E. We revise our SOTP target price higher to 750 from 677 earlier as we roll over to FY18E with standalone ABV of 152. We maintain our HOLD rating on the stock. Exhibit 13: DuPont Analysis (Bank standalone) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Net interest income/ avg. total assets 5.3 5.6 4.8 4.3 4.6 3.8 3.8 3.8 3.8 3.8 Non-interest income/ avg. total assets 1.0 1.9 1.8 1.7 1.8 1.6 1.8 1.4 1.5 1.5 Non-operating profit/ avg. total assets 6.3 7.5 6.5 6.0 6.5 5.4 5.6 5.2 5.3 5.2 Operating expenses/ avg. total assets 4.2 3.6 3.5 3.1 3.4 2.8 3.0 3.0 3.0 3.0 Operating profit/ avg. total assets 2.1 3.9 3.0 2.8 3.1 2.6 2.6 2.2 2.3 2.3 Provisions/ avg. total assets 0.6 1.5 0.3 0.1 0.3 0.3 0.3 0.5 0.4 0.4 Return on avg. total assets 1.0 1.7 1.9 1.9 1.9 1.5 1.5 1.1 1.2 1.2 Leverage 7.8 8.0 7.8 7.9 9.3 8.6 7.9 8.0 8.2 8.7 Return on equity 7.5 13.5 14.5 14.7 17.9 13.0 12.1 9.2 10.2 10.8 Exhibit 14: Valuation FY14 FY15 FY16E FY17E FY18E EPS ( ) 9.4 13.6 11.4 14.0 16.6 Growth (%) 1.2 44.6-16.5 22.9 18.5 P/E (x) 78.6 54.4 65.1 53.0 44.7 ABV 81.3 114.8 123.7 136.6 151.8 P/ABV (x) 9.0 6.4 5.9 5.3 4.8 GNPA (%) 1.9 1.8 2.4 2.4 2.5 RoNA (%) 1.5 1.5 1.1 1.2 1.2 RoE (%) 13.0 12.1 9.2 10.2 10.8 Exhibit 15: Valuation ( ) Merged Entity Company Value / share KMB (Merged entity) 604 Kotak Life 26 Kotak Mahindra Prime 61 Kotak Mahindra Capital 11 Kotak Securities 32 Kotak AUM 16 750 ICICI Securities Ltd Retail Equity Research Page 9
Merged entity will have 441 branches in the Top 8 cities Details about merger with ING Vysya Bank (September 2014) Effective April 1, 2015, ING Vysya Bank will merge with Kotak Bank as it has received Competition Commission of India (CCI) and RBI approval for an all-stock amalgamation among the banks. Post merger, Kotak Mahindra Bank will become the fourth largest private bank with branches at 1261, business size of 230000 crore, employees at ~40000 and customers at ~10 million. With ~15.2% dilution of equity share capital, 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 2018. Rationale for deal 1. The merger would give Kotak Bank a deeper presence in southern India as ING Vysya has two-third of its 577 branches in south. Kotak Bank has 79% of its 684 branches in western & northern region. Thus, the merger provides 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 Bank to leverage on large international corporates in India with access to overseas relationships of ING Group 4. The merger is also beneficial on the liability front as both banks have 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% Owing to lower NIMs and higher CI ratio of ING Vysya Bank, Kotak s banking business RoA is expected to decline to ~1.0% from 1.8% immediately. RoA can further be maintained at 1.0% in FY15-17E. However, we believe the benefits of merger synergies will accrue over time, which will enable the merged entity to clock healthy return ratios post FY17E. Exhibit 16: 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 17: Advances mix (Q3FY15) % ING Kotak Bank Merged Agri 11 12 12 SME 38 7 17 Large corporates 39 31 33 Retail 19 50 40 ICICI Securities Ltd Retail Equity Research Page 10
