Kotak Mahindra Bank (KOTMAH) 1388

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 1123.2 966.5 16.2 1059.4 6.0 Other Income 668.1 340.5 96.2 494.1 35.2 PPP 860.8 607.1 41.8 737.6 16.7 PAT 527.3 407.2 29.5 464.5 13.5 Key financials (Merged) crore FY14 FY15E FY16E FY17E NII 5473 6142 7229 8584 PPP 3705 4166 4789 5680 PAT 2165 2477 2927 3489 Valuation summary (Merged) FY14 FY15E FY16E FY17E P/E 73.6 50.8 43.0 36.1 Target P/E 76.2 52.6 44.5 37.4 P/ABV 8.5 6.0 5.3 4.7 Target P/ABV 8.8 6.2 5.6 4.9 RoA 1.5 1.5 1.5 1.5 RoE 13.0 12.1 12.8 13.5 Stock data Market Capitalisation 107810 crore GNPA (Q4FY15) 1237 crore NNPA (Q4FY15) 609 crore NIM (Q4FY15) 4.9 52 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 -5.6 7.3 25.4 43.1 HDFC Bank 3.9 7.4 24.4 32.1 Axis Bank 2.5 4.7 42.6 80.7 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 ( 66161 crore) while deposits grew 26.7% YoY ( 74860 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 66161 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 4.5-4.9% 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 3.9 4.0% 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. 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 110950 crore in FY17E. For the combined entity, post merger, we expect deposit growth at 20.7% CAGR to 179012 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 15520 crore and post that at 25% CAGR to 48468 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

Variance analysis Q4FY15 Q4FY15E Q4FY14 YoY (%) Q3FY15 QoQ (%) Comments NII 1,123.2 1,079.1 966.5 16.2 1,059.4 6.0 NII came in higher than estimate due to 24.8% YoY credit growth vs. our estimate of 21% Calculated NIM (%) 4.70 4.53 4.98-28 bps 4.63 6 bps Other Income 668.1 503.9 340.5 96.2 494.1 35.2 Strong treasury gain of 164 crore and higher fee income at 389 crore push other income Net Total Income 1,791.4 1,583.0 1,307.0 37.1 1,553.5 15.3 Staff cost 378.9 366.9 315.7 20.0 367.9 3.0 Other Operating Expenses 551.7 448.4 384.3 43.6 448.1 23.1 Integration expenses push other operating cost PPP 860.8 767.8 607.1 41.8 737.6 16.7 Provision 66.9 50.0-6.2-1,180.8 29.9 123.6 PBT 793.9 717.8 613.3 29.4 707.7 12.2 Tax Outgo 266.6 236.9 206.1 29.4 243.1 9.7 PAT 527.3 480.9 407.2 29.5 464.5 13.5 PAT growth came in higher-than-expected Key Metrics GNPA 1,237.2 1,250.4 1,059.0 16.8 1,219.9 1.4 NNPA 609.1 661.3 573.0 6.3 629.8-3.3 Asset quality relatively stable Total Restructured assets 158.1 175.0 10.0 1,481.0 159.1-0.6 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 4,984.6 5,058.5 1.5 5,906.1 6,216.7 5.3 Pre Provision Profit 3,441.3 3,566.4 3.6 4,154.8 4,359.8 4.9 NIM (%) 4.6 4.5-11 bps 4.5 4.6 6 bps PAT 2,077.2 2,276.5 9.6 2,495.5 2,783.4 11.5 ABV ( ) 195.6 202.1 3.3 225.8 235.7 4.4 Assumptions Current Earlier FY14 FY15 FY16E FY17E FY16E FY17E Credit growth (%) 9.4 24.8 23.5 24.0 23.5 24.0 Deposit growth (%) 15.8 26.7 21.1 22.4 21.2 22.8 CASA ratio (%) 31.9 36.4 36.9 35.6 33.1 31.5 NIM calculated (%) 4.5 4.5 4.5 4.6 4.6 4.5 Cost to income ratio (%) 49.7 52.1 51.4 50.4 50.0 48.3 GNPA ( crore) 1,059.6 1,237.2 1,482.3 1,786.1 1,425.7 1,784.5 NNPA ( crore) 573.7 609.1 657.1 707.1 781.7 789.7 Slippage ratio (%) 1.9 1.1 1.4 1.4 1.4 1.4 Credit cost (%) 0.5 0.3 0.3 0.3 0.6 0.6 Estimate (Introduced for Merged banking entity) FY16E FY17E ( Crore) Net Interest Income 7,096.9 8,473.6 Pre Provision Profit 4,801.3 5,758.3 NIM (%) 3.9 3.9 PAT 2,814.5 3,383.1 ABV ( ) 254.4 286.9 ICICI Securities Ltd Retail Equity Research Page 2

