Kotak Mahindra Bank. CMP: INR495 TP: INR429 Neutral

BSE SENSEX S&P CNX 16,739 5,049 Bloomberg KMB IN Equity Shares (m) 689.3 52-Week Range 515/333 1,6,12 Rel.Perf.(%) 0/12/31 M.Cap. (Rs b) 340.5 M.Cap. (US$ b) 6.7 25 January 2012 3QFY12 Results Update Sector: Financials Kotak Mahindra Bank CMP: INR495 TP: INR429 Neutral Kotak Mahindra Bank (KMB) posted 21% YoY (7% QoQ) growth in 3QFY12 consolidated PAT to INR4.6b. Excluding profit from the life insurance business, PAT grew 16% YoY (8% QoQ) to INR4.2b. Profitability of lending business remained strong, with robust loan growth and superior asset quality performance. Contribution of lending operations to consolidated profit increased further to ~83% (as compared with ~80% in 1HFY12). Consolidated loans grew 31.8% YoY and 4.5% QoQ to INR528b, driven by strong sequential growth in personal, agriculture and home loans. Reported margin contracted by 10bp QoQ to 4.7%. KMB's (standalone bank) deposits grew 36% YoY and 6% QoQ to INR384b. CASA ratio improved to 27.7% from 25.7% on account of healthy 24% QoQ increase in savings bank balances boosted by high interest rates offered on savings bank deposits post deregulation of savings bank rates. Profit from the life insurance business continued to grow on a YoY basis, but declined QoQ to INR470m from INR530m in the previous quarter. In line with the industry scenario, profitability of capital market related businesses remains under pressure. Valuation and view: KMB is likely to remain on a strong growth path, led by corporate, home and CV loans. We expect the bank to report ~29% CAGR in loan growth over FY11-13. Cost-to-income ratio is likely to remain above 50%, led by aggressive branch expansion and marketing campaign for savings deposits. Lending business will continue to drive profitability and we expect the contribution of lending business to remain high at 80%+. The stock trades at 2.4x FY13E consolidated BV and 17x FY13E consolidated EPS. Given the rich valuations, we maintain Neutral, with an SOTP-based target price of INR429. ; Quarterly numbers may vary from annual numbers due to difference in reporting Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com) + 91 22 3982 5415 Umang Shah (Umang.Shah@MotilalOswal.com) + 91 22 3982 5521

Lending business: Profit growth remains buoyant; Reported margins decline 10bp QoQ The consolidated profits in the lending business grew 35% YoY and 9% QoQ to INR3.8b, of which standalone PAT for the banking business grew 47% YoY and 6% QoQ to INR2.6b. Strong YoY PAT growth was driven by (1) Robust traction in non-interest income (up 71% YoY and 33% QoQ) for standalone bank (2) Strong consolidated loan growth (up 32% YoY and 5% QoQ) and (3) stable asset quality resulting into lower credit costs. Reported consolidated margins contracted 10bp QoQ to 4.7% as cost pressures continued to mount. During the quarter, the bank raised interest rates on savings bank deposits up to 5.5%-6.0%, which too contributed to the increase in interest expenses. Lending business: Strong business growth; Healthy asset quality Standalone bank loans grew 7% QoQ and 36% YoY to INR398b, while the consolidated loan book grew 5% QoQ and 2% YoY to INR528b. Robust asset growth was driven by strong growth in the agri segment (in order to meet the priority sector target towards the year end), personal loan and home loan segments. Standalone bank GNPAs remained stable QoQ in absolute terms, while consolidated GNPA (ex stress assets) in absolute terms increased by 7% QoQ. Consolidated GNPA (ex stress assets) ratio remained largely steady at 0.95% v/s 0.93% a quarter ago. Provision coverage ratio (including technical write offs) for the standalone bank stood healthy at ~70% levels. KMPL's (NBFC car financing business) 3QFY12 PAT grew 11% YoY and 16% QoQ to INR1.04b. KMPL's loans grew 19% YoY but declined marginally 1% QoQ to INR124b. Strong growth driven by Agri, personal and home loan segments Consolidated asset book grew 32% YoY (INR m) 3QFY12 3QFY11 YoY Gr % 2QFY12 QoQ Gr % Commercial Vehicles 75,400 55,485 35.9 73,510 2.6 Car Loans (KPrime) 97,710 79,935 22.2 98,580-0.9 Personal Loans 16,890 12,268 37.7 15,010 12.5 Home loans 79,350 66,261 19.8 75,280 5.4 Corp Banking 166,970 116,580 43.2 163,790 1.9 Agri 48,940 37,528 30.4 42,480 15.2 Others 43,200 32,910 31.3 37,160 16.3 Total Loans 528,460 400,967 31.8 505,810 4.5 Invt / Treasury Assets 199,020 157,690 26.2 183,470 8.5 Loan Mix (Dec-11, %) Overall loan mix has remained fairly stable 25 January 2012 2

