Kotak Mahindra Bank (KOTMAH) 690

Result Update Rating matrix Rating : Hold Target : 660 Target Period : 12 months Potential Upside : -4% What s changed? Target Changed from 718 to 660 EPS FY16E Changed from 16.1 to 8 EPS FY17E Changed from 19.3 to 13.1 Rating Unchanged Quarterly performance Crore Q1FY16 Q1FY15 YoY (%) Q4FY15 QoQ (%) NII 1598.2 1465.3 9.1 1589.7 0.5 Other Income 592.4 979.5-39.5 1767.2-66.5 PPP 597.0 979.5-39.1 1767.2-66.2 PAT 189.8 573.2-66.9 1320.8-85.6 Key financials (Merged) crore FY14 FY15 FY16E FY17E NII 5473 6142 6538 7247 PPP 3705 4166 3424 4278 PAT 2165 2477 1457 2369 Valuation summary (Merged) FY14 FY15 FY16E FY17E P/E 73.2 50.5 85.9 52.8 Target P/E 70.0 48.3 82.2 50.5 P/ABV 8.4 5.9 5.6 5.1 Target P/ABV 8.1 5.7 5.5 5.1 RoA 1.5 1.5 0.8 1.1 RoE 13.0 12.1 6.5 9.6 Stock data Market Capitalisation 127813 crore GNPA (Q1FY16) 2421 crore NNPA (Q1FY16) 1077 crore NIM (Q1FY16) 4.2 52 week H/L 744/460 Equity capital 453 crore Face value 5 DII holding (%) 3.7 FII holding (%) 35.3 Price performance Return % 1M 3M 6M 12M Kotak Mahindra bank 3.4 7.6 8.4 47.1 HDFC Bank 4.1 12.3 3.1 32.4 Axis Bank 1.2-0.4-3.8 40.8 Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com August 3, 2015 Kotak Mahindra Bank (KOTMAH) 690 Growth trajectory intact; merger to add value The merged bank s PAT came in lower-than-expected at 190 crore in Q1FY16 (I-direct estimate - 635 crore) Variation in earnings was due to lower-than-expected other income at 593 crore (I-direct estimate - 816 crore) and higher-thanexpected operating expense at 1593 crore. Higher operating expense could be attributable to integration cost ( 63 crore in Q1FY16) and alignment of employee compensation making 339 crore pension provision for erstwhile ING Vysya Bank employees. Provision surged to 305 crore; higher than our estimate of 80 crore, owing to addition in stressed assets from ING Vysya Bank which forms ~2.5% of overall combined book. Accordingly, provision on advance climbed higher to 266 crore in Q1FY16. NIM declined at 4.2% in Q1FY16 vs 5.1% in Q1FY15, owing to lower yield on integrated book and higher interest outgo on saving account of ING Vysya Bank to the tune of 30 crore. NII came in-line with our estimate at 1598 crore (I-direct estimate - 1575 crore). Credit and deposit grew 9.0% YoY to 103614 crore and 12.7% YoY to 116812 crore, respectively, with CASA ratio at 34.3% As the management has guided for incremental 50 bps credit cost in FY16 and one-time provisions made in Q1FY16, we have significantly revised our FY16 expected profit lower to 1457 crore for the merged bank. Credit book structure expected to alter with merger Kotak Mahindra Bank, promoted by Uday Kotak, post receiving a licence in 2002 has grown to a loan-book size of 103614 crore in FY15 and built a branch network of 1260 branches. Bank s retail loans form ~50% of total loans, which enabled KMB to earn the best NIM in industry at 4.5-4.9% led by high yielding retail loans. With ING Vysya Bank merger, composition of loan portfolio has been altered with retail