Shareholding pattern (September 2014) % Ing Vysya Kotak Bank Kotak (Merged) FIIS 29.59 36.85 33.6 Domestic 27.96 55.15 19.1 Other FDI 0.1 8 6.8 ING Groep 42.35-6.5 Promoters - 40.02 34 Foreign Holding 72.04 44.85 46.9 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 230000 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 2018. 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 ~ 230000 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 3.9-4.0% 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

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 11 12 12 SME 38 7 17 Large corporates 39 31 33 Retail 19 50 40 Exhibit 3: Business parameters H1FY15 Merged banking entity Amount ( crore) ING Vysya Kotak bank* Kotak Bank (Merged) Branches (nos) 573 641 1214 ATMs (nos) 635 1159 1794 Employees (nos) 10591 29220 39811 Customers (millions) ~2 ~8 ~10 Total Assets 64582 95430 160012, * Standalone numbers ICICI Securities Ltd Retail Equity Research Page 4

[ 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 66161 crore and 74860 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 66161 crore. Ex CV/CE, the growth was 28.2% YoY. Deposits grew a strong 26.7% YoY to 74860 crore. Exhibit 4: On YoY basis healthy business growth 120000. ( crore) 100000 80000 60000 40000 20000 39079 38537 42318 41632 45443 45463 50245 51524 48469 51029 50539 52454 50609 52641 53149 54671 53028 59072 56922 61407 60948 68103 64641 73066 66160 74860 81702 90637 101275 110950 0 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 88632 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. 7798 7805 7508 6781 6005 5441 5104 5062 5027 5204-4.4 7.9 Personal Loans incl small busines 1868 2897 2940 3082 3156 4632 4723 5301 5929 6263 35 9.5 Home loans 8333 10727 11030 11307 11454 12100 12312 12894 13738 14709 21.6 22.2 Corporate banking 10942 12291 14849 14759 16621 14337 18568 21140 22044 20299 42 30.7 Agricultural finance 5714 8356 7841 7910 9023 10468 9941 10137 10849 12106 15.6 18.3 Others 4424 6393 6371 6770 6890 6010 6274 6414 7054 7580 26 11.5 Total 39079 48469 50539 50609 53149 52988 56922 60948 64641 66161 24.9 100.0 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. 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

Exhibit 6: NIM remains stable at 4.5% 5.2 (%) 5.0 4.8 4.6 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 4.9 4.4 4.2 4.0 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 2015. With strong savings deposits growth at 27% YoY to 22603 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 110950 crore in FY17E. For the combined entity, post merger, we expect deposit growth at 20.7% CAGR to 179012 crore in FY17E. Exhibit 7: Branch network grows to 684 branches (added 79 branches in last year) 800 700 600 500 400 300 200 100 0 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

Exhibit 8: NPA levels maintained at comfortable levels NNPA has been consistently maintained ~1% bodes confidence in asset quality (%) 2.7 2.3 1.9 1.5 1.1 0.7 0.3 2.5 0.8 2.0 1.9 0.7 0.7 1.6 1.5 1.6 1.6 1.6 0.8 0.8 0.6 0.6 0.6 1.5 1.6 0.6 0.6 2.0 2.0 2.0 2.0 1.0 1.0 1.1 1.1 1.9 1.9 1.9 1.9 1.8 1.8 1.0 1.0 1.0 0.9 0.8 0.7-0.1 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 188 249 252 260 276 297 282 280 362 436 403 353 340 407 430 445 466 527 Kotak Securities 47 36 23 29 24 50 23 40 38 *13 31 40 46 44 68 66 60 96 Kotak Mahindra Capital 8 30 1-4 4 5 6 4 2 4 4-2 7 5-4 -7-6 30 Kotak Prime 94 87 94 90 104 97 94 114 105 119 117 125 123 126 120 125 120 143 Kotak AMC & Trust 7 4 9 7 3 3 4-5 11 2 7 17 12 4 0-1 -10-18 International Subsidiaries 8 15-3 -7-4 3-5 8 5-1 -10 1 9 6 7 13 14 18 Kotak Investment advisors 5 6 11 8 7 10 8 9 6 8 1 4 7 5 8 4 2 11 Kotak Mahindra Investments 3 6 3 3 3 6 4 16 8 5 4 11 11 16 17 25 24 40 Kotak Mahindra Old Mutual 24 71 46 53 47 57 32 47 53 58 71 44 60 65 49 52 51 76 Total (net off aflliates/minority) 384 491 436 433 464 528 443 502 577 666 627 583 591 678 695 718 717 913 Exhibit 10: Profitability performance at consolidated level PAT ( crore) Q4FY15 Q4FY14 YOY (%) Q3FY15 QoQ (%) Kotak Bank 527.3 407.0 29.6 465.5 13.3 Kotak Securities 96.0 44.0 118.2 60.0 60.0 Kotak Mahindra Capital 30.0 5.0 NA -6.0 NA Kotak Prime 143.0 126.0 13.5 120.0 19.2 Kotak AMC & Trust -18.0 4.0 NA -10.0 NA International Subsidiaries 18.0 6.0 NA 14.0 28.6 Kotak Investment advisors 11.0 5.0 120.0 2.0 450.0 Kotak Mahindra Investments 40.0 16.0 150.0 24.0 66.7 Kotak Mahindra Old Mutual 76.0 65.0 16.9 51.0 49.0 Total (net off equity aflliates/minority) 913.3 678.0 34.7 716.9 27.4 Source: Company quarterly earnings update, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