Company snapshot 800 700 600 500 Target Price: 750 400 300 200 100 0 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 May-16 Sep-16 Jan-17 May-17 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 tobe 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 600-800 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 2018. 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 being 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-Mar-16 33.39 612.5-0.6 2 ING Bank N.V. 31-Mar-16 6.43 117.9 0.0 3 Capital International, Inc. 31-Mar-16 4.94 90.7-17.8 4 CPP Investment Board 31-Mar-16 4.90 89.8 18.1 5 Mahindra (Anuradha) 31-Mar-16 2.71 49.8 23.6 6 Capital World Investors 31-Mar-16 2.19 40.2-69.3 7 Sumitomo Mitsui Banking Corp 31-Mar-16 1.79 32.8-32.8 8 Stewart Investors 31-Mar-16 1.61 29.6-12.6 9 Caladium Investments Pte. Ltd. 31-Mar-16 1.42 26.0-3.2 10 Matthews International Capital Management, L.L.C. 31-Dec-15 1.29 23.7 0.2 Source: Reuters, ICICIdirect.com Research Recent Activity ( crore and shares in mn) Shareholding Pattern (in %) Dec-14 Jun-15 Sep-15 Dec-15 Mar-16 Promoter 40.05 33.86 33.77 33.73 33.70 FII 35.09 35.32 34.67 34.58 35.90 DII 2.03 3.69 4.22 4.55 4.70 Others 22.66 27.13 27.34 27.14 25.70 Buys Sells Investor name Value Shares Investor name Value Shares Mahindra (Anuradha) 242.61 23.61 C apital World Investors -711.77-69.28 C P P Investment Board 185.96 18.10 C apital R esearch G lobal Investors -390.66-38.02 Norges Bank Investment Management (NBIM) 80.79 7.43 S umitomo Mitsui Banking C orp -336.99-32.80 J.P. Morgan Asset Management (H ong K ong) Ltd. 52.11 5.07 C apital International, Inc. -182.99-17.81 First State Investments (HK ) Ltd. 47.95 4.41 Stewart Investors -129.91-12.64 Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 11
Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16 FY17E FY18E Interest Earned 9719.9 16384.0 18766.4 22002.4 Interest Expended 5496.1 9484.0 10825.6 12783.6 Net Interest Income 4223.8 6900.0 7940.8 9218.8 growth (%) 13.5 63.4 15.1 16.1 Non Interest Income 2028.4 2612.3 3035.6 3568.1 Net Income 6252.2 9512.3 10976.4 12786.9 Operating expense 3254.7 5471.5 6229.1 7245.2 Gross profit 2997.5 4040.8 4747.3 5541.8 Provisions 164.5 917.3 914.6 1000.3 Taxes 966.9 1033.9 1264.8 1498.7 Net Profit 1866.1 2089.6 2567.9 3042.8 growth (%) 24.2 12.0 22.9 18.5 EPS 12.1 11.4 14.0 16.6 Key Ratios (Year-end March) FY15 FY16 FY17E FY18E Valuation No. of Equity Shares 154.5 183.4 183.4 183.4 EPS ( ) 12.1 11.4 14.0 16.6 BV ( ) 91.3 130.6 144.7 161.4 BV-ADJ ( ) 87.4 123.7 136.6 151.8 P/E 114.9 65.1 53.0 44.7 P/BV 15.9 6.0 5.4 4.9 P/ABV 15.6 5.9 5.3 4.8 Yields & Margins (%) Yield on avg earning assets 10.4 9.4 9.7 9.7 Avg. cost on funds 6.8 6.1 6.1 6.1 Net Interest Margins 4.5 4.0 4.1 4.1 Avg. Cost of Deposits 6.7 6.0 6.0 6.0 Yield on average advances 12.5 11.2 11.5 11.5 Quality and Efficiency (%) Cost / Total net income 52.1 57.5 56.8 56.7 Credit/Deposit ratio 88.4 85.6 85.1 84.9 GNPA 1.9 2.4 2.4 