advances proportion declining to ~43% from 50%. Accordingly, blended margins of merged business declined to 3.8-4.0% from 4.5% 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 2010. The bank almost tripled its savings deposits from 3331 crore in March 2011 to 14036 crore by March 2015. CASA ratio improved from 28-29% in the past to 32-33% and is seen averaging around 32-34% in merged bank. For combined entity, post merger, we expect deposit growth at 20.0% CAGR to 177084 crore in FY17E. 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 is seen rising to 2.84%, NNPA ratio to 1.67% in FY16. Kotak s PAT in FY15 remained healthy at 1866 crore (24% YoY). Post revisions, we expect merged bank s PAT to decline in FY16E to 1457 crore and grow 62% to 2369 crore by FY17E. Maintain HOLD, merger to add strength KMB trades at rich valuations consistently due to its superior return ratios and NIM (RoA of ~1.8% and NIM at ~4.8-5%). Post merger, NIMs and RoA are expected to further dip to 3.8-4.0% and 9.5% in FY17E. However, they will continue to stay better than peers. Synergy benefits are expected to accrue over time and improve RoA. Factoring in integration expense and increased provisioning related to erstwhile ING Vysya Bank, we have lowered our ABV to 128.5 from 145.6. Accordingly, we revise our target price to 660 (earlier 718), valuing on SOTP basis. Maintaining multiple at 4.0x for bank, thereby we maintain HOLD rating. ICICI Securities Ltd Retail Equity Research

Variance analysis Q1FY16 Q1FY16E Q1FY15 YoY (%) Q4FY15 QoQ (%) Comments NII 1,598.2 1,575.3 1,465.3 9.1 1,589.7 0.5 NIM (%) 4.20 4.90 5.00-80 bps 4.80-60 bps NIM declined at 4.2% in Q1FY16, owing to lower yield on integrated book and higher interest outgo on saving account of ING Vysya Bank to the tune of 30 crore Other Income 592.4 815.6 627.4-5.6 914.0-35.2 Net Total Income 2,190.6 2,390.9 2,092.6 4.7 2,503.7-12.5 Staff cost 928.8 613.3 571.7 62.5 348.4 166.6 Other Operating Expenses 664.9 749.6 541.4 22.8 388.0 71.3 PPP 597.0 1,028.1 979.5-39.1 1,767.2-66.2 Provision 305.3 80.0 114.8 166.0 106.0 187.9 PBT 291.7 948.1 864.7-66.3 1,661.2-82.4 Tax Outgo 101.9 312.9 291.5-65.0 340.4-70.1 Integration cost of 63 crore and 339 crore of pension provision for erstwhile ING Vysya Bank employees led to higher opex Provision surged to 305 crore; owing to addition in stressed assets from ING Vysya Bank, which forms ~2.5% of overall combined book PAT 189.8 635.2 573.2-66.9 1,320.8-85.6 PAT growth came in lower-than-expected due to higher opex and provision Key Metrics GNPA 2,421.8 2,067.9 2,007.7 20.6 1,237.2 95.7 GNPA rose QoQ to 2.3% vs 1.9% NNPA 1,077.3 935.6 891.0 20.9 609.1 76.9 Total Restructured assets 418.0 200.0 662.0-36.9 159.1 162.7 271 crore of RA added due to integration of ING Vysya Bank Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Net Interest Income 7,096.9 6,537.8-7.9 8,473.6 7,247.0-14.5 NII revised downwards due to lower anticipated advance growth Pre Provision Profit 4,801.3 3,424.3-28.7 5,758.3 4,278.1-25.7 NIM (%) 3.9 3.6-28 