Kotak Prime The overall loan book has increased nearly four times in seven years from 5615 crore to 19707 crore in FY15. Kotak Prime, the next highest profit making segment, grew tepidly with loan growth of 13.4% YoY to 19707 crore in FY15 while car loans within the same grew 10.9% YoY to 14726 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 218.0 183.0 192.0 13.5 19.1 PAT 143.0 120.0 126.0 13.5 19.2 Loans 19707.0 19073.0 17371.0 13.4 3.3 -car loans in same 14726.0 14234.0 13273.0 10.9 3.5 CAR (%) 18.3 17.3 - - ROA (%) 2.5 2.3 - - NET NPA -cars (%) 0.4 0.4 - - 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 218 183 190 183 192 190 191 179 174 158 170 139 143 152 134 PAT 143 120 125 120 126 123 125 117 119 105 114 94 97 104 90 Loans 19707 19073 18819 17693 17371 16858 16952 17093 17022 16042 15173 14114 13386 12379 12547 -car loans 14726 14234 13946 13418 13273 13066 13136 13055 12777 12237 11756 11154 10577 9737 9821 CAR 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 15.9 ROA 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 2.8 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

Exhibit 13: 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 7378 8372 1000 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) 5.5 5 5.3 4.5 4.5 4.3 The market share of Kotak Securities improved to 2.9% in Q4FY15 (%) 4 3.5 3 2.5 2 3.9 3.8 3.7 3.8 3.5 3.0 2.7 2.9 2.9 2.9 2.9 2.5 2.5 2.6 2.7 2.8 2.9 2.5 2.2 2.4 2.3 2.4 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. 3946 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 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 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 (single @ 1/10th) basis, share of Kotak Bank for FY14 is at 40% ICICI Securities Ltd Retail Equity Research Page 9

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 334.0 527.0 240.0 337.0 350.0 571.0 Indvl Regular 101.0 186.0 58.0 111.0 133.0 301.0 Group 127.0 205.0 134.0 170.0 159.0 328.0 Single 37.0 88.0 26.0 50.0 26.0 46.0 New Business Premium 265.0 479.0 218.0 331.0 318.0 675.0 APE 231.7 399.8 194.6 286.0 294.6 633.6 Solvency Ratio (%) 3.2 3.2 3.1 3.0 3.0 3.1 PAT 60.0 65.0 49.0 52.0 51.0 76.0 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 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