Asset quality remains healthy (Consolidated) Management expects asset quality to remain strong, due to higher share of collateralized loan and improved risk management practices Banking: Lower credit cost and healthy loan growth driving profitability KMB standalone PAT grew 47% YoY and 6% QoQ to INR2.6b. Strong YoY PAT growth was driven by (1) Robust traction in non-interest income (up 71% YoY and 33% QoQ) (2) Strong loan growth (up 36% YoY and 7% QoQ) and (3) stable asset quality resulting into lower credit costs. Standalone bank loans grew 7% QoQ and 36% YoY to INR398b, driven by strong sequential growth in the agri loan (up 16% YoY and 15% QoQ; in order to meet the priority sector target towards the year end), personal loan (up 29% YoY and 13% QoQ) and home loan (up 15% YoY and 5% QoQ) segments. The management has maintained its guidance of 30% loan growth for FY12 and expects 25-30% loan growth for FY13. Strong traction in Savings account deposits in a de-regularized environment; though still early days KMB's deposits grew 36% YoY and 6% QoQ to INR384b. Importantly, CASA ratio improved to 27.7% from 25.7% on account of healthy 24% QoQ increase in the savings bank balances. This is a result of high interest rates offered by the bank on the savings bank deposits. However, the sustainability of the accretion of the savings bank deposits going forward will remain a key monitorable. Reported margins contracted 10bp QoQ to 4.7% as cost pressures continued to mount. During the quarter, the bank raised interest rates on savings bank deposits up to 5.5%-6.0%, which too partially contributed towards a 15% QoQ increase in interest expenses. During the quarter, the bank added 7 branches taking the total number of branches to 330. KMB plans to achieve a branch network of 360 branches by FY12 and 500 branches by CY13. Healthy non interest income growth; Asset quality performance remains impressive Non-interest income increased steeply by 71% YoY and 33% QoQ to INR2.8b on the back of strong income on foreign exchange transactions, income from stressed assets recovery and investment income. Standalone bank GNPAs remained stable QoQ in absolute terms. Provision coverage ratio (including technical write offs) for the standalone bank stood healthy at ~70% levels. 25 January 2012 3

Kotak Prime - Loans decline QoQ Kotak Prime's total income grew 12% QoQ and 23% YoY to INR4.7b in 3QFY12. KMPL PAT grew 11% YoY and 16% QoQ to INR1.04b. Auto loans were up 22% YoY, but down marginally by 1% QoQ to INR97b. Growth in other loans moderated to 8% YoY, as it declined 3% QoQ to INR26b. Overall loans grew 19% YoY and declined 1% QoQ to INR124b. Net NPAs on car finance remained stable QoQ at 0.2%. Overall loan portfolio remained largely stable QoQ KPrime's auto loan portfolio remained largely flattish on a QoQ basis Trend in PAT (INR m) KPrime's profitability improved sequentially 25 January 2012 4