bps 3.9 3.5-43 bps PAT 2,814.5 1,456.9-48.2 3,383.1 2,369.5-30.0 Bank has guided on realising ~ 1800-2000 crore from its stressed portfolio over next three years not factored by us in estimates ABV ( ) 254.4 119.6-53.0 286.9 128.5-55.2 Assumptions FY14 FY15 FY16E FY17E FY16E FY17E Credit growth (%) 9.4 24.8 0.9 18.7 Deposit growth (%) 15.8 26.7 1.0 19.9 CASA ratio (%) 32.5 35.4 36.0 35.6 NIM calculated (%) 4.5 4.5 3.6 3.5 Cost to income ratio (%) 49.7 52.1 64.4 60.3 GNPA ( crore) 1,703.8 2,010.4 3,615.9 4,371.3 NNPA ( crore) 675.7 779.8 1,819.6 2,544.1 Slippage ratio (%) 1.6 1.0 1.7 1.3 Credit cost (%) 0.4 0.3 0.9 0.4 Current Earlier ICICI Securities Ltd Retail Equity Research Page 2

[ Going ahead, the management has guided 15-20% growth in advance in FY16E. 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 and deposit CAGR has been 26% and 29%, respectively, to 66161 crore and 74860 crore 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 stands at 103614 crore with alteration in composition of loan portfolio; retail advances proportion declining to ~43% from 50%. Going ahead, we expect credit off-take at 17.6% in FY16-17E to 150856 crore. Exhibit 1: On YoY basis healthy business growth 210000 180000. ( crore) 150000 120000 90000 60000 30000 88856 100289 95101 103676 100506 112755 105198 119018 109155 122968 103614 116812 127137 147669 150856 177084 0 FY14 Q1FY15 Q2FY15 Q3FY15 FY15 1QFY16 FY16E FY17E Advances Deposits Source: Company quarterly earnings update, ICICIdirect.com Research Retail loans now constitute ~43.6% of total credit in standalone whereas due to auto loans of Kotak Prime, in consolidated, retail forms ~43% of total credit of 125522 crore as on FY15. Exhibit 2: Loan book movement over the years (standalone) crore FY13 Q1FY14 Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Growth yoy (%) Proportion (%) CVs and contruction eqmt. 7805 7508 6781 6005 5441 5104 5062 5027 5204 5626 10.2 5.4 Personal Loans incl small busines 2897 2940 3082 3156 4632 4723 5301 5929 6263 7429 57 7.2 Home loans 10727 11030 11307 11454 12100 12312 12894 13738 14709 20756 68.6 20.0 Corporate banking 12291 14849 14759 16621 14337 18568 21140 22044 20299 31205 68 30.1 Agricultural finance 8356 7841 7910 9023 10468 9941 10137 10849 12106 15268 53.6 14.7 Others 6393 6371 6770 6890 6010 706 6414 7054 1158 1854 163 1.8 Total 48469 50539 50609 53149 52988 56922 60948 64641 66161 103614 82.0 100.0 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. Post merger, NIM has declined to 4.2% in Q1FY16, owing to decline in proportion of high yield retail credit and higher interest outgo on saving account of ING Vysya Bank. Going ahead, we expect benign NII growth at 8.6% CAGR to 7247 crore by FY17E on account of slower credit growth and margin compression. However, as ICICI Securities Ltd Retail Equity Research Page 3

