Knowledge Base

Kotak Mahindra Bank LTD.

CMP: ₹1,731.95

Recommendation: Buy

Investment Horizon: 3 years

Veer Trivedi – Research Analyst

Date – March 01, 2023.

Outlook & Review

The banking sector is standing at the cusp of a broad-based credit up-cycle and the tailwinds are coming in from all directions. The System credit growth has been in double digits since July 2022 and the momentum is expected to sustain. Kotak Mahindra Bank is a key beneficiary of this macro improvement. The Bank has demonstrated improvement in its asset quality, NIM, and Profitability in the past few years. It has also changed gears in building digital infrastructure and has made investments in the same. The bank’s ongoing efforts to diversify its product mix, focus on the mobilization of low-cost granular deposits, declining credit costs, margin improvement, and an improved return ratios matrix are encouraging signs for future growth in earnings. The correction in the bank’ stock price has resulted in the bank trading at a P/B of 3.2x down from its 2020 December peak of 5.1x. We believe this correction provides a good opportunity for the investors and assures a better risk-reward.

Key Positives

Robust Macro Environment

The Banking system credit growth for the fortnight ending February grew 16.1% YoY. The system credit growth has been in double digits since July 2022 indicating a strong demand environment. The RBI recently published its Bank lending survey and noted that the bankers are highly optimistic of the credit demand across all the main sectors. As per the survey the momentum in credit growth is expected to sustain for coming quarters as well. The rising credit demand bodes well for the sector and thus major players like Kotak Bank would continue to be a major beneficiary.

Bank shifting gears to accelerate growth

Mr. Uday Kotak has stated several times in its latest con-calls that this is a ‘Cinderella Moment’ for the sector and therefore Growing fast is one of their core strategies now. This is visible in their latest quarterly results as the bank has been growing its loan book at 20%+ in the past four quarters. In the latest quarter the bank grew its loan book by 22.85% highest among the leading banking players. The loan growth has been broad-based for the bank with each major segment firing. The bank has a special focus on ramping up its share of unsecured retail loans to mid-teen levels from 9.3% currently. The unsecured retail loans grew by 121% YoY in Q3FY23. This shift in its product mix would aid the overall margins for the bank.

Best Margin profile among its leading peers

The Kotak Bank in its latest quarterly results (Q3FY23) reported a Net Interest Margin of 5.47% vs 4.62% a year ago. The Bank has been one of biggest beneficiary of rising interest rates as 55% of its loans are linked to EBLR which are in turn linked to repo rates. Thus, the bank has been able to pass on the rates faster to its asset side customers versus its liability and gained margin expansion. It is widely accepted that the terminal rates are now closer and thus there can be reduction of repo rates in near future. This would impact the margins of the bank. However, considering the changing product mix of the bank and focus on building its CASA ratio back to its average the impact on margins would be limited in our view.

Strong performance from its non-banking business

As on Q3FY23, the non-banking business contributed 30% to the consolidated earnings. The Insurance segment contributed 8%, Capital Markets 7%, Assets Management 5% and other lending related activity at 10%. The bank aims to be a financial institution across the spectrum and they tend to continue to keep that core culture of a unified holistic financial institution working to build an even stronger positioning in the broader financial sector. The bank’s consolidated profit was up 11% YoY with its major segments like Life Insurance, AMC & Securities witnessed sequential growth of 22%, 42% & 8% respectively.

Valuation

The bank has always enjoyed a premium valuation over its peers due to its well-established brand, sustainable growth, continues focus on asset quality & a higher share of retail deposits. However, in the past few periods bank has been witnessing a sort of de-rating due to the overhang of succession planning as Mr. Uday Kotak would be retiring at the end of this Calendar-year. The price-to-book of the bank currently trades at 3.2x down from its 2020 December peak of 5.1x. We believe this correction provides a good opportunity for the investors and assures a better risk-reward.

Key Risks

Kotak Bank’s succession planning would be closely monitored

There is a growing interest and tension in the succession plan at Kotak Mahindra Bank as the term of Managing Director and CEO Uday Kotak would end in December 2023. Any upset regarding the appointment of the new MD could be a major overhang for the stock.

Slowdown in Retail Deposits

There has been an overall slowdown in the deposits growth across the sector and all the major banks are reporting poor deposit growth in comparison to their advances growth. Kotak Bank reported a slower deposit growth at 12.9% YoY versus advances growth at 22.8% YoY. The bank’s CASA deposits also witnessed a slowdown as it relied on its bulk deposits to boost growth. Therefore, the bank’s CASA ratio witnessed a decline and stood at 53.3% vs 59.9%. Although its CASA ratio still remains superior to its peers, the ratio getting bank to its normal levels would help aid the margins.

About the company

Kotak Mahindra Finance Limited received the banking license in the year 2003 forming Kotak Mahindra bank.  It was the first non-banking finance company to get a banking license in the country. Since then, it has been one of the fastest growing banks in India. As of Q3FY23 the bank has 1,752 branches and 2,814 ATMs across the country. The bank with its subsidiaries provides a wide range of financial services across Banking, Equity broking, asset management, insurance and Investment banking.

Financials Snapshot

P&L (in INR Cr)	Q3FY22	Q2FY23	Q3FY23	YoY%	QoQ%
Net Interest Income	4,334	5,099	5,653	30.4%	10.9%
Other Income	1,364	1,955	2,100	54.0%	7.4%
Fee and Services	1,496	1,760	1,847	23.5%	4.9%
Others	-132	195	253	-291.7%	29.7%
Net Total Income	5,698	7,054	7,753	36.1%	9.9%
Employee Cost	1,200	1,415	1,478	23.2%	4.5%
Other Operating Expenses	1,797	2,071	2,425	34.9%	17.1%
Operating Expenditure	2,997	3,486	3,903	30.2%	12.0%
Operating Profit	2,701	3,568	3,850	42.5%	7.9%
Provision & Contingencies	-131	137	149	-213.7%	8.8%
PBT	2,832	3,431	3,701	30.7%	7.9%
PAT	2,131	2,581	2,792	31.0%	8.2%

Balance Sheet

Particulars (in INR Cr)	Q3FY22	Q2FY23	Q3FY23	YoY%	QoQ%
Advances	252935	294023.2	310734	22.9%	5.7%
Deposits	305286	325203.2	344666	12.9%	6.0%

Business Ratio

Particulars (in %)	Q3FY22	Q2FY23	Q3FY23
RoA	2.06	2.38	2.46
RoE	12.4	13.6	14.2
CASA Ratio	59.9	56.2	53.1
Credit to Deposit Ratio	82.9	90.4	90.2
Cost to Income Ratio	52.6	49.4	50.3
Tier I	22.3	21.5	20.7

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