Capital market business and Asset management business remains under pressure K-Sec PAT declined 49% YoY and 17% QoQ to INR240m. Average daily volumes declined to INR41.6b from INR42.6b in 2QFY12. KSEC's market share remained stable at 2.9% on a sequential basis. Investment Banking reported PAT of INR40m v/s a net loss of INR40m in 2QFY12 and INR76m in 3QFY11. Overall AUMs declined QoQ to INR487b v/ s INR505b in 2QFY12. PAT from the AMC business stood at INR30m v/s INR70m in 2QFY12 and INR56m in3qfy11. K-Sec: Market share holding up (%) K-Sec: Earnings trend Pressure on K-Sec's profitability persists KMCC: Earnings trend IB business reports profit but overall profitability remains weak 25 January 2012 5

Domestic AUMs decline QoQ (INR b) Both Equity as well as PMS AUMs witness decline QoQ MF AUMs declines QoQ (INR b) The QoQ declining trend in MF AUMs has continued during YTD FY12 period Life Insurance: PAT of INR470m for 3QFY12 and INR1.5b for 9MFY12 Kotak Life Insurance premium income increased 4.6% YoY but declined 5.5% QoQ to INR6.4b in 3QFY12. First year regular premium declined 18.1% YoY and 10.5% QoQ to INR1.5b. Renewal to total premium ratio improved marginally to 64.6% v/s 63% a quarter ago (and down from 69% a year ago). Life insurance business reported PAT of INR470m v/s INR530m a quarter ago and INR236m in 3QFY11. AUM of life insurance business remained stable QoQ to INR82b and increased from INR78b a year ago. Trend in segment-wise profitability Pressure on capital market related profitability continued to persist. The broking business witnessed a sequential decline in profits, while IB business recouped the losses incurred in the previous quarter, the overall profitability continued to remain weak. As a result, contribution of lending business in overall profitability remained high at ~83%. Considering challenging scenario for capital market and asset management related business, lending business will continue to be a largest (75%+) contributor to profitability. Share of asset management business continues to head downwards. On the back of competitive pressures, the share of capital market and asset management will remain tepid. Strong growth in lending business will continue to drive overall growth. 25 January 2012 6

Trend in segment-wise profitability Key takeaways from the management concall Management feels that the ground reality not as bad as the mood. Management expects to achieve 30%+ loan growth for FY12 and 25-30% loan growth for FY13 seems feasible. KMB does not have any exposure to the aviation sector. In terms of exposure to the infrastructure sector, KMB has exposure in the form of short term working capital loans and transaction banking. It does not have any exposure in the form of project loans. Strong fee income momentum was on account of traction in income from foreign exchange transactions, stressed asset recovery and profit on sale of investments. Initial response post the de-regulation of savings bank rate has been positive, but it would be premature to comment on whether the initial trends would sustain or not. Non-banking financial services business is currently facing a challenging environment. Management believes the business is at its trough; it may not deteriorate further but improvement too may not be very soon. Valuation and view KMB is likely to remain on a strong growth path with focus on growth across segments. However, in our view, corporate, home loans and CV loans will be key growth drivers. We expect the bank to report ~29% CAGR in loan growth over FY11-13. Cost to income ratio for the bank is expected to remain above 50% led by aggressive branch expansion and marketing campaign for savings deposits. 25 January 2012 7

Capital market related business pressure on profitability to persist led by heightened competition across the sector. Lending business will continue to drive profitability and we expect its contribution to remain high at 80%+. We expect consolidated earnings CAGR of ~15% over FY11-13 and expect the bank to report consolidated EPS of INR24 in FY12 and INR28 in FY13 and consolidated BV of INR172 and INR200 in FY12 and FY13 respectively. Stock trades at 2.4x FY13E consolidated BV and 17x FY13E consolidated EPS. On back of rich valuation we continue to maintain Neutral with SOTP based target price of INR429. 25 January 2012 8

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