integration benefits unfold with proportion of retail advances rising in overall book, NIMs are expected to revive and inch up, not factored by us. Exhibit 3: Decline in NIM led by low yield book accretion 5.2 5.0 4.8 4.6 4.4 4.2 4.0 4.8 4.7 4.8 4.7 4.6 4.6 4.6 4.8 4.9 4.9 4.9 5.0 5.0 4.7 4.8 4.2 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 FY15 (%) Q1FY16 NIM (%) 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 1260 as of June 2015. With strong savings deposits growth at 30% YoY to 22730 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 20% CAGR to 177083 crore in FY17E. Exhibit 4: Branch network grows to 1260 branches to support CASA accretion 1400 1200 1000 800 600 400 200 0 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 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 44.9% to 2028 crore in FY15. Core fee income and treasury gains enabled the bank to achieve stronger other income. Q1FY16 saw decline of 5.6% YoY in non interest income to 592 crore mainly led by lower traction from integrated business. Also, a change in mutual Fund fees recognition from upfront to over the life, has led to lower fee income. We expect non-interest income traction to remain slower in FY16E and than pick-up in FY17E and thereby expect 9.5% CAGR in FY16-17E to 3522 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 management having full control. Exhibit 5: NPA levels maintained at comfortable levels 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 (%) 3.0 2.6 2.2 1.8 1.4 1.0 0.6 2.3 1.9 2.0 2.0 2.0 2.0 1.9 1.9 1.9 1.9 1.6 1.5 1.6 1.6 1.6 1.5 1.6 0.7 0.6 0.6 0.6 0.8 1.0 1.0 1.1 1.1 1.0 1.0 1.0 0.9 1.0 0.8 0.6 0.6 2.8 2.9 1.7 1.4 0.2-0.2 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 FY15 Q1FY16 FY16E FY17E 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 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. Standard restructured loans also increased at 418 crore (0.4% of net advances) owing to 271 crore from integration. We expect GNPA and NNPA ratios to inch up at 2.9% and 1.7%, respectively, by FY17E. Accordingly, provision expenses are expected to remain higher at 1.0% (annualised) in FY16E and then come down at 0.5% (annualised) 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 ~40% of PAT Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Kotak Bank 252 260 276 297 282 280 362 436 403 353 340 407 430 626 611 527 191 Kotak Securities 23 29 24 50 23 40 38 *13 31 40 46 44 68 66 60 96 67 Kotak Mahindra Capital 1-4 4 5 6 4 2 4 4-2 7 5-4 -7-6 30 3 Kotak Prime 94 90 104 97 94 114 105 119 117 125 123 126 120 125 120 143 119 Kotak AMC & Trust 9 7 3 3 4-5 11 2 7 17 12 4 0-1 -10-18 20 International Subsidiaries -3-7 -4 3-5 8 5-1 -10 1 9 6 7 13 14 18 25 Kotak Investment advisors 11 8 7 10 8 9 6 8 1 4 7 5 8 4 2 11 0 Kotak Mahindra Investments 3 3 3 6 4 16 8 5 4 11 11 16 17 25 24 40 30 Kotak Mahindra Old Mutual 46 53 47 57 32 47 53 58 71 44 60 65 49 52 51 76 66 Total (net off aflliates/minority) 436 433 464 528 443 502 577 666 627 583 591 678 695 899 863 913 518 Exhibit 7: Profitability performance at consolidated level PAT ( crore) Q1FY16 Q1FY15 YOY (%) Q4FY15 QoQ (%) Kotak Bank 190.8 430.0-55.6 527.0-63.8 Kotak Securities 67.0 68.0-1.5 96.0-30.2 Kotak Mahindra