2.5 NNPA 0.9 1.1 1.1 1.1 ROE 14.1 9.2 10.2 10.8 ROA 1.9 1.1 1.2 1.2 Balance sheet Crore (Year-end March) FY15 FY16 FY17E FY18E Sources of Funds Capital 386.2 917.2 917.2 917.2 ESOPS 3.0 3.4 3.4 3.4 Reserves and Surplus 13722.6 23041.9 25635.4 28692.3 Networth 14111.8 23962.5 26556.0 29612.9 Deposits 74860.4 138643.3 164269.2 194660.3 Borrowings 12149.8 20975.0 24795.4 29342.4 Other Liabilities & Provisions 4858.1 8679.0 9220.0 9809.5 Total 105980.0 192259.8 224840.6 263425.0 Applications of Funds Fixed Assets 1206.7 1551.6 1684.7 1834.7 Investments 30422.1 51260.2 58333.4 67162.5 Advances 66160.5 118665.0 139853.1 165267.6 Other Assets 1928.4 9445.6 12176.7 14662.5 Cash with RBI & call money 6262.4 10879.5 12334.7 14039.9 Total 105980.0 191801.9 224382.6 262967.1 Growth ratios (Year-end March) FY15 FY16 FY17E FY18E Total assets 21.0 81.0 17.0 17.2 Advances 24.8 79.4 17.9 18.2 Deposits 26.7 85.2 18.5 18.5 Total Income 15.6 61.7 14.8 17.3 Net interest income 13.5 63.4 15.1 16.1 Operating expenses 28.0 68.1 13.8 16.3 Operating profit 16.3 34.8 17.5 16.7 Net profit 24.2 12.0 22.9 18.5 Book value 14.9 43.0 10.8 11.5 EPS -38.1-5.7 22.9 18.5 ICICI Securities Ltd Retail Equity Research Page 12
ICICIdirect.com coverage universe (Banks) CMP M Cap EPS ( ) P/E (x) P/ABV (x) RoA (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Bank of Baroda (BANBAR) 157 123 Hold 36,227 15-8 11 10.2-19.4 13.8 1.1 2.5 2.2 0.5-0.3 0.3 9-5 7 Punjab National Bank (PUNBAN) 79 74 Hold 15,512 17 6 14 4.8 13.1 5.7 0.7 1.1 0.9 0.5 0.2 0.4 8 3 6 State Bank of India (STABAN) 187 160 Hold 139,460 18 14 18 10.7 13.4 10.5 1.4 1.4 1.4 0.7 0.5 0.6 11 8 9 Indian Bank (INDIBA) 90 91 Hold 3,856 21 15 19 4.3 6.1 4.7 0.4 0.4 0.4 0.5 0.4 0.4 7 5 6 Axis Bank (AXIBAN) 502 480 Hold 119,141 31 35 37 16.2 14.5 13.6 2.7 2.4 2.1 1.7 1.7 1.5 18 17 15 City Union Bank (CITUNI) 96 90 Buy 5,746 6 8 8 14.9 12.7 12.0 2.3 2.1 1.8 1.4 1.5 1.5 16 16 15 DCB Bank (DCB) 92 85 Hold 2,380 7 7 7 13.5 13.4 13.1 1.8 1.6 1.4 1.3 1.1 1.0 15 12 11 Federal Bank (FEDBAN) 49 45 Hold 8,410 6 3 4 8.3 17.7 12.7 1.1 1.2 1.1 1.3 0.5 0.7 14 6 8 HDFC Bank (HDFBAN) 1,145 1,225 Buy 286,250 41 49 59 28.1 23.5 19.5 4.7 4.1 3.5 1.9 1.9 1.9 19 18 19 IndusInd Bank (INDBA) 1,070 1,060 Hold 63,642 34 38 49 31.6 27.8 21.6 5.4 3.6 3.2 1.8 1.9 2.0 18 16 15 Jammu & Kashmir Bk(JAMKAS) 64 70 Hold 3,122 10 12 17 6.1 5.2 3.8 0.6 0.6 0.5 0.7 0.8 1.0 9 10 12 Kotak Mahindra Bank (KOTMAH) 741 750 Hold 135,607 14 11 14 54.4 65.1 53.0 6.5 6.0 5.4 1.5 1.1 1.2 12 9 10 Yes Bank (YESBAN) 963 890 Hold 40,429 48 60 73 20.1 16.0 13.1 3.5 3.0 2.5 1.6 1.7 1.7 21 20 20 ICICI Securities Ltd Retail Equity Research Page 13
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 400 093 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 14
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 Sebi registered Research Analyst having registration no. INH000000990. 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 www.icicibank.com. 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. ICICI Securities Ltd Retail Equity Research Page 15