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 5.1 5.3 5.6 4.8 4.3 4.3 4.3 4.4 4.4 4.5 Non-interest income/ avg. total assets 1.9 1.0 1.9 1.8 1.7 1.6 1.6 2.1 2.0 1.8 Non-operating profit/ avg. total assets 7.0 6.3 7.5 6.5 6.0 5.8 6.0 6.5 6.3 6.3 Operating expenses/ avg. total assets 4.2 4.2 3.6 3.5 3.1 3.0 3.0 3.4 3.2 3.2 Operating profit/ avg. total assets 2.8 2.1 3.9 3.0 2.8 2.9 3.0 3.1 3.1 3.1 Provisions/ avg. total assets 1.1 0.6 1.5 0.3 0.1 0.2 0.4 0.2 0.2 0.2 Return on avg. total assets 1.2 1.0 1.7 1.9 1.9 1.8 1.8 1.9 2.0 2.0 Leverage 9.3 7.8 8.0 7.8 7.9 8.6 7.9 7.3 7.6 7.9 Return on equity 11.4 7.5 13.5 14.5 14.7 15.6 13.8 14.1 15.0 15.8 Exhibit 17: Valuation FY14 FY15 FY16E FY17E EPS ( ) 19.5 24.2 29.5 36.0 Growth (%) 7.0 23.9 22.0 22.3 P/E (x) 71.2 57.4 47.1 38.5 ABV 151.9 175.2 202.1 235.7 P/ABV (x) 9.0 7.8 6.8 5.8 GNPA (%) 2.0 1.9 1.8 1.8 RoNA (%) 1.8 1.9 2.0 2.0 RoE (%) 13.8 14.1 15.0 15.8 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 24 1437 ICICI Securities Ltd Retail Equity Research Page 11

Company snapshot 1,600 Target - 1437 1,400 1,200 1,000 800 600 400 200 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 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 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 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-14 0.40 306.3 0.0 2 Capital International, Inc. 31-Dec-14 0.05 36.2 6.2 3 CPP Investment Board 31-Dec-14 0.05 35.9 0.0 4 Sumitomo Mitsui Banking Corp 31-Dec-14 0.04 32.8 0.0 5 First State Investment Management (UK) Limited 31-Dec-14 0.03 20.0 0.2 6 Caladium Investments Pte. Ltd. 31-Dec-14 0.03 20.0 0.0 7 Mahindra (Anuradha) 31-Dec-14 0.02 13.4 0.0 8 Matthews International Capital Management, L.L.C. 31-Dec-14 0.02 12.4 0.2 9 Genesis Group Trust Employee Benefit Plans 30-Sep-14 0.01 9.6-0.3 10 The Vanguard Group, Inc. 31-Dec-14 0.01 8.6 0.0 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 43.58 40.33 40.33 40.07 40.05 FII 32.06 35.09 35.09 34.61 35.09 DII 1.63 1.78 1.78 2.01 2.03 Others 22.73 22.80 22.80 23.31 22.66 Buys Sells Investor name Value Shares Investor name Value Shares First State Investment Management (UK) Limited 180.12 11.10 Kotak (Uday Suresh) -398.93-26.90 CPP Investment Board 160.17 10.88 BlackRock Institutional Trust Company, N.A. -70.39-4.45 Capital International, Inc. 103.22 4.78 ICICI Prudential Asset Management Co. Ltd. -37.79-2.07 Franklin Advisers, Inc. 49.69 3.00 Lyxor Asset Management -26.16-1.66 Matthews International Capital Management, L.L.C. 43.85 2.91 Kotak Mahindra Asset Management Company Ltd. -27.44-1.60 Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 12