Capital 3.0-4.0 NA 30.0 NA Kotak Prime 119.0 120.0-0.8 143.0-16.8 Kotak AMC & Trust 20.0 0.0 NA -18.0 NA International Subsidiaries 25.0 7.0 NA 18.0 38.9 Kotak Investment advisors 0.0 8.0-100.0 11.0-100.0 Kotak Mahindra Investments 30.0 17.0 76.5 40.0-25.0 Kotak Mahindra Old Mutual 66.0 49.0 34.7 76.0-13.2 Total (net off equity aflliates/minority) 517.8 695.0-25.5 913.0-43.3 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 19728 crore in Q1FY16. Kotak Prime, the next highest profit making segment, grew tepidly with loan growth of 11.5% YoY to 19728 crore in Q1FY16 while car loans within the same grew 12.3% YoY to 15070 crore. PAT came in flat QoQ 119 crore. Exhibit 8: Kotak Mahindra Prime profitability on a slower track Crore Q1FY16 Q4FY15 Q1FY15 YoY Gr. (%) QoQ Gr. (%) PBT 183.0 218.0 183.0 0.0-16.1 PAT 119.0 143.0 120.0-0.8-16.8 Loans 19728.0 19707.0 17693.0 11.5 0.1 -car loans in same 15070.0 14726.0 13418.0 12.3 2.3 CAR (%) 18.3 18.3 - - ROA (%) 2.5 2.5 - - NET NPA -cars (%) 0.5 0.4 - - Source: Company quarterly earnings update, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6

Exhibit 9: Kotak Prime second highest profit contributor Q1FY16 Q4FY15 Q3FY15 Q2FY15 Q1FY15 Q4FY14 Q3FY14 Q2FY14 Q1FY14 Q4FY13 Q3FY13 Q2FY13 Q1FY13 Q4FY12 Q3FY12 PBT 183 218 183 190 183 192 190 191 179 174 158 170 139 143 152 PAT 119 143 120 125 120 126 123 125 117 119 105 114 94 97 104 Loans 19728 19707 19073 18819 17693 17371 16858 16952 17093 17022 16042 15173 14114 13386 12379 -car loans 15070 14726 14234 13946 13418 13273 13066 13136 13055 12777 12237 11756 11154 10577 9737 CAR 18.3 18.3 17.3 17.7 17 17.7 17.1 16.4 16 15.4 15.8 15.8 15.9 16.3 16.8 ROA 2.5 2.5 2.3 2.5 2.5 2.6 2.6 2.6 2.5 2.6 2.4 2.8 2.4 2.9 3 Net NPA -cars 0.5% 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% 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 2.7% 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 7813 crore in Q1FY16 on the back of increased volumes in 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. Exhibit 10: Average daily turnover trend 9000 8000 7000 ( Crore) 6000 5000 4000 3000 2000 3800 3600 3925 4522 5205 4648 3582 4261 4160 4137 3300 3343 3673 3814 3692 4248 3720 3903 6053 6621 8372 8372 7813 1000 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Exhibit 11: Market share in average daily volume surges in Q1FY16 (reported) 5.5 5 5.3 4.5 4.5 4.3 The market share of Kotak Securities remained at 2.7% in Q1FY16 (%) 4 3.5 3.9 3.8 3.7 3.8 3.5 3 3.0 2.7 2.9 2.9 2.9 2.9 2.7 2.82.85 2.7 2.5 2.5 2.5 2.6 2.5 2.2 2.4 2.3 2.4 2 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 Q1FY16 Source: Company quarterly earnings update, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

