Edelweiss' review of Kotak Mahindra Bank's earnings

Kotak Mahindra Bank - Ending the year on a good note; result update Q4FY17

(KMB IN, INR 917, Hold)

Kotak Mahindra Bank (KMB) clocked decent Q4FY17 performance with PAT (consolidated, ex-life insurance) at ~INR13bn coming broadly in line with estimate. Profitability of the banking business (standalone) at INR9.8bn was marginally lower than estimate following higher provisions as most stressed loans from eIVBL (6% of eIVBL book) have now been recognised. However, core operating performance was strong, reflected in: a) signs of improvement in loan growth (up 5% QoQ), though sustenance holds key; and b) this, along with superior NIMs (up 10bps QoQ to 4.6%), strong fee income and contained opex (up <10% YoY) helped report >10% QoQ core profitability spurt. Overall stress (GNPLs + restructured) was broadly stable at 2.7% (2.5% in Q3FY17). Liability franchise continued to strengthen with average SA jumping >40% YoY, taking CASA ratio to 44%. Given limited levers on credit cost & opex, we anticipate revenue traction to be key for RoE improvement (capped at low mid-teens). Maintain ‘HOLD’ as valuations at 3.9x FY19E P/ABV (standalone) factor in a fair bit of upside.

Gradual pick up in revenue momentum; sustenance key

While synergy benefits are reflecting in cost metrics, key concern for KMB has been slower revenue traction, largely due to below-trend loan growth. Integration challenges in H1FY17 followed by demonetisation took a toll on 9mFY17 growth. However, Q4FY17 saw marked improvement with loan growth at 5% QoQ, largely on account of ~8% QoQ spurt in business banking. Management stated that integration and demonetisation challenges have ceased and hence the current momentum in business banking and retail will sustain. It is targeting overall 20% YoY growth in FY18. Robust franchise, limited stress baggage and strong capital position provide it with the ammunition to capitalise on growth opportunities in various business segments. However, with intact asset quality and limited cost levers, improvement in revenue traction needs to be monitored, as we believe it is critical for RoE improvement.

Outlook and valuations: Fairly priced; maintain ‘HOLD’

Q4FY17 was a strong quarter for KMB with green shoots of integration on cost and revenue fronts (first time post integration). However, their sustenance holds key. Performance of other subsidiaries was broadly in line with estimates. With significant benefit likely to flow from formalisation of financial savings, the subsidiaries could see strong business tailwinds. Valuations at 3.9x FY19E P/ABV (std. for RoE of 16% by FY19E) factor in a fair bit of upside. Hence, we maintain ‘HOLD/SP’ with target price of INR896.

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