Financial summary Profit and loss statement Crore (Year-end March) FY14 FY15 FY16E FY17E Interest Earned 8767.1 9719.9 11443.6 13760.6 Interest Expended 5047.1 5496.1 6385.1 7543.8 Net Interest Income 3720.0 4223.8 5058.5 6216.7 growth (%) 16.0 13.5 19.8 22.9 Non Interest Income 1399.7 2028.4 2276.0 2573.3 Net Income 5119.8 6252.2 7334.5 8790.0 Operating expense 2542.7 3254.7 3768.0 4430.2 Gross profit 2577.1 2997.5 3566.4 4359.8 Provisions 304.7 164.5 267.2 325.9 Taxes 770.0 966.9 1022.8 1250.5 Net Profit 1502.4 1866.1 2276.5 2783.4 growth (%) 10.4 24.2 22.0 22.3 EPS 19.5 24.2 29.5 36.0 Key Ratios (Year-end March) FY14 FY15 FY16E FY17E Valuation No. of Equity Shares 77.0 77.2 77.2 77.2 EPS ( ) 19.5 24.2 29.5 36.0 BV ( ) 159.4 183.1 210.6 244.8 BV-ADJ ( ) 151.9 175.2 202.1 235.7 P/E 71.2 57.4 47.1 38.5 P/BV 9.1 7.9 6.9 5.9 P/ABV 9.0 7.8 6.8 5.8 Yields & Margins (%) Yield on avg earning assets 10.6 10.4 10.2 10.1 Avg. cost on funds 6.9 6.8 6.6 6.4 Net Interest Margins 4.5 4.5 4.5 4.6 Avg. Cost of Deposits 6.9 6.7 6.6 6.5 Yield on average advances 13.2 12.5 12.4 12.3 Quality and Efficiency (%) Cost / Total net income 49.7 52.1 51.4 50.4 Credit/Deposit ratio 89.8 88.4 90.1 91.3 GNPA 2.0 1.9 1.8 1.8 NNPA 1.1 0.9 0.8 0.7 ROE 13.8 14.1 15.0 15.8 ROA 1.8 1.9 2.0 2.0 Balance sheet Crore (Year-end March) FY14 FY15 FY16E FY17E Sources of Funds Capital 385.2 386.2 386.2 386.2 ESOPS 8.5 3.0 3.0 3.0 Reserves and Surplus 11889.9 13755.1 15880.4 18524.6 Networth 12283.5 14144.2 16269.6 18913.8 Deposits 59072.3 74860.4 90637.2 110950.0 Borrowings 12895.6 12149.8 14174.5 16563.6 Other Liabilities & Provisions 3333.8 4858.1 5203.0 5585.5 Total 87585.2 106012.5 126284.2 152012.8 Applications of Funds Fixed Assets 1106.9 1206.7 1270.7 1345.7 Investments 25484.5 30422.1 34431.4 39333.2 Advances 53027.5 66160.5 81702.3 101275.0 Other Assets 1972.3 1960.9 1128.6 459.2 Cash with RBI & call money 5979.9 6262.4 7751.2 9599.7 Total 87571.1 106012.5 126284.2 152012.8 Growth ratios (Year-end March) FY14 FY15 FY16E FY16E Total assets 4.6 21.1 19.1 20.4 Advances 9.4 24.8 23.5 24.0 Deposits 15.8 26.7 21.1 22.4 Total Income 10.5 15.6 16.8 19.1 Net interest income 16.0 13.5 19.8 22.9 Operating expenses 15.1 28.0 15.8 17.6 Operating profit 30.7 16.3 19.0 22.2 Net profit 10.4 24.2 22.0 22.3 Book value 29.9 15.2 15.0 16.3 EPS 7.0 23.9 22.0 22.3. ICICI Securities Ltd Retail Equity Research Page 13

Financial summary (Merged Entity) Profit and loss statement Crore (Year-end March) FY14 FY15E FY16E FY17E Interest Earned 13972.3 15555.7 18076.9 21257.0 Interest Expended 8499.1 9413.9 10848.0 12672.6 Net Interest Income 5473.2 6141.8 7228.9 8584.4 growth (%) 15.4 12.2 17.7 18.8 Non Interest Income 2266.8 2936.1 3303.8 3742.3 Net Income 7740.0 9077.9 10532.7 12326.8 Operating expense 4035.4 4912.2 5743.3 6646.6 Gross profit 3704.6 4165.7 4789.4 5680.2 Provisions 450.1 415.6 547.1 624.2 Taxes 1089.9 1273.2 1315.1 1567.4 Net Profit 2164.6 2477.0 2927.2 3488.6 growth (%) 10.0 14.4 18.2 19.2 EPS 18.9 27.3 32.3 38.5 Key Ratios (Year-end March) FY14 FY15E FY16E FY17E Valuation No. of Equity Shares 114.8 90.7 90.7 90.7 EPS ( ) 18.9 27.3 32.3 38.5 BV ( ) 168.6 238.7 267.2 301.9 BV-ADJ ( ) 162.7 230.1 257.7 291.3 P/E 73.6 50.8 43.0 36.1 P/BV 8.5 6.0 5.4 4.8 P/ABV 8.5 6.0 5.3 4.7 Yields & Margins (%) Yield on avg earning assets 10.3 10.1 9.9 9.8 Avg. cost on funds 6.9 6.9 6.7 6.5 Net Interest Margins 4.0 4.0 4.0 4.0 Avg. Cost of Deposits 6.8 6.8 6.7 6.6 Yield on average advances 12.4 12.0 11.9 11.7 Quality and Efficiency (%) Cost / Total net income 52.1 54.1 54.5 53.9 Credit/Deposit ratio 88.6 88.8 89.0 89.6 GNPA 1.9 1.8 1.8 1.7 NNPA 0.8 0.7 0.7 0.6 ROE 13.0 12.1 12.8 13.5 ROA 1.5 1.5 1.5 1.5 Balance sheet Crore (Year-end March) FY14 FY15E FY16E FY17E Sources of Funds Capital 573.8 453.4 453.4 453.4 ESOPS 8.5 8.5 8.5 8.5 Reserves and Surplus 18772.1 21195.1 23774.5 26923.1 Networth 19354.4 21657.0 24236.4 27385.0 Deposits 100289.1 122967.5 147876.0 179011.5 Borrowings 22564.0 22560.7 26658.1 31533.6 Other Liabilities & Provisions 5790.5 6774.6 7113.4 7469.0 Total 147997.9 173959.9 205883.8 245399.1 Applications of Funds Fixed Assets 1631.4 1818.2 1914.2 2058.5 Investments 42205.3 49262.8 54727.9 61525.8 Advances 88856.4 109155.1 131599.8 160363.6 Other Assets 3425.4 3528.5 5753.1 7492.9 Cash with RBI & call money 11806.0 10870.7 12700.2 14932.7 Total 147924.4 174635.2 206695.1 246373.5 Growth ratios (Year-end March) FY14 FY15E FY16E FY16E Total assets 6.8 18.1 18.4 19.2 Advances 10.7 22.8 20.6 21.9 Deposits 8.6 22.6 20.3 21.1 Total Income 9.8 13.9 15.6 16.9 Net interest income 15.4 12.2 17.7 18.8 Operating expenses 15.9 21.7 16.9 15.7 Operating profit 29.2 12.4 15.0 18.6 Net profit 10.0 14.4 18.2 19.2 Book value 37.5 11.9 11.9 13.0 EPS 1.2 44.8 18.2 19.2 ICICI Securities Ltd Retail Equity Research Page 14