In Q1FY16, Kotak Securities clocked 12.1% YoY growth in topline at 250 crore on healthy daily volume of 7813 crore vs. 6053 crore in Q1FY15. PAT came in at 67 crore; same as in same quarter in previous fiscal owing to higher expenses incurred 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 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 78% YoY to 388 crore with APE increasing 92% YoY. Q1FY16 PAT was at 66 crore led by strong individual premium growth. On APE (Single @ 1/10th) basis, Kotak Bank share for Q1FY16 is 48% (Q1FY15 27%) for first year individual premium Exhibit 12: Life insurance business statistics on APE basis market share is 29% Premium ( crore) Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Renewal 327.0 334.0 527.0 240.0 337.0 350.0 571.0 Indvl Regular 104.0 101.0 186.0 58.0 111.0 133.0 301.0 124.0 Group 127.0 127.0 205.0 134.0 170.0 159.0 328.0 248.0 Single 49.0 37.0 88.0 26.0 50.0 26.0 46.0 16.0 New Business Premium 280.0 265.0 479.0 218.0 331.0 318.0 675.0 388.0 APE 235.9 231.7 399.8 194.6 286.0 294.6 633.6 373.6 Solvency Ratio (%) 3.1 3.2 3.2 3.1 3.0 3.0 3.1 3.2 PAT 44.0 60.0 65.0 49.0 52.0 51.0 76.0 66.0 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. Its share of equity in total has been rising gradually from 14% in FY09 to 24% in FY14. In Q1FY16, average AUM grew 35% YoY to 48337 crore. This has helped in improving profitability to 20 crore in Q1FY16 vs. nil profit in Q1FY15. 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 21 crore and PAT of 3 crore in Q1FY16. 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 ING Vysya Bank merger, the bank brought down promoter stake from 40% to 34% and also added value and geographical synergies in the company. Post merger, NIMs and RoA is expected to decline to 3.8-4.0% and 9.5% in FY17E, however, will continue to remain competitive compared to peers. Synergy benefits are expected to accrue over time and will enable the bank to improve RoA. Factoring in integration expense and increased provisioning related to erstwhile ING Vysya Bank, we have lowered our ABV to 128.5 from 145.6. Accordingly, valuing on SOTP basis, we revise our target price at 660 (earlier 718), maintaining multiple at 4.0x and, thereby, maintain our HOLD rating on the stock. Exhibit 13: DuPont Analysis (Bank standalone) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Net interest income/ avg. total assets 5.1 5.3 5.6 4.8 4.3 4.6 3.8 3.8 3.4 3.2 Non-interest income/ avg. total assets 1.9 1.0 1.9 1.8 1.7 1.8 1.6 1.8 1.6 1.6 Non-operating profit/ avg. total assets 7.0 6.3 7.5 6.5 6.0 6.5 5.4 5.6 5.1 4.8 Operating expenses/ avg. total assets 4.2 4.2 3.6 3.5 3.1 3.4 2.8 3.0 3.3 2.9 Operating profit/ avg. total assets 2.8 2.1 3.9 3.0 2.8 3.1 2.6 2.6 1.8 1.9 Provisions/ avg. total assets 1.1 0.6 1.5 0.3 0.1 0.3 0.3 0.3 0.7 0.3 Return on avg. total assets 1.2 1.0 1.7 1.9 1.9 1.9 1.5 1.5 0.8 1.1 Leverage 9.3 7.8 8.0 7.8 7.9 9.3 8.6 7.9 8.4 9.1 Return on equity 11.4 7.5 13.5 14.5 14.7 17.9 13.0 12.1 6.5 9.6 Exhibit 14: Valuation FY14 FY15 FY16E FY17E EPS ( ) 9.4 13.7 8.0 13.1 Growth (%) 1.2 44.8-41.2 62.6 P/E (x) 73.2 50.5 85.9 52.8 ABV 81.3 114.9 119.6 128.5 P/ABV (x) 8.4 5.9 5.6 5.1 GNPA (%) 1.9 1.8 2.8 2.9 RoNA (%) 1.5 1.5 0.8 1.1 RoE (%) 13.0 12.1 6.5 9.6 Exhibit 15: Valuation ( ) Merged Entity Company Value / share KMB (Merged entity) 522 Kotak Life 23 Kotak Mahindra Prime 64 Kotak Mahindra Capital 11 Kotak Securities 30 Kotak AUM 12 662 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 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. 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 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 ~1.5% from 1.8% immediately. RoA can further be maintained at 1.5% in FY15-17E. However, we believe the benefits of merger synergies to 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 Target Price: 660 500 400 300 200 100 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 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 Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Mar-14 Jun-14 Sep-14 Dec-14 Jun-15 1 Kotak (Uday Suresh) 30-Jun-15 33.52 612.5 0.0 Promoter 40.33 40.33 40.07 40.05 33.86 2 ING Bank N.V. 30-Jun-15 6.45 117.9 117.9 FII 35.09 35.09 34.61 35.09 35.32 3 Capital International, Inc. 30-Jun-15 5.86 107.1 34.6 DII 1.78 1.78 2.01 2.03 3.69 4 CPP Investment Board 30-Jun-15 3.93 71.7 0.0 Others 22.80 22.80 23.31 22.66 27.13 5 Sumitomo Mitsui Banking Corp 30-Jun-15 3.59 65.6 0.0 6 First State Investment Management (UK) Limited 30-Jun-15 2.02 37.0-3.1 7 Genesis Investment Management, LLP 31-May-15 1.93 35.3 0.0 8 Caladium Investments Pte. Ltd. 30-Jun-15 1.64 30.0-10.0 9 Mahindra (Anuradha) 30-Jun-15 1.44 26.4-0.5 10 Matthews International Capital Management, L.L.C. 30-Jun-15 1.15 21.0-7.5 Source: Reuters, ICICIdirect.com Research Recent Activity ( crore and shares in mn) Buys Sells Investor name Value Shares Investor name Value Shares ING Bank N.V.,284.59m 117.90m Caladium Investments Pte. Ltd. -108.96m -10.00m Capital International, Inc. 377.43m 34.64m Matthews International Capital Management, L.L.C. -81.72m -7.50m Capital Research Global Investors 211.08m 19.37m Lyxor Asset Management -33.55m -3.31m Birla Sun Life Asset Management Company Ltd. 91.63m 8.35m Kotak Mahindra Asset Management Company Ltd. -28.36m -3.20m Norges Bank Investment Management (NBIM) 37.83m 3.77m First State Investment Management (UK) Limited -27.44m -3.08m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 11

Financial summary Profit and loss statement Crore (Year-end March) FY14 FY15 FY16E FY17E Interest Earned 8767.1 9719.9 17528.1 20092.8 Interest Expended 5047.1 5496.1 10990.4 12845.8 Net Interest Income 3720.0 4223.8 6537.8 7247.0 growth (%) 16.0 13.5 54.8 10.8 Non Interest Income 1399.7 2028.4 3083.8 3522.3 Net Income 5119.8 6252.2 9621.6 10769.3 Operating expense 2542.7 3254.7 6197.3 6491.2 Gross profit 2577.1 2997.5 3424.3 4278.1 Provisions 304.7 164.5 1281.9 741.6 Taxes 770.0 966.9 685.6 1167.1 Net Profit 1502.4 1866.1 1456.9 2369.5 growth (%) 10.4 24.2-0.2 62.6 EPS 19.5 12.1 8.0 13.1 Key Ratios (Year-end March) FY14 FY15 FY16E FY17E Valuation No. of Equity Shares 77.0 154.5 181.4 181.4 EPS ( ) 19.5 12.1 8.0 13.1 BV ( ) 159.4 91.3 129.6 142.5 BV-ADJ ( ) 151.9 87.4 119.6 128.5 P/E 71.2 114.9 85.9 52.8 P/BV 9.1 15.9 5.8 5.4 P/ABV 9.0 15.6 5.6 5.1 Yields & Margins (%) Yield on avg earning assets 10.6 10.4 9.7 9.6 Avg. cost