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) 212 255 Hold 12,621 39 45 51 5.4 4.7 4.2 0.8 0.8 0.7 0.4 0.4 0.4 8 9 10 Bank of Baroda (BANBAR) 169 210 Buy 35,565 17 24 30 10.0 7.1 5.6 1.3 1.1 1.0 0.5 0.7 0.8 10 13 14 Dena Bank (DENBAN) 49 56 Hold 2,625 5 9 10 9.2 5.5 4.7 0.8 0.7 0.6 0.2 0.3 0.3 4 7 7 Punjab National Bank (PUNBAN) 160 215 Buy 28,884 20 23 29 7.9 6.9 5.5 1.3 1.0 0.9 0.6 0.7 0.7 10 10 12 Syndicate Bank (SYNBN) 99 124 Hold 5,938 23 28 32 4.4 3.6 3.1 0.9 0.8 0.8 0.5 0.6 0.6 12 13 14 Indian Bank (INDIBA) 140 221 Buy 5,991 23 27 36 6.2 5.2 3.9 0.6 0.6 0.6 0.6 0.6 0.7 8 8 10 Axis Bank (UTIBAN) 571 690 Buy 134,545 31 35 42 18.4 16.2 13.7 3.1 2.7 2.3 1.7 1.7 1.7 18 17 17 City Union Bank (CITUNI) 94 110 Buy 4,551 7 9 11 13.6 10.8 8.8 2.2 1.9 1.6 1.5 1.7 1.8 17 18 18 DCB Bank (DCB) 121 160 Buy 3,129 7 8 9 17.9 15.2 12.8 2.4 2.1 1.8 1.3 1.3 1.3 14 14 14 Federal Bank (FEDBAN) 131 164 Buy 11,176 12 14 18 11.1 9.1 7.4 1.5 1.3 1.2 1.3 1.4 1.4 14 15 16 HDFC Bank (HDFBAN) 981 1,225 Buy 245,238 41 50 60 24.1 19.6 16.3 4.1 3.5 3.0 1.9 2.0 2.0 19 19 19 IndusInd Bank (INDBA) 826 1,000 Buy 43,266 34 43 55 24.4 19.2 15.1 4.2 3.6 3.0 1.8 1.9 2.0 18 20 21 Jammu & Kashmir Bank(JAMKAS) 96 119 Hold 4,630 13 22 27 7.3 4.4 3.6 1.0 0.8 0.7 0.8 1.1 1.2 11 16 17 Kotak Mahindra Bank (KOTMAH) 1,303 1,437 Hold 99,938 24 29 36 53.9 44.2 36.2 7.3 6.4 5.5 1.9 2.0 2.0 14 15 16 ICICI Securities Ltd Retail Equity Research Page 15

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 16

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ICICI Securities Ltd Retail Equity Research Page 17