on funds 6.9 6.8 6.8 6.6 Net Interest Margins 4.5 4.5 3.6 3.5 Avg. Cost of Deposits 6.9 6.7 6.7 6.7 Yield on average advances 13.2 12.5 11.6 11.5 Quality and Efficiency (%) Cost / Total net income 49.7 52.1 64.4 60.3 Credit/Deposit ratio 89.8 88.4 86.1 85.2 GNPA 2.0 1.9 2.8 2.9 NNPA 1.1 0.9 1.4 1.7 ROE 13.8 14.1 6.5 9.6 ROA 1.8 1.9 0.8 1.1 Balance sheet Crore (Year-end March) FY14 FY15 FY16E FY17E Sources of Funds Capital 385.2 386.2 453.4 453.4 ESOPS 8.5 3.0 8.5 8.5 Reserves and Surplus 11889.9 13722.6 23055.2 25389.4 Networth 12283.5 14111.8 23517.1 25851.3 Deposits 59072.3 74860.4 147668.9 177083.5 Borrowings 12895.6 12149.8 26658.1 31533.6 Other Liabilities & Provisions 3333.8 4858.1 7113.4 7469.0 Total 87585.2 105980.0 204957.6 241937.5 Applications of Funds Fixed Assets 1106.9 1206.7 1914.2 2058.5 Investments 25484.5 30422.1 54727.9 60708.2 Advances 53027.5 66160.5 127136.8 150855.7 Other Assets 1972.3 1928.4 9516.8 14583.8 Cash with RBI & call money 5979.9 6262.4 12700.2 14932.7 Total 87571.1 105980.0 205995.8 243138.9 Growth ratios (Year-end March) FY14 FY15 FY16E FY16E Total assets 4.6 21.0 0.9 18.0 Advances 9.4 24.8 0.9 18.7 Deposits 15.8 26.7 1.0 19.9 Total Income 10.5 15.6 0.8 14.6 Net interest income 16.0 13.5 0.5 10.8 Operating expenses 15.1 28.0 0.9 4.7 Operating profit 30.7 16.3 0.1 24.9 Net profit 10.4 24.2-0.2 62.6 Book value 29.9 14.9 0.4 9.9 EPS 7.0-38.1-0.3 62.6 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 India (BANIND) 169 135 Sell 10,426 26 21 32 6.6 8.0 5.3 0.9 1.1 1.0 0.3 0.2 0.3 6 4 7 Bank of Baroda (BANBAR) 186 200 Buy 41,057 15 20 23 12.1 9.2 8.1 1.3 1.3 1.1 0.5 0.6 0.6 9 11 11 Punjab National Bank (PUNBAN) 156 145 Hold 28,251 17 19 26 9.5 8.2 6.1 1.3 1.2 1.1 0.5 0.6 0.7 8 9 11 Syndicate Bank (SYNBN) 98 100 Hold 6,478 23 23 31 4.3 4.3 3.1 0.8 0.8 0.8 0.5 0.5 0.6 12 11 14 Indian Bank (INDIBA) 143 200 Buy 6,124 21 23 28 6.8 6.3 5.0 0.6 0.6 0.6 0.5 0.5 0.6 7 7 9 Axis Bank (UTIBAN) 579 690 Buy 137,415 31 35 43 18.6 16.4 13.5 3.2 2.7 2.3 1.7 1.7 1.8 18 17 18 City Union Bank (CITUNI) 100 118 Buy 4,861 7 8 10 14.4 12.1 9.9 2.4 2.0 1.7 1.5 1.7 1.8 17 17 18 DCB Bank (DCB) 135 160 Buy 3,490 7 8 9 19.8 17.0 14.5 2.7 2.3 2.0 1.3 1.3 1.2 15 14 14 Federal Bank (FEDBAN) 68 76 Hold 11,677 6 6 7 11.6 11.9 9.8 1.5 1.5 1.3 1.3 1.1 1.1 14 12 13 HDFC Bank (HDFBAN) 1,097 1,225 Buy 274,175 41 49 59 26.9 22.4 18.6 4.5 3.8 3.3 1.9 1.9 2.0 19 18 19 IndusInd Bank (INDBA) 973 1,050 Buy 56,663 34 39 51 28.7 25.1 19.1 4.9 3.3 2.9 1.8 1.9 2.1 18 16 16 Jammu & Kashmir Bk(JAMKAS) 105 119 Buy 5,080 10 21 25 10.0 5.0 4.1 1.0 0.9 0.8 0.7 1.2 1.3 9 16 17 Kotak Mahindra Bank (KOTMAH) 691 660 Hold 126,387 14 8 13 50.6 86.0 52.9 6.0 5.8 5.4 1.5 0.8 1.1 12 6 10 South Indian Bank (SOUIN0) 23 27 Buy 3,165 2 3 4 10.3 7.8 5.9 1.0 1.0 0.9 0.5 0.6 0.8 9 11 14 Yes Bank (YESBAN) 832 950 Buy 34,644 48 61 78 17.3 13.7 10.7 3.0 2.5 2.1 1.6 1.7 1.8 21 20 21 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. 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ICICI Securities Ltd Retail Equity Research Page 15